Telecom & Cable Regulation

A few states have passed Internet regulations because the Trump FCC, citing a 20 year US policy of leaving the Internet “unfettered by Federal or State regulation,” decided to reverse the Obama FCC’s 2015 decision to regulate the Internet with telephone laws.

Those state laws regulating Internet traffic management practices–which supporters call “net neutrality”–are unlikely to survive lawsuits because the Internet and Internet services are clearly interstate communications and FCC authority dominates. (The California bill also likely violates federal law concerning E-Rate-funded Internet access.) 

However, litigation can take years. In the meantime ISP operators will find they face fewer regulatory headaches if they do exactly what net neutrality supporters believe the laws prohibit: block Internet content. Net neutrality laws in the US don’t apply to ISPs that “edit the Internet.”

The problem for net neutrality supporters is that Internet service providers, like cable TV providers, are protected by the First Amendment. In fact, Internet regulations with a nexus to content are subject to “strict scrutiny,” which typically means regulations are struck down. Even leading net neutrality proponents, like the ACLU and EFF, endorse the view that ISP curation is expressive activity protected by First Amendment.

As I’ve pointed out, these First Amendment concerns were raised during the 2016 litigation and compelled the Obama FCC to clarify that its 2015 “net neutrality” Order allows ISPs to block content. As a pro-net neutrality journalist recently wrote in TechCrunch about the 2015 rules, 

[A] tiny ISP in Texas called Alamo . . . wanted to offer a “family-friendly” edited subset of the internet to its customers.

Funnily enough, this is permitted! And by publicly stating that it has no intention of providing access to “substantially all Internet endpoints,” Alamo would exempt itself from the net neutrality rules! Yes, you read that correctly — an ISP can opt out of the rules by changing its business model. They are . . . essentially voluntary.

The author wrote this to ridicule Judge Kavanaugh, but the joke is clearly not on Kavanuagh.

In fact, under the 2015 Order, filtered Internet service was less regulated than conventional Internet service. Note that the rules were “essentially voluntary”–ISPs could opt out of regulation by filtering content. The perverse incentive of this regulatory asymmetry, whereby the FCC would regulate conventional broadband heavily but not regulate filtered Internet at all, was cited by the Trump FCC as a reason to eliminate the 2015 rules. 

State net neutrality laws basically copy and paste from the 2015 FCC regulations and will have the same problem: Any ISP that forthrightly blocks content it doesn’t wish to transmit–like adult content–and edits the Internet is unregulated.

This looks bad for net neutrality proponents leading the charge, so they often respond that the Internet regulations cover the “functional equivalent” of conventional (heavily regulated) Internet access. Therefore, the story goes, regulators can stop an ISP from filtering because an edited Internet is the functional equivalent of an unedited Internet.

Curiously, the Obama FCC didn’t make this argument in court. The reason the Obama FCC didn’t endorse this “functional equivalent” response is obvious. Let’s play this out: An ISP markets and offers a discounted “clean Internet” package because it knows that many consumers would appreciate it. To bring the ISP back into the regulated category, regulators sue, drag the ISP operators into court, and tell judges that state law compels the operator to transmit adult content.

This argument would receive a chilly reception in court. More likely is that state regulators, in order to preserve some authority to regulate the Internet, will simply concede that filtered Internet drops out of regulation, like the Obama FCC did.

As one telecom scholar wrote in a Harvard Law publication years ago, “net neutrality” is dead in the US unless there’s a legal revolution in the courts. Section 230 of the Telecom Act encourages ISPs to filter content and the First Amendment protects ISP curation of the Internet. State law can’t change that. The open Internet has been a net positive for society. However, state net neutrality laws may have the unintended effect of encouraging ISPs to filter. This is not news if you follow the debate closely, but rank-and-file net neutrality advocates have no idea. The top fear of leading net neutrality advocates is not ISP filtering, it’s the prospect that the Internet–the most powerful media distributor in history–will escape the regulatory state.

The US government has spent about $100 billion on rural telecommunications in the last 20 years. (That figure doesn’t include the billions of dollars in private investment and state subsidies.) It doesn’t feel like it in many rural areas.

The lion’s share of rural telecom subsidies come from the FCC’s “high-cost” fund, which is part of the Universal Service Fund. The high-cost fund currently disburses about $4.5 billion per year to rural carriers and large carriers serving rural areas. 

