With great fanfare, FCC Chairman Thomas Wheeler is calling for sweeping changes to the way cable TV set-top boxes work.

In an essay published Jan. 27 by Re/Code, Wheeler began by citing the high prices consumers pay for set-top box rentals, and bemoans the fact that alternatives are not easily available. Yet for all the talk and tweets about pricing and consumer lock-in, Wheeler did not propose an inquiry into set-top box profit margins, nor whether the supply chain is unduly controlled by the cable companies. Neither did Wheeler propose an investigation into the complaints consumers have made about cable companies’ hassles around CableCards, which under FCC mandate cable companies must provide to customers who buy their own set-top boxes.

In fact, he dropped the pricing issue halfway through and began discussing access to streaming content:

To receive streaming Internet video, it is necessary to have a smart TV, or to watch it on a tablet or laptop computer that, similarly, do not have access to the channels and content that pay-TV subscribers pay for. The result is multiple devices and controllers, constrained program choice and higher costs.

This statement seems intentionally misleading. Roku, Apple TV and Amazon Fire sell boxes that connect to TVs and allow a huge amount of streaming content to play. True, the devices are still independent of the set-top cable box but there is no evidence that this lack of integration is a competitive barrier.

A new generation of devices, called media home gateways (MHGs), is poised to provide this integration, as well as manage other media-based cloud services on behalf of consumers. This is where Wheeler’s proposal should be worrisome. He writes:

The new rules would create a framework for providing device manufacturers, software developers and others the information they need to introduce innovative new technologies, while at the same time maintaining strong security, copyright and consumer protections.

This sounds much more like a plan to dictate operating systems, user interfaces and other hardware and software standards for equipment that until now has been unregulated. Wheeler gives no explanation as to how his proposal will lead to lower prices or development of a direct-to-consumer sales channel.

[M]y proposal will pave the way for a competitive marketplace for alternate navigation devices, and could even end the need for multiple remote controls, allowing you to use one for all of the video sources you use.

What Wheeler really wants is FCC management of the transition from today’s set-top boxes to the media home gateways (MHGs) just beginning to appear on the market—a foray into customer premises equipment regulation unseen since the 1960s.

For good reason, the words “media home gateway” never appear in Wheeler’s Re/Code article. By avoiding mention of MHGs, he can play his “lack of competition” card, as he did in Thursday’s press briefing on his proposal.

There’s more than a whiff of misdirection here. Set-top boxes are a maturing market. An October 2015 TechNavio report forecasts the shipment volume of the global set-top box market to decline at a compound annual rate of 1.34 % over the period 2014-2019. By revenue, the market is expected to decline at a compound annual rate 1.36% during the forecast period. When consumers “cut the cable cord,” as some 21 million have, it’s set-top boxes that get unplugged.

At the same time, TechNavio forecasts the global MHG market to grow at a compound annual rate of 7.82% over the same period. Elsewhere, SNL Kagan’s Multimedia Research Group forecasts MHG shipments will exceed 24 million in 2017, up from 7.7 million in 2012. The long list of MHG manufacturers includes ActionTec, Arris, Ceva, Huawei, Humax, Samsung and Technicolor.

MHGs are the “alternative navigation devices” Wheeler coyly refers to in his Re/Code essay. These devices will replace the set-top boxes in use today, but because of their ability to handle Internet streaming, they are likely to be available through more than one channel. That’s why they only way to view Wheeler’s call to “unlock the set-top box” is as a pre-emptive move to extend the FCC’s regulation into the delivery of streaming media.

To be sure, if the FCC mandates integration of streaming options into cable-provided MHGs, streaming companies would gain stronger foothold into consumers’ homes, which would then allow them to share their apps, gather data on users, and, perhaps most lucratively of all, control the interface on which channels are displayed, as noted by The Verge’s Ashley Carman.

Yet the streaming companies that would appear to benefit most from this proposal have thus far been quiet. Perhaps because Wheeler has made no secret that he believes Apple TV, Amazon Fire and Roku are multichannel video programming distributors (MVPDs), FCC-speak for “local cable companies.” Is his “unlock the box” plan precisely the opposite? Is it an effort to fold streaming aggregators into the existing cable TV regulatory platform, with all its myriad rules, regulations, legal obligations and—dare we say it—fees and surcharges? You might roll your eyes, but this is the only analysis in which the proposal, which focuses on “device manufacturers, software developers and others,” makes sense.

But does the FCC have the right to require cable companies to share customer data acquired through the infrastructure and software they built and own? It’s yet another iteration of the old unbundled network elements model that is consistently shot down by the courts yet one that the FCC can’t seem to get past.

Arcane details aside, the FCC should not be involved in directing evolution paths, operating software or other product features. It creates too much opportunity for lobbying and rent-seeking. History shows that when the government gets granularly involved in promoting technology direction, costs go up and innovation suffers as capital is diverted into politically-favored choices where it ends up wasted. The debacles with the Chevy Volt and Solera are just two recent examples of the dangers inherent when bureaucrats try to pick winners, or give a subset of companies in one industry an assist and the expense of others.

This post originally appeared Feb. 1, 2016 on the R Street Institute official blog.

For tech policy progressives, 2015 was a great year. After a decade of campaigning, network neutrality advocates finally got the Federal Communications Commission to codify regulations that require Internet service providers to treat all traffic the same as it crosses the network and is delivered to customers.

Yet the rapid way broadband business models, always tenuous to begin with, are being overhauled, may throw some damp linens on their party. More powerful smart phones, the huge uptick in Internet streaming and improved WiFi technology are just three factors driving this shift.

As regulatory mechanisms lag market trends in general, they can’t help but be upended along with the industry they aim to govern. Looking ahead to the coming year, the consequences of 2015’s regulatory activism will create some difficult situations for the FCC.

Zero rating will clash with net neutrality

 The FCC biggest question will be whether “zero rating,” also known as “toll-free data,” is permissible under its new Open Internet rules. Network neutrality prohibits an ISP from favoring one provider’s content over another’s. Yet by definition, that’s what zero rating does: an ISP agrees not to count data generated by a specific content provider against a customer’s overall bandwidth cap. Looking at from another angle, instead of charging more for enhanced quality—the Internet “toll road” network neutrality is designed to prevent, zero rating offers a discount for downgraded transmission. As ISPs, particularly bandwidth-constrained wireless companies, replace “all-you-can-eat” data with tiered pricing plans that place a monthly limit on total data used—and assess additional charges on consumers who go beyond the cap—zero rating agreements become critical in allowing companies like Alphabet (formerly Google), Facebook and Netflix, companies that were among the most vocal supports of network neutrality, to keep users regularly engaged.

T-Mobile has been aggressive with zero rating, having reached agreements with Netflix, Hulu, HBO Now, and SlingTV for its Binge On feature. Facebook, another network neutrality advocate, has begun lobbying for zero rating exceptions outside the U.S. Facebook founder and CEO Mark Zuckerberg told a tech audience in India, where net neutrality has been a long-standing rule, that zero rating is not a violation, a contention that some tech bloggers immediately challenged.

When it came to net neutrality rulings, the FCC may have hoped it would only have to deal with disputes dealing with the technical sausage-making covered by the “reasonable network management” clause in the Title II order (to be fair, zero rating involves some data optimization). But any ruling that permits zero rating would collapse its entire case for network neutrality. The Electronic Frontier Foundation, another vocal net neutrality supporter, understands this explicitly, and wants the FCC to nip zero rating in the bud.

The problem is that zero-rating is not anti-consumer, but a healthy, market-based response to bandwidth limitations. Even though ISPs are treating data differently, customers get access to more entertainment and content without higher costs. Bottom line: consumers get more for their money. For providers like Alphabet and Facebook, which rely on advertising, there stands to be substantial return on investment. Unlike blanket regulation, it’s voluntary, sensitive to market shifts and not coercive.

How long before these companies who lobbied for network neutrality begin their semantic gymnastics to demand exemptions for zero rating? The Court of Appeals may make it moot by overturning Title II reclassification outright. But failing that, expect some of the big Silicon Valley tech companies to start their rhetorical games soon.

  Internet streaming will confound the FCC

The zero rating controversy is just one more outgrowth of the rise in Internet streaming.

For the past seven years, the FCC’s regulatory policy has been based on the questionable assertion that cable and phone companies are monopoly bottlenecks.

Title II reclassification is aimed at preventing ISPs from using these perceived bottlenecks to extract higher costs from content providers. Yet at the same time, the FCC, in keeping with its cable/telco/ISPs-are-monopolies mindset, depends on them to fund its universal service and e-rate funds and fulfill its public interest mandate by carrying broadcast feeds from local television stations.

The simple fact is that the local telephone, cable and ISP bundlers are not monopolies. The 463,000 subscribers the top 8 cable companies lost in the second quarter of 2015 are getting their TV entertainment from somewhere. Those who are not cutting the cord completely are reducing their service: Another study estimated that 45 percent of U.S. households reduced the level of cable or satellite service in 2014.

Consumers are replacing their cable bundle with streaming options such as Roku, Amazon Fire, Apple TV and Google Play. These companies aggregate and optimize the Internet video for big screen TVs and home entertainment centers. Broadcast and basic cable programs are usually free (but carry ads); other programming can be purchased by subscription (Netflix, HBO Now) or on demand (iTunes, Amazon). While in many cases consumers retain their broadband connection, that remains their only purchase from the cable or telephone company. But even that might be optional, too. Millennial consumers are comfortable using free WiFi services or zero-rated wireless plans like T-Mobile’s Binge On.

But as consumers cut the cord, cable revenues go down. When cable revenues drop, so does the funding for all those FCC pet causes. The question is how hard will the FCC push to require streaming services to pay universal service fees, or include local TV feeds among their channel offerings? Under the current law, the FCC has no regulatory jurisdiction over streaming applications, unless, as with Title II, it tries to play fast and loose with legal definitions. The FCC has never been shy about overreaching, and as early as October 2014 Chairman Tom Wheeler suggested that IP video aggregators could be considered multichannel video programming distributors, a term that to date has been applied only to cable television companies.

Ironically, streaming stands to meet two long-held progressive policy goals—a la carte programming selection and structural separation of the companies that build and manage physical broadband networks and the companies that provide the applications that ride it. Cable and Internet bundles are so 2012! Yet 2016 finds the FCC is woefully unprepared for this shift. In fact, last we looked was encouraging small towns to borrow millions of dollars to get onto the cable TV business.

Over the past seven years, the FCC has pursued Internet regulations from an ideological perspective—treating it as a necessary component of the overall business ecosystem. In truth, regulation is supposed to serve consumer interests, and should be applied to address extant problems, not as precautionary measures. Unfortunately, the FCC has chosen to ignore market realities and apply rules that fit its own deliberate misperceptions. The Commission’s looming inability to find consistency in enforcing its own edicts is a problem solely of its own making.

After some ten years, gallons of ink and thousands of megabytes of bandwidth, the debate over network neutrality is reaching a climactic moment.

Bills are expected to be introduced in both the Senate and House this week that would allow the Federal Communications Commission to regulate paid prioritization, the stated goal of network neutrality advocates from the start. Led by Sen. John Thune (R-S.D.) and Rep. Fred Upton (R-Mich.), the legislation represents a major compromise on the part of congressional Republicans, who until now have held fast against any additional Internet regulation. Their willingness to soften on paid prioritization has gotten the attention of a number of leading Democrats, including Sens. Bill Nelson (D-Fla.) and Cory Booker (D-N.J.). The only question that remains is if FCC Chairman Thomas Wheeler and President Barack Obama are willing to buy into this emerging spirit of partisanship.

Obama wants a more radical course—outright reclassification of Internet services under Title II of the Communications Act, a policy Wheeler appears to have embraced in spite of reservations he expressed last year. Title II, however, would give the FCC the same type of sweeping regulatory authority over the Internet as it does monopoly phone service—a situation that stands to create a “Mother, may I” regime over what, to date, has been an wildly successful environment of permissionless innovation.

Important to remember is that Title II reclassification is a response to repeated court decisions preventing the FCC from enforcing certain provisions against paid prioritization. Current law, the courts affirmed, classifies the Internet as an information service, a definition that limits the FCC’s regulatory control over it. Using reclassification, the FCC hopes to give itself the necessary legal cover.

But the paid prioritization matter can addressed easily, elegantly and, most important, constitutionally, through Congress.

As a libertarian, I question the value of any regulation on the Internet on principle. And practically speaking, there’s been no egregious abuse of paid prioritization that justifies unilateral reclassification. It’s not in an ISPs interest to block any websites. And, contrary to being a consumer problem, allowing major content companies like Netflix to purchase network management services that improve the quality of video delivery while reducing network congestion for other applications might actually serve the market.

But if paid prioritization is the concern, then Thune-Upton addresses it. It would allow the FCC to investigate and impose penalties on ISPs that throttle traffic, or demand payment for quality delivery. On the other hand, Thune-Upton would also create carve outs for certain types of applications that require prioritization to work, like telemedicine and emergency services, and would allow for the reasonable network management that is necessary for optimum performance—answering criticisms that come not only from center-right policy analysts, but from network engineers.

