Articles by James Gattuso

James Gattuso is a Senior Research Fellow in Regulatory Policy in the Roe Institute for Economic Policy Studies at The Heritage Foundation. Gattuso also leads the Enterprise and Free Markets Initiative at Heritage, with responsiblity for a range of regulatory and market issues. Prior to joining Heritage, he served as Vice President for Policy at the Competitive Enterprise Institute and also as Vice President for Policy Development with Citizens for a Sound Economy (CSE). From 1990 to 1993, he was Deputy Chief of the Office of Plans and Policy at the Federal Communications Commission. From May 1991 to June 1992, he was detailed from the FCC to the office of Vice President Dan Quayle, where he served as Associate Director of the President's Council on Competitiveness. He lives in Alexandria, Virginia with his wife Dana, 8 year-old son, Peter (whom he relies upon to operate his VCR), and his four year-old daughter Lindsey (who does the DVD player.) He has no known hobbies, but is not nearly as boring as he seems.


A well-regulated Internet?

by on April 25, 2006 · 2 comments

MoveOn.org. The Consumer Federation of America. Consumers Union. The list of members of the new SavetheInternet.com Coalition are a mostly unsurprising bunch. Mostly left-of-center, many of whom have never met a regulation they didn’t like. But then comes the Gun Owners of America. Whoa. As Cynthia Brumfield over at IPDemocracy put it “huh? how’d they get in there?”

Last time I checked, the second Amendment referred to a “well-regulated Militia” being important. I didn’t catch the part about a regulated Internet. Yet, there was GOA, pushing for wide-ranging government controls on how network providers run their networks. Craig Fields of the group explained their position this way:

“Gun Owners of America opposes any attempt to limit or curtail political speech. Without statutory network neutrality, there is nothing to prevent big telecom companies from injecting political bias into the very skeleton of modern communications. If the telecoms believe they can frame opposition to their power grab as a liberal or anti-free-market attack, they are sadly mistaken.”

It’s hard to know where to begin with this. First, no one is talking about limiting political speech, and if Verizon or AT&T has an anti-gun bias, its news to me. (AT&T is based in Texas, for gods sake.) In any case, does anyone think that the way to protect political speech is to give the FCC more power? Someone should give these people a lesson in FCC history.

But the real eycatcher here is the assertion that this isn’t a free-market attack. Whether you support net neutrality regulations or not, you must acknowledge that they are regulations. If you think they are necessary, that’s one thing, but don’t pretend this is a “free market” initiative. It’s anti-market, no matter how many lofty references to speech you make. Fields himself gave away the game when said, regarding how the Internet market works, “even if you leave political bias out of it, simple greed takes over.” So much for the marketplace.

In other words, GOA is saying that the same government that can’t be trusted to regulate our guns somehow can be trusted to regulate the Internet. Leave our handguns alone, but go ahead and take control of the greatest engine for innovation in history.

A surpising position indeed.

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It’s Official: FCC Doesn’t Know the Time of Day.

by on March 28, 2006

The indecency fines imposed recently by the FCC have raised a lot of eyebrows, for their inconsistency as well as severity. (See Adam Thierer’s excellent discussion here.) Now, however, the FCC’s basic competence is at issue. According to Communications Daily, among the fines handed down by the Commission two weeks ago were several on stations in Indiana which aired the CBS show “Without a Trace.” Turns out however, that the stations aired the shows at 10 pm, when such content is allowed, not at 9 p.m. as the FCC believed. Apparently, the ever-vigilant regulators at the Commission didn’t know that most of Indiana is in the Eastern, not Central, time zone.

Certainly, Indiana’s time zones are confusing–the state is split between two time zones, and doesn’t go on Daylilght Savings Time. But, really, how hard could it be for the FCC to look these things up? A good Google search would have provided the answer, as would the maps in the front part of any phone book. (No doubt the FCC has lots of phone books around.)

The extra effort would seem well-justified–the stations involved were fined some $162,000 for their “violations.” That kind of money could buy an awful lot of watches.

The episode is (or should be) embarrassing to the Commission, and troubling for the rest of us. If the regulators can’t even get the time of day right, what are the odds they are getting the harder questions right? One more reason to question the whole notion of FCC speech regulations.

Perhaps it’s time for a change.

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What Digital Divide? Some Surprising Results in New Study

by on March 24, 2006 · 2 comments

Claims that new video competitors will “redline”–i.e. avoid building out in selected inner-city or minority areas–remain a major stumbling block to video franchise reform in Congress. This was underscored yesterday in a letter by the Congressional Black Caucus sent to Reps. Barton and Dingell calling for anti-bia rules in any legislation. (As reported in Communications Daily (subscription)).

But do providers really have an incentive to redline? Certainly there are economic reasons not to build everywhere at once, but race or geography may have little to do with it. According to a just-released survey by Steve Pociask’s American Consumer Institute, African-Americans may be more profitable customers for video providers than others. At 78 percent, the total African-American subscription rate is one point above the national average. More striking, almost half of those subscribers are signed up for premium channels, compared to 31 percent overall. And a quarter of African-American subscribers have used pay per view features in the past six months, compared to only 19 percent of all cable subscribers.