Excess in the high-cost program

Bill drafters in Congress and the CBO, after the passage of the 1996 Telecom Act creating the Fund, expected the USF program subsidies to decrease over time. That hasn’t happened. The high-cost fund has increased from $800 million in 1997 to $4.5 billion today.

The GAO and independent scholars find evidence of waste in the rural fund, which traditionally funded rural telephone (voice) service. For instance, former FCC chief economist Prof. Tom Hazlett and Scott Wallsten estimate that “each additional household is added to voice networks at an annual USF cost of about $25,000.” There are at least seven high-cost programs and each has its own complex nomenclature and disbursement mechanisms.

These programs violate many best practices for public finance. Shelanski and Hausman point out, for instance, that a huge distortion for decades has been US regulators’ choice to tax (demand-elastic) long-distance phone services to fund the (demand-inelastic) local phone services. The rural fund disbursement mechanisms also tempt providers to overinvest in goldplated services or, alternatively, inflate operational costs. Wallsten found that about 59 cent for every dollar of rural subsidy goes to carriers’ overhead.

To that end, the high-cost program appears to be supporting fewer households despite the program’s increasing costs. I found in Montana, for instance, that from 1999 to 2009 subsidies to carriers rose 40 percent even while the number of subsidized rural lines fell 30 percent. The FCC’s administrative costs for the four USF programs also seem high. According to the FCC’s most recent report, administrative costs are about $172 million annually, which is more than what 45 states received in high-cost funds in 2016.

A proposal: give consumers tech vouchers

A much more transparent and, I suspect, more effective way of satisfying Congress’ requirement that rural customers have “reasonably comparable” rates to urban customers’s rates for telecom services is to give “tech vouchers.” Vouchers are used in housing, heating, and food purchases in the US, and the UK is using them for rural broadband.

My colleague Trace Mitchell and I are using Census and FCC data to calculate about how much rural households could receive if the program were voucher-ized. Assuming all high-cost funds disbursed to states in 2016 were converted into broadband vouchers, these are our estimates.

If vouchers were distributed equally among rural households today, every rural household in the US (about 20% of US households) would receive about $15 per month to spend on the broadband provider and service of their choice. Low-income rural households could tack on the $9.25 USF Lifeline subsidy and any state subsidies they’re eligible for.

Perfect equality probably isn’t the best way to subsidize rural broadband. The cost of rural service is driven primarily by the housing density, and providing telecom to a rural household in the American West and Great Plains is typically more expensive than providing telecom to a rural household in the denser Northeast, and this is borne out in the FCC’s current high-cost disbursements. For instance, Vermont and Idaho have about the same number of rural households but rural carriers in Idaho receive about 2x as much as rural carriers in Vermont.

However, some disparities are hard to explain. For example, despite South Carolina’s flatter geography than and similar rural population as North Carolina, North Carolina carriers receive, on a per-household basis, only about 40% what South Carolina carriers receive. Alabama and Mississippi have similar geographies and rural populations but Alabama carriers receive only about 20% of what Mississippi carriers receive.

A tiered system of telecom vouchers smooths the disparities, empowers consumers, and simplifies the program. We’ve sorted the states into six tiers based on how much the state received on a per-household basis in 2016. This ranking puts large, Western states in the top tier and denser, Northeastern states in the bottom tier.

In our plan, every rural household in five hardest-to-serve Tier 1 states (Alaska, Kansas, Montana, North Dakota, and South Dakota) would receive a $45 monthly discount on the Internet service of their choice, whether DSL, cable, fixed wireless, LTE, or satellite. As they do in the UK, eligible rural households would enter a coupon code when they receive their telecom services bill and the carrier would reduce the price of service accordingly.

Similarly, every rural household in:

Tier 2 states (ten states) would receive a $30 monthly discount.

Tier 3 states (ten states) would receive a $19 monthly discount.

Tier 4 states (ten states) would receive a $13 monthly discount.

Tier 5 states (ten states) would receive a $6 monthly discount.

Tier 6 states (five states) would receive a $3 monthly discount.

$3 per month per rural household doesn’t sound like much but, for each of these states (Connecticut, Delaware, Massachusetts, New Jersey, Rhode Island), this is more than the state currently receives in rural funds. In Connecticut, for instance, the current high-cost funding amounts to about 25 cents per rural household per month.