Legislation also gives the FCC specific instructions, whereas Title II reclassification opens the door to large-scale, open-ended regulation. Here’s where I do indulge my libertarian leanings. Giving the government vague, unspecified powers asks for trouble. All we have to do is look at the National Security Agency’s widespread warrantless wiretapping and the Drug Enforcement Administration’s tracking of private vehicle movements around the country. Disturbing as they are to all citizens who value liberty and privacy, these practices are technically legal because there are no laws setting rules of due process with contemporary communications technology (a blog for another day). As much as the FCC promises to “forbear” more extensive Internet regulation, it’s better for all if specific limits are written in.

At the same time, the addition of regulatory powers invites corporate rent-seeking whereby companies turn to the government to protect them in the marketplace. Even as the FCC was drafting its Title II proposal, BlackBerry’s CEO, John Chen, were complaining that applications developers were only focusing on the iPhone and Android platforms. Chen seeks “app neutrality,” essentially a law to require any applications that work on iPhone and Android platforms to work on BlackBerry’s operating system, too, despite the low marker penetration of the devices.

Also, forcing the FCC to work inside narrow parameters means it can more readily ease up or even reverse itself in case a ban on paid prioritization leads to intended consequences, like a significant uptick in bandwidth congestion and measureable degradation in applications performance.

Finally, successful bi-partisan legislation can put net neutrality to bed. If the White House remains stubborn and instead pushes the FCC to reclassify, it almost assures a lengthy court case that not only would drag out the debate, but likely end with another decision against the FCC. But even if the court rulings go the FCC’s way, Title II is no guarantee against paid prioritization. Allowing Congress to give the FCC the necessary authority is constitutionally sound approach and has a better chance of meeting the desired objectives. Congress is offering a bipartisan solution that is reasonable and workable. The Obama administration has been banging the drum for network neutrality since Day 1. This is its moment to seize.

Today the Heartland Institute is publishing my policy brief, U.S. Cybersecurity Policy: P roblems and Principles, which examines the proper role of government in defending U.S. citizens, organizations and infrastructure from cyberattacks, that is, criminal theft, vandalism or outright death and destruction through the use of global interconnected computer networks.

The hype around the idea of cyberterrorism and cybercrime is fast reaching a point where any skepticism risks being shouted down as willful ignorance of the scope of the problem. So let’s begin by admitting that cybersecurity is a genuine existential challenge. Last year, in what is believed to be the most damaging cyberattack against U.S. interests to date, a large-scale hack of some 30,000 Saudi Arabia-based ARAMCO personal computers erased all data on their hard drives. A militant Islamic group called the Sword of Justice took credit, although U.S. Defense Department analysts believe the government of Iran provided support.

This year, the New York Times and Wall Street Journal have had computer systems hacked, allegedly by agents of the Chinese government looking for information on the newspapers’ China sources. In February, the loose-knit hacker group Anonymous claimed credit for a series of hacks of the Federal Reserve Bank, Bank of America, and American Express, targeting documents about salaries and corporate financial policies in an effort to embarrass the institutions. Meanwhile, organized crime rings are testing cybersecurity at banks, universities, government organizations and any other enterprise that maintains databases containing names, addresses, social security and credit card numbers of millions of Americans.

These and other reports, aided by popular entertainment that often depicts social breakdown in the face of massive cyberattack, have the White House and Congress scrambling to “do something.” This year alone has seen Congressional proposals such as Cyber Intelligence Sharing and Protection Act (CISPA), the Cybersecurity Act and a Presidential Executive Order all aimed at cybersecurity. Common to all three is a drastic increase the authority and control the federal government would have over the Internet and the information that resides in it should there be any vaguely defined attack on any vaguely defined critical U.S. information assets.

Yet we skeptics recently gained some ammo. McAfee, the security software manufacturer, recently revised its estimate of annual U.S. losses attribute to cybercrime downward to $100 billion, just one-tenth of the staggering $1 trillion it estimated in 2009. This is significant because both President Barack Obama and Gen. Keith Alexander, head of U.S. Cyber Command, have invoked the $1 trillion figure to justify greater government control of the Internet.

To be sure, $100 billion is hard to dismiss, but the figure is comparable to other types of losses U.S. businesses confront. For example, auto accidents result in annual losses between $99 billion and $168 billion. So while cybersecurity is a problem that needs to be addressed, we should be careful about the way we enlist the government to do so.

We should start by questioning the rush to create new laws that have vague definitions and poor measurables for success, yet give the government sweeping powers to collect private information from third parties. The NSA’s massive collection of phone and ISP data on millions of Americans—all done within the legal scope of the PATRIOT Act—should itself give pause to anyone who thinks it’s a good idea to expand the government’s access to information on citizens.

What’s more, vaguely-written law opens the door to prosecutorial abuse. My paper goes into more detail about how federal prosecutors used the Computer Fraud and Abuse Act to pile felony charges on Aaron Swartz, the renown young Internet entrepreneur and co-creator of the social news site Reddit, for what was an act of civil disobedience that entailed, at worst, physical trespassing and a sizable, but not far from damaging, violation of the terms of MIT’s JSTOR academic journal indexing service.

There may indeed be some debate over the legal and ethical scope of Swartz’s actions, but they were not aimed at profit or disruption. Yet the federal government decided to use a law designed to protect the public from sophisticated criminal organizations of thieves and fraudsters against a productive member of the Internet establishment, threatening him with 35 years in prison and loss of all rights to use computers and Internet for life. Swartz, who was plagued by depression, committed suicide before his case was adjudicated. Prosecutors exonerated him posthumously by dropping all charges, but controversy over the handling of the case continues to this day. (Also, a hat tip to Jerry Brito’s conversation with James Grimmelman on his Surprisingly Free podcast.)  .

Proper cybersecurity policy begins with understanding that there’s a limit to what government can do to prevent cybercrime or cyberattacks. Cybersecurity should not be seen as something disassociated with physical safety and security. And, for the most part, physical security is understood to entail personal responsibility. We lock our homes and garages, purchase alarm systems and similar services, and don’t leave valuables in plain sight. Businesses contract with private security companies to safeguard employees and property. Government law enforcement can be effective after the fact – investigating the crime and arresting and prosecuting the perpetrators – but police are not routinely deployed to protect private assets.

Similarly, it should not be the government’s job to protect private information assets. As with physical property, that responsibility falls to the property owner. Of course, we must recognize the government at all levels is an IT user and a custodian of its citizens’ data. As users with an interest in data protection, federal, state and local government information security managers deserve a place at the table—but as partners and stakeholders, not a dictators.

Since the first computers were networked, cybersecurity has best been managed through evolving best practices that involve communication across the user community. And yes, despite what the President and many members of Congress think, enterprises do share information about cyberattacks. For years they have managed to keep systems secure without turning vast quantities of personal data on clients and customers over the government absent due process or any judicial warrant.

In terms of lawmaking, cybercriminal law should be treated as an extension of physical criminal law. Theft, espionage, vandalism and sabotage were recognized as crimes long before computers were invented. The legislator’s job is first to determine how current law can apply to new methods used to carry off age-old capers, amending where necessary, as opposed to creating a new category of badly-written laws.

If any new laws are needed, they should be written to punish and deter acts that involve destruction and loss. The severity of the penalties must be consonant with the severity of the act. The law must come down hard on deliberate theft, destruction, or other clear criminal intent. Well-written law will ensure that prosecutorial resources are devoted to stopping organized groups of criminals who use email scams to drain the life savings of pensioners, not to relentlessly pursue a lone activist who, as an act of protest, downloaded and posted public-record local government documents that proved embarrassing to local elected officials.

Finally, my paper also addresses acts of cyberterrorism and cyberwar, which can exceed the reach of domestic law enforcement and involve nation-states or stateless organizations such as Al-Qaida. Combatting international cyberterrorism involves diplomacy and cooperation with allies—as well as rethinking the rules of engagement regarding response to an attack.

While it is wise to have appropriate defenses in place, before rushing to expand FISA courts or demand Internet “kill switches,” we need a calmer discussion of the likelihood of a devastating act of cyberterrorism, such as hacking into air traffic control or attacking the national power grid. Despite popular notions, attacks of this caliber cannot be carried out by a lone individual with a laptop and a public WiFi connection. An attacker would need considerable resources, the cooperation of a large number of insiders, and would have to rely on a number of factors outside his control. For more, I refer readers to a SANS Institute paper and a more recent article in Slate. Both discuss the logistics involved in a number of cyberterrorism scenarios. Suffice it to say, a terrorist can accomplish more with an inexpensive yet well-placed bomb than a time-consuming multi-stage hack that risks both failure and exposure.

The most important takeaway, however, is that today’s cybersecurity challenges can be met within a constitutional framework that respects liberty, privacy, property and legal due process. Author Eric Foner has written that since the nation’s founding, its most important organizing principle has been to maintain civil law and order within a structure of limited government powers and respect for individual rights. There is no reason this balance needs to be adjusted to favor state power at the expense of individual rights in combating computer crime or defending the nation’s information systems from foreign attack.

Related Articles:

Robert Samuelson Engages in a Bit of Argumentum in Cyber-Terrorem

CISPA’s vast overreach

Rise of the cyber-industrial complex

Do we need a special government program to help cybersecurity supply meet demand?

My new policy brief urges the Federal Communications Commission to get on with the business of allocating the necessary spectrum to meet the burgeoning demand for wireless services.

The paper was finished before Chairman Julius Genachowski announced his resignation last month. At the risk of sounding harsh, that might be addition by subtraction. One of the big disappointments of Genachowski’s tenure was the lack of significant movement to get spectrum freed up and auctioned. In fairness, there were the interests a number of powerful constituencies to be balanced: the wireless companies, the broadcasters, and the federal government itself, which is sitting on chunks of prime spectrum and refuses to budge.

But that’s the job Congress specifically delegated to the FCC. We’d be closer to a resolution–and the public would have been better served–had the FCC put its energies into crafting a viable plan for spectrum trading and re-assignment instead of hand-wringing over how to handicap bidders with neutrality conditions and giving regulatory favors to developers of unproven technologies such as Super WiFi. Instead of managing the spectrum process, the FCC got sidetracked trying to to pick winners and losers.

A new chairman brings an opportunity for a new direction. Spectrum relief should go to the top of the agenda. And as I say in the policy brief, just do it.

Today Reason has published my policy paper addressing privacy concerns created by search, social networking and Web-based e-commerce in general.

These web sites have been in regulatory crosshairs for some time, although Congress and the Federal Trade Commission have been hesitant to push forward with restrictive legislation such as “Do Not Track” and mandatory opt-in or top-down mandates such as the White House drafted “Privacy Bill of Rights.” An the U.S. seems unwilling to go to the lengths Europe is, contemplating such unworkable rules like demanding an “Internet eraser button”—a sort of online memory hole that would scrub any information about you that is accessible on the Web, even if it is part of the public record.

In my paper, It’s Not Personal: The Dangers of Misapplied Policies to Search, Social Media and Other Web Content, I discuss the difficulty of regulating personal disclosure because different people have different thresholds for privacy. We all know people who refuse to go on Facebook because they are wary of allowing too much information about themselves to circulate. Where it gets dicey is when authority figures take a paternalistic attitude and start deciding what information I will not be allowed to share, for what they claim is my own good.

Top down mandates really don’t work, mainly because popular attitudes are always in flux. Offer me 50 percent off on a hotel room, and I may be willing to tell you where I’m vacationing. Find me interesting books and movies, and I may be happy to let you know my favorite titles.

Instead, ground-up guidelines that arise as users become more comfortable with the medium, and sites work to establish trust, work better. True, Google and Facebook often push the envelope in trying to determine where user boundaries are, but pull back when run into user protest. And when the FTC took up Google’s and Facebook’s practices, while the agency shook a metaphorical finger at both companies’ aggressiveness, it assessed no fines or penalties, essentially finding that no consumer harm was done.

This course has been wise. The willingness of users to exchange information about themselves in return for value is an important element of e-commerce. It is worth considering some likely consequences if the government pushes too hard to prevent sites from gathering information about users.

Free Services Go Away

Hundreds of thousands, if not millions, of sites support themselves through targeted advertising. If the federal government began to clamp down on websites’ ability to use consumer information to target ads, an immediate consequence would be a decline in the amount of free content, information and services available on the Web. A University of Toronto study of Web sites in Europe, where targeted advertising is heavily regulated, found that advertising effectiveness decreased  65 percent relative to counterparts in the rest of the world, and predicts that of European sites will see a declining share of the $8 billion in global online ad revenues decrease over time because they can’t effectively deliver an audience of interested customers.

This may explain why there are no European search of social media sites that rival Google and Facebook, and why Hyves, a Netherlands-based social networking sites, charges a fee for users access most of the benefits Facebook, LinkedIn, Google+ and Pinterest users get for free.

‘Mother, May I?’ trumps experimentation

Regulation forces companies to evaluate compliance issues before pursuing a potentially innovative product or service direction. As a result, innovation is slowed, or does not happen at all, not because of market considerations, but on the advice of legal counsel. This is a major risk of any regulation or legislation in technology, an area that is constantly changing and evolving, and where success and survival often hinge on out-of-the-box thinking. It is another reason why guidelines are preferable to law.

Regulations against information-sharing undermine the community-building benefit of the medium

One of the reasons people go online is to meet and interact others who share interests and passions. Individuals with unique interests—from birdwatching to Axis & Allies gaming—can connect with far more like-minded individuals than they might in their own geographic community. These communities in turn build knowledge bases that the general population of users can turn to from time to time. For example, someone planning a vacation in New York City can use Google to find a bevy of bulletin boards and forums, some quite granular, that provide information about shows, restaurants and attractions, all from people who have shared their experience. These boards thrive because search engines like Google and social networks like Facebook drive traffic to them—all based on preferences. Regulate this technology away and the Web loses its unique community-building character.

