Congress has become a less important player in the field of technology policy. Why did that happen, and what are the ramifications for technological governance efforts going forward?

I’ve spent almost 30 years covering technology policy. There was a time in my life when I spent almost all my time as a policy analyst preoccupied with developments in the federal legislative arena. I lived in the trenches of Capitol Hill and interacted with lawmakers and their staff morning, noon, and night.

In recent years, however, I have spent very little time focused on the Legislative Branch because it has effectively become a non-actor on technology policy. It is not that congressional lawmakers stopped caring about tech policy. Interest actually remains quite high—perhaps higher than ever before. Congress also continues to introduce lots of bills, host plenty of hearings, and issue mountains of press releases related to tech policy issues.

Nonetheless, all that interest and activity has not really translated into much important legislation. While it is hard to track tech-oriented legislative trends statistically because of the complication of defining “technology policy” over time, judged by substantive output, Congress has largely checked out of technological policymaking.

Think about digital privacy. How many years now have people been predicting a comprehensive “baseline” privacy bill would pass in each legislative session? It never happens. Perhaps it will this year, but if you would like to place a wager on it, I will take that bet.

Speaking of bets, for several years now, I have been wagering with friends that Congress will not pass federal legislation creating a national autonomous vehicles framework. Each session I win that bet. Keep in mind, a framework for driverless cars is far less controversial than privacy policy. Still, nothing substantive ever gets done in Congress.

Same goes for cybersecurity with lots of calls for big measures, but no final action. Folks are now also telling me to expect a big artificial intelligence bill one day soon. I sincerely doubt it. Again, I’ll bet on it if you’d like to lose some money!

Let me be clear, there may actually be some very good reasons why Congress should implement a national framework for privacy, driverless cars, and some AI policy issues. But all the wishful thinking in the world will not magically make it happen.

We need to entertain the possibility that Congress has largely checked out of the world of substantive tech policymaking and isn’t coming back. We may get a few big surprise measures here and there, as we did with clumsily-drafted FOSTA-SESTA. If anything, it is more likely that we instead see misguided legislative riders attached to non-germane measures during late night negotiations. But even haphazard efforts like those will be extremely rare. The days of Congress passing big bills like the Telecom Act of 1996 or the Cable Act of 1992 appear mostly over.

Why Congress Is No Longer the Major Player It Once Was

I think there are probably many obvious explanations for why Congress has checked out of tech policymaking, but let me try to boil it down to a couple of interrelated trends:

The “pacing problem” has intensified: The pacing problem refers to the inability of legal or regulatory regimes to keep adjust to the intensifying pace of technological change. There are just more emerging technologies than ever, and they are evolving faster than ever, too. “New technologies that used to have two-year cycle times now can become obsolete in six months, and the pace of change is not slowing,” says consulting firm Deloitte.

A growing multiplicity of technologies means more tech policy issues to cover. And those issues grow more complicated each year. As soon as lawmakers wrap their heads around one technology (if they do at all), another innovation pops up that complicates things further or crowds out their attention.

Technological convergence and blurring governance boundaries: Technology policymaking increasingly involves metaphysical questions about the underlying nature of things. For example, what is a “phone,” a “medical device,” or an “aerial vehicle”? These things used to be relatively easy to define and had well-understood meanings in federal statutes and regulations. But those concepts evolved rapidly in an age of widespread technological convergence and rapid-fire “combinatorial innovation,” with new technologies multiplying and building on top of one another in the symbiotic fashion. Basically, almost as soon as new tech laws or regulations are enacted, they are confronted with new marketplace realities and technological changes that call into question legal classifications or regulatory distinctions.

For example, today’s smartphones combine dozens of different functions that were previously quite distinct, including health tracking capabilities, mobile payment systems, and video distribution, all of which remain heavily regulated by an assortment of federal laws and agencies. But the convergence of all these capabilities in a single device that we can carry in our pockets creates massive governance challenges, not only for archaic legislative frameworks, but even for newer semantic distinctions that may seem current one moment only to be obliterated the next. These factors also make it harder to figure out who in Congress should be driving policy because technological convergence blurs previously distinct governance categories among legislative committees and the laws they have crafted.

Legislative dysfunctionalism: Policymaking processes move slowly by design. Constitutional constraints and other legal requirements demand it. But things move even slower today because of what Jonathan Rauch calls “demosclerosis,” or the “government’s progressive loss of the ability to adapt.” “[A]s layer is dropped upon layer,” he argued, “the accumulated mass becomes gradually less rational and less flexible.”

Inadequate resources are also part of the problem with Congress facing a complex, rapidly-evolving set of issues but devoting only limited resources to technical staff or studies to better understand these developments. This combined with the factors cited above has led to a never-ending “competency trap,” with lawmakers and their staffs seemingly always one step behind technological developments and societal demands or expectations.

Meanwhile, partisanship increases and the work load on many other fronts grows alongside it. There’s just a lot more on Congress’s plate than ever before. Plus, tech policy matters seemingly always take a back seat to tax, budget, entitlements, defense, and other issues.

Many people hope that boosting technology assessment efforts might help correct these problems. Perhaps better technical advice could help lawmakers ask less ignorant questions at tech-oriented congressional hearings, which have become showcases for the staggering lack of congressional understanding of modern technologies. But just adding new technology assessment capacity, such as in the form of a revived Office of Technology Assessment, won’t likely move the needle much in terms of actual legislative output. More serious structural reforms will be required.

Globalization: Many modern technologies “are truly global and call out for policy approaches that do not respect traditional national borders,” note former NITA officials Lawrence E. Strickling and Jonah Force Hill. Congress only has so much control over technologies that defy national boundaries, further complicating tech governance questions.

Yet, one would think that when America’s global competitive advantage was on the line, Congress would have greater reason to assert itself and craft frameworks to ensure US firms are not disadvantaged by a lack of policy clarity. That has not proven to be the case, however. Congressional lawmakers do plenty of huffing and puffing about the tech governance choices made by Europe, China, and other governments, but they then leave the field wide open to them (as well as lower levels of government) to craft policies that govern national markets throughout the United States.

Endless delegation: Speaking of passing the buck, Congress has been doing it for decades on tech policy by delegating massive and quite amorphous authority to technocratic administrative agencies. Over the past half century, scholars from various disciplines—economics, law, political science, history, and others—have explored the growth of what has been alternatively called the “interest group society,”  “receivership by regulation,”  “iron triangles,” and “client politics.” This literature identifies the way Congress has increasingly abdicated its constitutional role as lawmaker by shifting hard policy questions to regulatory agencies and then hoping that bureaucrats could figure out all the answers.

Delegation is even more common for the most technical policy matters, and that trend has only accelerated in recent years as the complexity increases and overwhelms lawmakers and their staff.

Ramifications for Tech Governance Going Forward

If Congress remains largely incapable of ever getting the ball over the goal line on important tech policy matters, what are some of the ramifications? There are many, but I will identify just a few of the most obvious ones:

• More tech-oriented legislative activity will shift to the states: In fact, it already has. For each of the tech policy issues I identified earlier (privacy, driverless cars, cybersecurity, and even some AI-related issues like facial recognition), states are—for better or worse—picking up the slack. We should expect that trend to accelerate. This will create an increasingly confusing patchwork of policies that will potentially raise serious barriers to entry and innovation. Nonetheless, I can’t see this trend reversing anytime soon. Perhaps Congress will finally act on privacy or driverless cars legislation if for no other reason than to preempt a crazy-quilt of contradictory policies. Of course, that’s what people have been predicting for years, and it never happens.
• “Soft law” becomes the dominate governance force for tech: Again, it already has. Soft law refers to informal, collaborative, and constantly evolving governance mechanisms that differ from hard law in that they lack the same degree of enforceability. Soft law can include things like multi-stakeholder processes, industry best practices and standards, agency workshops and guidance documents, and educational efforts. But that just scratches the surface of soft law mechanisms. For better or worse, soft law is becoming the dominant modus operandi for most modern technological governance. We can expect that trend to accelerate to fill the governance gap left by Congressional inaction. For example, we don’t have any formal “rules of the road” for driverless cars, but we do now have four iterations of Department of Transportation guidance on driverless cars. Version 4.0of the DoT guidance for automated vehicles was just released this month. Expect the “soft law-ization” of technological governance to expand considerably in coming years because it is really the only way for agencies to cope with the pacing problem and those metaphysical issues identified earlier. Because soft law is not boxed in by rigid preconceptions of what a particular technology or technological process is or entails, it is often better able to address new marketplace realities. Soft law can adapt as technologies do. With Congress out of the picture, it will have to.
• The congressional tech policy death spiral accelerates. Some may think (or at least hope) that the situation described here can’t get any worse. To the contrary, it can get radically worse. With our politics increasingly infected with bitter partisanship and rancor, what are the chances that lawmakers can work together to craft comprehensive tech policy measures? I’d say the odds are approaching zero. The Cable Act, the Telecom Act (and Sec. 230), and the Internet Tax Freedom Act all enjoyed broad, bipartisan support when they passed in the 1990s. People reached across the aisle to get things done. It didn’t always work, and sometimes it resulted in misguided policies (like the Communications Decency Act’s provisions trying to censor internet “indecency”). But bipartisan lawmaking scenarios like those seem almost unthinkable now. To the extent many lawmakers even show up at tech-oriented congressional hearings anymore, it is mostly to score points in front of the cameras for Team Red or Team Blue back home. Serious legislative oversight and policymaking is dead; it’s mostly just show-trials and media circuses at this point.

Should I Care about Congress Anymore?

If you believe this miserable thesis is correct but continue to focus on the Legislative Branch for a living, you may be asking yourself: Am I wasting all my time here? Not necessarily. Congress is still actively interested in tech policy matters. For those who hope to limit that damage Congress might do by hastily passing ham-handed, crisis-driven policy measures, your efforts in the trenches will continue to be important in curbing the worst instincts of some lawmakers. In many instances, preserving a perpetual stalemate may go down as a tremendous victory.

For example, as the debate over Section 230 intensifies—with politicians of all stripes looking to gut the most important of all Internet freedom policies—it is vital that smart people work with lawmakers and their staff to beat back misguided and destructive measures. Hopefully this becomes another instance of legislative gridlock winning out! And I think it will.

More realistically, your role will not be to stop Congress from doing insanely destructive things, it will be to just stop them from saying those things. In fact, that seems to be what a lot of people who work with Congress already do today. When I chat with various inside-the-Beltway policy advocates and industry reps today, they usually acknowledge that the prospects for actual legislation on any given issue are quite slim. They will, of course, continue to try to work with lawmakers, their committees, and their staff to either advance or stop legislative measures. Yet, they all seem to accept the utter futility of it all.

Why do they persist? Most obviously, they want to at least preserve the legislative stalemate and not cede the ground to their enemies who might succeed in getting lawmakers to do something if only one side was communicating with Congress.

But the other thing these policy advocates are hoping to achieve is better messaging. Regulatory advocates want lawmakers to use the power of the bully pulpit to put pressure on various people or groups to change behavior, even in the absence of any legislative action. By contrast, many in industry want to make sure that their technologies are understood and not endlessly demonized. Bad press isn’t good for business, even if all the congressional threats never result in final legislation. Also, those defending innovation more generally will want to make sure that even if lawmakers aren’t making any actual laws, they still better understand and appreciate the importance of new technological capabilities for improving human welfare.

Those are all good reasons not to give up your legislative advocacy. For some of us, however, the personal cost-benefit analysis just doesn’t add up. Our focus has shifted to where the real action is at: federal administrative agencies, statehouses and state administrative agencies, the courts, and the growing world of multi-stakeholder governance and other soft law efforts. Congress has checked out, but technological governance lives on in many other forms and venues.

In the US there is a tangle of communications laws that were added over decades by Congress as–one-by-one–broadcast, cable, and satellite technologies transformed the TV marketplace. The primary TV laws are from 1976, 1984, and 1992, though Congress creates minor patches when the marketplace changes and commercial negotiations start to unravel.

Congress, to its great credit, largely has left alone Internet-based TV (namely, IPTV and vMVPDs) which has created a novel “problem”–too much TV. Internet-based TV, however, for years has put stress on the kludge-y legacy legal system we have, particularly the impenetrable mix of communications and copyright laws that regulates broadcast TV distribution.

Internet-based TV does two things–it undermines the current system with regulatory arbitrage but also shows how tons of diverse TV programming can be distributed to millions of households without Congress (and the FCC and the Copyright Office) injecting politics into the TV marketplace.

Locast TV is the latest Internet-based TV distributor to threaten to unravel parts the current system. In July, broadcast programmers sued Locast (its founder, David Goodfriend) and in September, Locast filed its own suit against the broadcast programmers.

Many readers will remember the 2014 Aereo decision from the Supreme Court. Much like Aereo, Locast TV captures free broadcast TV signals in the markets it operates and transmits the programming via the Internet to viewers in that market. That said, Locast isn’t Aereo.

Aereo’s position was that it could relay broadcast signals without paying broadcasters because it wasn’t a “cable company” (a critical category in copyright law). The majority of the Supreme Court disagreed; Aereo closed up shop.

Locast has a different position: it says it can relay broadcast signals without paying because it is a nonprofit.

It’s a plausible argument. Federal copyright law has a carveout allowing “nonprofit organizations” to relay broadcast signals without payment so long as the nonprofit operates “without any purpose of direct or indirect commercial advantage.”

The broadcasters are focusing on this latter provision, that any nonprofit taking advantage of the carveout mustn’t have commercial purpose. David Goodfriend, the Locast founder, is a lawyer and professor who, apparently, sought to abide by the law. However, the broadcasters argue, his past employment and commercial ties to pay-TV companies mean that the nonprofit is operating for commercial advantage.

It’s hard to say how a court will rule. Assuming a court takes up the major issues, judges will have to decide what “indirect commercial advantage” means. That’s a fact-intensive inquiry. The broadcasters will likely search for hot docs or other evidence that Locast is not a “real” nonprofit. Whatever the facts are, Locast’s arbitrage of the existing regulations is one that could be replicated.

Nobody likes the existing legacy TV regulation system: Broadcasters dislike being subject to compulsory licenses; Cable and satellite operators dislike being forced to carry some broadcast TV and to pay for a bizarre “retransmission” right. Copyright holders are largely sidelined in these artificial commercial negotiations. Wholesale reform–so that programming negotiations look more like the free-market world of Netflix and Hulu programming–would mean every party has give up something they like improve the overall system.