Under this (tentative) scheme, the US government would actually save $25 million per year from the current disbursements. And these are conservative numbers since they assume 100% participation from every rural household in the US. It’s hard to know what participation would look like but consider Lifeline, which is essentially a phone and broadband voucher program for low-income households. At $9.25 per month, 28% of those eligible for Lifeline participate. This is just a starting point and needs more analysis (see link below for spreadsheet), but it seems conceivable that the FCC could increase the rural voucher amounts above, expect 50% participation, and still save the program money.

Conclusion

As Jerry Hausman and Howard Shelanski have said, “It is well established that targeted subsidies paid from general income tax revenues are often the most efficient way to fund specific activities.” Current law doesn’t allow allow for tech vouchers from general income taxes, but the FCC could allow states to convert their current high-cost funds into tech vouchers for rural households. Vouchers would be more tech-neutral, less costly to administer, and, I suspect, more effective and popular.

 

Excel spreadsheet of tech vouchers by state (Dropbox): link.

For decades, cities, the FCC, and Congress have mandated that cable TV operators carry certain types of TV programming, including public access channels, local broadcast channels, local public television, and children’s programming. These carriage mandates have generated several First Amendment lawsuits but cable operators have generally lost. Cable operators have junior varsity First Amendment rights and the content they distribute is more regulated than, say, newspapers, Internet service providers, search engines, and Netflix. I submitted public interest comments (with JP Mohler) to the FCC this week explaining why cable operators would likely win today if they litigated these cable carriage regulations.

Regulations requiring newspapers, book publishers, or Internet service providers to carry the government’s preferred types of content are subject to strict scrutiny, which means such regulations typically don’t survive. However, cable is different, the Supreme Court held in the 1994 Turner case. The Supreme Court said regulations about what cable operators must carry are subject to intermediate–not strict–scrutiny because cable operators (in 1994) possessed about 95% of the subscription TV market and nearly every household had a single choice for subscription TV–their local cable monopoly. In the words of the Supreme Court, cable’s content regulations “are justified by the special characteristics of the cable medium: the bottleneck monopoly power exercised by cable operators.”

As a result, the FCC enforces “leased access” regulations that require cable operators to leave blank certain TV channels and give non-affiliated programmers a chance to use that channel capacity and gain viewership. Cable operators in the 1990s sued the FCC for enforcing these regulations in a 1996 case called Time Warner v. FCC. The DC Circuit relied on the 1994 Turner case and upheld the leased access rules.

Recently, however, the FCC asked whether First Amendment interests or TV competition requires giving these regulations another look. In our public interest comment, JP and I say that these rules have outlived their usefulness and cable operators would likely win a First Amendment lawsuit against the FCC today.

Two things have changed. First, cable operators have lost their “bottleneck monopoly power” that justified, in the eyes of the Supreme Court in 1994, giving cable operators weakened First Amendment protection.

Unlike in the 1990s, cable operators face significant competition in most local markets from satellite and telco TV providers. Over 99 percent of US households have at least three pay-TV options, and cable has lost over 15 million subscriber households since 2002. In 1997, when Turner II was decided, cable had over 90 percent of the pay-TV market. Cable operators’ market share has shrunk nearly every year since, and in 2015 cable had around 54 percent market share.

This competitive marketplace has stimulated massive investment and choice in TV programming. The typical household has access to far more channels than in the past. Independent researchers found that a typical US household in 1999 received about 50 TV channels. By 2014, the typical household received over 200 TV channels. In 2018, there will be an estimated 520 scripted TV series available, which is up nearly 50 percent from just five years ago.

This emergence of TV competition and its beneficial effects in programming and consumer choice undermines the justification for upholding cable content regulations like leased access.

Second, courts are more likely to view the Supreme Court’s Denver decision about leased access regulations in a new light.  In Denver, the Supreme Court divided into concurrences as to the proper First Amendment category of cable operators, and whether intermediate or strict scrutiny should apply to the leased access laws at issue. The “Marks test” is the test lower courts use for determining the holding of a Supreme Court decision where there is no majority supporting the rationale of any opinion. Viewed through the lens of the prevailing Marks test, cable operators are entitled to “bookstore owner” status for First Amendment purposes:

Given that four justices in Denver concur that one of the potential bases for deciding cable’s First Amendment status is the classification of cable operators as bookstores and three justices concur that this classification is the definitive justification for the judgment, the narrowest grounds for resolving the issue is simply this latter justification. Under the prevailing Marks test, then, lower courts will apply strict scrutiny to the leased access rules in light of the Denver decision.

For these reasons, and the need to conserve agency resources for more pressing matters, like rural broadband deployment and spectrum auctions, we encourage the FCC to discontinue these regulations.