Privacy regulation won’t address information security issues

Politicians often conflate privacy and security. The two are related, but are not the same thing.

Security pertains to the protection of critical user information that, if disclosed, can result in theft or fraud. Neither Do Not Track nor the on-line privacy “bill of rights” truly addresses security issues related to on-line information.

Wire fraud laws already make it illegal to steal user information. Identity theft and identity fraud are crimes. Companies that fail to adequately protect confidential and sensitive information, such as social security numbers, banking information or specific health-related data, that in the wrong hands could be used for malicious purposes. By contrast, the information websites collect, collate and process for targeted marketing is not highly personal and confidential, but has to do with individual habits and preferences that could otherwise be easily observed—does the person prefer beer or wine? The Cubs or the White Sox? Mystery novels or biographies? For the most part, it is anonymized. True, Facebook and other sites allow users to post pictures and disclose more intimate personal details such as religion or sexual orientation, but again, users can decide whether to disclose these facts and, if they do, decide who may see them. Opt-in, Do Not Track and privacy bills of rights are all about substituting government mandates for individual discretion. They do not strengthen or expand on any current laws against online fraud or theft, which by themselves are quite strong.

Make no mistake, personal choice must be respected, and the right to confidentiality should be protected. Yet specific harms must be understood, delineated and targeted in any legislation or regulation before it goes forward. The information economy is called so for a reason. Nothing would be more counterproductive to it than clumsy government policies designed to generally inhibit the voluntary exchange and use of information. Right now, search, social media and informational websites are the most visible users of consumer information, but in the background, many of the automated, intelligent services we expect the Web to support will need to trade in user information. These include such basic applications as Web-enabled home appliances, such as refrigerators that sense when you’re low on milk to more critical services such as health care management. This is why it’s best to derive privacy policies from a strong and constantly evolving knowledge base of best practices, rather than to codify them into laws that, in their failure to foresee innovation, will discourage it.

Today the Reason Foundation publishes my policy brief on keys to successful state regulation of Internet gambling.

Thanks to a Department of Justice’s December 2011 memo on the parameters of the Wire Act, states can now license real-money intrastate online casino games. Earlier this year, Nevada became the first state to permit online wagering, and in August granted the first online operating license to South Point Poker LLC, which was to have launched trials last month. Since the Reason report went to press, South Point disclosed that its software is still undergoing independent testing but  hopes to have its site up by the end of the year.

Elsewhere, Delaware has enacted legislation to authorize online gambling under the auspcies of the state lottery commission and Illinois has begun selling lottery tickets online.

It goes without saying that U.S. citizens should be free to gamble online, just as they legally can in casinos throughout the country. The degree of regulation is subject to debate, but unfortunately remains a necessary element in policy. Yet lessons about taxation and regulation can be learned from experiences in Europe, as well as from regulation of brick-and-mortar casinos in the U.S. With a better understanding of usage trends, consumer game choices and operator cost models, legislators who want to offer constituents the freedom to play online can craft an environment that supports a robust online gaming climate, as opposed to one that drives legitimate operators away.

Regulation should derive from an enlightened approach that respects the responsibility and intelligence of its citizens. Internet gambling can be a safe, secure pastime.  Overall, the government’s only goal should be to protect users from theft or fraud. Gambling should not approached as an activity that needs to be controlled or discouraged under the rationale that it is a “sin” (to moralists) or “destructive behavior” (to social utilitarians), and then, hypocritically,  politically tolerated so it can be excessively taxed on those rationales.

Although it is likely states will differ in the particulars of how they structure the license and tax arrangements, a successful climate for legalized Internet gambling is likely to derive from the following fundamental principles. Lawmakers should heed the following guidelines:

Create a competitive environment

Consumers are best served when there is ample competition. The greater the competition, the more incentive competing companies have to offer better value—both to win new customers, and to keep existing ones loyal.

The state government itself should not compete for players

As a corollary to the competition guideline, states should not attempt to operate online casinos themselves. They should also be wary of giving incumbent lottery management companies a built-in advantage, such as an automatic license set-aside. Experiences in Europe, where some countries initially granted exclusive Internet poker and other gaming licenses to lottery operators, have shown that such ventures are rarely competitive, are inefficiently run, and do not draw players.

Recognizes intrastate online gambling has different cost structure than brick-and-mortar casinos

States that do not account for the difference in cost models between brick-and-mortar casinos and Internet counterparts are setting themselves up for failure. An Internet gaming site can be established with a capital investment that is a fraction of that required to build a land-based casino. But revenues scale down as well; one reason an online poker room can support penny-ante games. States must grasp the lower revenue and tax expectations and set up tax and licensing structures so they are compatible.

Tax operators not players

On the other hand, states should avoid creative new tax structures purely on the justification that some hold the opinion that gambling is a vice or sin. Players should not be taxed through levies on their accounts or through “hand charges” that are paid directly to the state, as some European countries have attempted (again without success; players migrated to Internet casinos in countries without such taxes). Meanwhile, winning players under law are obliged to report winnings (and are often held accountable though W-2Gs). Anything else is double taxation.

Do not attempt to “protect players from themselves.”

State legislatures tend to have a love/hate relationship with gambling. They covet the tax revenues, yet they believe that they are being “responsible” by creating artificial notions, such as limiting casinos to “riverboats” or out-of-way locations, in the belief that this will somehow either mask or temper the popular appeal of gambling. The ineffectiveness of these measures is seen in how these conventions gradually fall by the wayside. Likewise, regulations that infantilize players, such as a since-revised Missouri rule that limited player chip purchases to $200 per hour, have proved ineffective and easy to defeat.

Don’t discount the market as an effective regulator

The Internet itself offers numerous resources in the form of information sites, message boards and discussion groups where players can exchange information about the quality and reliability of particular sites, the general skill level of players, and any concerns about sites that might be cheating or too tolerant of collusion or poker bots. Independent game analysts have proved adept at identifying problem software and posted their findings.

The return of Internet gambling is only a matter of time; the consumer demand is there and the fiscal situation in many states makes the taxation opportunities attractive. While a number of states will resist, for most, the issue should lead to serious debate. The paper, in addition to making the principled case for legalized Internet gambling, addresses and recommends policy approach with an aim toward creating win-win-win regulatory environments for consumers, game site operators and state governments.

The full report can be downloaded here.

A cable TV monopoly is imminent and high prices loom, at least as far as the Associated Press is concerned.

That was the angle of a widely syndicated AP story last week reporting that in the second quarter of this year, landline phone companies lost broadband subscribers while cable companies gained market share.

Beneath the lead, Peter Svensson, AP technology reporter, wrote:

The flow of subscribers from phone companies to cable providers could lead to a de facto monopoly on broadband in many areas of the U.S., say industry watchers. That could mean a lack of choice and higher prices.

In the news business, the second graph is usually referred to as the “nut” graph. It encapsulates the significance of the story, that is, why it’s news.

It’s interesting that Svensson, with either support or input from his editors, jumped on the “de facto” monopoly angle. There could be any number of reasons why cable broadband is outpacing telco DSL, beginning with superior speed (to be fair, an aspect noted in the lead).

However, AP defaulted to the clichéd narrative that the telecom, Internet and media technology markets inevitably bend toward monopoly (see here, here, here and here for just as a sample). Moreover, that the money quote came from Susan Crawford, President Obama’s former special assistant for science, technology and innovation policy, and a vocal advocate of broad industry regulation, was all the more reason it should have been countered with some acknowledgement of the growing data on how consumer behavior is changing when it comes to TV viewing. Arguably, at least, the cable companies, far from heading toward monopoly, are sailing into competitive headwinds stirred up by video on demand services such as Netflix, Hulu and iTunes.

What numbers does AP base its monopoly supposition on? Their own tally from separate phone company reports finds that the eight largest phone companies in the U.S. collectively lost 70,000 broadband subscribers between April and June. Meanwhile, the top four public cable companies reported a gain of 290,000 subscribers. Assuming most of the 70,000 the telcos lost was DSL-to-cable churn, that still leaves cable with a net gain of 220,000 broadband subscribers (although some likely switched from satellite). So another way to read these numbers is that U.S. broadband subscriptions increased by nearly a quarter-million households in the second quarter. Too much of a smiley face? OK.

Then consider this:

Balancing the AP’s reporting of cable dominance is the Convergence Consulting Group’s finding that between 2008 and 2011 2.65 million people have dropped cable entirely in favor of alternative methods. Separate research from Nielsen tracked with this, finding that the number of households paying a multichannel provider last year declined by 1.5 million, which suggests the rate of cord-cutting is increasing.

In an excellent analysis of these trends, Engadget’s Brad Hill, no fan of cable, looks at how the cable companies are slowly getting boxed in between the on-demand alternatives and their traditional tiered pricing model, which day-by-day appears less and less price-competitive.

My purpose here has not been to pile on AP’s or the mainstream media’s technology reporting. But the danger in defaulting to the monopoly angle reinforces erroneous perceptions that persist in policy circles. I can’t predict how it’s going to turn out, but if consumers are to be served, broadband providers, as well as companies in any other segment of the digital economy, need the freedom to respond to market conditions. Regulations that restrain now-competitive companies as if they were once-and-future monopolies is not going to promote innovation. If progress is to be made on broadband policy that truly benefits consumers, lawmakers and regulators have approach the industry as it exists today—not as it was one, three, five or ten years ago. I’ll be the first to say legacy perceptions are hard to dismiss. But responsible reporting and analysis contributes to greater clarity and does not reinforce outdated notions.

President Obama seems to be poised once again to use executive powers to get what Congress won’t give him.

In this case, it’s the imposition of a sweeping set of cybersecurity mandates and regulations on the private sector. My latest commentary at Reason.org addresses the problems of the original Cybersecurity Act, which did not muster enough support in the Senate to get to a vote, and why a White House decision to implement it by executive order simply expands the government’s surveillance and datagathering power while doing little to secure the nation’s information infrastrucuture.

Find the commentary here.

Facebook has quietly launched a real-money online gambling application in the U.K., marking a major thrust of the social networking site into online gambling.

The Financial Times is reporting that starting today, Facebook will offer users in the U.K. ages 18 and over online bingo and slots for cash prizes. Slate.com  picked up the story this afternoon.

“Gambling is very popular and well regulated in the U.K. For millions of bingo users it’s already a social experience [so] it makes sense [for us] to offer that as well,” Julien Codorniou, Facebook’s head of gaming for Europe, Middle East and Africa, told the Financial Times.

It’s telling in and of itself that Facebook has a gaming chief for the EMEA region. The synergies of social media and gambling has been seriously discussed for several years, mostly in foreign venues,  as the U.S. government until recently, has been hostile toward Internet gambling.

However, the recent thaw on the part of the Department of Justice, seen most recently in its settlement (don’t-call-it-an-exoneration) with PokerStars, plus state action toward legalization in in states such as Nevada and Delaware, point to eventual legalization of Internet gambling in the U.S.

In that respect, look for Facebook to be ready. Research from The Innovation Group,  a gaming marketing research company, shows that more than half the users on online gaming come in through social media or search. Companies such as Zynga, which began by offering multiplayer social games such as Cityville, Castleville and Mafia Wars on Facebook, are particularly well-positioned. Zynga’s most popular on-line game is poker, and Zynga and companies like it have a logical growth path into online gambling. Given their established connection with social networks, it’s a good shot we’ll see virtual online casino environments emerge within social networks such as Facebook, Google+, Orkut and others.

The natural convergence of social media and gaming environments has been explored fairly extensively. European researchers such as Jani Kinnunen of the Game Research Lab at Finland’s University of Tampere finds this running both ways. As social networks explore gaming, gaming sites explore social networking.

Skill gaming sites can be excellent examples of new forms of gambling. Casual web-browser based games (any game can be a gambling game). Players can place a monetary bet on their games and play against each other, which requires social interaction between player.

Moreover, games and game-related interaction don’t have to be situated in the same place. Kinnunen notes that online poker sites and player forums are usually separated. Poker forums are online communities where players can interact with each other before and after playing, communicating, learning new skills, exchanging tips for good gaming sites and so on.

What we have yet to learn is how Facebook is setting up age-verification and security procedures, as well as location-based restrictions. All of these will be part of the picture once Internet gambling moves forward in the U.S., and they represent technology skill strengths Americans have. The central takeaway today, however, is that a major U.S. company has entered the international online gambling market, where legitimacy has long been established. Facebook’s move is another step toward extending that legitimacy to the U.S.

Some 77 percent of wireless phone users who use their phones for online access say slow download speeds plague their mobile applications, according to a new survey from the Pew Internet and American Life Project. Of the same user group, 46 percent said they experienced slow download speeds at least once a week or more frequently (see chart below).

While the report, published last week, does not delve into the reasons behind the service problems, it does offer evidence that users are noticing the quality issues wireless congestion is creating. Slow download speeds are a function of available bandwidth for mobile data services. Bandwidth requires spectrum. The iPhone, for instance, uses 24 times as much spectrum as a conventional cell phone, and the iPad uses 122 120 times as much, according to the Federal Communications Commission FCC Chairman Julius Genachowski.  As more smartphones contend for more bandwidth within a given coverage area, connections slow or time out. Service providers and analysts have warned that the growing use of wireless smartphones and tablets, without an increase in spectrum, would begin to degrade service. There have been plenty of anecdotal instances of this. Pew offers some quantitative measurement.