The Internet’s effect on traditional providers’ market share has been modest to date, but hopefully Congress will anticipate the changing marketplace before regulatory distortions become intolerable.

Additional reading: Adam Thierer & Brent Skorup, Video Marketplace Regulation: A Primer on the History of Television Regulation and Current Legislative Proposals (2014).

There was a bold, bizarre proposal published by Axios yesterday that includes leaked documents by a “senior National Security Council official” for accelerating 5G deployment in the US. “5G” refers to the latest generation of wireless technologies, whose evolving specifications are being standardized by global telecommunications companies as we speak. The proposal highlights some reasonable concerns–the need for secure networks, the deleterious slowness in getting wireless infrastructure permits from thousands of municipalities and counties–but recommends an unreasonable solution–a government-operated, nationwide wireless network.

The proposal to nationalize some 5G equipment and network components needs to be nipped in the bud. It relies on the dated notion that centralized government management outperforms “wasteful competition.” It’s infeasible and would severely damage the US telecom and Internet sector, one of the brightest spots in the US economy. The plan will likely go nowhere but the fact it’s being circulated by administration officials is alarming.

First, a little context. In 1927, the US nationalized all radiofrequency spectrum, and for decades the government rations out dribbles of spectrum for commercial use (though much has improved since liberalization in the 1990s). To this day all spectrum is nationalized and wireless companies operate at sufferance. What this new document proposes is to make a poor situation worse.

In particular, the presentation proposes to re-nationalize 500 MHz of spectrum (the 3.7 GHz to 4.2 GHz band, which contains mostly satellite and government incumbents) and build wireless equipment and infrastructure across the country to transmit on this band. The federal government would act as a wholesaler to the commercial networks (AT&T, Verizon, T-Mobile, Sprint, etc.), who would sell retail wireless plans to consumers and businesses.

The justification for nationalizing a portion of 5G networks has a national security component and an economic component: prevent Chinese spying and beat China in the “5G race.”

The announced goals are simultaneously broad and narrow, and at severe tension.

The plan is broad in that it contemplates nationalizing part of the 5G equipment and network. However, it’s narrow in that it would nationalize only a portion of the 5G network (3.7 GHz to 4.2 GHz) and not other portions (like 600 MHz and 28 GHz). This undermines the national security purpose (assuming it’s even feasible to protect the nationalized portion) since 5G networks interconnect. It’d be like having government checkpoints on Interstate 95 but leaving all other interstates checkpoint-free.

Further, the document author misunderstands the evolutionary nature of 5G networks. 5G for awhile will be an overlay on the existing 4G LTE network, not a brand-new parallel network, as the NSC document assumes. 5G equipment will be installed on 4G LTE infrastructure in neighborhoods where capacity is strained. As Sherif Hanna, director of the 5G team at Qualcomm, noted on Twitter, in fact, “the first version of the 5G [standard]…by definition requires an existing 4G radio and core network.”

https://twitter.com/sherifhanna/status/957891843533946880

The most implausible idea in the document is a nationwide 5G network could be deployed in the next few years. Environmental and historic preservation review in a single city can take longer than that. (AT&T has battled NIMBYs and local government in San Francisco for a decade, for instance, to install a few hundred utility boxes on the public right-of-way.) The federal government deploying and maintaining hundreds of thousands 5G installations in two years from scratch is a pipe dream. And how to pay for it? The “Financing” section in the document says nothing about how the federal government will find tens of billions of dollars for nationwide deployment of a government 5G network.

The plan to nationalize a portion of 5G wireless networks and deploy nationwide is unwise and unrealistic. It would permanently damage the US broadband industry, it would antagonize city and state officials, it would raise serious privacy and First Amendment concerns, and it would require billions of new tax dollars to deploy. The released plan would also fail to ensure the network security it purports to protect. US telecom companies are lining up to pay the government for spectrum and to invest private dollars to build world-class 5G networks. If the federal government wants to accelerate 5G deployment, it should sell more spectrum and redirect existing government funding towards roadside infrastructure. Network security is a difficult problem but nationalizing networks is overkill.

Already, four out of five [update: all five] FCC commissioners have come out strongly against this plan. Someone reading the NSC proposal would get the impression that the US is sitting still while China is racing ahead on 5G. The US has unique challenges but wireless broadband deployment is probably the FCC’s highest priority. The Commission is aware of the permitting problems and formed the Broadband Deployment Advisory Committee in part for that very purpose (I’m a member). The agency, in cooperation with the Department of Commerce, is also busy looking for more spectrum to release for 5G.

Recode is reporting that White House officials are already distancing the White House from the proposal. Hopefully they will publicly reject the plan soon.

[originally published on Plaintext on June 21, 2017.]

This summer, we celebrate the 20th anniversary of two developments that gave us the modern Internet as we know it. One was a court case that guaranteed online speech would flow freely, without government prior restraints or censorship threats. The other was an official White House framework for digital markets that ensured the free movement of goods and services online.

The result of these two vital policy decisions was an unprecedented explosion of speech freedoms and commercial opportunities that we continue to enjoy the benefits of twenty years later.

While it is easy to take all this for granted today, it is worth remembering that, in the long arc of human history, no technology or medium has more rapidly expanded the range of human liberties — both speech and commercial liberties — than the Internet and digital technologies. But things could have turned out much differently if not for the crucially important policy choices the United States made for the Internet two decades ago.

First, on June 26, 1997, the Supreme Court handed down its landmark decision in Reno v. ACLU, which struck down the Communications Decency Act’s provisions seeking to regulate online content under the old broadcast media standard. The Court concluded that there was “no basis for qualifying the level of First Amendment scrutiny that should be applied to this medium” and rejected the congressional effort to pigeonhole this exciting new medium into the archaic censorship regimes of the past.

The Reno decision was tremendously important in protecting online speakers from the chilling effect of government “indecency” regulations. The decision also set a strong legal precedent and was cited in countless subsequent decisions involving not only online speech, but also efforts to regulate video game content.

Second, in July 1997, the Clinton Administration released The Framework for Global Electronic Commerce, a document that outlined the US government’s new policy approach toward the Internet and the emerging digital economy. The Framework was a bold vision statement that endorsed comprehensive online freedom of exchange, saying that “the private sector should lead [and] the Internet should develop as a market driven arena not a regulated industry.” The Administration rejected a restrictive regulatory regime for commercial activities and instead recommended reliance on civil society, contractual negotiations, voluntary agreements, and industry self-regulation.

To “avoid undue restrictions on electronic commerce,” the vision statement recommended that “parties should be able to enter into legitimate agreements to buy and sell products and services across the Internet with minimal government involvement or intervention.” But, “[w]here governmental involvement is needed, its aim should be to support and enforce a predictable, minimalist, consistent and simple legal environment for commerce.”

Taken together, the Reno decision and the Clinton Administration’s Framework acted as a Magna Carta moment for the Internet and digital technologies. It signaled that “permissionless innovation” would become America’s governance stance toward online speech and commerce.

As I defined it in a book on the subject, permissionless innovation, “refers to the notion that experimentation with new technologies and business models should generally be permitted by default. Unless a compelling case can be made that a new invention will bring serious harm to society, innovation should be allowed to continue unabated and problems, if any develop, can be addressed later.” The primary advantage of permissionless innovation as a governance disposition is that it sends a clear green light to citizens telling them they are at liberty to pursue their own interests and passions, free from the suffocating grip of prior restraints on free speech and free exchange.

But the Reno decision and the Clinton Administration’s Framework are not the only critical policy decisions that helped enshrine permissionless innovation as the lodestar of online policy in the US. In the mid-1990s, the Clinton Administration made the decision to allow open commercialization of the Internet, which was previously just the domain of government agencies and university researchers. Even more crucially, when Congress passed and President Bill Clinton signed into law the Telecommunications Act of 1996, lawmakers made it clear that traditional analog-era communications and media regulatory regimes would generally not be applied to the Internet.

The Telecom Act also included an obscure provision known as “Section 230,” which immunized online intermediaries from onerous liability for the content and communications that traveled over their networks. Section 230 was hugely important in that it let online speech and commerce flourish without the constant threat of frivolous lawsuits looming overhead. Internet scholar David Post has argued that “it is impossible to imagine what the Internet ecosystem would look like today without [Section 230]. Virtually every successful online venture that emerged after 1996 — including all the usual suspects, viz. Google, Facebook, Tumblr, Twitter, Reddit, Craigslist, YouTube, Instagram, eBay, Amazon — relies in large part (or entirely) on content provided by their users, who number in the hundreds of millions, or billions,” he notes. It is unlikely that the vibrant marketplace of online speech and commerce we enjoy today could have existed without the protections afforded by Section 230.

Finally, in 1998, another important legislative development occurred when Congress passed the Internet Tax Freedom Act, which blocked all levels of government in the US from imposing discriminatory taxes on the Internet. That made it clear that the Net would not be milked as a “cash cow” the way previous communications systems had been.

So, let’s recap how policymakers generally got policy right for the Internet in the mid-1990s by enshrining permissionless innovation as the law of the land:

• The Executive Branch set the tone for online freedom by fully privatizing the underlying network and then establishing a governance vision based upon minimal government interference with online speech and exchange.
• The Legislative Branch generally endorsed the Clinton Administration’s vision for the Internet and digital technologies by ensuring that new policies would not be based upon the failed regulatory and tax policies of the past.
• The Judicial Branch upheld the centrality of the First Amendment in the Information Age and made it clear that this new medium for speech would be granted the strongest protection against government encroachments on freedom of speech and expression.

The combined effect of these wise, bipartisan policy decisions was that the Net and digital tech were “born free” instead of being born into regulatory captivity. We continue to enjoy the fruits of these freedoms today as citizens here in the US and across the world take advantage of the unprecedented ability to connect and communicate to pursue their passions and interests as they see fit.

There’s still more work to be done, however. Online platforms and digital technologies continue to come under attack from regulatory activists both here and abroad. Many governments continue to push back against these online speech and commercial freedoms, meaning we’ll need to redouble our efforts to highlight and defend the benefits of preserving these important victories.

Finally, as the underlying drivers of the Digital Revolution continue to spread into other segments of the economy, these freedoms will come into conflict with older top-down regulatory regimes for automobiles, aviation, medical technology, finance, and much more. This will create an epic conflict of governance visions between the Internet’s permissionless innovation model versus the precautionary, command-and-control regulatory regimes of the industrial age. We already see tension at work in policy deliberations over the Internet of Things, “big data,” driverless cars, commercial drones, robotics, artificial intelligence, 3D printing, virtual reality, the sharing economy, and others.

If policymakers hope to preserve and extend the benefits of the hard-fought victories of the Internet’s past twenty years, they will need to restate and reinvigorate their commitment to permissionless innovation to help spur the next great technological revolutions in these and other fields.

Yesterday, Hillary Clinton’s campaign released a tech and innovation agenda. The document covers many tech subjects, including cybersecurity, copyright, and and tech workforce investments, but I’ll narrow my comments to the areas I have the most expertise in: broadband infrastructure and Internet regulation. These roughly match up, respectively, to the second and fourth sections of the five-section document.

On the whole, the broadband infrastructure and Internet regulation sections list good, useful priorities. The biggest exception is Hillary’s strong endorsement of the Title II rules for the Internet, which, as I explained in the National Review last week, is a heavy-handed regulatory regime that is ripe for abuse and will be enforced by a politicized agency.

Her tech agenda doesn’t mention a Communications Act rewrite but I’d argue it’s implied in her proposed reforms. Further, her statements last year at an event suggest she supports significant telecom reforms.  In early 2015, Clinton spoke to tech journalist Kara Swisher (HT Doug Brake) and it was pretty clear Clinton viewed Title II as an imperfect and likely temporary effort to enforce neutrality norms. In fact, Clinton said she prefers “a modern, 21st-century telecom technology act” to replace Title II and the rest of the 1934 Communications Act.

It’s refreshing to see that, regarding broadband and Internet policy, there’s significant bipartisan agreement that government’s role should be primarily to provide public goods, protect consumers, and lower regulatory barriers, not micromanage providers, deploy public networks, and shape social policy. (Niskanen Center’s Ryan Hagemann similarly agrees that, with the exception of Title II, there’s a lot to like in Clinton’s tech agenda. )  In fact, 85% of the text in Clinton’s broadband infrastructure and Internet policy sections could be copied-and-pasted to a free-market Republican presidential candidate’s tech platform and it would be right at home.

It’s difficult to know what to make of her pledge to defend and enforce Title II. I suspect it represents a promise she won’t reverse the Title II determination of the FCC, not that she’s particularly enamored with Title II. Clinton (and President Bill Clinton ) seem to prefer a more hands-off approach to the Internet.

The Good

The document emphasizes that all types of broadband should be encouraged, including “fiber, wireless, satellite, and other technologies.” It’s nice to see this flexibility because many advocates are pushing a fiber optics-only agenda that is simply infeasible and tremendously expensive. (Professor Susan Crawford has said bluntly that governments should “refuse to fund last-mile solutions that aren’t primarily fiber.” )  The reality, acknowledged by Google and others, is that fixed wireless and satellite broadband are needed to affordably connect households in rural and suburban areas for the foreseeable future.  A fiber-only policy, because it’s impractically expensive, would have rather regressive effects and Clinton’s all-the-above strategy is commendable.

There’s also a recognition in the document that broadband networks are not natural monopolies and can be competitive, especially if the federal government works to lower entry barriers. Government policy for several decades was that telephone and cable networks were natural monopolies. Increasingly, broadband is competitive, especially as consumers go wireless only, but we’re still living with the negative side effects of past policies. The Clinton document emphasizes the need to reduce local regulatory barriers, streamline permitting, and allow nondiscriminatory access to conduits, poles, and rights-of-way controlled by local governments.

Spectrum policy is critical to any technology agenda and it’s a priority for Clinton. She emphasizes the need for more spectrum and identifying and reclaiming underutilized federal spectrum, a subject I’ve written about. The federal government uses spectrum worth hundreds of billions of dollars and pays very little for that asset, so there’s significant consumer gains available.

Clinton’s call to reinvigorate antitrust enforcement in technology and telecommunications is also noteworthy. Though the DOJ and FTC can overreach, they are better equipped to handle broadband and tech competition issues than the FCC.

The Not So Good

In the “Close the Digital Divide” item, there are some problems. In a word: the right goal with the wrong tools. The legacy broadband subsidy programs, which Clinton wishes to retain and expand, are fragmented and poorly designed. They essentially function as corporate welfare programs and should be eliminated in favor of consumer-focused subsidies.