You can read our public interest comment about the leased access regulations at the Mercatus Center website.

Leased Access Mandates Infringe on the First Amendment Rights of Cable Operators, and the FCC Should Decline to Enforce the Regulations

The move to small cells and fixed wireless broadband means states, cities, and the FCC are changing their regulatory approaches. For decades, wireless providers have competed primarily on coverage, which meant building large cell towers all over the country, each one serving hundreds of people. That’s changing. As Commissioner Carr noted,

5G networks will look very different from today’s 4G deployments. 5G will involve the addition of hundreds of thousands of new, small-scale facilities with antennas no larger than a small backpack.

Currently, wireless companies don’t have many good options when it comes to placing these lower-power, higher-bandwidth “small cells.” They typically install small cells and 5G transmitters on public rights-of-way and on utility poles, but there may not be room on poles and attachment fees might be high. 

One thing the FCC might consider to stimulate 5G and small cell investment is to dust off its 20 year-old over-the-air-reception-device (OTARD) rules. These little-known rules protect homeowners and renters from unwarranted regulation of TV and broadband antennas placed on their property. If liberalized, the OTARD rules would open up tens of millions of other potential small cell sites–on rooftops, on balconies, and in open fields and backyards around the country. 

Background

In the early 1990s, cities and homeowner associations would sometimes prohibit, charge for, or regulate satellite dishes that homeowners or renters installed on their rooftops or balconies. Lawmakers saw a problem and wanted to jumpstart competition in television (cities had authorized cable TV monopolies for decades and cable had over 95% of the pay-TV market).

In the 1996 Telecom Act, then, Congress instructed the FCC to increase TV competition by regulating the regulators. Congress said that state, local, and HOA restrictions cannot impose restrictions that

impair a viewer’s ability to receive video programming services through devices designed for over-the-air reception of television broadcast signals, multichannel multipoint distribution service [MMDS], or direct broadcast satellite services.

With these congressional instructions, the FCC created its OTARD rules, informally known as the “pizza box rule.” Briefly stated, if your TV antenna, satellite TV receiver, or “fixed wireless” antenna is smaller than a large pizza (1 meter diameter–no cell towers in front yards), you are free to install the necessary equipment on property you control, like a yard or balcony. (There are some exceptions for safety issues and historical buildings.) The 1996 law expressly protects MMDS (now called “broadband radio service”), which includes spectrum in the 2.1 GHz, 2.5 GHz, 2.6 GHz, 28 GHz, 29 GHz, and 31 GHz bands. The Clinton FCC expanded the rules to protect, broadly, any antennas that “receive or transmit fixed wireless signals.” You can even install a mast with an antenna that extends up to 12 feet above your roofline. 

OTARD reform

The rules protect fixed wireless antennas and could see new life in the 5G world. Carriers are building small cells and fixed wireless primarily to provide faster broadband and “mobile TV” services. Millions of Americans now view their cable and Netflix content on mobile devices and carriers are starting to test mobile-focused pay-TV services. AT&T has Watch TV, T-Mobile is expected to deploy a mobile TV service soon because of its Layer3 acquisition, and reporting suggests that Verizon is approaching YouTube TV and Apple to supply TV for its 5G service. 

The FCC’s current interpretation of its OTARD rules doesn’t help 5G and small cell deployment all that much, even though the antennas are small and they transmit TV services. The actual rules don’t say this but the FCC’s interpretation is that their OTARD protections don’t protect antenna “hubs” (one-to-many transmitters like small cells). The FCC liberalized this interpretation in its Massport proceeding and allowed hub one-to-many transmitters [Correction, via Connor at the FCC: the FCC liberalized to say that one-to-many transmitters are permitted, not hub antennas.] but did not extend this interpretation for homeowners’ antennas. In short, under the current interpretation, cities and HOAs can regulate, charge for, and prohibit the installation of 5G and small cells on private property.

The FCC should consider expanding its rules to protect the installation of (low power) 5G and small cell hubs on private property. This would directly improve, per the statute, “viewers’ ability to receive video programming services” via wireless. It would have the ancillary effect of improving other wireless services. The prospect of installing small cells on private property, even temporarily, should temper the fees carriers are charged to use the public rights-of-way and poles.

In rural areas, the FCC might also consider modifying the rules to allow masts that extend beyond 12 feet above the roofline. Transmitters even a few feet taller would improve wireless backhaul and coverage to nearby homes, thus increasing rural broadband deployment and IP-based television services.