While technologies such from cell-splitting to 4G offer temporary fixes, the quality issue will not be fully addressed until the government frees up more spectrum. While the FCC hasn’t helped much by blocking the AT&T-T-Mobile merger and joining with the Department of Justice in delaying the Verizon deal to lease unused spectrum from the cable companies, at least the agency has acknowledged the problem. Right now, as Larry Downes reported last week, the National Telecommunications and Information Agency (NTIA), which has been charged with the task of identifying spectrum the government can vacate, is stalling.  It would be nice to see the FCC apply the aggressiveness it brings to industry regulation to getting NTIA off the schneid. At the same time, the Commission needs to put aside its ideological bent and do what it can to make more spectrum available in the short term.

Yesterday brought a spate of news reports, many of them inaccurate or oversimplified, about a settlement the U.S. Attorney’s office in Manhattan reached with two major international Internet poker sites—PokerStars and  Full Tilt Poker.

The buried lead–and very good news for online poker players–is that Internet poker site PokerStars is back in business. Manhattan U.S. Attorney Preet Bharara ended his case against the site and it is now free to re-enter the U.S. market when states begin permitting Internet gambling, which could start as early as this year in states such as Nevada and Delaware.

The three-way settlement itself  is rather complicated. Full Tilt Poker will have to forfeit all of its assets, at this point mostly property, to the U.S. government. PokerStars will then acquire those forfeited Full Tilt Poker assets from the feds in return for its own forfeiture of $547 million. PokerStars also agreed to make available $184 million in funds in deposits held by non-U.S. Full Tilt players, money players believed was lost.

The U.S. government seized these funds on April 15, 2011 when it shut down Full Tilt, PokerStars and a third site, Absolute Poker, on charges of money laundering. The date has become known as Black Friday in the poker community. Specifically, the three sites were charged with violation of the 2006 Unlawful Internet Gambling Enforcement Act (UIGEA), which prohibited U.S. banks from transferring funds to off-shore Internet poker and gambling sites. To combat the measure, sites such as PokerStars and Full Tilt began using payment processors that allegedly lied to U.S. banks about their ties to gambling sites. Although this would be fraud under the letter of the law, the U.S. government never claimed payment processors stole money from players or banks and no evidence suggests they did.

What the shutdown did reveal, however, was a shortfall in player deposits at Full Tilt, which led prosecutors to charge that Full Tilt was illegally paying investors out of player funds in a Ponzi-like scheme. Those charges, which look to be more serious then the UIGEA violations, still have yet to be resolved. The deal prohibits Full Tilt management and investors to have roles in PokerStars.

PokerStars, however, is clean. In the settlement the site admits no wrongdoing. While $547 million is far from nominal, it’s a far cry from the money-laundering convictions and 20-year prison sentences that were talked up when the charges were first brought.  In reality, the resolution of the case is PokerStar’s takeover of one of its largest competitors and the opportunity to reposition itself for the U.S. market, perhaps getting its deal with Wynn Resorts back on track.

If you see something truly punitive here, please comment. The arrangement actually appears to be another concession by the government on Internet gambling. The first, and still most significant, was the Department of Justice’s December 2011 memo to Illinois and New York saying the Wire Act does not prevent them from selling lottery tickets online—or offering any other wagering game on the Internet–as long as customers are in-state. That decision opened the door to state Internet gambling legislation and several states have jumped at it. The New York settlement also strengthens the contention, voiced by some in the gaming law community, that the government, faced with pressure from states who covet tax revenue, the unpopularity of the Internet gambling prohibition, and the difficulty in winning convictions, may eventually grant some sort of general amnesty just to get free of what was, at the end of the day, a political compromise to appease a handful of moralists in Congress.

The PokerStars settlement, while allowing U.S. Attorney Bharara to save face, may be the first step toward that.

Hat tip to Hard Boiled Poker, a blog that adeptly clarifies the media’s inaccuracies and oversights in reporting this story as well outing the inability of  CNNmoney.com’s editors to tell the difference between a blackjack and poker layout. The blog commends Forbes.com’s coverage as the best for grasping the settlement’s significance.

The U.S. Senate holds hearings Wednesday on the so-called Market Fairness Act (S. 1832), which would be better dubbed the “Consumer and Enterprise Unfairness Act,” as it seeks to undo a critical requirement that prevents states from engaging in interstate tax plunder.

In a series of court decisions that stretch back to the 1950s, the courts have consistently affirmed that a business must have a physical presence within a state in order to be compelled to collect sales taxes set by that state and any local jurisdiction.

That meant catalogue and mail order businesses were not required to collect sales tax from customers in any other state but their own. The three major decision that serve as the legal foundation for this rule, including Quill v. North Dakota, the case cited most frequently.

Quill left room for Congress to act, which indeed it is doing with the Market Fairness Act. The impetus for the act has nothing to with the catalogue business, however. Rather, it’s the  estimated $200 billion in annual Internet retail sales, a significant portion of which escapes taxation, that’s got the states pushing Congress to take a sledgehammer to a fundamental U.S. tax principle that has served the purpose of interstate commerce since 1787.

That year, of course, is when the U.S. Constitution replaced the Articles of Confederation. One of the flaws of the Articles was that it permitted each of the states to tax residents of others. Rather than get the budding nation closer to the nominal goal of confederation, it was endangering the expansion of vital post-colonial commerce by creating 13 tax fiefdoms and protectorates. The authors of the Constitution wisely addressed this by vesting the regulation of interstate commerce in the federal government.

That’s why the Marketplace Fairness Act is so troublesome. While indeed Congress has the power to create an state-to-state tax structure, it may be imprudent to do so.  In seeking to close what it disingenuously calls a “loophole” that allows Internet sales to remain tax-free, it bulldozes a vital element of commerce law that protects consumers from taxation from other jurisdictions.

And that protection is as necessary as ever. As the Tax Foundation’s Joseph Henchman will remind Congress today in his testimony, states have every incentive to shift tax burdens from their own residents to others elsewhere. As an example, take all those taxes attached to hotel and car rental bills.

The Marketplace Fairness Bill puts great stock in the idea that software and technology can relived the “burden” that, according to the courts, state and local tax compliance places on out-of-state business. But even sales tax complexity can’t be solved with the literal click of the mouse. It’s more than just the 9,600 sales tax jurisdictions that need to be factored in. Tax rules differ state to state, city to city and town to town. Sometimes a candy bar is taxed, sometimes it’s not. Every August, some states declare a “sales tax holiday weekend” in hopes of boosting back-to-school business. Dates can vary. Bottom line, there’s no reliable plug-and-play software for this. Overstock.com chairman and CEO Patrick Byrne has said it cost his company $300,000 and months of man-hours to create a solution.

The Marketplace Fairness Bill takes tax policy in the wrong direction, setting up a classic slippery slope that will see states becoming more and more predatory. What’s needed instead is an alternative that respects both state’s rights and the limits set by the Constitution.

But there will be no real progress until state legislators admit what they are trying to do: collect more taxes. That at least makes the dialogue honest. Then the question becomes whether the initiative is necessary to begin with. After that, more reasonable constructs include an origin-based tax system, building on the framework that exists today. When I purchase an item in Sugar Land, Tex, I pay sales tax to Texas and Sugar Land. When I travel to Los Angeles and buy a souvenir from the Universal Studios tour, I pat sales taxes levied there. A more sensible tax structure allows merchants to comply with the tax rules in their own states.

The only objection comes from legislators in high sales tax states who complain origin-based taxation gives businesses that locate in states such as Oregon and New Hampshire, two of five that charge no sales tax, an advantage. My affable reply is “Why yes, it does. Doesn’t it?.”

A low-tax policy is one way states can compete constructively for commerce and economic growth. Consumers and businesses would be much better off if states looked at e-commerce as an opportunity to boost their economies by welcoming Internet enterprises instead of treating them, and their customers, as just another cash pump.

For more, See “About that Sales Tax ‘Loophole'” 

Proponents of higher taxes have taken to calling the exemption that out-of-state online shoppers enjoy a “loophole,” as if it were an unintended flaw in two established court rulings that addressed the power of one state to tax residents of another.

My latest commentary at Reason.org looks at the so-called Marketplace Fairness Act, a bill that the House Judiciary Committee has scheduled for hearings tomorrow. The bill aims to help states collect sales taxes on out-of-state purchases, typically made via catalogue or, to an ever-greater extent, the Internet. Two Supreme Court decisions, Quill vs. North Dakota and National Bellas Hess vs. [Illinois] Department of Revenue, both of which pre-date Internet shopping, protect out-of-state consumers from the taxman’s reach.

As I write:

Editorials and op-eds supporting the bill, such as in the Arizone Daily Star and the Chicago Sun-Times, say it will close a “loophole” that allows Internet purchases to escape taxation. This is akin to saying the Supreme Court’s Miranda decision is a loophole for defendants to escape prosecution. No doubt some overzealous prosecutors may think so, but in truth, Miranda sharpened and affirmed the right of due process already present in the Fourth and Fifth Amendments. Likewise, in Quill and Bellas Haas, the courts sharpened and affirmed the Constitution’s commerce clause that prevents one state from taxing residents of another. Seeing it as counterproductive to an interdependent economy, the Founders did not want states plundering each other’s residents and enterprises with taxes. Yet that’s exactly the environment the Marketplace Fairness Act sets up. New York State can tax residents of Illinois and the Prairie State can tax Hoosiers. In doing so, the Marketplace Fairness Act ignores the constitutional underpinnings of the  Quill and Bellas Hess decisions and treats the Internet sales tax issue as a procedural issue when the in fact the constitutional bar is set much higher. The giveaway, however, is the portion of the bill that requires states to simplify their state tax collection procedures before launching cross-border taxation. It’s an unusual quid pro quo, perhaps because Congress has to offer states the prerequisite of a buy-in. That’s because any attempt to impose a tax collection structure wholesale on the states would likely face a constitutional challenge on 10^th Amendment grounds of state’s rights.

In reality, the states, struggling as they are with debt crises of their own making, are angling for a greater piece of the $200 billion Americans are spending with Internet merchants each year. Of course, not all of this goes untaxed; on-line retailers who have brick-and-mortar stores within a state must collect tax from residents in that state. Besides creating a mess of competing state tax grabs, this law stands to increase paperwork and complexity for thousands of small online businesses and catalogue firms, who would now be obliged to calculate taxes on some 11,000 sales tax jurisdictions throughout the country. Whether or not it’s “simplified” in line with some Congressional definition, it still stands to be the burden as noted in  Quill and Bellas Hess.

But all the talk of loopholes, level playing fields and what does or does not constitute a “burden” diverts attention from the real issue. The Marketplace Fairness Act is not about the Internet, e-commerce, the marketplace or fairness–it’s about what the Constitution says about the power of state governments to tax citizens beyond their borders.

It’s come to this. After more than a decade of policies aimed at reducing the telephone companies’ share of the landline broadband market, the feds now want to thwart a key wireless deal on the remote chance it might result in a major phone company exiting the wireline market completely.

The Department of Justice is holding up the $3.9 billion deal that would transfer a block of unused wireless spectrum from a consortium of four cable companies to Verizon Wireless, an arm of Verizon, the country’s largest phone company.

The rationale, reports The Washington Post’s Cecilia Kang, is that DoJ is concerned the deal, which also would involve a wireless co-marketing agreement with Comcast, Cox, Time Warner and Bright House Networks, the companies that jointly own the spectrum in question, would lead Verizon to neglect of its FiOS fiber-to-the-home service.

There’s no evidence that this might happen, but the fact that DoJ put it on the table demonstrates the problems inherent in government attempts to regulate competition.

For years, broadband competition has been an obsession at a number of agencies, starting with the FCC but also addressed by DoJ, the Federal Trade Commission, Congress and the White House. Federal policies such as UNE-P, network neutrality, spectrum set-asides and universal service funding have all sought to artificially tilt the competitive advantage toward non-incumbent providers, regardless of their overall financial viability (think Solyndra). State and local officials took the cue, and state public utilities commissions developed their own UNE-P-type set-ups and endorsed fiscally suicidal municipal broadband projects, all aimed at providing competitive alternatives to “monopolistic” telephone company broadband service.

So there’s some regulatory whiplash when a major government agency says that a competitively weak Verizon would be bad for consumers.

Nonetheless, this is pure supposition. Verizon shows every sign of remaining a significant competitor. The company is upgrading its FiOS service, offering speeds of up to 300 Mb/s. The Newark Star-Ledger, citing data from the New Jersey Board of Public Utilities, in June reported that cable companies are losing subscribers to FiOS, in the Garden State and the nation. “Verizon FiOS ate up market share in Jersey and the nation, growing nearly 20 percent through 2011 in Jersey, even better than the national gain for paid TV by telecommunications companies, up 15 percent,” the Ledger states.

Balanced against DoJ’s academic speculation is the fact that the cable spectrum is sitting unused amid a dire spectrum crunch. Wireless demand is booming, yet the government’s penchant for precautionary regulation is getting in the way of market-based solutions to real-world problems.