One item says that by 2020 “100 percent of households in America will have the option of affordable broadband.” Literally connecting all American homes to the Internet is impossible today because millions of Americans simply don’t want the Internet. According to Pew, 70% of non-adopters are just not interested, and many would not subscribe no matter the price.  (Relatedly, after over a century of telephone’s existence and tens of billions in federal universal service funding, US phone subscribership has hovered around 95% for 20 years. )  

To accomplish the expansion of broadband access, Clinton promises to fund the FCC’s Connect America Fund (CAF), the Ag Department’s Rural Utilities Service Program (RUS), and the Broadband Technology Opportunities Program (BTOP). They differ somewhat in purpose and strategy but their major flaw is the same: they primarily fund and lend to broadband providers, not subscribers.

As I’ve noted before,

A direct subsidy plus a menu of options is a good way to expand access to low-income people (assuming there are effective anti-fraud procedures). A direct subsidy is more or less how the US and state governments help lower-income families afford products and services like energy, food, housing, and education. For energy bills there’s LIHEAP. For grocery bills there’s SNAP and WIC. For housing, there’s Section 8 vouchers. For higher education, there’s Pell grants.

By subsidizing providers, not consumers, there’s immense waste, corruption, and featherbedding. For instance, last year, Tony Romm at Politico published an in-depth investigation about the RUS program, funded by the stimulus. The waste in the RUS broadband program is appalling and the program will serve only a fraction of the subscribers that were promised. As one GAO researcher said about the program, “We are left with a program that spent $3 billion and we really don’t know what became of it.”  “ Even more troubling,” Romm explained “RUS can’t tell which residents its stimulus dollars served.”

Similarly, Clinton cites E-rate as a model for connecting “anchor institutions” like libraries and schools. E-rate likewise primarily benefits telecom and tech companies, not the intended recipients. As OECD researchers have found regarding EdTech government investment,   

The results…show no appreciable improvements in student achievement in reading, mathematics or science in the countries that had invested heavily in ICT for education.

Rather than the E-rate model, a smarter policy is to provide block grants to schools and institutions to give them more flexibility to optimize according to their own perceived technology and education needs.  The federal government already started doing this to a limited extent with Section IV of the 2015 Every Student Succeeds Act, which allocates $1.6 billion annually in block grants to states for tech-focused education spending. Policymakers should eliminate the expensive, dysfunctional E-rate program, which is funded by regressive fees on telephone bills, and expand the block grants somewhat to make up the shortfall.

Altogether, there’s a lot to like in Clinton’s broadband infrastructure and Internet policy agenda. There are hiccups–namely Title II enforcement and retention of broken broadband and tech subsidy programs–and hopefully her advisors will reexamine those. Given Clinton’s past statements about the need for a modernized Communications Act in place of Title II, she and her advisors have developed a forward-looking telecom agenda.

As 2014 draws to a close, we take a look back at the most-read posts from the past year at The Technology Liberation Front. Thank you for reading, and enjoy.

10. New York’s financial regulator releases a draft of ‘BitLicense’ for Bitcoin businesses. Here are my initial thoughts.

In July, Jerry Brito wrote about New York’s proposed framework for regulating digital currencies like Bitcoin.

My initial reaction to the rules is that they are a step in the right direction. Whether one likes it or not, states will want to license and regulate Bitcoin-related businesses, so it’s good to see that New York engaged in a thoughtful process, and that the rules they have proposed are not out of the ordinary.

9. Google Fiber: The Uber of Broadband

In February, I noted some of the parallels between Google Fiber and ride-sharing, in that new entrants are upending the competitive and regulatory status quo to the benefit of consumers.

The taxi registration systems and the cable franchise agreements were major regulatory mistakes. Local regulators should reduce regulations for all similarly-situated competitors and resist the temptation to remedy past errors with more distortions.

8. The Debate over the Sharing Economy: Talking Points & Recommended Reading

In September, Adam Thierer appeared on Fox Business Network’s Stossel show to talk about the sharing economy. In a TLF post, he expands upon his televised commentary and highlights five main points.

7. CES 2014 Report: The Internet of Things Arrives, but Will Washington Welcome It?

After attending the 2014 Consumer Electronics Show in January, Adam wrote a prescient post about the promise of the Internet of Things and the regulatory risks ahead.

When every device has a sensor, a chip, and some sort of networking capability, amazing opportunities become available to consumers…. But those same capabilities are exactly what raise the blood pressure of many policymakers and policy activists who fear the safety, security, or privacy-related problems that might creep up in a world filled with such technologies.

6. Defining “Technology”

Earlier this year, Adam compiled examples of how technologists and experts define “technology,” with entries ranging from the Oxford Dictionary to Peter Thiel. It’s a slippery exercise, but

if you are going to make an attempt to either study or critique a particular technology or technological practice or development, then you probably should take the time to tell us how broadly or narrowly you are defining the term “technology” or “technological process.”

5. The Problem with “Pessimism Porn”

Adam highlights the tendency of tech press, academics, and activists to mislead the public about technology policy by sensationalizing technology risks.

The problem with all this, of course, is that it perpetuates societal fears and distrust. It also sometimes leads to misguided policies based on hypothetical worst-case thinking…. [I]f we spend all our time living in constant fear of worst-case scenarios—and premising public policy upon them—it means that best-case scenarios will never come about.

4. Mark T. Williams predicted Bitcoin’s price would be under $10 by now; it’s over $600

Professor Mark T. Williams predicted in December 2013 that by mid-2014, Bitcoin’s price would fall to below $10. In mid-2014, Jerry commends Prof. Williams for providing, unlike most Bitcoin watchers, a bold and falsifiable prediction about Bitcoin’s value. However, as Jerry points out, that prediction was erroneous: Bitcoin’s 2014 collapse never happened and the digital currency’s value exceeded $600.

3. What Vox Doesn’t Get About the “Battle for the Future of the Internet”

In May, Tim Lee wrote a Vox piece about net neutrality and the Netflix-Comcast interconnection fight. Eli Dourado posted a widely-read and useful corrective to some of the handwringing in the Vox piece about interconnection, ISP market power, and the future of the Internet.

I think the article doesn’t really consider how interconnection has worked in the last few years, and consequently, it makes a big deal out of something that is pretty harmless…. There is nothing unseemly about Netflix making … payments to Comcast, whether indirectly through Cogent or directly, nor is there anything about this arrangement that harms “the little guy” (like me!).

2. Muddling Through: How We Learn to Cope with Technological Change

The second most-read TLF post of 2014 is also the longest and most philosophical in this top-10 list. Adam wrote a popular and in-depth post about the social effects of technological change and notes that technology advances are largely for consumers’ benefit, yet “[m]odern thinking and scholarship on the impact of technological change on societies has been largely dominated by skeptics and critics.” The nature of human resilience, Adam explains, should encourage a cautiously optimistic view of technological change.

1. Help me answer Senate committee’s questions about Bitcoin

Two days into 2014, Jerry wrote the most-read TLF piece of the past year. Jerry had testified before the Senate Homeland Security and Governmental Affairs Committee in 2013 as an expert on Bitcoin. The Committee requested more information about Bitcoin post-hearing and Jerry solicited comment from our readers.

Thank you to our loyal readers for continuing to visit The Technology Liberation Front. It was busy year for tech and telecom policy and 2015 promises to be similarly exciting. Have a happy and safe New Years!

The FCC is currently considering ways to make municipal broadband projects easier to deploy, an exercise that has drawn substantial criticism from Republicans, who passed a bill to prevent FCC preemption of state laws. Today the Mercatus Center released a policy analysis of municipal broadband projects, titled Community Broadband, Community Benefits? An Economic Analysis of Local Government Broadband Initiatives. The researcher is Brian Deignan, an alumnus of the Mercatus Center MA Fellowship. Brian wrote an excellent, empirical paper about the economic effects of publicly-funded broadband.

It’s remarkable how little empirical research there is on municipal broadband investment, despite years of federal data and billions of dollars in federal investment (notably, the American Recovery and Reinvestment Act). This dearth of research is in part because muni broadband proponents, as Brian points out, expressly downplay the relevance of economic evidence and suggest that the primary social benefits of muni broadband cannot be measured using traditional metrics. The current “research” about muni broadband, pro- and anti-, tends to be unfalsifiable generalizations based on extrapolations of cherry-picked examples. (There are several successes and failures, depending on your point of view.)

Brian’s paper provides researchers a great starting point when they attempt to answer an increasingly important policy question: What is the economic impact of publicly-funded broadband? Brian uses 23 years of BLS data from 80 cities that have deployed broadband and analyzes muni broadband’s effect on 1) quantity of businesses; 2) employee wages; and 3) employment.

In short, the economic effects of muni broadband appear to be modest. Brian’s economic models show that municipal broadband is associated with a 3 percent increase in the number of business establishments in a city. However, there is a small, negative effect on employee wages (perhaps as firms substitute technology for employee hours?). There is no effect on private employment but the existence of a public broadband network increases local government employment by about 6 percent.

In a research area filled with advocacy, this is a much-needed rigorous analysis and a great update to the research that does exist. The muni broadband fights will continue, but hopefully both sides will make use of the economic data out there. Given the amount of direct federal investment, some positive effects were inevitable and Brian’s paper suggests where those effects show up (quantity of businesses and local government employment). Still, it seems that there are more cost-effective ways of improving local business development and jobs.

I suspect, and the research suggests, that the detrimental effect on private investment (and taxpayers) likely outweighs these ambiguous economic effects. Unlike city-provided utilities, like water and sewer, broadband infrastructure requires regular network upgrades, and consumers often prefer broadband bundled with TV and phone, which cities have a harder time providing. But on this subject, as scholars like to say on difficult issues, more research is needed.

There are several “flavors” of net neutrality–Eli Noam at Columbia University estimates there are seven distinct meanings of the term–but most net neutrality proponents agree that reinterpreting the 1934 Communications Act and “classifying” Internet service providers as Title II “telecommunications” companies is the best way forward. Proponents argue that ISPs are common carriers and therefore should be regulated much like common carrier telephone companies. Last week I filed a public interest comment about net neutrality and pointed out why the Title II option is unwise and possibly illegal.

For one, courts have defined “common carriers” in such a way that ISPs don’t look much like common carriers. It’s also unlikely that ISPs can be classified as telecommunications providers because Congress defines “telecommunications” as the transmission of information “between or among points specified by the user.” Phone calls are telecommunications because callers are selecting the endpoint–a person associated with the known phone number. Even simple web browsing, however, requires substantial processing by an ISP that often coordinates several networks, servers, and routers to bring the user the correct information, say, a Wikipedia article or Netflix video. Under normal circumstances, this process is completely mysterious to a user. By classifying ISPs as common carriers and telecommunications providers, therefore, the FCC invites immense legal risk.

As I’ve noted before, prioritized data can provide consumer benefits and stringent net neutrality rules would harm the development of new services on the horizon. Title II–in making the Internet more “neutral”–is anti-progress and is akin to putting the toothpaste back in the tube. The Internet has never been neutral, as computer scientist David Clark and others point out, and it’s getting less neutral all the time. VoIP phone service is already prioritized for millions of households. VoLTE will do the same for wireless phone customers.

It’s a largely unreported story that many of the most informed net neutrality proponents, including President Obama’s former chief technology officer, are fine with so-called “fast lanes”–particularly if it’s the user, not the ISP, selecting the services to be prioritized. There is general agreement that prioritized services are demanded by consumers, but Title II would have a predictable chilling effect on new services because of the regulatory burdens.

MetroPCS, for example, a small wireless carrier with about 3% market share attempted selling a purportedly non-neutral phone plan that allowed unlimited YouTube viewing and was pilloried for it by net neutrality proponents. MetroPCS, chastened, dropped the plan. With Title II, a small ISP or wireless carrier wouldn’t dream of attempting such a thing.

In the comment, I note other undesirable effects of Title II, including that it undermines the position the US has held publicly for years that the Internet is different than traditional communications.

If the FCC further intermingles traditional telecommunications with broadband, it may increase the probability of the [International Telecommunications Union] extending sender-pays or other tariffing and tax rules to the exchange of Internet traffic. Several countries proposed instituting sender-pays at a contentious 2012 ITU forum and the United States representatives vigorously fought sender-pays for the Internet. Many developing countries, particularly, would welcome such a change in regulations, because, as Mercatus scholar Eli Dourado found, sender-pays rules “allow governments to export some of their statutory tax burden.” New foreign tariffing rules would function essentially as a transfer of wealth from popular US-based companies like Facebook and Google to corrupt foreign governments and telephone cartels.

Finally, I note that classifying ISPs as common carriers weakens the enforcement of antitrust and consumer protection laws. Generally, it is difficult to bring antitrust lawsuits in extensively regulated industries. After filing my comment, I learned that the FTC also filed a comment noting, similarly, that its Section 5 authority would be limited if the FCC goes the Title II route. Brian Fung and others have since written about this interesting political and legal development. This detrimental effect on antitrust enforcement should weigh against Title II regulation.

There are substantial drawbacks to Title II regulation of ISPs and the FCC should exercise regulatory humility and its traditional hands-off approach to the Internet. In the end, Title II would harm investment in nascent technologies and network upgrades. The harms to consumers and small carriers, particularly, would be immense. It almost makes one think that comedy sketches and “death of the Internet” reporting don’t lead to good public policy.

More Information

See my presentation (36 minutes) on net neutrality and “fast lanes” on the Mercatus website.

Timothy B. Lee, founder of The Washington Post’s blog The Switch discusses his approach to reporting at the intersection of technology and policy. He covers how to make tech concepts more accessible; the difference between blogs and the news; the importance of investigative journalism in the tech space; whether paywalls are here to stay; Jeff Bezos’ recent purchase of The Washington Post; and the future of print news.

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Related Links

• Here are eight ways investing in Bitcoins could go horribly wrongn, Lee
• Blind advocates: Hollywood lobbying threatens deal for accessible books, Lee
• New Job, Lee

There are few things more likely to get constituents to call their representative than TV programming blackouts, and the increase in broadcasting disruptions arising from licensing disputes in recent years means Congress may be forced to once again fix television and copyright laws. As Jerry Brito explains at Reason, the current standoff between CBS and Time Warner Cable is the result of bad regulations, which contribute to more frequent broadcaster blackouts. While each type of TV distributor (cable, satellite, broadcasters, telcos) is both disadvantaged and advantaged through regulation, broadcasters are particularly favored. As the US Copyright Office has said, the rule at issue in CBS-TWC is “part of a thicket of communications law requirements aimed at protecting and supporting the broadcast industry.”