Wireless trends

OTARD reform is especially timely today because the Wheeler and Pai FCCs have freed up several bands of spectrum and fixed wireless is surging. Fixed wireless and mesh network providers using CBRS and other spectrum bands could benefit from more installation sites, particularly in rural areas. C Spire, for instance, is creating “hub homes” for fixed wireless, and Starry and Rise Broadband are expanding their service areas. CableLabs is working on upgrading cable networks for mobile and 5G backhaul and cable operators might benefit from OTARD reform and more outside infrastructure.

Modifying the OTARD rules might be controversial but modification directly gives consumers and homeowners more control over improving broadband service in their neighborhood, just as the rules improved TV competition in the past. Courts are pretty deferential when agencies change an interpretation of an existing rule. Further, as the agency said years ago:

The Federal Communications Commission has consistently maintained that it has the ultimate responsibility to determine whether the public interest would be served by construction of any specific antenna tower.

The future of wireless services is densification–putting fiber and small cells all over downtowns and neighborhoods in order to increase broadband capacity for cutting-edge services, like smart glasses for the blind and remote-controlled passenger cars. The OTARD rules and the FCC’s authority over wireless antennas provides another tool to improve wireless coverage and TV services.

Though ubiquitous in urban and rural landscapes, most people barely notice utility poles. Nevertheless, utility poles play a large role in national broadband policy. Improving pole access won’t generate the headlines like billion-dollar spectrum auctions and repeal of Title II Internet regulations, but it’s just as important for improving broadband competition and investment. To that end, the FCC is proposing to create “one-touch-make-ready” rules for FCC-regulated utility poles across the country. I was pleased to see that the FCC will likely implement this and other policy recommendations from the FCC’s Broadband Deployment Advisory Committee.*

“Access regulations”–like must-carry of broadcast TV, net neutrality, and telecom network unbundling–are always controversial and frequently fail. However, in my view, one-touch-make-ready is an example of useful access regulation and I think it’s likely to succeed at its aims–more broadband competition and investment. Pole access appears to be, using former FCC chief economist Jerry Faulhaber’s phrase, an efficient market boundary. FCC pole access mandates are feasible because the “interface”–physical wires and poles–is relatively simple and regulatory compliance–did the entrant damage existing users? did they provide notice?–is pretty easy to ascertain. Typically, visual inspection will reveal damage and the liable party is usually obvious.

As the FCC says in the proposed order, these proposed modifications and one-touch-make-ready,

put[] the parties most interested in efficient broadband deployment—new attachers—in a position to control the survey and make-ready processes.

Reasonable people (even on the free-market side) will disagree about how to regulate utility pole access. One-touch-make-ready was a controversial proposal and commercial operators have been divided on the issue. In the end, it was not unanimous but the BDAC reached large consensus on the issue. In my view, the FCC struck the right balance in protecting existing companies’ equipment and promoting infrastructure construction and competitive entry.

Some utility pole basics: Utility poles are often owned by a phone company, a utility company, or a city. At the top of utility poles are electric lines. (The FCC is not talking about doing work near the electric lines on top, which is trickier and more dangerous for obvious reasons.) The rule changes here affect the “communications space,” which is midway up the poles and typically has one or several copper, coaxial, or fiber lines strung across.

For decades, the “market” for communications space access was highly regulated but stable. National and local policy encouraged monopoly phone service and cable TV provision and, therefore, entrants rarely sought access to string up lines on utility poles. In the 1990s, however, phone and cable was deregulated and competition became national policy. In the last ten years, as the price of fiber broadband provision has fallen and consumer demand for competitive broadband options has increased, new companies–notably Google Fiber–have needed access to utility poles. The FCC notes in its proposed order that, going forward, “small cell” and 5G deployments will benefit from competitive, lower-cost fiber providers.

The pre-2018 approach to pole attachments, wherein many parties had effective veto rights over new entrants, was creating too many backlogs and discouraging competitive providers from making the investments necessary. The FCC’s proposed rules streamline the process by creating tighter deadlines for other parties to respond to new entrants. The rules also give new entrants new privileges and greater control in constructing new lines and equipment, so long as they notify existing users and don’t damage existing lines.

I’m pleased to see that the Broadband Deployment Advisory Committee’s recommendations are proving useful to the agency. It’s encouraging that this FCC, by taking a weed-whacker to legacy policies regarding spectrum, pole access, and net neutrality, is taking steps to improve broadband in America.