Similarly, geography may not matter as much as many think. Urban subscribers subscribe to pay TV at almost the national average, and 38 percent of those urban subscribers sign up for premium channels, as opposed to only 17 percent of suburbanites. Rural subscribers, by the way, have the lowest subscription rate, although even they use more premium services that suburbanites.

Income, not surprisingly, does make a difference, with 64 percent of households making $25,000 or less subscribing to pay TV, as opposed to 77 percent of the population at large. But again, premium channels are a different story. Thirty percent of these lowest-income subscribers receive premium channels, almost exactly the national average.

This of course doesn’t mean providers will build out everywhere at once–economically, it makes sense to stagger the buildout. But the factors that determine that buildout may be more complex, and less predictable, than many assume.

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Rag-tag band for net neutrality?

by on March 23, 2006 · 2 comments

Some people just can’t resist a David and Goliath storyline. That’s especially true of “consumer advocates” who see an underdog in the mirror no matter how big the hound is. Case in point: A site called consumeraffairs.com yesterday ran a story on the net neutrality battle with this lead paragraph:

There’s nothing virtual about the battle lines being drawn in the fast-developing
Net Neutrality War. Disney, Verizon and AT&T are among the superpowers developing
a shock and awe strategy intended to annihilate the rag-tag band of consumers and
non-profits working to keep the Internet playing field level.

Just for the record, the pro-regulation “rag tag band” at last count included the following: Amazon.com, Google, e-bay, Yahoo, the Consumer Electronics Associaton, Sony, and of course a small start-up called Microsoft. This band is not rag-tag. It’s an orchestra.

Opponents of regulation, of course, also have some heavy-hitters on their side, including Disney and Cisco in addition to phone and cable companies. But its hardly a David and Goliath struggle. Its more Goliath v. Goliath. Oh, and by the way, there are non-profits and pro-consumer groups on both sides (unless you believe you have to be pro-regulation to be pro-consumer).

Ultimately, the game of “who’s the underdog” simply obscures the real issues in policy debates. The real question is what is good for consumers. And, even wearing Underdog’s cape, net neutrality rules just won’t fly.

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Deregulating by Doing Nothing: The FCC Makes the Right Non-Decision

by on March 21, 2006

One problem at the FCC–and most other regulatory agencies–is the difficulty of getting obsolete restrictions off the books. Even minor changes get bogged down in endless notices of proposed rulemaking and further notices of proposed rulemaking. This make good business for lobbyists, but not good policy. But a provision adopted in the ’96 Telecom Act–until recently rarely used–may change that. Known as “forbearance,” the provision directs the Commission to “forbear”–stop enforcing–regulations it finds are no longer necessary. And, if it doesn’t act within a year on a petition to forbear, the petition automatically takes effect.

That’s exactly what happened this Monday when the deadline for action on a Verizon forbearance petition expired. The petition has asked for deregulation of Verizon’s business broadband services–which operate in a fairly competitive market. It has now taken effect–freeing Verizon of common carrier requirements, line sharing requirements, and a raft of other unnecessary rules.

The exact extent of the change is a bit unclear, since there was no written decision implementing the change. But they are likely substantial, and given the competition in this area, well-justified.

Not all members thought this a good thing. Democratic Commissioner Jonathan Adelstein was apoplectic, saying the non-action “erases decades of communications policy in a single stroke.” That’s an exaggeration, but wouldn’t that be a good thing if true?

Congratulations to Chairman Martin and the FCC for getting unnecessary rules off the books. Hopefully, there will be a lot more to come.

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Net Neutrality, France and iTunes

by on March 21, 2006

Forget Verizon and AT&T. As American policymakers debate whether to impose “net neutrality” rules to Internet network providers, France–always a step ahead in regulation–has fingered another threat to neutrality: Apple’s iTunes service. In a vote scheduled for today, the French parliament will vote on whether to require Apple to open its iTunes service to competing tune providers.

It would be easy to scoff at this. After all, Apple’s service is one of the most popular innovations since the flush toilet, revolutionizing online music to the benefit of millions of (apparently happy) consumers. But the French are annoyed: “France is against monopolies,” said an adviser at the French Culture Ministry yesterday.

But this is more than an idosyncratic French regulation. Its a logical extension of net neutrality principles: “The consumer must be able to listen to the music they have bought on no matter what platform” the French advisor said. Take away the French accent, and the argument is indistinguishable from that used by U.S. net neutrality proponents.

Of course, in the U.S., policymakers wouldn’t think of applying net neutrality regulations to anyone but the Bells and the cable companies. Would they? Its a question that Internet companies now supporting these net neutrality regulations should think pretty hard about. Maybe they should phone Steve Jobs for his opinion.

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Will the House Regulate the Internet? Commerce Committee Considers Net Neutrality

by on March 10, 2006

All eyes have been on the House Commerce Committee the past few days, as reports have floated about regarding a draft telecom reform bill being hammered out by the members. Committee chairman Joe Barton mooted two earlier proposals last year, both of which attempted to comprehensively reform telecom laws. Both–especially the first–were stillborn–because of complaints that they imposed new regulation, rather than just free up this now-competitive market.