But as we approach a damaging tipping point of rising programming costs and blackouts, Congress’ potential rescuer–Aereo–appears on the horizon, possibly buying more time before a major regulatory rewrite. Aereo, for the uninitiated, is a small online company that sets up tiny antennas in certain cities to capture broadcast television station signals–like CBS, NBC, ABC, Fox, the CW, and Univision–and streams those signals online to paying customers, who can watch live or record the local signals captured by their own “rented” Aereo antenna. Broadcasters hate this because the service deprives them of lucrative retransmission fees and unsuccessfully sued to get Aereo to cease operations.

Let’s back up. Broadcast television is–as my colleague Tom Hazlett says–the “killer app of 1952.” It’s an old technology featuring a few dozen channels that hasn’t fared well with the rise of subscription television offering hundreds of channels–Comcast, Dish, U-Verse, and others. Only about 10% to 15% of households rely on rabbit ears antennas to receive free broadcast TV, while the rest have a subscription.

I’m doubtful Congress will step in and make online distributors like Aereo pay for retransmission. While the laws tilt in broadcasters’ favor, Aereo gives cable and satellite companies additional leverage since–if they have a protracted fight with a broadcaster–they can direct their customers to Aereo. TWC is, in fact, doing this in its current dispute with CBS. Since customers have an online option, no one needs to miss NFL preseason football or the latest How I Met Your Mother. Aereo is not an ideal solution, but it gives a cable or satellite provider another bargaining weapon.

For several reasons, I think Congress may allow Aereo to proceed. First, with the variety of print, online, and television options consumers face today, broadcast programming is no longer a sacred cow. Congress, the FCC, and the tech and telecom industries are anxious to get more broadcasters off the air to make room for spectrum-hungry mobile technologies. That is the precise purpose of the pending incentive auctions. Broadcasters are a powerful group with compelling arguments for the status quo–they provide high-demand local news, sports, and weather, for instance–but many people are beginning to realistically imagine life without them.

Second, the primary political justification for protecting local broadcasters–local ownership and diversity–has “virtually vanished” because of industry consolidation in the 1990s and 2000s, as Harold Feld from Public Knowledge notes. It was easier in the past to defend these regulatory carve-outs for broadcasters when locally-owned operations were the beneficiaries, but today many broadcasters are owned by large media companies.

Finally, in the dynamic video marketplace, Congress may be hesitant to impose more regulations on new video technologies. Protecting a 1950s technology by enforcing 1990s laws on today’s Internet services makes little sense. Already, television laws passed in the 1990s look terribly dated and give Congress and the FCC headaches. Rewriting television and copyright laws is a huge task involving many powerful industries seeking protection from disruptive law changes. With the House and Senate controlled by different parties, this makes a grand compromise even less likely.

So Aereo and other antenna rental services represent some relief for regulators since it gives cable and satellite providers a little more leverage. The service is only in a few cities but is quickly expanding. If consumers adopt the service during future disputes, a semblance of equilibrium may return when subscription services bargain with broadcasters. For that reason, Congress may want to sit back and see how it plays out.

Ajit Pai, a Republican commissioner at the Federal Communications Commission (FCC), had an outstanding op-ed in the L.A. Times yesterday about state and local efforts to regulate private taxi or ride-sharing services such as Uber, Lyft, and Sidecar. “Ever since Uber came to California,” Pai notes, “regulators have seemed determined to send Uber and companies like it on a one-way ride out of the Golden State.” Regulators have thrown numerous impediments in their way in California as well as in other states and localities (including here in Washington, D.C.). Pai continues on to discuss how, sadly, “tech start-ups in other industries face similar burdens”:

For example, Square has created a credit card reader for mobile devices. Small businesses love Square because it reduces costs and is convenient for customers. But some states want a piece of the action. Illinois, for example, has ordered Square to stop doing business in the Land of Lincoln until it gets a money transmitter license, even though the money flows through existing payment networks when Square processes credit cards. If Square had to get licenses in the 47 states with such laws, it could cost nearly half a million dollars, an extraordinary expense for a fledgling company.

He also notes that “Obstacles to entrepreneurship aren’t limited to the tech world”:

Across the country, restaurant associations have tried to kick food trucks off the streets. Auto dealers have used franchise laws to prevent car company Tesla from cutting out the middleman and selling directly to customers. Professional boards, too, often fiercely defend the status quo, impeding telemedicine by requiring state-by-state licensing or in-person consultations and even restricting who can sell tooth-whitening services.

What’s going on here? It’s an old and lamentable tale of incumbent protectionism and outright cronyism, Pai notes:

These are just the latest chapters in an old economic story. Incumbents have long promoted regulation in the name of protecting consumers when their actual goal is to block new entrants and stifle competition. As Milton Friedman observed, “The pressure on the legislature to license an occupation rarely comes from the members of the public … the pressure invariably comes from members of the occupation itself.”

Indeed, this is exactly the sort of cronyist nightmare that Brent Skorup and I documented in our new Mercatus Center report, “A History of Cronyism and Capture in the Information Technology Sector.” Our 73-page working paper outlines the evolution of government-granted privileges in America’s information and communications technology marketplace and in the media-producing sectors. Sadly, there are all too many examples of special interests seeking to commandeer the levers of government power to distort market outcomes and head off disruptive forms of innovation or new competition.

“Consumer protection is important,” Pai notes, “and rules to ensure safety and to deter fraud are necessary. But many regulations aren’t about safeguarding consumers; they’re about entrenching incumbents (at consumers’ expense), and they’re typically created by the very agencies that are supposed to oversee those incumbents.” he correctly observes.

The costs of cronyism can be significant. In our paper, Skorup and I note that when companies seek and receive favors from government, it can dull entrepreneurialism and competition in this highly innovative sector since time and resources spent on influencing politicians and capturing regulators cannot be spent competing and innovating in the marketplace. Every dollar spent trying to influence government is a dollar that could have been better spent trying to develop the next iPhone or other innovative gadget or service. Thus, cronyism can negatively impact consumer welfare by denying consumers more and better products and services. Additionally, consumers might end up paying higher prices or higher taxes due to government privileges for industry.

Worse yet, cronyism also raises the specter of greater government control of the Internet and of the digital economy. When policymakers dispense favors, they usually expect something in return. Just ask the agriculture and transportation sectors how their experience with favor-seeking has worked out. Yes, they have often received the special favors and benefits they sought, but along with the goodies came a litany of demands from lawmakers and regulators about how to run their businesses.

At the end of the day, it all goes back to the consumer and how they get screwed in this process. As Pai eloquently puts it:

Heavy-handed regulations hurt the very consumers they’re supposed to help. Consumers fare best when the barriers to business entry are low, which helps ensure that the market — any market — becomes competitive and stays that way. …  Governments at all levels should guard against this tendency by prioritizing innovation and removing unnecessary regulations that burden risk-taking entrepreneurs.

Amen, brother! If only all government officials thought this way. I hope some of them at least take the time to read Commissioner Pai’s excellent essay.

Adam Thierer, Senior Research Fellow at the Mercatus Center discusses his recent working paper with coauthor Brent Skorup, A History of Cronyism and Capture in the Information Technology Sector. Thierer takes a look at how cronyism has manifested itself in technology and media markets — whether it be in the form of regulatory favoritism or tax privileges. Which tech companies are the worst offenders? What are the consequences for consumers? And, how does cronyism affect entrepreneurship over the long term?

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Related Links

• A History of Cronyism and Capture in the Information Technology Sector, Thierer
• Video: A History of Cronysim and Capture in the Information Technology Sector, Thierer
• Adam Thierer Biography, Mercatus Center
• Adam Thierer on Anti-Tech Grump Evgeny Morozov, Thierer

The Mercatus Center at George Mason University has just released a new paper by Brent Skorup and me entitled, “A History of Cronyism and Capture in the Information Technology Sector.” In this 73-page working paper, which we hope to place in a law review or political science journal shortly, we document the evolution of government-granted privileges, or “cronyism,” in the information and communications technology marketplace and in the media-producing sectors. Specifically, we offer detailed histories of rent-seeking and regulatory capture in: the early history of the telephony and spectrum licensing in the United States; local cable TV franchising; the universal service system; the digital TV transition in the 1990s; and modern video marketplace regulation (i.e., must-carry and retransmission consent rules, among others.

Our paper also shows how cronyism is slowly creeping into new high-technology sectors.We document how Internet companies and other high-tech giants are among the fastest-growing lobbying shops in Washington these days. According to the Center for Responsive Politics, lobbying spending by information technology sectors has almost doubled since the turn of the century, from roughly $200 million in 2000 to $390 million in 2012.  The computing and Internet sector has been responsible for most of that growth in recent years. Worse yet, we document how many of these high-tech firms are increasingly seeking and receiving government favors, mostly in the form of targeted tax breaks or incentives.

We argue that the creeping cronyism could have two major negative ramifications. First, it could dull entrepreneurialism and competition in this highly innovative sector since time and resources spent on influencing politicians and capturing regulators cannot be spent competing and innovating in the marketplace. Cronyism will also negatively impact consumer welfare by denying consumers more and better products and services. Additionally, consumers might end up paying higher prices or higher taxes due to government privileges for industry.

Second, cronyism also raises the specter of greater government control of the Internet and of the digital economy. When policymakers dispense favors, they usually expect something in return. They also become accustomed to having greater informal powers over the sector receiving favors, and contribute to DC’s infamous “revolving door” problem.

High-tech America’s recent embrace of Washington could take it down the familiar path followed by the agriculture, telecommunications, and automotive sectors (among many others), with government becoming both protector and punisher of industry. Today’s dynamic tech industries will increasingly come under the “Mother, may I?” permission-based regulatory regime that encumbered the older information technology sectors.

Finally, this paper offers strategies for stalling and diminishing the cronyism already taking root in the high-tech sector. We suggest several targeted reforms to limit or undo cronyism. Generally speaking, however, we note that, as economist David R. Henderson argued in an earlier Mercatus Center report, “There is only one way to end, or at least to reduce, the amount of cronyism, and that is to reduce government power.”

The paper can be downloaded from the Mercatus website, SSRN, or Scribd. The Scribd version is embedded down below. (Also, here’s some coverage of the paper over at the Washington Post’s “Wonkblog” from our old colleague Tim Lee. Here’s more coverage from Bloomberg Businessweek and the San Francisco Chronicle. And here’s a U.S. News oped that Brent and I wrote condensing our paper into just 600 words. Finally, a short 3-minute video of me discussing the problem of tech cronyism is also embedded below.)

A History of Cronyism and Capture in the Information Technology Sector [Thierer and Skorup – July 2013] by Adam Thierer

Few dispute that mobile carriers are being squeezed by the relative scarcity of radio spectrum. This scarcity is a painful artifact of regulatory decisions made decades ago, when the regulators gave valuable spectrum away for free to government agencies and to commercial users via so-called “beauty contests.” As more Americans purchase tablets and smartphones (as of a year ago, smartphones comprise a majority of phone plans in the US), many fear that consumers will be hurt by higher prices, stringent data limits, and less wireless innovation.

In the face of this demand, freeing up more airwaves for mobile broadband became a bipartisan effort and many scholars and policymakers have turned their hungry eyes to the ample spectrum possessed by federal agencies, which hold around 1500 MHz of the most valuable bands. The scholarly consensus–confirmed by government audits–is that federal agencies use their spectrum poorly. Because many licensees use spectrum under the old rules (free spectrum) and use it inefficiently, President Obama directed the FCC and NTIA to find 500 MHz of spectrum for mobile broadband use by 2020.

I recently published a Mercatus working paper surveying plans that encourage federal agencies to economize on their use of radio spectrum, with the ultimate goal of auctioning cleared spectrum to the highest bidders (probably mobile broadband service providers given consumer needs). In my research, interviewees pointed to two problems with reclaiming federal spectrum: (a) there is no effective process to get federal users (especially the powerful Department of Defense) to turn over spectrum, and (b) federal users don’t pay market prices for spectrum, resulting in inefficient use and billions of dollars of value annually wasted.

I’ll note two of the promising spectrum management plans here. As for improving the process of quickly getting federal spectrum auctioned off, there is a bill, promoted by Sen. Kirk and Rep. Kinzinger, to “BRAC the spectrum.” BRAC (the Base Realignment and Closure procedure), as Jerry Brito documents, was a move by Congress in 1988 to successfully accomplish the politically difficult task of closing military bases. BRAC-ing the spectrum would mean the congressional creation of a commission with the authority to clear federal users out of their spectrum. All spectrum-clearing decisions by this commission during its tenure would stand, absent a disapproving joint resolution from Congress. The identified spectrum could be auctioned off within a few years and the proceeds could be used to move the federal systems to other bands, with the remainder going to the Treasury.

The second proposal I highlight is the creation of a GSA-like agency that controls federal spectrum. This proposal, from Thomas Lenard, Lawrence White, and James Riso, would accomplish the second goal of making federal users pay substantial fees for their spectrum. The federal government pays market rates for many important inputs–tanks, carriers, land, etc.–so why is spectrum free? The GSA, the authors explain, owns real estate and buildings and it leases those to federal agencies. Just as paying rent forces federal agencies to economize on building size and amenities, a “GSA for spectrum” would lease spectrum to agencies, hopefully preventing the sort of waste currently seen in federal bands.

I’m probably the first TLF author to favor the creation of 2 new federal agencies in a post (hopefully not my last!), but these proposals may be necessary given the damaging status quo. Federal waste of spectrum assets isn’t disputed and the consumer benefits of freeing up spectrum are obvious. The fight lies primarily between powerful interest groups and affected congressional committees, some of whom will see their constituent oxen gored (DoD, defense contractors, technology firms). Given the urgent needs, it’s foolish to continue to do nothing.

In an important essay this week entitled “Silicon Valley’s ‘Suicide Impulse’,” Wall Street Journal columnist L. Gordon Crovitz warns that “Silicon Valley has long prided itself on avoiding the lumbering relationship between big government and most industries, but somehow it has become one of the top lobbyists in Washington.” Crovitz is worried that Internet and technology companies are falling prey to what Milton Friedman labeled “The Business Community’s Suicidal Impulse”: the persistent propensity to persecute one’s competitors using regulation or the threat thereof. “Rather than lobby government to go after one another,” Crovitz argues, “Silicon Valley lobbyists should unite to go after overreaching government. Instead of the ‘suicide impulse’ of lobbying for more regulation, Silicon Valley should seek deregulation and a long-overdue freedom to return to its entrepreneurial roots.”