 

*I’m the vice chair of the Competitive Access working group.

Related research and commentary:

The Importance of Spectrum Access to the Future of Innovation (pdf)

A Truly ‘Open Internet’ Would Be Free of Burdensome FCC Regulation (NRO)

The Internet is a great tool for women’s empowerment, because it gives us the freedom to better our lives in ways that previously far more limited. Today, the FCC’s Restoring Internet Freedom Order helped the Internet become even freer.

There is a lot of misinformation and scare tactics about the previous administration’s so-called “net neutrality” rules. But the Obama-era Open Internet Order regulations were not neutral at all. Rather, they ham-handedly forced Internet Service Providers (ISPs) into a Depression-era regulatory classification known as a Title II common carrier. This would have slowed Internet dynamism, and with it, opportunities for women.

Today’s deregulatory move by the FCC reverses that decision, which will allow more ISPs to enter the market. More players in the market make Internet service better, faster, cheaper, and more wildly available. This is especially good for women who have especially benefited from the increased connectivity and flexibility that the Internet has provided.

Continue reading →

Mobile broadband is a tough business in the US. There are four national carriers–Verizon, AT&T, T-Mobile, and Sprint–but since about 2011, mergers have been contemplated (and attempted, but blocked). Recently, the competition has gotten fiercer. The higher data buckets and unlimited data plans have been great for consumers.

The FCC’s latest mobile competition report, citing UBS data, says that industry ARPU (basically, monthly revenue per subscriber), which had been pretty stable since 1998, declined significantly from 2013 to 2016 from about $46 to about $36. These revenue pressures seemed to fall hardest on Sprint, who in February, issued $1.5 billion of “junk bonds” to help fund its network investments. Analysts pointed out in 2016 that “Sprint has not reported full-year net profits since 2006.” Further, mobile TV watching is becoming a bigger business. AT&T and Verizon both plan to offer a TV bundle to their wireless customers this year, and T-Mobile’s purchase of Layer3 indicates an interest in offering a mobile TV service.

It’s these trends that probably pushed T-Mobile and Sprint to announce yesterday their intention to merge. All eyes will be on the DOJ and the FCC as their competition divisions consider whether to approve the merger.

The Core Arguments

Merger opponents’ primary argument is what’s been raised several times since the 2011 AT&T-T-Mobile aborted merger: this “4 to 3” merger significantly raises the prospect of “tacit collusion.” After the merger, the story goes, the 3 remaining mobile carriers won’t work as hard to lower prices or improve services. While outright collusion on prices is illegal, they have a point that tacit collusion is more difficult for regulators to prove, to prevent, and to prosecute.

The counterargument, that T-Mobile and Sprint are already making, is that “mobile” is not a distinct market anymore–technologies and services are converging. Therefore, tacit collusion won’t be feasible because mobile broadband is increasingly competing with landline broadband providers (like Comcast and Charter), and possibly even media companies (like Netflix and Disney). Further, they claim, T-Mobile and Sprint going it alone will each struggle to deploy a capex-intensive 5G network that can compete with AT&T, Verizon, Comcast-NBCU, and the rest, but the merged company will be a formidable competitor in TV and in consumer and enterprise broadband.

Competitive Review

Any prediction about whether the deal will be approved or denied is premature. This is a horizontal merger in a highly-visible industry and it will receive an intense antitrust review. (Rachel Barkow and Peter Huber have an informative 2001 law journal article about telecom mergers at the DOJ and FCC.) The DOJ and FCC will seek years of emails and financial records from Sprint and T-Mobile executives and attempt to ascertain the “real” motivation for the merger and its likely consumer effects.

T-Mobile and Sprint will likely lean on evidence that consumers view (or soon will view) mobile broadband and TV as a substitute for landline broadband and TV. Much like phone and TV went from “local markets with one or two competitors” years ago to a “national market with several competitors,” their story seems to be, broadband is following a similar trajectory and viewing this as a 4 to 3 merger misreads industry trends.

There’s preliminary evidence that mobile broadband will put competitive pressure on conventional, landline broadband. Census surveys indicate that in 2013, 10% of Internet-using households were mobile Internet only (no landline Internet). By 2015, about 20% of households were mobile-only, and the proportion of Internet users who had landline broadband actually fell from 82% to 75%. But this is still preliminary and I haven’t seen economic evidence yet that mobile is putting pricing pressure on landline TV and broadband.