Moreover, as Scott Cleland points out on his blog, the Verizon-cable deal will create more competition as it will allow the four cable companies to bundle wireless service with cable. “The Verizon-Cable spectrum transaction, as currently configured,” Cleland writes, “is now a series of integrated secondary market transactions that result in multiple competitors gaining access to spectrum that they need, which will enable them to offer faster and more competitive broadband offerings, greatly benefiting American consumers.”

Even President Obama’s notoriously activist FCC cleared the spectrum sale, stipulating only that Verizon swap some of the acquired spectrum with T-Mobile (perhaps to abate some of the consequences of the FCC’s competition-obsessed decision to kill T-Mobile’s merger with AT&T, a rant for another day). But that condition itself implied an understanding that getting additional spectrum in play is a paramount goal.

I suppose there’s something to be said for the fact that two days into DirecTV’s shutdown of 17 Viacom programming channels (26 if you count the HD feeds) no congressman, senator or FCC chairman has come forth demanding that DirecTV reinstate them to protect consumers’ “right” to watch SpongeBob SquarePants.

Yes, it’s another one of those dust-ups between studios and cable/satellite companies over the cost of carrying programming. Two weeks ago, DirecTV competitor Dish Network dropped AMC, IFC and WE TV. As with AMC and Dish, Viacom wants a bigger payment—in this case 30 percent more—from DirecTV to carry its channel line-up, which includes Comedy Central, MTV and Nickelodeon. DirecTV, balked, wanting to keep its own prices down. Hence, as of yesterday, those channels are not available pending a resolution.

As I have said in the past, Washington should let both these disputes play out. For starters, despite some consumer complaints, demographics might be in DirecTV’s favor. True, Viacom has some popular channels with popular shows. But they all skew to younger age groups that are turning to their tablets and smartphones for viewing entertainment. At the same time, satellite TV service likely skews toward homeowners, a slightly older demographic. It could be that DirecTV’s research and the math shows dropping Viacom will not cost them too many subscribers.

This is the new reality of TV viewing. If you are willing to wait a few days, you can download most of Comedy Central’s latest episodes for free (although John Bergmayer at Public Knowledge reports that, in a move related to the DirecTV dispute, Comedy Central has pulled The Daily Show episodes from its site, although they are still available at Hulu).

What’s more, in a decision that should raise eyebrows all around, AMC said it will allow Dish subscribers to watch the season premiere of its hit series Breaking Bad online this Sunday, simultaneous with the broadcast/cablecast. This decision should be the final coffin nail for the regulatory claim of “cable programming bottleneck.” Obviously, studios have other means of reaching their audience, and are willing to use them when they have to.

Meanwhile, a Michigan user, commenting on the DirecTV-Viacom fight, told the MLive web site that “I love [DirecTV] compared to everyone else. I get local channels, I get sports channels. I wouldn’t have chosen if it was a problem.”

Now if Congress or the FCC steps up and requires that satellite and cable companies carry programming on behalf of Hollywood, the irony would be rich. Recall that just a few years ago, Congress and the FCC were pushing for a la carte regulation that would require cable companies to  reduce total channel packaging and let consumers essentially pick  the ones they want. Even the Parents Television Council is glomming onto this, as reported in the Washington Post, although not precisely from a libertarian perspective.

“The contract negotiation between DirecTV and Viacom is the latest startling example of failure in the marketplace through forced product bundling,” said PTC President Tim Winter in a statement calling on Congress and the FCC to examine the issue. “The easy answer is to allow consumers to pick and pay for the cable channels they want,” he said.

Winter’s mistake is that he views DirecTV’s challenge to Viacom as marketplace failure. Quite the contrary, it is a sure sign of a functional marketplace when one party feels it has the leverage to say no to a supplier’s aggressive price increase. And while I would be against a ruling forcing cable and satellite companies to construct a la carte alternatives, market evolution may soon be taking us there, but perhaps not the way activists imagined.

I’ll hazard a guess to say that today’s viewer paradigm isn’t so much “I never watch such-and-such a channel” than “I only watch one show on such-and-such a channel.” When Dish cuts off AMC and DirecTV cuts off Comedy Channel et al, they are banking that their customers won’t miss the station, just a handful of shows that they will be motivated enough to find elsewhere, if they haven’t done so already.

It might take a pencil and paper, but there is enough price transparency for a budget-minded video consumer to calculate the best balance between multichannel TV program platforms like satellite and cable, pay-per-view video, free and paid digital downloads and DVD rentals. The cable cord (or satellite link) may be difficult to cut completely, but the $200-a-month bill packed with multiple premium channel packages is endangered. The video consumer of the near-future might still keep cable or satellite for ESPN for Monday Night Football, but turn to Netflix for Game of Thrones, iTunes for Breaking Bad, and the bargain DVD bin for a season box set of Dora the Explorer videos. DirecTV and Dish Network are confronting these economics by confronting studios on their distribution strategy. The studios, for their part, may find they can’t aggressively exploit other digital channels and keep raising rates for multichannel operators.

While disputes like this are messy for consumers in the short term, the resolution will be a consumer win because it will force multichannel operators and the studios to adapt to actual changes in consumer behavior, not a policymaker’s construct of competitive supply chain. Washington would be wise to stay out.

Delaware looks ready to become the second state after Nevada to authorize Internet poker as a gambling bill was approved this week by the state senate 14-6 with one senator abstaining.

In the wake of the Department of Justice’s Dec. 23, 2011 memo that for all intents and purposes said there were no federal statutes prohibiting intrastate online wagering on anything save sports, several states. Including Iowa, New Jersey and California, have started moving on legislation that would permit Internet poker, other casino games, and online purchasing of lottery tickets for residents and visitors inside their borders.

Poker players across the country would welcome the chance to play online once more. The Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006 did not make Internet poker illegal outright, but by prohibiting U.S. banks from conducting transactions with off-shore gaming sites, made it extremely difficult for U.S. players to open or maintain accounts with legitimate sites such as Bovada, Bodog and PartyPoker.

With legislation moving along, most gaming industry analysts see Internet poker becoming a reality in at least one or two states by the end of this year.

While the topic of online gambling is still controversial, poker is just one more place where the Internet has had an impact. Before the World Wide Web, you either had to live in Nevada or New Jersey (even in states that had casino gambling, not every casino had a card room) to play regularly. For most who did play, poker was a friendly diversion within a family or social circle.

In broadening poker’s appeal, the Internet also changed the nature of the game. These changes fully manifested themselves when Chris Moneymaker won the main event of World Series of Poker (WSOP) in 2003. Moneymaker was the first world champion to have qualified for the tournament at on line site. The WSOP was the first major live tournament he played. The bulk of his experience and expertise was acquired through online play.

In honor of developments in Delaware and elsewhere, and keeping in mind that the main event of the 2012 World Series of Poker begins July 7, and because it’s Friday afternoon, let’s look at four ways the Internet has changed poker significantly from the game your parents knew. For our purposes here, we will keep things in the context of Texas Hold ‘Em, today’s most popular poker game.

Math knowledge has become critical to winning

You’re last to act and have four to the winning, or “nut,” flush (say the Ace and 10 of spades in your hand, with two more spades among the four community cards that have been drawn). There are no pairs showing on the board that would make an opponent a possible full house. You’re the last to act. The pot is $100 and it will cost you $50 to call. Do you call, raise or fold?

Since the Internet offers no opportunity to assess a player’s body language, a solid grounding in mathematics and probability theory became more important to consistent winning online. This has since carried over to live games. When it comes to gambling, a good bet pays better than the odds of the expected outcome. Since there are 9 spades remaining among the 46 cards you haven’t seen, the odds of a making the nut flush “on the river,” that is, with the final card drawn, is 46/9 or just slightly more than 5 to 1. That means for you to consistently make money from this decision the pot must be more than 5 times the size of your $50 bet for you to correctly call. In the example above, the right move is to fold.

Good poker players always had a feel for pot odds. But the Internet made the math aspect integral to long-term success at the game. In the past, mediocre players could survive much longer without a grasp of pot odds and the more fluid concept of “implied odds.” Today, because of the Internet, you’ll find good players are adept at calculating and manipulating pot sizes to drive out drawing hands that could trump treys or a made two-pair. Sharper players not only keep pot odds in mind, but are aware of basic win percentages of any two-card Hold ‘Em hand against any random hand. That accounts for the “maniac” play you find in richer no-limit games–players making big bets, even going all-in pre-flop from a late position (that is, they are among the last to act). They may hold a weak hand, but they are nonetheless wagering that it has a 50 percent chance or better of beating the two or three hands behind it. Detailed knowledge of hand percentages, which can determine the correct times as to bet all your chips, is now integral to winning tournaments. Sites like PokerStove.com provide hand-analysis software that help players hone this tactic.

Aggressiveness is Rewarded

Because successful Internet play depends on the application of math in every poker hand, it has yielded a generation of players who are far more aggressive when they have the edge. Today’s players who are dealt pocket aces or kings, unless they develop into a monster hand on the flop, are not going to allow six or seven players to stick around through the river just to fuel a big pot. By then, their aces will likely have gone from favorite to underdog. The Internet has taught players to play big pairs, two-pairs and treys early and aggressively, while they still have the lead.

Conversely, today’s passive players suffer in several ways. For one, they pay heavily for calling early with marginal hands that can’t justify a follow-up call to a raise behind them. Second, once an aggressive player realizes that a passive player won’t call a raise, the aggressive player will begin raising with weaker hands, say a suited 8-7, in hopes the passive player, out of fear, will muck a slightly better hand like 6,6 or J,10. Third, when an habitual passive player does call a raise, the aggressive player knows that he is likely has a strong hand and backs off. The passive player doesn’t get the full value for his good hand.

Growth of Fast Tournaments

Until the Internet, multi-day, multi-table tournaments were the rule, a tradition that’s kept alive by the WSOP, which features a number of two- and three-day events, culminating in the 10-day main event. The Internet popularized “sit-and-goes”–single table tournaments decided in a few hours, as well as smaller multi-table events in which the blinds and antes rise in 15 or 20-minute intervals compared to an hour or more in traditional formats. For up-and-coming players they can be fun because an inexpensive entry fee can yield several hours of play.

These “fast” tournaments call for the knowledge of math and the daring (some might say reckless) aggressiveness that the Internet has fostered. In fact, traditional tournament strategies may be of no use in these faster formats. For a long time, Patrick Harrington’s three-volume Harrington on Hold ‘Em was the bible for tournament strategy. Newer books, such as Arnold Snyder’sPoker Tournament Formula and Lee Nelson’s Kill Phil and Kill Everyone have generated controversy by claiming Harrington’s advice and methods won’t work in fast tournament formats. Snyder and Nelson advocate new strategies that address factors that arise in these fast games, such as relative chip value, playing position and the way the math of the game changes when play reaches the “bubble,” that is, when exiting the tournament means missing the a significant share of the prize money by just one or two places.

The Game Has Expanded

Fifteen years ago, only a handful of casinos had poker rooms. Because of the Internet, now you can find one in every casino. There’s also a wider variety of games and tournaments, suited to players of various skill and experience levels. A beginner may be comfortable at the $3-$6 limit game Golden Nugget in downtown Vegas. Someone looking for a challenge may try the $10-$20 no-limit game at the Aria on the Strip.

The return of Internet poker promises more variety at lower stakes, increasing the popularity of a game of skill already enjoyed by millions of responsible adults. And yes, the changes to the game brought by online players further underlines the level of skill poker requires. Poker is not a game of chance, despite what some legislators insist when citing existing state laws against online wagering. The very fact that playing strategies evolve over time–techniques that won in the past fail to win now–demonstrates this. Poker is much closer to chess or go in this regard. As players master the game, they affect the way it is played.

In his syndicated column yesterday, Leonard Pitts, Jr. bemoaned the decision by the New Orleans Times-Picayune to cut back its print edition to three days a week, and attacked the sentiment, most recently expressed by former Alaska Gov. Sarah Palin, who might herself been quoting Matt Drudge, that the Internet allows “every citizen to be a reporter and take on the powers that be.”

Pitts immediately attacks the comment on the basis of its source, Palin. Then he wanders further from the point by conjuring the truly unpleasant conditions under which reporters, Picayune staffers no doubt among them, labored to ensure news got out in the weeks following Hurricane Katrina’s devastation of the Gulf Coast.

One night I had the distinct honor of sleeping in an RV in the parking lot of the Sun Herald in Gulfport, Miss., part of an army of journalists who had descended on the beleaguered city to help its reporters get this story told. The locals wore donated clothes and subsisted on snack food. They worked from a broken building in a broken city where the rotten egg smell of natural gas lingered in the air and homes had been reduced to debris fields, to produce their paper. Shattered, cut off from the rest of the world, people in the Biloxi-Gulfport region received those jerry-rigged newspapers, those bulletins from the outside world, the way a starving man receives food.

Yet nothing in this rather self-important prose tells us what’s so irreplaceable about printed newspapers as a platform for news delivery. Instead, we get a straw man.

Palin’s sin–and she is hardly alone in this–is to consider professional reporters easily replaceable by so-called citizen journalists like Drudge. Granted, bloggers occasionally originate news. Still, I can’t envision Matt Drudge standing his ground in a flooded city to report and inform.

One can say the same thing about Bill Maher, Keith Olbermann or Wolf Blitzer. Yet, come the next disaster, there’s no reason not to expect the same dedication from a handful of individuals who are driven to place themselves in the middle of an adverse, if not outright dangerous, event just to document first-hand what is happening. Only this time they have the cheap video cameras, battery operated laptops and cellphones with wireless Internet connections. The news will get out.