Crovitz’s essay touches upon a dangerous trend I have written about here and elsewhere in the past: the increasing politicization of the Internet and information technology sectors and the gradual rise of rent-seeking (i.e., favor-seeking) over time. I’ve written about this problem in essays like:

• “The Sad State of Cyber-Politics” (Cato, 2010)
• “The Troubling Growth of High-Tech Regulation, Lobbying, and Rent-Seeking” (Dec. 2, 2012)
• “On Facebook ‘Normalizing Relations’ with Washington” (March 29, 2011)
• “DC’s LivingSocial Cronyism Experiment Already Going off the Rails” (Nov. 29, 2012)

These essays have documented how tech companies are increasingly vying for the attention of legislators and regulators in Washington, statehouses, and international capitals across the globe.

Why should we care about the increasing politicization of the information technology sector? In a forthcoming Mercatus Center working paper entitled, “A History of Cronyism & Capture in the Information Technology Sector,” Brent Skorup and I explain how “time and resources spent focusing on influencing politicians and capturing regulators represent time and resources that could better be spent competing and innovating in the marketplace. This can negatively impact consumer welfare in two ways: Not only are consumers denied more and better products and services, but they also may pay higher prices or higher taxes extracted by the corporate-government agreement.”

We document how rent-seeking and cronyism have had a corrupting influence on older information sectors and technologies, especially broadcasting and communications. We develop lengthy case studies from each sector to illustrate the costs that rent-seeking imposes on consumers, competitors, and ongoing innovation.

It’s a miserable history but one that is essential to recount if we hope to avoid it for newer sectors and technologies. That’s why Brent and I devote the closing section of our paper to a list of “Strategies to Limit Cronyism” in the Internet world before things get as bad as they have in the communications and media sectors. We argue that it is essential that we use a combination of institutional safeguards and market/social norms if we hope to head-off incessant rent-seeking and avoid the ‘suicidal impulse’ problem that Milton Friedman and Gordon Crovtiz identified.

Generally speaking, we must begin by acknowledging that, as economist David Henderson correctly notes, “There is only one way to end, or at least to reduce, the amount of cronyism, and that is to reduce government power.” Special interest rent-seeking and the chronic cronyism problems of modern America are fundamentally tied up with the constantly expanding horizons of government power. As Mancur Olson taught us in his 1965 book, The Logic of Collective Action, when benefits are concentrated and costs are dispersed (across all taxpayers or ratepayers, for example), we can expect groups to form to take advantage of those benefits. Those groups have a powerful motivation to create, preserve, and perpetuate government programs that favor their narrow interests at the expense of others, while those bearing the true costs of those policies or programs do not have the same incentive (or resources) to lobby government to reduce or end those burdens.

This leads to what economist Gordon Tullock called the “transitional gains trap”: once a policy or program is put in place to favor a certain interest, most of their gains come upfront and are factored into future earnings. Those benefiting from the policies would face large transitional losses if reform is undertaken, even if these policies impose large deadweight costs on society as a whole. This “trap” can frustrate beneficial reform efforts because the interest benefiting from the cronyist policies and programs will fight to the death to preserve them, no matter how costly or inefficient they may be for society as a whole.

There are several steps we can take if we hope to overcome the collective action problem in the tech sector and avoid Tullock’s transitional gains trap.

First, we must limit the scope of technology regulation whenever possible, and where existing rules open the door to cronyism, streamline or eliminate as many of them as possible. When policymakers deregulated other sectors in past—airlines, railroads, trucking, etc.—it helped eliminate the legal levers that industry could capture or influence. Consequently, deregulation forced companies to spend more time satisfying consumers as opposed to lawmakers and regulators.

Second, whenever possible we should rely on auctions and property rights to ensure that resources are being allocated according to market demand instead of political influence. The ugly history of spectrum cronyism is rooted in the misguided reliance upon the so-called “public interest” theory of regulation, which claimed that supposedly enlightened and benevolent regulators would steer resources and markets in more pro-consumer directions. The reality was just the opposite: the “public interest” became synonymous with the private interest of regulated entities, who largely “gamed” the system for their own ends. It was only when policymakers finally embraced the logic of auctions to allocate spectrum that America began to see cronyism dissipate in this sector. Auctions ensured faster allocation and more efficient distribution and development of this important resource. While full-blown spectrum property rights have not yet taken hold, the gradual movement in that direction helps minimize cronyism opportunities.

Third, the use of vouchers can help limit corporate gaming of social programs that are deemed essential. For example, America’s universal service program, which subsidizes phone and now broadband service, is a permanent fixture of communications policy. Unfortunately, cronyism is a permanent fixture of the system as well. Because the universal service system delivers assistance to end-users indirectly through favored local providers, it limits the potential for new entry and undermines competition. A means-tested voucher could have targeted assistance to those who needed it without creating an inefficient, unsustainable hidden tax or undermining competition.

Fourth, sunsetting provisions for new and existing laws and regulations can greatly limit cronyism opportunities. All new technology proposals should include a provision sunsetting the law or regulation within a few years of enactment and existing technology laws and regulations should be reopened and reassessed on a regular timetable as well to ensure they are not being abused. (Here’s a Forbes column I wrote last year with details about how to do so.)

Fifth, we need serious limits on congressional delegations of power to regulatory bodies and executive branch agencies. Too often, lawmakers “pass the buck” on to agencies and expect them to figure out how to interpret and administer arcane technology policy statutes. The result is abuse both by over-zealous regulators and interests looking to game the system. Congress should be more accountable and, at a minimum, must make their regulatory intent and standards clearer before delegating authority.

Finally, we need to encourage better norms inside the tech industry itself and encourage them to hold themselves to a higher standard. We should ask them to promise not to exploit government power that would discourage innovation or crush competition. Better yet, we should ask them to consider “strategic disengagement” with Washington and politics in general. Yes, I understand that sounds like a pipe dream since where power exists interests will likely look to exploit it. And, again, that’s the best reason for serious deregulation and strong limits on government power to begin with. But social pressure and market norms can also help in the absence of more sweeping reforms. Some firms already adopt the right approach. For example, Apple and Sony have largely shunned political engagement and instead focused on satisfying their customers in the marketplace. While their hands aren’t entirely clean, we should encourage more tech innovators to follow their general lead of not sending small armies of lobbyists to Washington and state capitals.

In the end, there is no silver-bullet solution that can forever cure cronyism. It would be foolish to pretend that we’ll be able to significantly curtail the scope of government powers in the short-term. Nonetheless, there are many sensible institutional reforms and marketplace norms that can help us keep cronyism in check before it begins running rampant in this important sector of our economy.

(Brent and I have just sent our paper on this topic off for peer review from some academic experts in this field, but we welcome thoughts from others about strategies to limit and reduce cronyism in this arena. We hope to publish this paper in a law review or poly sci journal later this Summer or Fall.)

By Geoffrey Manne & Berin Szoka

As Democrats insist that income taxes on the 1% must go up in the name of fairness, one Democratic Senator wants to make sure that the 1% of heaviest Internet users pay the same price as the rest of us. It’s ironic how confused social justice gets when the Internet’s involved.

Senator Ron Wyden is beloved by defenders of Internet freedom, most notably for blocking the Protect IP bill—sister to the more infamous SOPA—in the Senate. He’s widely celebrated as one of the most tech-savvy members of Congress. But his latest bill, the “Data Cap Integrity Act,” is a bizarre, reverse-Robin Hood form of price control for broadband. It should offend those who defend Internet freedom just as much as SOPA did.

Wyden worries that “data caps” will discourage Internet use and allow “Internet providers to extract monopoly rents,” quoting a New York Times editorial from July that stirred up a tempest in a teapot. But his fears are straw men, based on four false premises.

First, US ISPs aren’t “capping” anyone’s broadband; they’re experimenting with usage-based pricing—service tiers. If you want more than the basic tier, your usage isn’t capped: you can always pay more for more bandwidth. But few users will actually exceed that basic tier. For example, Comcast’s basic tier, 300 GB/month, is so generous that 98.5% of users will not exceed it. That’s enough for 130 hours of HD video each month (two full-length movies a day) or between 300 and 1000 hours of standard (compressed) video streaming.

Second, Wyden sets up a false dichotomy: Caps (or tiers, more accurately) are, according to Wyden, “appropriate if they are carefully constructed to manage network congestion,” but apparently for Wyden the only alternative explanation for usage-based pricing is extraction of monopoly rents. This simply isn’t the case, and propagating that fallacy risks chilling investment in network infrastructure. In fact, usage-based pricing allows networks to charge heavy users more, thereby recovering more costs and actually reducing prices for the majority of us who don’t need more bandwidth than the basic tier permits—and whose usage is effectively subsidized by those few who do. Unfortunately, Wyden’s bill wouldn’t allow pricing structures based on cost recovery—only network congestion. So, for example, an ISP might be allowed to price usage during times of peak congestion, but couldn’t simply offer a lower price for the basic tier to light users.

That’s nuts—from the perspective of social justice as well as basic economic rationality. Even as the FCC was issuing its famous Net Neutrality regulations, the agency rejected proposals to ban usage-based pricing, explaining:

prohibiting tiered or usage-based pricing and requiring all subscribers to pay the same amount for broadband service, regardless of the performance or usage of the service, would force lighter end users of the network to subsidize heavier end users. It would also foreclose practices that may appropriately align incentives to encourage efficient use of networks.

It is unclear why Senator Wyden thinks the FCC—no friend of broadband “monopolists”—has this wrong.

Third, charging heavy users more isn’t just more equitable, it’s actually a solution to the very problem Wyden worries about: ensuring that ISPs have an incentive to encourage Internet use. Tiered pricing means they actually benefit from heavy use. So rather than try to slow use or discriminate against bandwidth-heavy applications—which is how the Net Neutrality fight started—ISPs will continue to build out faster networks.

Now, it’s certainly possible that, if the basic tier were set low enough or if additional data were expensive enough, cable companies could discourage their subscribers from canceling a cable subscription and switching to a competing service like Netflix. But it’s hard to see how a 300 GB basic tier deters anyone, especially when users can buy additional blocks of 50 GB for just $10/month—enough for nearly two more hours a day of streamed video. If there actually were a problem here, antitrust law could address it far better than blunt pricing restrictions. Indeed, such an investigation is already ongoing.

Finally, Wyden would require that broadband providers count content download from them against your usage—fearing that a “discriminatory cap” would harm competing video providers. But if the “cap” is high enough, who cares? Under antitrust law, such “discrimination” is illegal only if it harms consumers—and it’s hard to see how consumers suffer from being able to download more video. Would they really be better off if every hour of video they streamed from their cable company meant an hour less they could stream from Netflix? That’s what Wyden’s bill would require.

The recent kerfuffle over Comcast’s decision in October to make some of its television (pay per view) content available through Xbox without counting against Internet usage limits brought this point into stark relief. While activists like Public Knowledge decried the decision for the same reasons Wyden does now, they missed the fact that by removing some of its content from usage limits Comcast was actually freeing up users to access more content at lower prices.

If Wyden’s concern is that usage-based pricing would allow ISPs to extract “monopoly profits” from users who bump up against tiers, then “preferencing” some of their own content will reduce, not increase, that risk: Users would be able to access, say, bandwidth-heavy video content just as they do television content now—without it counting against Internet usage limits. That this might “discriminate” against other Internet-based content providers does not mean that it harms consumers—quite the opposite, in fact. Again, to the extent that it might, antitrust rules are more than sufficient to discourage such practices in the first place or punish them if they arise— without restricting firms’ ability to price their content and manage their networks to ensure a reasonable return on their investments.

Pricing structures for broadband are still evolving. Just this year, Comcast moved from its original 250 GB cap—which it never enforced—to today’s 300 GB basic tier, and other broadband providers will likely follow suit. Those plans will probably continue to evolve towards pricing structures that minimize network congestion—like offering periods of unmetered use in the middle of the night, when network use plummets. That would go a long way to allaying concerns about the effect of tiered plans on competition, since Netflix could send your favorite shows and the next movies in your queue to the device of your choice while you sleep. But pricing structures also have to allow sensible, fair recovery of costs—which the Wyden bill would simply ban.

So much for not blithely regulating the Internet, Senator!

[Cross-posted at Truth on the Market]

This may be the best speech by a regulator that you will read in your entire life. Federal Communications Commission (FCC) Commissioner Robert McDowell delivered an address in Rome today entitled, “The Siren Call of “Please Regulate My Rival”: A Recipe for Regulatory Failure.” I highly recommend it (and not just because I’m cited in it!) It is infused with important insights about the ugly downsides of excessive regulation of technology markets.

McDowell is an astute student of regulatory history and he documents how, despite the best of intentions, economic regulation has often been turned into a tool that industry exploits for their own narrow interests. Sadly, examples of such “regulatory capture” are rampant, as I have documented here before. McDowell notes that many telecom and media companies “suffer from the ‘please regulate my rival’ malady of an industry that has been regulated too much and for too long.  History is replete with such scenarios,” he says, “and the desire for more regulation for competitors always ends badly for the incumbent regulated industry in the form of unintended and harmful consequences.” That is exactly right.

I strongly encourage you to read the entire speech, but if you only have time to read one thing, make it the powerful and poetic closing paragraphs, which I have reprinted below:

“Regulating my rival” is a seductive notion for many, but it only lures its victims to rocky shores before revealing itself as a perilous Siren call.  Telecom companies should not look to regulate their “rivals,” Internet content and applications companies, down to their level – especially not through an intergovernmental body.

Instead, network operators should seek deregulation by their home governments to allow them full flexibility to produce and price freely in competitive markets.  In fact, as history shows us, attempting to regulate rivals will only produce unintended consequences that will harm the companies advocating regulation.  More importantly, consumers end up losing the most.  In short, the opposite of what is desired will occur, something called “regulatory failure.”  No government, let alone an intergovernmental body, can make economic and engineering decisions in lightning fast Internet time.  Nor can any government mandate innovation.  But new rules can undermine investment, innovation and job creation all too easily.

Despite these realities, resisting the temptation to regulate is difficult for many.  Furthermore, deregulation can seem counterintuitive to some.  We always hear talk of “market failure,” but we rarely see analyses of “regulatory failure.”  Perhaps that is why, in the words of Professor Adam Thierer, “regulation always spreads.” As world economies contract and government debt mounts, repeating the same government actions of regulating more and spending more of the public’s money will only produce the same results: shrinking economies and growing debt.  It is time to reverse these trends, but doing so will require tremendous political courage.