FCC Review

Antitrust review is only one step, however. The FCC transaction review process is typically longer and harder to predict. The FCC has concurrent authority with the DOJ under the Clayton Act to review telecommunications mergers under Sections 7 and 11 of the Clayton Act but it has never used that authority. Instead, the FCC uses its spectrum transfer review authority as a hook to evaluate mergers using the Communication Act’s (vague) “public interest standard.” Unlike antitrust standards, which generally put the burden on regulators to show consumer and competitive harm, the public interest standard as currently interpreted puts the burden on merging companies to show social and competitive benefits.

Hopefully the FCC will hew to a more rigorous antitrust inquiry and reform the open-ended public interest inquiry. As Chris Koopman and I wrote for the law journal a few years ago, these FCC  “public interest” reviews are sometimes excessively long and advocates use the vague standards to force the FCC into ancillary concerns, like TV programming decisions and “net neutrality” compliance.

Part of the public interest inquiry is a complex “spectrum screen” analysis. Basically, transacting companies can’t have too much “good” spectrum in a single regional market. I doubt the spectrum screen analysis would be dispositive (much of the analysis in the past seemed pretty ad hoc), but I do wonder if it will be an issue since this was a major issue raised in the AT&T-T-Mobile attempted merger.

In any case, that’s where I see the core issues, though we’ll learn much more as the merger reviews commence.

Internet regulation advocates lost their fight at the FCC, which voted in December 2017 to rescind the 2015 Open Internet Order. Regulation advocates have now taken their “net neutrality” regulations to the states.

Some state officials–via procurement contracts, executive order, or legislation–are attempting to monitor and regulate traffic management techniques and Internet service provider business models in the name of net neutrality. No one, apparently, told these officials that government-mandated net neutrality principles are dead in the US.

As the litigation over the 2015 rules showed, our national laissez faire policy towards the Internet and our First Amendment guts any attempt to enforce net neutrality. Recall that the 1996 amendments to the Communications Act announce a clear national policy about the Internet: Continue reading →

Last week the FCC commissioners voted to restructure the agency and create an Office of Economics and Analytics. Hopefully the new Office will give some rigor to the “public interest standard” that guides most FCC decisions. It’s important the FCC formally inject economics in to public interest determinations, perhaps much like the Australian telecom regulator’s “total welfare standard,” which is basically a social welfare calculation plus consideration of “broader social impacts.”

In contrast, the existing “standard” has several components and subcomponents (some of them contradictory) depending on the circumstances; that is, it’s no standard at all. As the first general counsel of the Federal Radio Commission, Louis Caldwell, said of the public interest standard, it means

as little as any phrase that the drafters of the Act could have used and still comply with the constitutional requirement that there be some standard to guide the administrative wisdom of the licensing authority.

Unfortunately, this means public interest determinations are largely shielded from serious court scrutiny. As Judge Posner said of the standard in Schurz Communications v. FCC,

So nebulous a mandate invests the Commission with an enormous discretion and correspondingly limits the practical scope of responsible judicial review.

Posner colorfully characterized FCC public interest analysis in that case:

The Commission’s majority opinion … is long, but much of it consists of boilerplate, the recitation of the multitudinous parties’ multifarious contentions, and self-congratulatory rhetoric about how careful and thoughtful and measured and balanced the majority has been in evaluating those contentions and carrying out its responsibilities. Stripped of verbiage, the opinion, like a Persian cat with its fur shaved, is alarmingly pale and thin.

Every party who does significant work before the FCC has agreed with Judge Posner’s sentiments at one time or another.

Which brings us to the Office of Economics and Analytics. Cost-benefit analysis has its limits, but economic rigor is increasingly important as the FCC turns its attention away from media regulation and towards spectrum assignment and broadband subsidies.

The worst excesses of FCC regulation are in the past where, for instance, one broadcaster’s staff in 1989 “was required to review 14,000 pages of records to compile information for one [FCC] interrogatory alone out of 299.” Or when, say, FCC staff had to sift through and consider 60,000 TV and radio “fairness” complaints in 1970. These regulatory excesses were corrected by economists (namely, Ronald Coase’s recommendation that spectrum licenses be auctioned, rather than given away for free by the FCC after a broadcast “beauty contest” hearing), but history shows that FCC proceedings spiral out of control without the agency intending it.