This time around, Barton has tried a more targeted approach–instead of all-inclusive reform, the legislation would be focused on eliminating local cable television franchise regulations, which have been slowing the advent of competition in cable TV. A smart move–a rifleshot reform, and one that that would significantly help consumers.

But it now looks like even this bill is being bogged down with new regulation. Although no copy of the proposed bill is yet public, reports are that the plan would keep the old regulations in place for a some time for existing cable firms, and even impose new price controls on them.

Worst of all, however, there are indications that “net neutrality” regulations may be soldered on to this bill. Such regulation–which would prohibit network owners from differentiating among different types of content–would place the FCC squarely in the business of regulating the Internet. (see here and here for more about problems with net neutrality rules).

Such provisions would turn Barton’s original deregulatory intent on its head. Rather than eliminating obsolete and unneeded regulations of telecommunications, the bill would introduce new and equally unneeded regulations on the Internet. Lawmaking may be like sausage-making, but such a result would be particularly hard to digest.

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The Economist Speaks Out Against Regulation

by on March 10, 2006

Good piece in The Economist this week on the specter of “net neutrality” regulation. The London-based magazine, which is pro-market in a British sort of way, hasn’t hesitated to support competition rules in the past (it was an avid supporter of the Microsoft prosecution). But in an editorial in this weeks issue, it warned against overly-prescriptive net rules, arguing:

An overly prescriptive set of net-neutrality rules could prove counterproductive. For a start, it would mean that all new network construction costs would have to be recouped from consumers alone, which could drive up prices or discourage investment. Ensuring “neutrality” could require regulators to interpose themselves in all kinds of agreements between network operators, content providers and consumers. If a network link is too slow to support a particular service, does that constitute a breach of neutrality? Strict rules could also hinder the development of new services that depend on being able to distinguish between different types of traffic, imposing a “one size fits all” architecture on the internet just as engineers are considering novel ways to improve its underlying design.

The piece does allow that some basic rules could be in order. Alas, one would think that a magazine based in Europe would know more than most that limited and simple regulations all too often turn into expansive and complex rules.

Still worth reading (subscription required).

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Economists Speak Out Against Regulation

by on March 10, 2006

The AEI-Brookings Joint Center on Regulation yesterday released a statement by 25 top economists on broadband reform. The economists–an impressive group including airline deregulation pioneers Alfred Kahn and Elizabeth Bailey, former CEA member Richard Schmalensee, and FCC veterans Tom Hazlett, Greg Rosston and Howard Shelanski–make two recommendations:

1. Congress should eliminate local cable franchising regulations; and
2. Congress and the FCC should make more spectrum available to private parties, and allow them to use it or trade the right to use it, so that it will go to its highest-valued uses.

The bottom line, according to the group: “…investment in broadband should be as easy as possible. Regulations that primarily protect incumbents or serve as barriers to entry should be removed.”

Worth reading.

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AT&T-BellSouth: No Big Deal

by on March 6, 2006

There no doubt will be much gnashing of teeth in the wake of yesterday’s announcement that AT&T (the former SBC) has agreed to buy BellSouth. WIthin hours, to no one’s surprise, old-line consumer groups called for regulators to reject the merger. In truth, however, the acquisition just won’t make that much difference, and to the extent it does, it likely will help consumers in the southeastern states BellSouth serves.

Sure, the deal reduces the number of “Bell” telephone companies to two–down from the original seven created in 1984. But does that mean less choice and less competition for consumers? Far from it. Today’s traditional telephone companies are quickly becoming but one choic among many for consumers wanting to make a telephone call. Cable TV companies alone now provide telephone service for some six million Americans, a number that is rapidly increasing. And that doesn’t include the millions more service by stand-alone Internet telephone companies such as Vonage. Wireless telephone service provides another source of competition to traditional telephoney, with millions of Americans cutting the cord, and dropping their traditional service entirely. And while the merged AT&T-BellSouth will own Cingular, one of the leading wireless firms, the wireless market is still vibrantly competitive.

Perhaps more important for the future is the market for broadband Internet service. The networks that connect Americans to the Internet are increasingly important–serving as the platform for everythng from e-mail to Internet telephony, to (soon) television. Here, however, the traditional telephone companies are even less dominant. In fact, they are the challengers in this market, trailing cable TV firms, who have some 60 percent of the market.

As a result, this merger, like last years mergers before it, is no big deal to consumers. However, at least one area, consumers will likely be better off. BellSouth has trailed AT&T and Verizon in making plans to enter the television market. While the two larger phone companies are already starting to offer TV service in competition with traditional cable firms, BellSouth–with more limited resources – has lagged behind. As a result, while consumers in many areas of the country could soon be enjoying the benefits of more cable TV competition, consumers in the southeastern U.S. were facing a long wait for the same benefits. If the proposed deal goes through, cable competition could come sooner to the South.

Despite the easy rhetoric, this deal does not signal a return to the days of monopoly in telephone service. Instead, it serves as a reminder of how far competition has come, and how choices have increased, for American consumers. And that competition and choice will, if anything, be stronger due to this merger.

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