We can start by avoiding any expansion of regulation to the Internet.  Its phenomenal success can be traced directly to its voluntary and self-governing structure, the result of a multi-stakeholder process free from top-down governmental influences.  In fact, policy makers should head in the opposite direction of the proposals outlined earlier. We should learn from the voluntary, bottom-up, self governance approach in the image of the non-hierarchical Internet itself, and look to apply this successful model elsewhere.  Revolutionizing public policy through a fundamental modernization of legacy laws to clear away unnecessary regulatory obstructions will uncork the flow of investment capital, spark innovation, drive economic growth and propel job creation.  Couldn’t today’s world economy benefit from such positive and constructive change?

On the other hand, dragging rivals down to the lowest common denominator of overly regulated international telecom companies will enshrine mediocrity at best, and, at worst, snuff out incentives to take risks and reap the resulting rewards, therefore killing opportunities to revitalize moribund economies and improve the human condition.

Thank you, Commissioner McDowell, for speaking the truth and reminding the world that the actual history of telecom and media regulation has been a miserable, cronyist, anti-consumer fiasco.  This is exactly why we need to comprehensively deregulate these markets right now while also making sure that creeping cronyism and “regulate my rival” politics do not spread to new tech sectors.

Did Apple conspire with e-book publishers to raise e-book prices?  That’s what DOJ argues in a lawsuit filed yesterday. But does that violate the antitrust laws?  Not necessarily—and even if it does, perhaps it shouldn’t.

Antitrust’s sole goal is maximizing consumer welfare.  While that generally means antitrust regulators should focus on lower prices, the situation is more complicated when we’re talking about markets for new products, where technologies for distribution and consumption are evolving rapidly along with business models.  In short, the so-called Agency pricing model Apple and publishers adopted may mean (and may not mean) higher e-book prices in the short run, but it also means more variability in pricing, and it might well have facilitated Apple’s entry into the market, increasing e-book retail competition and promoting innovation among e-book readers, while increasing funding for e-book content creators.

The procompetitive story goes something like the following.  (As always with antitrust, the question isn’t so much which model is better, but that no one really knows what the right model is—least of all antitrust regulators—and that, the more unclear the consumer welfare effects of a practice are, as in rapidly evolving markets, the more we should err on the side of restraint).

Apple versus Amazon

Apple–decidedly a hardware company–entered the e-book market as a device maker eager to attract consumers to its expensive iPad tablets by offering appealing media content.  In this it is the very opposite of Amazon, a general retailer that naturally moved into retailing digital content, and began selling hardware (Kindle readers) only as a way of getting consumers to embrace e-books.

The Kindle is essentially a one-trick pony (the latest Kindle notwithstanding), and its focus is on e-books.  By contrast, Apple’s platform (the iPad and, to a lesser degree, the iPhone) is a multi-use platform, offering Internet browsing, word processing, music, apps, and other products, of which books probably accounted–and still account–for a relatively small percentage of revenue.  Importantly, unlike Amazon, Apple has many options for promoting adoption of its platform—not least, the “sex appeal” of its famously glam products.  Without denigrating Amazon’s offerings, Amazon, by contrast, competes largely on the basis of its content, and its devices sell only as long as the content is attractive and attractively priced.

In essence, Apple’s iPad is a platform; Amazon’s Kindle is a book merchant wrapped up in a cool device.

What this means is that Apple, unlike Amazon, is far less interested in controlling content prices for books and other content; it hardly needs to control that lever to effectively market its platform, and it can easily rely on content providers’ self interest to ensure that enough content flows through its devices.

In other words, Apple is content to act as a typical platform would, acting as a conduit for others’ content, which the content owner controls.  Amazon surely has “platform” status in its sights, but reliant as it is on e-books, and nascent as that market is, it is not quite ready to act like a “pure” platform.  (For more on this, see my blog post from 2010).

The Agency Model

As it happens, publishers seem to prefer the Agency Model, as well, preferring to keep control over their content in this medium rather than selling it (as in the brick-and-mortar model) to a retailer like Amazon to price, market, promote and re-sell at will.  For the publishers, the Agency Model is essentially a form of resale price maintenance — ensuring that retailers who sell their products do not inefficiently discount prices.  (For a clear exposition of the procompetitive merits of RPM, see this article by Benjamin Klein).

(As a side note, I suspect that they may well be wrong to feel this way.  The inclination seems to stem from a fear of e-books’ threat to their traditional business model — a fear of technological evolution that can have catastrophic consequences (cf. Kodak, about which I wrote a few weeks ago).  But then content providers moving into digital media have been consistently woeful at understanding digital markets).

So the publishers strike a deal with Apple that gives the publishers control over pricing and Apple a cut (30%) of the profits.  Contrary to the DOJ’s claim in its complaint, this model happens to look exactly like Apple’s arrangement for apps and music, as well, right down to the same percentage Apple takes from sales.  This makes things easier for Apple, gives publishers more control over pricing, and offers Apple content and a good return sufficient to induce it to market and sell its platform.

It is worth noting here that there is no reason to think that the wholesale model wouldn’t also have generated enough content and enough return for Apple, so I don’t think the ultimate motivation here for Apple was higher prices (which could well have actually led to lower total return given fewer sales), but rather that it wasn’t interested in paying for control.  So in exchange for a (possibly) larger slice of the pie, as well as consistency with its existing content provider back-end and the avoidance of having to monitor and make pricing decisions,  Apple happily relinquished decision-making over pricing and other aspects of sales.

The Most Favored Nation Clauses

Having given up this price control, Apple has one remaining problem: no guarantee of being able to offer attractive content at an attractive price if it is forced to try to sell e-books at a high price while its competitors can undercut it.  And so, as is common in this sort of distribution agreement, Apple obtains “Most Favored Nation” (MFN) clauses from publishers to ensure that if they are permitting other platforms to sell their books at a lower price, Apple will at least be able to do so, as well.  The contracts at issue in the case specify maximum resale prices for content and ensure Apple that if a publisher permits, say, Amazon to sell the same content at a lower price, it will likewise offer the content via Apple’s iBooks store for the same price.

The DOJ is fighting a war against MFNs, which is a story for another day, and it seems clear from the terms of the settlement with the three setting publishers that indeed MFNs are a big part of the target here.  But there is nothing inherently problematic about MFNs, and there is plenty of scholarship explaining why they are beneficial.  Here, and important among these, they facilitate entry by offering some protection for an entrant’s up-front investment in challenging an incumbent, and prevent subsequent entrants from undercutting this price.  In this sense MFNs are essentially an important way of inducing retailers like Apple to sign on to an RPM (no control) model by offering some protection against publishers striking a deal with a competitor that leaves Apple forced to price its e-books out of the market.

There is nothing, that I know of, in the MFNs or elsewhere in the agreements that requires the publishers to impose higher resale prices elsewhere, or prevents the publishers from selling throughApple at a lower price, if necessary.  That said, it may well have been everyone’s hope that, as the DOJ alleges, the MFNs would operate like price floors instead of price ceilings, ensuring higher prices for publishers.  But hoping for higher prices is not an antitrust offense, and, as I’ve discussed, it’s not even clear that, viewed more broadly in terms of the evolution of the e-book and e-reader markets, higher prices in the short run would be bad for consumers.

The Legal Standard

To the extent that book publishers don’t necessarily know what’s really in their best interest, the DOJ is even more constrained in judging the benefits (or costs) for consumers at large from this scheme.  As I’ve suggested, there is a pretty clear procompetitive story here, and a court may indeed agree that this should not be judged under a per se liability standard (as would apply in the case of naked price-fixing).

Most important, here there is no allegation that the publishers and Apple (or the publishers among themselves) agreed on price.  Rather, the allegation is that they agreed to adopt a particular business model (one that, I would point out, probably resulted in greater variation in price, rather than less, compared to Amazon’s traditional $9.99-for-all pricing scheme).  If the DOJ can convince a court that this nevertheless amounts to a naked price-fixing agreement among publishers, with Apple operating as the hub, then they are probably sunk.  But while antitrust law is suspicious of collective action among rivals in coordinating on prices, this change in business model does not alone coordinate on prices.  Each individual publisher can set its own price, and it’s not clear that the DOJ’s evidence points to any agreement with respect to actual pricing level.

It does seem pretty clear that there is coordination here on the shift in business models.  But sometimes antitrust law condones such collective action to take account of various efficiencies (think standard setting or joint ventures or collective rights groups like BMI).  Here, there is a more than plausible case that coordinated action to move to a plausibly-more-efficient business model was necessary and pro-competitive.  If Apple can convince a court of that, then the DOJ has a rule of reason case on its hands and is facing a very uphill battle.

[Cross posted at Forbes.com]

In the wake of last week’s big SOPA showdown, a lot of people are talking about the expanded presence and power of the Internet, online operators, and digital Netizens in Washington policy debates. I certainly don’t mean to diminish the importance of this particular episode. It certainly is historic, regardless of how you feel about the specifics of SOPA. What does concern me, however, is the way this episode is prompting questions about how much more “engagement” Internet companies need to consider inside the Beltway. For example, today’s Wall Street Journal features an article on “The Web’s Growing Muscle” and notes:

The Internet industry has found a rare sweet spot in Washington. With Google in the lead, the companies have begun building a strong traditional lobbying force in Washington. And, to complement that inside game, websites’ millions of users have become a powerful outside weight on Congress. What’s more, in a rare Washington double play, the concerns of Internet companies have found a sympathetic ear both in the Democratic White House and among Republican presidential candidates who otherwise can’t agree with Barack Obama on anything.

The piece concludes with a quote from an anonymous media executive saying “People are looking at what Google spent on lobbying and wondering, ‘Can we match that?’ It has to be a big spend.”

I cannot possibly think of anything more demoralizing than that. The idea that web companies should spend more of their time in Washington showering politicians with cash instead of out there in the real world innovating and making consumers happy is extremely troubling. I wrote about this growing trend in my 2010 Cato essay on “The Sad State of Cyber-Politics.” I built that essay around an old manifesto by Cypress Semiconductor CEO T. J. Rodgers on “Why Silicon Valley Should Not Normalize Relations with Washington, D.C.”  Rodgers had argued that “The political scene in Washington is antithetical to the core values that drive our success in the international marketplace and risks converting entrepreneurs into statist businessmen,” and that “The collectivist notion that drives policymaking in Washington is the irrevocable enemy of high-technology capitalism and the wealth creation process.”

But no one was listening then and they certainly aren’t listening now. We find ourselves in the midst a mad rush to see who can open a bigger, fancier office in Washington and have glitzier parties to make the political class happy. As I noted in the Cato essay:

There’s enormous pressure on the high-tech sector to actually become more entrenched in coming years, at least to remain “competitive” with other companies who have planted a flag inside the Beltway. Recently, for example, Reid Hoffman, founder of LinkedIn, a social networking site for professionals, worried that policymakers tend to ignore high-tech startups. “We don’t have an entrepreneurship lobby,” he said, “because entrepreneurs are off doing it.” As if that was a bad thing! In particular, he fretted about startups not getting their share of recent stimulus funding and argued that “It’s much easier when you’re embedded in the political infrastructure to respond to immediate things” such as nabbing stimulus dollars, he said.

Am I being naive about all this? Don’t these new tech companies have to have armies of lobbyists pressing the flesh and greasing the palms here in DC in order to compete against other entrenched competitors who are doing to same thing?  Perhaps, but there’s always been self-fulfilling circularity to the argument that you have to be here in order to “be a player” or “have a seat at the table.” The end result of that thinking is always the same: more lobbying, more logrolling, more of “the big spend.” And then we end up with one giant cesspool of protected markets, protracted legal nightmares, bloated bureaucracies, and widespread regulatory capture. Welcome to the wonderful world of crony capitalism! And your tech sector superstars are now falling all over themselves to make sure they have that proverbial “seat at the table” so they can feast at this Big Government supper.

It makes me sick to my stomach to even think about it. So, I’ll continue right on being a naive dope and conclude this piece the same way I concluded my old Cato essay on the sad state of cyber-politics:

For that small remnant of believers in real Internet Freedom — freedom from incessant government techno-meddling — we will never stop hoping that disputes among high-tech companies might be settled in the marketplace instead of within regulatory agencies and congressional committee rooms. And we must continue our push to discourage high-tech companies from an excessive “normalization” of relations with the parasitic culture that dominates Washington by reminding them, as Rodgers noted in 2000, “that free minds and free markets are the moral foundation that has made our success possible. We must never allow those freedoms to be diminished for any reason.”

Just let me dream, people.

Over at TIME.com, I consult public choice theory to glean the meaning of last week’s SOPA protest success:

The SOPA blackout protest last week was an unprecedented event. Its massive success — with dozens of members of Congress switching their stance in one day under the withering intensity of thousands of phone calls — surprised even the activists who spurred the protest. So does this mean that we are entering the much-heralded era of Internet-powered citizen democracy?

Read the whole thing here.

Yesterday, President Barack Obama announced two nominations to the Federal Communications Commission: Jessica Rosenworcel, replacing Democratic Commissioner Michael Copps, and Ajit Pai, replacing Republican Commissioner Meredith Attwell Baker.

The FCC faces a unique challenge: Because it regulates the communications industry, essentially every rule it issues implicates the free speech values at the heart of our Constitutional heritage. The First Amendment was intended to be a shield against government meddling, not a sword for regulatory activism, however well-intentioned. Moreover, the FCC regulates an industry being transformed by the Digital Revolution.

We at TechFreedom look forward to working with these new Commissioners to ensure that FCC regulations serve consumers by advancing competition and innovation while respecting free speech rights. The Commission should ask, and explicitly answer, the following questions whenever considering the need for new, or existing, regulations:

1. What free speech rights are at stake?
2. How substantial is the government’s interest? Has the market failed?
3. Can regulation, always slow to start and slower to adapt, really address the problem better than technological change?
4. Will the regulation’s benefits outweigh its costs, considering its likely unintended consequences?
5. Are there less-restrictive and more speech-protective ways government can achieve its interest, such as enforcing existing antitrust and consumer protection laws, supporting consumer education, empowering users to make their own decisions, or compelling disclosure to consumers?

Over a week ago the Washington Post published an interview with Google’s Eric Schmidt to which I’ve been meaning to draw your attention. He’s reflecting on the relationship between Silicon Valle and D.C. days after his Senate testimony, and it’s incredibly candid, perhaps because as the Post noted, “He had just come from the dentist. And had a toothache.” Here are some choice quotes:

On getting told to testify:

So we get hauled in front of the Congress for developing a product that’s free, that serves a billion people. Okay? I mean, I don’t know how to say it any clearer. I mean, it’s fine. It’s their job. But it’s not like we raised prices. We could lower prices from free to…lower than free? You see what I’m saying?