Since Congress gave such a nebulous standard, the FCC is always at risk of regressing. Look no further than the FCC’s meaningless “Internet conduct standard” from its 2015 Open Internet Order. This “net neutrality” regulation is a throwback to the bad old days, an unpredictable conduct standard that–like the Fairness Doctrine–would constantly draw the FCC into social policy activism and distract companies with interminable FCC investigations and unknowable compliance requirements.

In the OIO’s mercifully short life, we saw glimpses of the disputes that would’ve distracted the agency and regulated companies. For instance, prominent net neutrality supporters had wildly different views about whether a common practice, “zero rating” of IP content, by T-Mobile violated the Internet conduct standard. Chairman Tom Wheeler initially called it “highly innovative and highly competitive” while Harvard professor Susan Crawford said it was “dangerous” and “malignant” and should be outlawed “immediately.” The nearly year-long FCC investigations into zero rating and the equivocal report sent a clear, chilling message to ISPs and app companies: 20 years of permissionless innovation for the Internet was long enough. Submit your new technologies and business plans to us or face the consequences.

Fortunately, by rescinding the 2015 Order and creating the new economics Office, Chairman Pai and his Republican colleagues are improving the outlook for the development of the Internet. Hopefully the Office will make social welfare calculations a critical part of the public interest standard.

Broadcast license renewal challenges have troubled libertarians and free speech advocates for decades. Despite our efforts (and our law journal articles on the abuse of the licensing process), license challenges are legal. In fact, political parties, prior FCCs, and activist groups have encouraged license challenges based on TV content to ensure broadcasters are operating in “the public interest.” Further, courts have compelled and will compel a reluctant FCC to investigate “news distortion” and other violations of FCC broadcast rules. It’s a troubling state of affairs that has been pushed back into relevancy because FCC license challenges are in the news.

In recent years the FCC, whether led by Democrats or Republicans, has preferred to avoid tricky questions surrounding license renewals. Chairman Pai, like most recent FCC chairs, has been an outspoken defender of First Amendment protections and norms. He opposed, for instance, the Obama FCC’s attempt to survey broadcast newsrooms about their coverage. He also penned an op-ed bringing attention to the fact that federal NSF funding was being used by left-leaning researchers to monitor and combat “misinformation and propaganda” on social media.

The silence of the Republican commissioners today about license renewals is likely primarily because they have higher priorities (like broadband deployment and freeing up spectrum) than intervening in the competitive media marketplace. But second, and less understood, is because whether to investigate a news station isn’t really up to them. Courts can overrule them and compel an investigation.

Political actors have used FCC licensing procedures for decades to silence political opponents and unfavorable media. For reasons I won’t explore here, TV and radio broadcasters have diminished First Amendment rights and the public is permitted to challenge their licenses at renewal time.

So, progressive “citizens groups” even in recent years have challenged license renewals for broadcasters for “one-sided programming.” Unfortunately, it works. For instance, in 2004 the promises of multi-year renewal challenges from outside groups and the risk of payback from a Democrat FCC forced broadcast stations to trim a documentary critical of John Kerry from 40 minutes to 4 minutes. And, unlike their cable counterparts, broadcasters censor nude scenes in TV and movies because even a Janet Jackson Superbowl scenario can lead to expensive license challenges.

These troubling licensing procedures and pressure points were largely unknown to most people, but, on October 11, President Trump tweeted:

“With all of the Fake News coming out of NBC and the Networks, at what point is it appropriate to challenge their License? Bad for country!”

So why hasn’t the FCC said they won’t investigate NBC and other broadcast station owners? It may be because courts can compel the FCC to investigate “news distortion.”

This is exactly what happened to the Clinton FCC. As Melody Calkins and I wrote in August about the FCC’s news distortion rule:

Though uncodified and not strictly enforced, the rule was reiterated in the FCC’s 2008 broadcast guidelines. The outline of the rule was laid out in the 1998 case Serafyn v. CBS, involving a complaint by a Ukrainian-American who alleged that the “60 Minutes” news program had unfairly edited interviews to portray Ukrainians as backwards and anti-Semitic. The FCC dismissed the complaint but DC Circuit Court reversed that dismissal and required FCC intervention. (CBS settled and the complaint was dropped before the FCC could intervene.)

The commissioners might personally wish broadcasters had full First Amendment protections and want to dismiss all challenges but current law permits and encourages license challenges. The commission can be compelled to act because of the sins of omission of prior FCCs: deciding to retain the news distortion rule and other antiquated “public interest” regulations for broadcasters. The existence of these old media rules mean the FCC’s hands are tied.