What Pitts actually is lamenting is the end of the monopoly of institutional media. Big media won’t go away, and will certainly carve out a large space on the Internet, but it’s losing the ability to define news and confer legitimacy on a newsgathering enterprise. Pitts equates the loss of newspapers with the loss of skilled reporting. This fallacy needs to be called out because it fuels the contention , voiced by FCC Chairman Julius Genachowski, Sen. John Kerry, and former Connecticut Gov. Jodi Rell, among other political leaders, that the government should prop up failing newspapers so they can compete against Internet news outlets. To his credit, Pitts never goes this far, but his arguments contain an unspoken invitation for others to do so.

At the end of his column Pitts says he doubts that “citizen journalists” have the credibility, knowledge or training of their newspaper or broadcast counterparts. Here, it helps to remember that we journalists did not truly join the professional class until the 1970s. Carl Bernstein, one-half of the reporting team that inspired a generation of j-school recruits, didn’t finish college. Peter Jennings, perhaps the best Middle East TV correspondent of his time, was a high school drop-out. What they did have, was that unique talent to sniff out news and follow a story where it led them.

My first boss at my first salaried reporting job, as old school a newspaper editor you would find, would give job applicants a convoluted press release to rewrite. The aim was not to test copy editing, speed, grammar or style, but to see if his prospective staffer could pull out the actual lead. More than anything, he valued and appreciated a reporter’s nose for news. To him this was the innate journalistic talent; everything else could be taught.

Newspaper companies don’t define news or reporters. News is timely, topical, compelling and significant. A reporter is anyone who can mine a topic-from something sweeping as global economy trends to as parochial as local city government-and communicate information that meets this criteria. And, yes, anyone can be one.

Thanks to TLFers Jerry Brito and Eli Dourado, and the anonymous individual who leaked a key planning document for the International Telecommunication Union’s World Conference on International Telecommunications (WCIT) on Jerry and Eli’s inspired WCITLeaks.org site, we now have a clearer view of what a handful of regimes hope to accomplish at WCIT, scheduled for December in Dubai, U.A.E.

Although there is some danger of oversimplification, essentially a number of member states in the ITU, an arm of the United Nations, are pushing for an international treaty that will give their governments a much more powerful role in the architecture of the Internet and economics of the cross-border interconnection. Dispensing with the fancy words, it represents a desperate, last ditch effort by several authoritarian nations to regain control of their national telecommunications infrastructure and operations

A little history may help. Until the 1990s, the U.S. was the only country where telephone companies were owned by private investors. Even then, from AT&T and GTE on down, they were government-sanctioned monopolies. Just about everywhere else, including western democracies such as the U.K, France and Germany, the phone company was a state-owned monopoly. Its president generally reported to the Minster of Telecommunications.

Since most phone companies were large state agencies, the ITU, as a UN organization, could wield a lot of clout in terms of telecom standards, policy and governance–and indeed that was the case for much of the last half of the 20th century. That changed, for nations as much as the ITU, with the advent of privatization and the introduction of wireless technology. In a policy change that directly connects to these very issues here, just about every country in the world embarked on full or partial telecom privatization and, moreover, allowed at least one private company to build wireless telecom infrastructure. As ITU membership was reserved for governments, not enterprises, the ITU’s political influence as a global standards and policy agency has since diminished greatly. Add to that concurrent emergence of the Internet, which changed the fundamental architecture and cost of public communications from a capital-intensive hierarchical mechanism to inexpensive peer-to-peer connections and the stage was set for today’s environment where every smartphone owner is a reporter and videographer. Telecommunications, once part of the commanding heights of government control, was decentralized down to street level.

There’s no going back. Even authoritarian regimes understand this. Fifty years ago, when a third-world dictatorship faced civil strife, it could control real-time information by shutting off its international telephone gateway switch. Not so today. So much commerce, banking, transportation and logistics depends on up-to-the-second cross-border data flow that no country, save for truly isolated regimes such as North Korea, can afford to cut themselves off the global Internet, even for one day.

That’s why it’s no surprise that the authoritarian regimes of China and Russia, supported by even more despotic states such as Iran, are spearheading the UN/ITU effort. Their politically repressive regimes can’t function with the Internet, but their economic regimes, tied as they are to world trade, can’t function without it. That’s why attempts at Internet control have to be more nuanced and cloaked in diplomacy.

As we see in the leaked documents, their agenda is masked as concerns about computer security and virus and malware detection, or in arguments about how nation-states have a historically justifiable regulatory responsibility for setting technical standards for IP-to-IP connections. But dig deeper and you find their proposed solutions would give them the power to read emails, record browser habits and extort fees from web sites and services such as Google, Facebook and Twitter (if they aren’t going to block them completely).

In the long run, it is doomed to fail. As an organism, the Internet defies top-down control. Every time a country attempts to impede certain types of Internet communications, via firewalls, filters, or outright domain name blocks, individuals create workarounds. It’s not that difficult.

That simple fact might engender complacency among netizens here in the U.S. And besides, speaking out against ominous plots by UN agencies makes us sound too much like the nutty neighbor with the backyard bunker.

But there are serious risks to what the ITU and the UN are attempting. Even if only gets part of what it wants, the ITU’s Internet grab stands to seriously damage the global free and open Internet.

First, as a multi-lateral “international” agreement, the ITU plan will give repressive regimes cover for Internet clampdowns. Even if the U.S. does not sign on, all it will take is buy-in a few other Western governments, who might just see the treaty as convenient (see the U.K.’s recent Home Office ideas), to allow the more egregious dictatorships in the world to take repressive action.

The U.S. should be leading all democratic governments in speaking out against the ITU plan. A weak-willed “I’m-OK-you’re-OK” approach, or worse, a non-judgmental relativism that suggests American ideas of Internet freedom should defer to a more repressive country’s “national culture,” are simply not acceptable.

It seeks to displace multi-stakeholder development. The collaborative culture of the Internet, driven by consensus and undergirded with a commitment to open standards and platforms, is the ITU’s primary target. When a nation-states make rules for phone networks, they can specify equipment, favor their domestic manufacturers, create cumbersome compliance rules, and ban possession of non-compliant devices all with the force of heavy-handed law. This is hardly far-fetched. Ethiopia has made Internet phone calls (i.e. Skype) illegal.

It seeks to normalize government regulation of the Internet. For more than 30 years, deregulation has been the predominant policy toward the Internet. This trend has managed to hold on despite numerous attempts at censorship, “neutrality” regulation and price controls. The most common proposition we hear runs to the effect of the Internet has become so important that it needs regulation. Frankly, the Internet has survived and thrived since its beginning without top-down state regulation. Worldwide access continues to grow. By and large, international data networks operate reliably and inexpensively. If anything, the burden of proof for regulation of the ‘Net should be ever higher. Why, exactly, do we need an international regulatory regime for the Internet? So far those who would impose one haven’t said so. And sorry to say, because citizens are taking to the streets with their iPhones and demanding basic freedoms is not an acceptable reason.

More Coverage:

WCITLeaks Gets Results

The UN’s “Internet Takeover” and the Politics of Kumbaya

WCIT is About People vs. Their Governments

Count me among those who are rolling their eyes as the Department of Justice initiates an investigation into whether cable companies are using data caps to strong-arm so-called “over-the-top” on-demand video providers like Netflix, Walmart’s Vudu and Amazon.com and YouTube.

The Wall Street Journal reported last week that DoJ investigators “are taking a particularly close look at the data caps that pay-TV providers like Comcast and AT&T Inc. have used to deal with surging video traffic on the Internet. The companies say the limits are needed to stop heavy users from overwhelming their networks.”

Internet video providers like Netflix have expressed concern that the limits are aimed at stopping consumers from dropping cable television and switching to online video providers. They also worry that cable companies will give priority to their own online video offerings on their networks to stop subscribers from leaving.

Here are five reasons why the current anticompetitive sturm und drang is an absurd waste of time and might end up leading to more harm than good.

Cable companies set data caps high, really high. Comcast, for example, currently sets its residential data limit at 250 or 300 gigabytes (GB), depending on the market. Searching around the ‘Net, I’ve found that a rule of thumb is 1 GB equals 1 hour of video, although quality, frame rate and resolution may affect this measure. However, this 1 hour = 1 GB tracks with my own household downloading, which varies between YouTube and iTunes downloads, and Netflix HD.

Also, despite the use of the word “caps,” residential Internet users are not cut off when they reach the 250 GB threshold. Comcast customers are just charged $10 for another 50 GBs, that is, another 50 hours of video.

The idea of a threshold is not unreasonable. Video delivery requires greater network management to address issues such as latency and error correction, adding costs to network operation. The alternative is for service providers to raise the base price of “unlimited downloads” for all users, essentially spreading the cost of a small percentage of high-volume users across the entire subscriber population. That in itself raises fairness questions. It’s a simple trade-off, do we want higher prices across the board, or should the top tier users bear the costs they are responsible for imposing?

The pay-per-view market is crowded, and cable has a right to compete. Consumers have a fair degree of choice among pay-per-view providers. Cable companies, along with Amazon, Vudu, Cinema Now and Apple’s iTunes all have solid selections in terms of recent film releases and TV episodes. These virtual rentals generally cost $5 to $7 for a 24- to 48-hour period. Most also offer viewers an option to buy a digital copy. While Netflix’s on-demand menu lacks the timeliness of the others, it compensates in terms of depth, and thousands of titles are available for a relatively low $8 per month subscription fee. Then there’s Google’s YouTube, the largest server of Internet video, which is trying to expand off the desktop PC and onto the living room big-screen by funding development of new “channels.” Although the first fruits of this venture, channels such as The Nerdist seems a bit, come across as a bit, well nerdy, we should know by now not to discount anything Google attempts.

The point is that cable is not somehow shutting down “low-cost” access to video, as the DoJ claims. In truth, alternatives to cable pay-per-view can be less expensive and more varied. At the same time, the argument that cable companies should count there own programming against data caps doesn’t have much traffic. It is their infrastructure after all, built with their capital, and the cost of programming and carriage is factored into the “cable TV” portion of the overall bill. Forcing cable companies to count the cost of their own programming in the data pipe also seems to penalize their customers rather than lead to any sort of level playing field.  (See Berin Szoka’s post for more discussion on this topic)

“Cutting the cable cord” involves a value proposition. Like telephone service before it, household video delivery no longer depends solely on a single hard-wired monopoly infrastructure. For someone not particularly interested in watching TV news, reality shows and real-time sports events, it is possible to do away with cable TV entirely and get one’s video fix through DVDs, digital downloads via wireless service providers. Or one could even chose the lowest-priced cable tier, essentially local channels, with Internet access.

But the landline telephone analogy has limits. Wireless service is replacing wireline because it offers much more value than the old home phone. For starters, wireless makes communications truly personal: your phone is associated with you, not a geographic location like your home office. Today’s wireless phones also are as much information appliances as they are communications tools.

True, cable companies don’t get much love from consumers, but there’s still something to be said for watching the NBA playoffs on a 50-inch HD big screen. And contrary to what the DoJ thinks, there is no consumer “right” or entitlement to this service at below-market prices. Saying so–and assigning the social cost on one segment of the value chain, namely the infrastructure owners, stands to create all sorts of problems. For example, why hold the cable company responsible for low-cost video and not the TV manufacturers? Why shouldn’t all DVDs rentals be priced at $1 rather than $3 for “new releases?” Why should Apple’s iTunes be permitted to charge extra for TV episodes delivered “free” the night before?

The answer is that there are costs and trade-offs associated with each. An Amazon customer may be able to buy all of season one of Game of Thrones for the cost of one month’s subscription to HBO, but she must wait almost a year for the opportunity to do so. In this model, the cable company leverages timeliness, HBO is protects its distribution partners, yet, in the the long run, the programming is available to those who don’t want to pay the cable premium. It’s difficult to see where consumer rights are being violated.

Wireless is the wild card. As alluded to above, wireless service may yet be a substitute for cable connections. Spectrum scarcity, however, makes wireless connections more expensive, and therefore usage caps are much lower (unless you’re piggybacking on a household WiFi supported to a cable modem). But this is just one more reason to speed ahead with spectrum re-allocation.

Here’s where current policy works at cross-purposes. Fostering greater consumer choice is a laudable goal. But that goal can be achieved faster and more cost-effectively if policy is aimed at increasing market mechanisms – which spectrum auctions, unencumbered by conditions, will do. It beats creating cumbersome regime of subsidized service and mandating prices, which, at the end of the day, is nothing but raiding the wallets of average users to pay the cost of the heaviest bandwidth consumers.

The TV game is changing. Looking at the current video landscape, I have trouble seeing the cable companies as having any sort of advantageous position right now. Their big competitive differentiator, wide scope of programming, is becoming commoditized. Television audiences are fragmenting, which means even the most popular shows draw lower ratings than in the past. oard. DVRs, DVDs and iTunes allow audiences to avoid advertising, which means the one-time stalwart business model that supported free content since the beginning of broadcasting is changing.

Truth be told, no one really knows exactly how TV programming content and delivery will change over the next ten years–only that it will. As broadband data capacity and management becomes more germane to video delivery, bandwidth tiers may yet be an important to pay for it and keep content free. At the same time, there is enormous potential for unintended consequences if unwise policy courses are taken. The worse thing right now is for any government agency to start fumbling around with mandates, regulations and directives on broadband video entertainment, whether they address pricing, platforms or business models.

The Reason Foundation today has published the Telecommunications and Internet section of its 2011 Annual Privatization Review.

Although there’s been a bit of lead time since the articles were written, they are still timely. Notable is the discussion on the collection of state sales taxes from Internet retailers, back in the news now that Amazon.com has reached an agreement with the state of Texas to collect sales taxes from consumers in the Lone Star State. The settlement concludes a lengthy battle in Austin as to whether Amazon’s distribution facility in Ft. Worth constitutes a “nexus” as defined in previous court cases.

While a blow to Amazon’s Texas customers (full disclosure: I count myself as one), the action may shed further light on the debate as to how much advantage the Amazon has because it can waive sales tax collection. Competitors such as ailing Best Buy have said it’s enough to hurt brick-and-mortar retailers. Amazon points to findings that in New York, the most populous state where it collects sales tax, sales have not fallen off. Soon we’ll see if Texas tracks with that data as well. If it does, it will further validate opinions that Amazon and other on-line retailers are succeeding because they have fundamentally changed the way people shop, not because they can simply avoid sales taxes.

Also in the report look for updates on the FCC’s options for the next spectrum auction, state and federal policymaking on search engines and social networking sites, and how priorities may change as the FCC migrates from the current Federal Universal Service Fund to its new more broadband-oriented Connect America Fund.

The telecom section of APR 2011 can be found here.

A few weeks back, now-former Best Buy CEO Brian Dunn blamed the retailer’s $1.7 billion quarterly loss and its decision to close 50 stores nationwide on the fact that its online competitors, Amazon.com in particular, “aren’t encumbered by the costs of running physical locations and in many cases don’t have to collect sales tax.”

Dunn’s comments rehash the now-familiar meme that forcing e-retailers to collect sales tax is the silver bullet to saving brick-and-mortar retailers. It gives politicians on all sides cover–for some, it’s a way to keep revenues coming in for excessive spending. For others, it’s a handy way to wave the flag for local commerce.

But slapping consumers with more taxes isn’t going to save retailing. In a short piece this week, BusinessWeek explores the fundamental shifts online retailing has created in consumer behavior. Here’s a nugget from the article:

Best Buy’s decline reflects a cultural shift that’s reshaping the retail world. All big-box stores, and Best Buy in particular, thrived in an era when comparison shopping meant physically going from store to store. The effort required of consumers was a kind of transactional friction. With the advent of mobile technology, friction has all but disappeared. Rather than ruminate with a salesperson before making a selection, tech-savvy consumers are more likely to walk into stores, eyeball products, scan barcodes with their smartphones, note cheaper prices online, and head for the exit. Shoppers can purchase virtually any product under the sun on Amazon or eBay while sipping a latte at Starbucks. For traditional retailers, that spells trouble, if not death. “So far nothing Best Buy is doing is fast enough or significant enough to get in front of these waves,” says Scot Wingo, CEO of e-commerce consulting firm ChannelAdvisor.

Certainly e-commerce created competitive problems for Best Buy, but the sales tax advantage was likely the least of them. Brick-and-mortar retailing is facing an out-and-out crisis that’s going to require creativity and innovation to solve. Taxing consumers who buy online won’t do much toward that end.

And for more, see Adam’s post on Heritage Foundation’s new report on Internet tax policy.

Reason.org has just posted my commentary on the five reasons why Federal Trade Commission’s proposals to regulate the collection and use of consumer information on the Web will do more harm than good.

As I note, the digital economy runs on information. Any regulations that impede the collection and processing of any information will affect its efficiency. Given the overall success of the Web and the popularity of search and social media, there’s every reason to believe that consumers have been able to balance their demand for content, entertainment and information services with the privacy policies these services have.

But there’s more to it than that. Technology simply doesn’t lend itself to the top-down mandates. Notions of privacy are highly subjective. Online, there is an adaptive dynamic constantly at work. Certainly web sites have pushed the boundaries of privacy sometimes. But only when the boundaries are tested do we find out where the consensus lies.

Legislative and regulatory directives pre-empt experimentation. Consumer needs are best addressed when best practices are allowed to bubble up through trial-and-error. When the economic and functional development of European Web media, which labors under the sweeping top-down European Union Privacy Directive, is contrasted with the dynamism of the U.S. Web media sector which has been relatively free of privacy regulation – the difference is profound.

An analysis of the web advertising market undertaken by researchers at the University of Toronto found that after the Privacy Directive was passed, online advertising effectiveness decreased on average by around 65 percent in Europe relative to the rest of the world. Even when the researchers controlled for possible differences in ad responsiveness and between Europeans and Americans, this disparity manifested itself. The authors go on to conclude that these findings will have a “striking impact” on the $8 billion spent each year on digital advertising: namely that European sites will see far less ad revenue than counterparts outside Europe.

Other points I explore in the commentary are:

• How free services go away and paywalls go up
• How consumers push back when they perceive that their privacy is being violated
• How Web advertising lives or dies by the willingness of consumers to participate
• How greater information availability is a social good

The full commentary can be found here.

[Cross-posted at Reason.org]

This week Google announced that it is grouping 60 of its Web services, such as Gmail, the Google+ social network, YouTube and Google Calendar, under a single privacy policy that would allow the company to share user data between any of those services. These changes will be effective March 1.

Although we have yet to see it play out in practice, this likely means that if you use Google services, the videos you play on YouTube may automatically be posted to your Google+ page. If you’ve logged an appointment in your Google calendar, Google may correlate the appointment time with your current location and local traffic conditions and send you an email advising you that you risk being late.

At the same time, if you’ve called in sick with the intention of going fishing, that visit to the nearby state park might show up your Google+ page, too.

The policy, however, will not include Google’s search engine, Google’s Chrome web browser, Google Wallet or Google Books.

The decision quickly touched off discussion as to whether Google was pushing the collection and manipulation too far. The Federal Trade Commission is already on its back over data sharing and web tracking. With this latest decision, although it’s not that far from how Facebook, Hotmail and Foursquare work, just more streamlined, Google, some say, is all but flouting user and regulatory concerns.

But let’s not rush to condemn this move. I, for one, want to see what happens because Google is boldly putting the privacy paradox to the test.

Going by my own Google search, the term “privacy paradox” has been kicked around for almost ten years. Boiled down, it describes the repeated finding that while individuals express a high degree of concern for privacy protection online, few, in practice, take advantage of privacy safeguards when they are offered.

This apparent contradictory behavior has been noted in a number of studies, including a noted 2007 paper in the Journal of Consumer Affairs.  A 2005 Pew Internet Study, cited at the time by Forbes, found that that 54 percent believe that Web sites invade their privacy when they track behavior. But the same study showed that 64 percent were willing to give up personal information to get access to a Web site.

In the marketplace, when search engines like Google began facing vocal pushback from users and regulators on its tracking of user search histories, one of Google’s competitors, Ask.com, tried to differentiate itself by unveiling AskEraser. Just like it sounds, the tool allows users to opt out of search tracking. As Forbes reported, users shrugged and AskEraser did nothing for Ask’s market share, while Google’s continued to grow.

Contrary to the first hysterical media reports, Google is not recording your whole digital life. There indeed is an opt-out: you don’t have to be part of the Google service ecosystem, which is far from the only game in town. Remember, browsing and search are outside this program. Everything else is available from other sources. Moreover, data is only shared if you’re logged in under your Google username. Otherwise you can look at all the YouTube videos and Google maps you want without anyone being the wiser.

I’ll admit the biggest outcry may come over the policy with regard to Android phones. Since you’re technically logged into your phone all the time, it seems tougher to opt out. But there are other devices aside from Android, even from Verizon, so consumer will have alternatives without having to change service providers. Nonetheless, given the popularity of the combination of mobility and social networking, seen not only in Google and Facebook, but in Twitter, Yelp! and Foursquare, it is arguable that a majority of users are not as concerned about their privacy as advocates of more restrictive regulations believe.

And arguable is the operative word. There indeed may be enough significant user backlash that Google backs off. In the last six months we’ve seen at least two instances of rapid market correction–Netflix’s decision not to go through with structurally separating mail and online video rental accounts and Bank of America’s reversal of its plan to charge online banking fees. Both occurred before the government could step in a provide its own (and no doubt clumsy) remedy.

Then again, there’s a significant body of research that suggests that, in spite of their own complaints, users may opt to accept greater benefits and convenience in exchange for more disclosure about their habits. With this mind, it will serve consumers best if companies like Google are allowed to experiment with the privacy paradox to find where actual boundaries are, rather than hamstringing potential innovation by pre-emptively and blindly setting them.

(Cross posted at Reason.org)

Americans got a preview of what life would be like under the U.S. Senate’s Protect Intellectual Property Act (PIPA) when the Department of Justice and the FBI yesterday shut down Megaupload.com and arrested its founder and six other executives on charges of illegally sharing copyrighted material.

The move comes in the middle of a vociferous debate on PIPA and its House counterpart, the Stop Online Piracy Act (SOPA) and provides more fuel for opponents who argue that the bills threaten to undermine legal, legitimate mechanisms that are integral to the Internet technological and social utility (See my commentary posted on Reason yesterday afternoon).

PIPA supporters have argued that worries about Internet censorship and user disruption are exaggerated and the bill’s real goal is to target shadowy “rogue” sites that deal in counterfeit merchandise and pirated video downloads. Yesterday we found out just who the Feds thinks these rogue sites are.

Megaupload.com is a major commercial file-sharing site used by millions of consumers and businesses in the course of daily business. Users park large files that can then be shared among friends, family or professional workgroups. It competes directly with other such services such as Dropbox and RapidUpload. Megaupload claims to have about 50 million daily visits and even DoJ notes that at one point it was estimated to be the 13th most frequently visited site on the Internet.

Can infringing material be found on Megaupload? No doubt it can. But infringing material can also be found on YouTube and just about every other file-sharing site. The courts have held that these sites are not liable for infringement as long as they honor cease and desist notices to take down offending content.

The DoJ’s indictment rests on the claim that Megaupload.com first and foremost was in the business of piracy. The seven executives arrested yesterday (a group that did not include the company’s CEO, Swizz Beatz, the husband of singer Alicia Keyes) are being charged with racketeering. The indictment claims that Megaupload.com robbed artists, musicians and authors of $500 million, and that the site is actually a front for a worldwide conspiracy.

These charges might yet be true, but the supposition shouldn’t trump due process (See Jerry Brito’s post below). That it did brings the precise concerns of PIPA and SOPA critics into high relief. In addition to the arrest, the Feds have forced Megaupload.com to shut down, essentially seizing not only private property of Megaupload, but the documents, photos, videos and artwork of millions of legitimate users–some of it crucial to their livelihoods–on what amounts to a thin pretext that could be applied to any file-sharing site. Anonymous, the loosely knit “hacktivist” group, made its feelings known with its retaliatory DDoS attacks on DoJ, FBI, MPAA and RIAA sites yesterday, but I think there’s more blowback to come. A significant number of average Americans lost time, money and digital property yesterday in what they perceive as a massive overreach by a DoJ that is already under fire for its blundering tactics (Fast and Furious, the Black Friday poker site shutdowns). I’ll bet the phones were ringing off the hook in many Congressional offices this morning.

Moreover, the charges may not stick. By all accounts, Megaupload is gearing up for a fight. As its lead attorney notes, case law, including the YouTube decision, favors the company. Plus there’s the fact there are no copyright  judgments currently against it. It reportedly has also been working to iron out copyright issues with rightsholders, and has garnered support from a cross-section of artists and performers–the very community that the government alleges Megaupload has been ripping off. But even it wins, it might be a Phyrric victory, because by the time the legal dust settles, Megaupload may well be out of business. Elsewhere, Dropbox and RapidUpload execs must be sweating.

The takeaway from all this is that SOPA and PIPA will codify these DoJ tactics. And with the Megaupload siezure sitting out there as Exhibit A, no one can take the Feds at their word that they will exercise any restraint or discretion in their definition of a “rogue” site.

The best hope is that Megaupload turns out to be the egg that make the omelet. The good news out of this week of contentious debate is that is that Senate Majority Leader Harry Reid has pulled the Tuesday PIPA vote from the floor calendar. In the lower chamber, House Judiciary Committee Chairman Lamar Smith said his panel won’t take up “there is wider agreement on a solution.”

Looks like the good guys might just win one.

Here’s Mike Riggs take on Reason.com’s Hit and Run.

(Cross posted at reason.org)

It’s rare when the entire Internet industry rises up with one voice. Perhaps that’s why the protest against the House of Representatives’ Stop Online Piracy Act and its Senate counterpart, the Protect Intellectual Property Act (PIPA), is getting so much attention. In policy circles, usually one segment of the online industry is jockeying for favorable position against another. Today, with Wikipedia dark, Google taped over, and a host of other sites large and small raising awareness through home page notices, New Media is drawing its line in the sand against the most astounding government overreach into Internet regulation to date.

The bills amount to good intentions gone awry. True, sites that sell brand-name counterfeits and offer illegal downloads are easy to find and no honest user advocates intellectual property theft. But SOPA and PIPA are extremely coercive and heavy-handed, and as both bills have percolated up through the legislative process, opposition has steadily mounted. There have even been outright turnarounds. The Business Software Alliance, a strong supporter of antipiracy measures and an initial backer of SOPA, reversed its position upon examining the bill.

SOPA and PIPA essentially place responsibility-and cost-of policing the Web for IP violations on the shoulders of Web site owners through an electronic version of prior restraint. The law would require Internet service providers (ISPs) to take steps to prevent their customers’ web browsers from connecting to alleged pirating site. Search engines like Google would have to scrub alleged pirating sites from their search results, or else disable links to them. Web advertising delivery systems would be required to block distribution of banners and links. Finally, sites which revolve around user-generated content, such as Facebook and Wikipedia, would be liable for any pirated content or link posted by any one of their millions of visitors.

How do the bills define a site that’s counterfeiting products or pirating copyrighted content, or one that allows users to link to them? Not very specifically. The bills’ vague language gives the Justice Department enormous leeway with a very light burden of proof in designating offenders. In sum, the bill would give the FBI and federal prosecutors to power to declare illegal any site they don’t like.

It is not the least bit alarmist to call this censorship. If either SOPA or PIPA were to pass, for the first time, the U.S. government would be able to block what Americans can access via the Web. Even the provisions against Internet gambling did not go as far (you could still get to a gambling site, you just couldn’t transfer money to it). Bottom line: the bills propose ISPs and search engines deploy the same type of Internet blocking mechanisms used today by authoritarian regimes in China, Iran and Syria, just to name three. Worse, when a democratic system such as ours engages in it, it provides these governments with political cover.

This is not to give short shrift to the problem of IP theft. But we have other methods for dealing with the issue that don’t trample free speech or due process. The Digital Millennium Copyright Act ensures that copyright can be policed and protected on music download sites and video sharing sites such as YouTube. But it requires the property owner to take responsibility. As for the complaint that much of the Web’s IP theft originates off-shore, then perhaps the best course is for the U.S. government, as a representative of its citizens, to work through diplomatic channels and with international law enforcement and to bring offenders to justice. It’s harder, and it doesn’t generate headlines for politicians, but it respects the rights of Americans, and that should trump convenience.

More on SOPA:

The Internet on Strike

At the Top of Congress’ New Year Agenda? Regulate the Net

Don’t Rush Anti-Piracy Bill, Free Market Groups Urge

The New SOPA: Now With Slightly Less Awfulness!

[Cross-posted at Reason.org]

One of the more critically praised films this year has been Shame, which has been in limited release around the country since December.  Although it’s an independent production, the film is being distributed by 20th Century Fox, a major studio, and stars Michael Fassbender, an actor who appears to be in the middle of his breakout moment.

The film is also rated NC-17.

Until recently, the Motion Picture Association of America’s NC-17 rating, which restricts admission to theatergoers 18 and older, was the box office kiss of death. Not only did NC-17 carry the notoriety of its predecessor, the X rating, it seriously hampered a film’s marketing. Boys Don’t Cry, The Cooler and Clerks are among the well-known examples of acclaimed films that were cut to win the more commercially acceptable R rating, in spite of protest from their filmmakers and actors that the cuts diminished the power and the point of the scenes in question.

But most newspapers and local TV stations won’t carry ads for NC-17 movies. Some theater chains, such as Cinemark, won’t exhibit them. Major retailers like Wal-Mart nor video rental chains like Blockbuster won’t stock NC-17-rated DVDs.

In Hollywood, art and commerce have always been in tense balance. That balance may shifting as the Web becomes a larger factor in advertising. For example, a newspaper’s policy against advertising NC-17 movies is meaningless if a theater chain no longer uses newspaper advertising at all. AMC, the second biggest chain in the country, has been cutting back on print advertising since 2009. Last June, the company documented its shift from print to Web in a quarterly filing with the SEC. Regal Entertainment Group, another chain, reportedly is following suit.

Meanwhile, consumers are buying and renting fewer DVDs from brick-and-mortar outfits, choosing to buy or rent online or simply watch on demand. Netflix, for example, makes Lust, Caution, a 2007 NC-17 feature directed by Academy Award winner Ang Lee, available both by mail and streaming.

Film promotion and advertising is a great example of the way the Web has become a significant marketing vehicle. Shame, albeit a grim, downbeat story of a sex addict and his troubled sister, not only opened to favorable reviews, it had one of the most impressive box office debuts for an NC-17 movie, averaging $36,118 per screen in a tight release in ten theaters in six cities the weekend of Dec. 2-4. By comparison, that weekend’s box office leader, Twilight Saga: Breaking Dawn Part 1, averaged just $4,087 per screen. The Muppets, second place in total gross, averaged $3,222.

Now in wider release, Shame has made $2 million as of Jan. 3, and currently ranks eighth among the 26 NC-17 films released since 1990.

As for Web-based marketing, Shame has its own site at FoxSearchlight.com. Shame has a fan page on Facebook. “Shame” delivers several movie-related links on the first page of a Google search, pretty impressive when you consider the title is a fairly common keyword (somewhere John Bradshaw’s eating his heart out).

You can find trailers for Shame at iTunes and Internet Movie Database (imdb.com), both mainstream sites for film previews. You don’t have to look too hard to find the “red band” trailer, which is played in theaters only in front of R-rated movies. Studios and exhibitors also can reach audiences through sites like Yahoo and Flixster, as well as through social networking, email and Twitter. These alternatives counter the limitations of advertising policies of old media.

They also decrease the clout of the MPAA Ratings Board, which has been accused of ratings bias against smaller, independent features aimed at adult audiences. Probably the best evidence of this is presented in the documentary This Film is Not Been Rated. Well aware that an NC-17 rating can kill a film at the box office, the ratings board has not been adverse to using it as a club to tone down films which its members subjectively find either morally or tastefully questionable.

While the shortcomings of the MPAA’s rating system have been discussed at length in many forums, I’ve always thought the most unfortunate aspect was that the MPAA never tried to counter the stigma of NC-17 as meaning “dirty movie.” Unlike the Electronic Entertainment Software Association, which devised the MA AO rating for video games while successfully communicating that the market can—and should—accommodate products designed exclusively for adults, the MPAA never tried to engage the media outlets, retailers and video rental companies that openly equated NC-17 with porn.

That Web-based marketing can chip away at this perception will prove much better for audiences and filmmakers. Most NC-17 movies are not aimed at mainstream moviegoers anyway. If Shame continues to find its audience—and draws more attention in the form of several Academy Award nominations, which many critics believe it will—studios may be less inclined to make compromising cuts on the MPAA’s whim out of fear of losing box office revenues. And this means a little more weight on the “art” side of art-commerce balance.

[Cross-posted at www.reason.org]

While shoppers were hitting the malls Friday–a fair percentage of them no doubt evaluating the many choices of wireless smartphones and service plans available–AT&T said it was withdrawing its FCC application to merge with T-Mobile.

AT&T’s move was in response to FCC Chairman Julius Genachowski’s decision to refer the merger to an administrative law judge, coupled with a statement that he remains opposed to the $39 billion merger.

Many analysts see this as the beginning of the unraveling of the acquisition. Although AT&T said it plans to defend the deal in court against a Department of Justice antitrust suit, the company has taken accounting steps that signal it is prepared to pay Deutsche Telekom, T-Mobile’s current parent, the $4 billion it pledged if it could not close the purchase by September 2012.

“The fat lady hasn’t sung yet,” said Craig Moffett, an investment analyst for Sanford C. Bernstein, as quoted by the Washington Post’s Cecilia Kang. “But she has taken the stage. And the band has begun to play.”

By itself, Genachowski’s move is a tremendous exercise of executive power, as an ALJ hearing would only occur if AT&T wins its suit with the DoJ or settles it satisfactorily. In essence, the FCC is attempting to craft an ad hoc court of appeals in order to abrogate a separate judicial ruling.

Genachowski says he opposes the merger because it will lead to higher prices for consumers, less innovation, less investment and fewer U.S. jobs, assertions that are all questionable. What Genachowski really thinks, as spelled out when the merger was first announced, is that there should be four national wireless network services providers in the U.S. (Cue Monty Python: Four, not three, not five, but four!), as it were some golden number.

This is technocratic thinking at its worst. Although over the course of his term Genachowski has correctly identified the pressing problems of spectrum shortages and rural broadband build-out, he believes telecom policy begins with enforcing what he sees as a “correct” number of wireless carriers. And while the FCC likes to point to market concentration metrics, including the highly dubious HHI index, much of the commission’s anticompetitive analysis (as does the DoJ’s) relies on narrow definitions that exclude legitimate regional competitors and acrobatic number-crunching.  All of these can be answered with equally, if not more significant numbers, much of it from the FCC’s own research.

What Genachowski and other fans of central economic planning overlook is that no matter what happens with AT&T, T-Mobile is going away. Deutsche Telekom doesn’t want it. It is losing customers and lacks the capital to invest.

Business analysts say a cable company or non-U.S.-based service provider like America Movil might step up, but as I’ve argued before, many of the same FCC objections would still hold. Now that the FCC has pressed ahead with its opposition, approval of any future T-Mobile buyer will appear arbitrary.

In the short term, the real impact of the FCC’s intransigence will be felt by the millions of wireless customers who are beginning to experience service degradation because of the spectrum crunch. The AT&T-T-Mobile merger was a market-driven response to that problem, as it would have combined the spectrum owned by each company, opening more channels to customers of both companies. It’s curious as to why the FCC, which acknowledges the spectrum shortage as well as its own dilemmas in addressing it, would short circuit a workable path toward some relief.

But you can always count on the magical thinking of government central planning to trump basic mathematics. According to Peter Rysavy, a wireless engineering consultant who spoke at on a spectrum policy panel at the DCWeek conference earlier this month, there is 10 MHz available per cell in a wireless downlink. 1 MHz of bandwidth can support about 1.4 Mb/s, he said, which means each cell can support only about 10 to 15 YouTube video streams at one time. This is why wireless data service often times out even in the middle of a big city. It’s only going to get worse as wireless data use increases.

It is ironic that the FCC, along with the consumer groups who have lined up against the merger, generally frown on the idea of bandwidth caps or throttling (indeed, consumers don’t like the either). But if the regulators are bent on preventing the market from fashioning solutions, while they themselves drag their feet on spectrum availability, restrictive pricing models are inevitable.

The FCC, in forcing AT&T’s retreat, virtually guarantees to bring about that which it wants to prevent-higher prices, poor service and reduced investment.

Cross-posted at Reason.org

The big news in online gambling circles these past two weeks has been the busting of BLR Technologies, a software supplier for a number of online gambling sites, after a leading gaming mathematician determined the variance against winning at its craps game was statistically off the charts.

While most online gambling sites host honest games, there’s bound to be some bad apples. What’s often overlooked is that there is a market-enforced structure that militates against suspect play or outright cheating. That was clearly at work here.

The finding already has led at least one online casino, 5Dimes, to remove the BLR software from its site. That the news circulated the online gambling community as quickly as it did, and led to immediate action from a major online casino group, testifies to the knowledge and power of online gamblers. Of course, the image of informed players backed by mathematical and statistical experts contrasts with the views of government policymakers, who tend to treat online gamblers as gullible knuckleheads who need to be protected from unscrupulous gambling predators, predominantly through bans. This misconception is worth keeping in mind as a Congressional panel convenes this week to revisit federal laws against online gambling.

In the BLR case, Michael Shackleford, whose Wizard of Odds website takes an in-depth mathematical approach to all manner of gaming probabilities, strategies and odds, personally tested the software after a reader complained that he had won only 25 percent of 3,200 “pass” or “don’t pass” bets made.

In craps, the bettor wins a pass bet by rolling a 7 or 11 on the initial, or “come-out,” roll. He loses immediately on a 2, 3 or 12. Rolling a 4, 5, 6, 8, 9 or 10 establishes a “point.” After this, in order to win, the player must roll the point before rolling another 7. A “don’t pass” bet works exactly the opposite.

In a Nov. 2 blog post, Shackleford said he first dismissed the complaint. Then, after reviewing videos the reader posted on YouTube, Shackleford decided to conduct his own series of trials, which confirmed the anomaly.

For example, the probability of rolling a 7 or 11 on a come-out roll is 22.2 percent. In the 328 bets Shackleford made, his expectation was about 73 come-out wins. His actual result with the BLR software was 33. Wins by successfully rolling an established point were not just below expectation, but statistical outliers. By Shackleford’s calculations, the odds of his overall result–a 24.7 percent win rate against an expectation of 49.29 percent–was 1 in 6 billion. Putting this in layman’s perspective, he said, “it would be 184 times easier to win the Powerball [lottery] 2 out of 2 times than to be as unlucky as I was in this craps game.”

Shackleford’s test was repeated by mathematician and gaming software consultant Eliot Jacobson, who also experienced the same extreme improbabilities. While Shackleford simply cautioned players against sites using the BLR software, Jacobson went as far to call the software “rigged.”

As the House panel gathers this week to evaluate the pros and cons of online gambling, members should be aware that most online gamblers are smart, responsible and sensible when it comes to playing. They are also very good at sniffing out suspicious sites, verifying whether real problems exist, and exposing them when they do. The online gambling ban, effectively managed through intrusive regulation of international financial transactions, was a mistake to begin with and deprives law-abiding Americans from using the Internet to engage in a recreational activity legal, in some form or another, in a majority of states. The busting of BLR is simply another reason to end the nannying over online wagering.