On regulation:

And one of the consequences of regulation is regulation prohibits real innovation, because the regulation essentially defines a path to follow—which by definition has a bias to the current outcome, because it’s a path for the current outcome.

On the D.C. shakedown:

And privately the politicians will say, ‘Look, you need to participate in our system. You need to participate at a personal level, you need to participate at a corporate level.’ We, after some debate, set up a PAC, as other companies have.

On political startups:

Now there are startups in Washington. And these startups have the interesting property that they’re founded by people who were policymakers, let’s say in telecommunications. They’re very clever people, and they’ve figured out a way in regulation to discriminate, to find a new satellite spectrum or a new frequency or whatever. They immediately hired a whole bunch of lobbyists. They raised some money to do that. And they’re trying to innovate through the regulation. So that’s what passes for innovation in Washington.

There’s a real sense of exasperation that is almost absurd–that is, an exhausting attempt to find rationality in political decision making. Of course, there is rational decision making, it’s just on a different margin. Here is Schmidt on expanding H-1B visas:

I’m so tired of this argument. I’m tired of making it. I’ve been making it for twenty years. In the current cast of characters, the Republicans are on our side, our local Democrats support us because our arguments are obvious, and the other Democrats don’t—because they don’t get it. The president understands the argument and would like to support us, he says, but there are various political issues. That’s roughly the situation. That’s been true for twenty years, through different presidents and different leaders. It’s stupid.

The whole thing is worth reading.

Today my colleague Tate Watkins and I are releasing a new working paper on cybersecurity policy. Please excuse my patently sleep-deprived mug while I describe it here:

Over the past few years there has been a steady drumbeat of alarmist rhetoric coming out of Washington about potential catastrophic cybersecurity threats. For example, at a Senate Armed Services Committee hearing last year, Chairman Carl Levin said that “cyberweapons and cyberattacks potentially can be devastating, approaching weapons of mass destruction in their effects.” Proposed responses include increased federal spending on cybersecurity and the regulation of private network security practices.

The rhetoric of “cyber doom” employed by proponents of increased federal intervention, however, lacks clear evidence of a serious threat that can be verified by the public. As a result, the United States may be witnessing a bout of threat inflation.

Threat inflation, according to Thrall and Cramer, is a concept in political science that refers to “the attempt by elites to create concern for a threat that goes beyond the scope and urgency that a disinterested analysis would justify.” Different actors—including members of Congress, defense contractors, journalists, policy experts, academics, and civilian, military, and intelligence officials—will each have their own motives for contributing to threat inflation. When a threat is inflated, the marketplace of ideas on which a democracy relies to make sound judgments—in particular, the media and popular debate—can become overwhelmed by fallacious information. The result can be unwarranted public support for misguided policies.

The run-up to the Iraq War illustrates the dynamic of threat inflation. After 9/11, the Bush Administration decided to invade Iraq to oust Saddam Hussein. Lacking any clear casus belli, the administration sought popular and congressional support for war by promoting several rationales that ultimately proved baseless.

Over the past two years, there has been a drive for increased federal involvement in cybersecurity. This drive is evidenced by the introduction of several comprehensive cybersecurity bills in Congress, the initiation of several regulatory proceedings related to cybersecurity by the Federal Communications Commission and Commerce Department, and increased coverage of the issue in the media. The official consensus seems to be that the United States is facing a grave and immediate threat that only quick federal intervention can address. This narrative has gone largely unchallenged by members of Congress or the press, and it has inflated the threat.

There is very little verifiable evidence to substantiate the threats claimed, and the most vocal proponents of a threat engage in rhetoric that can only be characterized as alarmist. Cyber threat inflation parallels what we saw in the run-up to the Iraq War.

Additionally, a cyber-industrial complex is emerging, much like the military-industrial complex of the Cold War. This complex may serve to not only supply cybersecurity solutions to the federal government, but to drum up demand for them as well.

In our new working paper, Tate Watkins and I draw a parallel between today’s cybersecurity debate and the run-up to the Iraq War and look at how an inflated public conception of the threat we face may lead to unnecessary regulation of the Internet. We also draw a parallel between the emerging cybersecurity establishment and the military-industrial complex of the Cold War and look at how unwarranted external influence can lead to unnecessary federal spending. Finally, we survey several federal cybersecurity proposals and present a framework for policy makers to analyze the cybersecurity threat.

Over the next few days I’ll be excerpting the paper here and would love your thoughts and reactions.

This week, my colleague Jerry Brito asked me to guest lecture to his George Mason University law school class on regulatory process. He asked me to talk about one of my favorite topics: the sad, sordid history of regulatory capture. Regular readers will recall the compendium I posted here a few months ago [and that I continue to update] of selected passages from books and papers penned by various economists and political scientists who have studied this issue.

Again, it doesn’t make for pretty reading, but the lesson that history teaches is vital: No matter how noble the “public interest” goals of regulatory advocates or their specific proposals, the only thing that really counts is what regulation means in practice.  Regrettably, all too often, regulation is “captured” by various interests and used to their advantage, or at least to the disadvantage of potential competitors, new entrants, and innovation.

While I was gathering some materials for the case study portion of my lecture — which incorporates the history of telecommunications monopolization, broadcast industry regulatory shenanigans, and transportation / airlines fiascos — I figured I had to post a passage from one of my favorite books on regulation of all-time: Thomas K. McCraw’s brilliant Pulitzer Prize-winning 1984 book, Prophets of Regulation. In his chapter on the late great Alfred Kahn, the father of airline deregulation, McCraw recounts the history of the Civil Aeronautics Board (CAB) from its creation in the 1940s up until the time of Kahn’s ascendency to CAB chairman in the Carter Administration (and then the CAB’s eventual deregulation and abolition). Here’s the key passage from that history:

“Clearly, in passing the Civil Aeronautics Act [of 1938], Congress intended to bring stability to airlines. What is not clear is whether the legislature intended to cartelize the industry. Yet this did happen. During the forty years between passage of the act of 1938 and the appointment of [Alfred] Kahn to the CAB chairmanship, the overall effect of board policies tended to freeze the industry more or less in its configuration of 1938. One policy, for example, forbade price competition. Instead the CAB ordinarily required that all carriers flying a certain route charge the same rates for the same class of customer. […] A second policy had to do with the CAB’s stance toward the entry of new companies into the business. Charged by Congress with the duty of ascertaining whether or not ‘the public interest, convenience, and necessity’ mandated that new carriers should receive a certificate to operate, the board often ruled simply that no applicant met these tests. In fact, over the entire history of the CAB, no new trunkline carrier had been permitted to join the sixteen that existed in 1938. And those sixteen, later reduced to ten by a series of mergers, still dominated the industry in the 1970s. All these companies… developed into large companies under the protective wing of the CAB. None wanted deregulation.” (p. 263)

To reiterate: Zero new competitors were allowed. Zero price competition was allowed. And very little service innovation was permitted. It was a comfy little protected cartel from start to finish. It’s no wonder that “none wanted deregulation”!  Folks, if that isn’t the very definition of regulatory capture, I don’t know what is.

This is what makes Fred Kahn’s achievement all the more monumental.  Beyond his obvious mastery of the subject and rigorous documentation of regulatory failure in action, it was Fred’s sheer force of will and amazing spirit that provided the spark to get the deregulation of this mess moving forward. Against all odds — and with the help of some fellow liberal Democrats like Ted Kennedy, Ralph Nader, and Stephen Breyer — Fred did it.

And consumers owe him a huge debt of gratitude for it. Prices plummeted following the CAB’s abolition and countless new industry faces have come and gone since deregulation. Things haven’t been perfect by any stretch of the imagination, but can you imagine how much worse off we would have been absent Fred Kahn’s bold move to break the regulatory capture logjam and “free the skies” for competition?

Something to think about next time someone tells you that regulation is always in consumer’s best interests.

[P.S. – I posted a short obit here late last December remembering Fred Kahn upon his passing. I hope you read it if you haven’t already.  I still wish I could hear Fred speak just one more time. What a joy and inspiration that man was. I always treasured my moments with him. I still have the final email he sent me from early 2010 sitting in my inbox. I just can’t bring myself to delete it for some reason. He had passed along a nice note about a paper I had recently written. I practically cried when I read his note. One of my intellectual heroes had not only read something I penned but he had actually liked it! And he was 92 when he sent it to me.  Blows my mind.]

Jack Shafer brought to my attention this terrific new Politico column by Michael Kinsley entitled, “How Microsoft Learned ABCs of D.C.”  In the editorial, Kinsley touches on some of the same themes I addressed in my recent piece here “On Facebook ‘Normalizing Relations’ with Washington” as well as in my Cato Institute essay from last year on”The Sad State of Cyber-Politics.”  Kinsley notes how Microsoft was originally bashed by many for not getting into the D.C. lobbying game early enough:

there even was a feeling that, in refusing to play the Washington game, Microsoft was being downright unpatriotic. Look, buddy, there is an American way of doing things, and that American way includes hiring lobbyists, paying lawyers vast sums by the hour, throwing lavish parties for politicians, aides, journalists and so on. So get with the program.

So that’s what Microsoft did. It moved its “government affairs” office out of distant Chevy Chase and into the downtown K Street corridor. It bulked up on lawyers and hired the best-connected lobbyists. Soon, Microsoft was coming under criticism for being heavy-handed in its attempts to buy influence.

The New York Times reports that, “Facebook is hoping to do something better and faster than any other technology start-up-turned-Internet superpower. Befriend Washington. Facebook has layered its executive, legal, policy and communications ranks with high-powered politicos from both parties, beefing up its firepower for future battles in Washington and beyond.”  The article goes on to cite a variety of recent hires by Facebook, its new DC office, and its increased political giving.

This isn’t at all surprising and, in one sense, it’s almost impossible to argue with the logic of Facebook deciding to beef up its lobbying presence inside the Beltway. In fact, later in the Times story we hear the same two traditional arguments trotted out for why Facebook must do so: (1) Because everyone’s doing it! and (2) You don’t want be Microsoft, do you?   But I’m not so sure whether “normalizing relations” with Washington is such a good idea for Facebook or other major tech companies, and I’m certainly not persuaded by the logic of those two common refrains regarding why every tech company must rush to Washington.

In an essay I penned for the Cato Institute last November entitled “The Sad State of Cyber-Politics,” I reiterated arguments made a decade earlier by two brilliant men: Cypress Semiconductor CEO T. J. Rodgers and the late great Milton Friedman. Rodgers penned a prescient manifesto for Cato in 2000 with the provocative title: “Why Silicon Valley Should Not Normalize Relations with Washington, D.C.” in which he argued that, “The political scene in Washington is antithetical to the core values that drive our success in the international marketplace and risks converting entrepreneurs into statist businessmen.” A year earlier, Friedman penned another Cato essay called “The Business Community’s Suicidal Impulse” in which he lamented the persistent propensity of companies to persecute one’s competitors using regulation or the threat thereof. What both men stressed was that coming to Washington has a tendency to change a company’s focus and disposition, and not for the better — if you believe in real capitalism, that is, and not the abominable crony capitalism fostered by Washington.

But few in the high-tech world have listened to this logic, especially when the whole rest of the world was falling all over themselves to open a Washington, DC office first in an effort to cover their butts from regulatory encroachments and then later to figure out how the wield the hammer of Big Government to their corporate advantage. I documented numerous examples of the latter in my Cato essay.

I’m not saying that the folks at Facebook are going to be looking to screw over their competitors right away. In fact, I can’t currently think of any examples of how they might.  The company is still firmly in that “cover your butt” period that is common when a hot new digital innovator first comes to DC.  And I certainly can’t blame them for wanting to push back against many misguided forms of Internet regulation, such as free speech controls or heavy-handed privacy regulation.  But I fear there will come a day when they fall in line with many other high-tech companies and trade associations and seek to turn the regulatory state to their advantage.  Only time will tell. And I certainly hope I am wrong.

Regardless, as the folks at Facebook and other high-tech firms ponder their future inside the Beltway, let me ask them to return to the two premises for “normalizing relations” that I cited above and explain why they are not exactly true:

Premise #1: Everyone’s doing it!  Most are, but not all. How active are Apple and Sony to name just two companies without a major DC presence?  Most days of the week, Steve Jobs seems to be giving DC a big middle finger. I’m the last guy in the world you’ll ever hear giving Apple much credit since I hate their products, but Jobs is about the closest thing you’ll find to an Ayn Rand character in Silicon Valley these days.  He seems to do exactly what he wants to build innovative products for consumers and, in the process, ignore all his critics, especially those in Washington. Of course, not everybody can be Steve Jobs in this regard, but I can’t help but wonder: Why don’t more of them try? What if high-tech entrepreneurs just told Washington to buzz off?

Premise #2: You don’t want be Microsoft, do you? The Times article says, “legal analysts say Facebook is hoping to avoid mistakes made by predecessors like Microsoft. And they say the company is becoming politically savvy earlier in its life than Google, whose connections were firmly established once Eric E. Schmidt, the chief executive, advised the Obama presidential campaign and the administration.”

I’ve never really bought into this argument. I think it’s pretty far-fetched to claim, as so many people in this field do, that if Microsoft would have just had a small army of lobbyists here on the ground back in the early 1990s that none of their antitrust problems would have popped up. And regarding Google coming to Washington in the hope of winning friends, well, how’s that working out for them?!  As I noted in my Cato essay:

Everybody — and I do mean everybody — wants Google dead, right now. Google currently serves as the Great Satan in this drama — taking over the role Microsoft filled a decade ago — as just about everyone views it with a combination of envy and enmity.

Indeed, no one could be happier about Facebook coming to town at this moment than Google!  They get to hand the “Great Satan” baton off to Facebook and wish them the best!  Of course, Google’s problems with Washington aren’t done by a long-shot, but I’m quite sure they’re relieved to see Facebook getting grilled more at hearings and events around town these days.

Anyway, in all seriousness, I’ll say the same thing to the fine folks in the Facebook DC office — several of whom I know well — that I’ve said to countless other tech companies here in the Beltway through the years: Stay true to the same principles that made your company so great to begin with.  It wasn’t Washington that built Facebook, or Google, or Microsoft, or any other high-tech innovators; it was entrepreneurial capitalism that did.  Free minds and free markets made the high-tech sector what it is today, not handouts and special favors from Washington. Stick to real capitalism; avoid the crony variety.

National Journal reports that the Department of Commerce (NTIA) will, at a Senate Commerce Committee hearing today, call for a “consumer privacy bill of rights”—a euphemism for sweeping privacy regulation:

“Having carefully reviewed all stakeholder comments to the Green Paper, the department has concluded that the U.S. consumer data privacy framework will benefit from legislation to establish a clearer set of rules for the road for businesses and consumers, while preserving the innovation and free flow of information that are hallmarks of the Internet,” [NTIA Administrator Larry] Strickling said in his prepared testimony obtained by Tech Daily Dose.

In other words: “We’ve taken the time to think this through very carefully and have reluctantly come to the conclusion that regulation is necessary.” Sorry, but I’m just not buying it—not just the wisdom of the recommendation but the process that produced it. Let’s consider the timeline here:

• October 27, 2010 – NTIA Administrator Strickling announces Green Paper is coming but says nothing about timing and little about substance
• December 16, 2010 – NTIA/Commerce releases its Privacy Green Paper
• January 28, 2011 – deadline for public comments (28 non-holiday business days later)
• ??? – Commerce decides regulation is necessary
• March 16, 2011 – Commerce is ready to ask Congress for legislation (31 non-holiday business days later)

The Commerce Department gave the many, many interested parties the  worst four weeks of the year—including  Christmas, New Year’s and Martin Luther King Day—to digest and comment on an 88 page, ~31,000 tome of a report on proposed regulation of how information flows in our… well, information economy. Oh, and did I mention that those same parties had already been given a deadline of January 31, 2011 to comment on the FTC’s 122 page, ~34,000 word privacy report back on December 1 (too bad for those celebrating Hanukkah)? In fairness, the FTC did, on January 21, extend its deadline to February 18—but that hardly excuses the Commerce Department’s rush to judgment.

Now, does this timeline suggest that either agency—but particularly Commerce—was really serious about gathering substantive comments on its report? Or that the agency really had time to carefully consider the comments that were filed in the short time it allowed? It should be pretty obvious to anyone what a mockery this process has made of transparency. The Commerce Department’s pretense of judicious deliberation is a pretty thin cover for its clearly premeditated rush to regulation.

Now, if I were a betting man, I’d wager that these agencies might not have been planning to move so quickly—until, by the time Strickling first mentioned the Green Paper at the end of October, it became clear the Democrats would be hammered in the November elections. Who could blame them for feeling they needed to put their regulatory agenda into high gear? It’s not just that the Republicans suddenly took over the House with a 48-seat majority. It’s also that people throughout the Administration had finally tasted their first real defeat—a reminder that they, too, might be booted out in November 2012—which means they had a mere 8-10 months to actually “do something” to move privacy regulation forward before everything in Washington shut down for the circus that is every presidential election.

All of that is perfectly understandable, and I don’t doubt that the Republicans would think much the same way if the shoe were on the other foot. But let’s not kid ourselves about the political reality here: This administration has been pushing to impose comprehensive controls on the collection and use of information long before they came into office: Obama made privacy regulation one of the key planks of his campaign’s tech policy statement, for example, and even on election day, the Washington Post was talking about his planned “focus on protecting online privacy.”

One might say the FTC staff had started down this path even under the Bush administration. (Indeed, Adam Thierer and I proposed “Principles to Guide the Debate” over online advertising & user privacy back in September 2008.) But the FTC is still “behind” the Commerce Department in terms of being willing to openly call for increased regulation—which is pretty ironic, since the Commerce department is supposed to be the one agency that can be relied on to think about how regulation affects, well, commerce!

Still, the FTC’ may be playing a bit coy: Despite repeated public insistence by FTC staff (most recently at last week’s IAPP Global Privacy Summit) that the agency was only calling for improved best practices, the Staff report is worded in such a way that the WSJ was able to assert last week (in a story on the “Privacy Bill of Rights” legislation being drafted by Sens. Kerry and McCain) that the FTC had “urged Congress to authorize creation of a ‘do-not-track’ system.” The WSJ later ran a correction to the story—but not on this critical statement, which apparently the FTC didn’t really mind… probably because it’s exactly what the agency wanted journalists to say!

In my comments on the FTC’s preliminary staff report, I pointed out the rather obvious fact that FTC Chairman Jon Leibowitz’s term expires this coming September. My hunch that he was using the draft report to gain political capital for his renomination was reinforced when, little more than two weeks after the FTC’s comment deadline closed, the President issued the Chairman’s renomination. (Some observers had speculated that Obama was dissatisfied with Leibowitz for not “doing more,” in terms of earning headlines, for privacy protection, and that the newly appointed Commissioner Edith Ramirez might make an attractive replacement, as the first Latina to head—I believe she would have been—a major regulatory agency. Thus, speculation went, Leibowitz was trying to earn brownie points among those on the Hill who want to do something, anything to “get tough” on privacy regulation, no matter the costs.)

Whatever one says of the FTC, it is, at least in theory, an independent regulatory agency. The Commerce Department, by contrast, is simply an arm of the White House. And it should be pretty clear that, while the FTC has spent a lot of time on roundtables and in thinking through its staff report, the Commerce Department is rarin’ to go. with new privacy regulations. That brings me back to my title: How serious could the Commerce Department really be here about collecting and processing public comment to understand the pitfalls of new privacy regulations?

I outline eight broad categories of concerns about privacy regulation in general in my FTC comments, which are equally applicable to the Commerce Department’s Green Paper.

my concerns are grounded in a firm belief that sound policymaking can be reduced to a single question: “And then what?”  What do we imagine will the first order consequences of the various changes the  FTC is proposing companies make—or perhaps be required by law to make—be  to the Internet ecosystem?  If the purpose of a “Do Not Track” mechanism is to create a market for privacy users to essentially, but simply and seamlessly, negotiate with websites over how to fund content, how do we imagine that marketplace will work?  …. These three, deceptively  simple  words—“And then what?”—make much the same point the Nobel Prize-winning economist F.A. Hayek made when he remarked  in  The Fatal Conceit, his damning treatment of top-down government planning, that “[t]he curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”. So, how much do we really know about the framework for governing data use the FTC has outlined in its Staff Report?  What will be its costs, its effects on competition, its various other unintended consequences?

Adam Thierer has sketched out a number of tough questions that the Senate Commerce Committee should ask at their hearing today, focusing on the paucity of serious economic analysis of the harms that supposedly need regulation, the potential costs of regulation, etc. That’s exactly the kind of hard-nosed realism that’s been sorely missing from this debate, as Adam and I have repeatedly noted (1, 2, 3).

On behalf of all those who took the time to file thoughtful comments on the Green Paper (sorry, I was busy launching a new think tank and finishing a 575 page book!) on the assumption that the Commerce Department was actually approaching this issue with an open mind and would weigh those comments seriously, I can only cite to that contemporary Blackstone of legal authority—yes, you guessed it, The Simpsons.  Specifically, I direct the court’s attention to episode 2F04, Bart’s Girlfriend:

Skinner: Congratulations, [Bart] Simpson.  You just fell for our sting and won
         yourself three months' detention.  There's no such thing as
         "Scotchtoberfest".

Willy: There's not?  Ya used me, Skinner!  Yah used me!

The clip is available here.  To paraphrase: “Ya used us, Strickling, ya used us!”

I absolutely loved this quote about the dangers of regulatory capture from Holman Jenkins in today’s Wall Street Journal in a story (“Let’s Restart the Green Revolution“) about how misguided agricultural / environmental policies are hurting consumers:

When some hear the word “regulation,” they imagine government rushing to the defense of consumers. In the real world, government serves up regulation to those who ask for it, which usually means organized interests seeking to block a competitive threat. This insight, by the way, originated with the left, with historians who went back and reconstructed how railroads in the U.S. concocted federal regulation to protect themselves from price competition. We should also notice that an astonishingly large part of the world has experienced an astonishing degree of stagnation for an astonishingly long time for exactly such reasons.

I’ve just added it to my growing compendium of notable quotations about regulatory capture.  It’s essential that we not ignore how — despite the very best of intentions —  regulation often has unintended and profoundly anti-consumer / anti-innovation consequences.

Washington Post cartoonist Tom Toles is certainly no fan of free markets, but his contribution to today’s paper offers us this humorous take on the dangers of regulatory capture, a subject we’ve spent much time documenting here on the TLF.

Well, there really isn’t anything left to be said about Net Neutrality regulation that hasn’t already been said a million times before.  Yes, it is the most important technology policy battle of our time, but man, I am sick of it!  Anyway, I’ve summarized the “The 5-Part Case against Net Neutrality Regulation” here before, so consult that for details, as well as this paper by Berin Szoka and me, “Net Neutrality, Slippery Slopes & High-Tech Mutually Assured Destruction.”

But on this day when the Federal Communications Commission (FCC) is enshrining an audacious new regulatory regime for the Internet, I’m going to ignore the shoddy economics behind the effort, the unjustifiable legal basis for it, and the whole stinking undemocratic process leading up to it.  Instead, I just want to focus on the one element of the fight that continues to interest me most, and which, ironically, the one thing that almost all intellectual combatants agree upon: Regulation is prone to excessive special interest influence.  I cannot possibly articulate this concern more succinctly than professors David Farber and Gerald Faulhaber have in this Atlantic op-ed today, “Net Neutrality: No One Will Be Satisfied, Everyone Will Complain.” They note that:

“When the FCC asserts regulatory jurisdiction over an area of telecommunications, the dynamic of the industry changes. No longer are customer needs and desires at the forefront of firms’ competitive strategies; rather firms take their competitive battles to the FCC, hoping for a favorable ruling that will translate into a marketplace advantage. Customer needs take second place; regulatory ‘rent-seeking’ becomes the rule of the day, and a previously innovative and vibrant industry becomes a creature of government rule-making.”

As I pointed out earlier this week in my essay on “Regulatory Capture: What the Experts Have Found,” countless studies by some of the most respected economists and political scientists of our time have shown that, throughout the history of economic regulation, special interests have co-opt policymakers and political bodies (regulatory agencies, in particular) to further their own ends.   No less an authority than Roger Ebert, the movie critic and vocal Net Neutrality supporter, has pointed this out in a Tweet last night:

And yet Ebert still gives FCC regulation a big thumbs up!  What gives?  Why is it that so many smart people seem to held captive by the fiction that we can somehow build a better breed of bureaucrat or legislator that will somehow be immune to special interest influence?  I can’t explain it, but all the wishful thinking in the world isn’t going to change the reality that any government agency or process big enough to control our economy will be prone to influence by the those most affected by it.  No one has ever said it better than former U.S. President, and progressive hero, Woodrow Wilson:

“If the government is to tell big business men how to run their business, then don’t you see that big business men have to get closer to the government even than they are now? Don’t you see that they must capture the government, in order not to be restrained too much by it? Must capture the government? They have already captured it. Are you going to invite those inside to stay? They don’t have to get there. They are there.” [The New Freedom: A Call For the Emancipation of the Generous Energies of a People (1913) at 201-202.]

Yes, they are already there, now more than ever.  As I noted in my old essay on “Lawyers, Lawsuits and Net Neutrality Regulation,” the Beltway is absolutely teeming with telecom, media, and technology lobbyists and lawyers hungry to grow the regulatory state in various ways.  Anyone here in town who has past copies of the Federal Communications Bar Association (FCBA) directory on their shelves knows this.  This compendium of people looking to influence public policy in this arena just grows and grows and grows. The last copy I received was practically as thick as a phone book. As I noted in that previous essay, the FCBA experienced absolutely explosive growth following passage of the Telecommunications Act of 1996 and the subsequent FCC regulatory uptick in activity.  But the growing FCBA ranks don’t even begin to capture the true extent of what the journalist Jonathan Rauch has called “the parasite economy” at work in this field.  And there’s a wicked self-perpetuating cycle of dependency at play here. The more these folks petition lawmakers and regulators asking for new law or clarifications of law, the more law gets created. As more law and regulation is created, more lawyers, consultants, economists and so on, are needed to figure out what it all means and how it all works. And when they all disagree about what it means and how it works, that leads to more congressional hearings and bill, more FCC inquiries and rulemakings, and then more lawsuits and court cases to adjudicate it all.  It never ends.

This is why I can’t help but to be amused by all the delightfully naive talk on Twitter and in the blogosphere about how the FCC’s move to impose Net Neutrality regulation is about “standing up for the little guy,” “putting consumers first” or “preserving Net freedom and openness.”  It all reminds me of a line from those rock-n’-roll sages Guns N’ Roses: “I’ve worked too hard for my illusions just to throw them all away.”   But I can’t help but be jaded by actual history, in which special interests and Washington insiders co-opt each and every regulatory process in this field for their own ends. Let’s recall what Tim Wu, the man who coined the term “Net neutrality” taught us in his new book, The Master Switch:

“Again and again in the histories I have recounted, the state has shown itself an inferior arbiter of what is good for the information industries. The federal government’s role in radio and television from the 1920s through the 1960s, for instance, was nothing short of a disgrace…. Government’s tendency to protect large market players amounts to an illegitimate complicity … [particularly its] sense of obligation to protect big industries irrespective of their having become uncompetitive.” (p. 308)

Oh, and just wait till the so-called “consumer advocates” use this new Net Neutrality regulatory regime to push the FCC to impose price control on broadband billing schemes.  No doubt, those advocates will claim this as a great consumer victory. In reality, it will push us right back into the fine hell that was the world of regulated monopoly, which we have been trying to escape for last 20 years.  Why have we been trying to escape that world of price controls and rate-of-return regulation?  Because it was a raw deal for consumers, competition, and innovation.  The promise of “consumer protection” was cruel fiction that masqueraded the reality of special interest favoritism, sheltered markets, and sub-standard services.

So, you ask, what is “The Constructive Alternative to Net Neutrality Regulation“? Well, click on that last link and find out!  That paper by my former colleague Mike Wendy and me represents an attempt to outline some different approaches to dealing with network management disputes other than heavy-handed and preemptive “Mother, May I” forms of regulation.

We don’t want to go back to the future, folks.  Yet today’s action by the FCC sets us on that path once again.

P.S. #1: Read these essays by FCC Commissioners Robert McDowell (“The FCC’s Threat to Internet Freedom“) and Meredith Attwell Baker (“ Hands Off Tomorrow’s Internet“).

P.S. #2: Watch this Reason TV video, which answers the question, “Will Net Neutrality Save the Internet?”: