Telecom & Cable Regulation

New Conventional Wisdom: Cable TV Bundling is Good for Consumers

by on January 28, 2010 · 5 comments

Catching up on some magazines while waiting for my car to pass its annual emissions test the other day, I came across an article on cable TV bundling. Not too long ago, the issue of cable TV multichannel packaging–and whether cable companies should be required to offer channels “a la carte,” allowing customers to pick and choose the channels they watch–was a hot issue. Former FCC Commissioner Kevin Martin pushed heavily for it, even though the FCC’s own research, and later as some real-world market trials, found that a la carte options would not gain market traction.

The article nicely summed up the reasons.

The simple argument for unbundling is: “If I pay sixty dollars for a hundred channels, I’d pay a fraction of that for sixteen channels.” But that’s not how a la carte pricing would work. Instead, the prices for individual channels would soar, and the providers, who wouldn’t be facing any more competition than before, would tweak prices, perhaps on a customer-by-customer basis, to maintain their revenue. That doesn’t necessarily mean that Bravo would suddenly cost fifteen dollars a month, but there’s little evidence to suggest that a la carte packages would be generally cheaper than the current bundles. One recent paper on the subject, in fact, estimated the best-case gain to consumers at thirty-five cents a month. But even if it wasn’t a boon to consumers an a la carte system would inject huge uncertainty into the cable business, and many cable networks wouldn’t get enough subscribers to survive. That’s a future that the industry would like to avoid.

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What is All This Nonsense about Smartphone Early Termination Fees?

by on January 26, 2010 · 5 comments

Worth It?

OK, time for a quick rant. What is all this confusion and consternation over early termination fees (ETFs) for high-end smartphones?  I mean, seriously, how hard is this process to understand?  The FCC has worked itself into a lather over this and is bombarding wireless operators and Google with hate mail letters of inquiry harassing asking them about their ETF policies.  I just don’t get it.  Let’s review some simple realities:

  • Smartphones — especially high-end devices like the iPhone, the Droid, and the Nexus One — are basically mobile mini computers.
  • Mini mobile computers do not grow on trees; someone has to make them and sell them at a profit or else no one would offer them to begin with.
  • But the people who make and sell these devices (and wireless service for these devices) want to ensure rapid, widespread distribution to win over customers and recoup their costs.
  • So, they offer a classic business inducement — an upfront subsidy for the product in exchange for monthly payments to amortize the upfront “loan” they have given the customer;
  • AND THEN THEY FORM A CONTRACT WITH THE BUYER TO MAKE THE DEAL WORK. And that contract obligates both sides to live up to their end of the deal.
  • Hey… did I mention they need to form a contract to make the deal worth it? OK, good, wanted to make sure I got that point across.
  • Then they give you a nice shiny new mobile mini-computer that for some reason we Americans still insist on calling a cell phone.
  • Then you start paying off the “loan” they’ve given you for that device over the span of the service contract. This is called “prorating.”
  • But, if you default on that loan by breaking your contract, you’ll be hit with a penalty — an early termination fee — since it would leave the carrier without a way to recoup the cost of that shiny new mobile mini-computer that they handed you on the cheap when you just absolutely had to have the hot new toy in town.

Is this process really all that complicated? And why is it so controversial? It certainly shouldn’t be. Prorating happens every day in countless ways in a capitalist economy.  And yet in the apparent techno-entitlement society we live in these days, some people seem to think there’s something scandalous about this process when it happens with our beloved mobile devices.  In reality, the smartphone subsidy and prorated contract system is really one of the great pro-consumer accomplishments of our time. Continue reading →

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Is the FCC Above the Law?

by on January 15, 2010 · 7 comments

Can the Federal Communications Commission (FCC) just do anything it wants? If it wants to bring the entire Internet under its thumb, or regulate any speech uttered over electronic media, can it just do so on a whim? The agency’s recent actions on the Net neutrality and free speech fronts seems to suggest that the agency thinks so.

I don’t need to rehash here what the FCC has been up to on the Net neutrality front.  Most everyone is familiar with how the agency has essentially been trying to invent its authority to regulate out of thin air.  If you want the whole ugly history of how this charade has unfolded over past few years, I encourage you to read these amazing comments filed today in the FCC’s net neutrality NPRM proceeding by my PFF colleague Barbara Esbin.  Barbara simply demolishes the FCC’s argument that it can do anything it wants under the guise of its “ancillary jurisdiction.” As Barbara argues in her comments, the FCC’s position “is akin to saying that the FCC can regulate if its actions are ancillary to its ancillary jurisdiction, and that is one ancillary too many.”  She notes that:

The proposed rules regulating the services and network management practices of broadband Internet providers must rest, if at all, on the Commission‘s implied or ancillary jurisdiction and the NPRM fails to provide a basis upon which the exercise of such jurisdiction can be considered lawful.

She shows how farcical it is for the FCC to concoct its supposed authority to regulate from provisions of the Communications Act that have nothing whatsoever to do with Net neutrality or even expanding regulation in general. Specifically, the agency’s reliance on sections 230(b) and 706(a) of the Telecommunications Act of 1996 is completely outlandish.  Anyone who knows a lick about telecom law and the nature of those two sections understands they were never intended to serve as the basis of an expansive new regulatory regime for the Internet. As Barbara puts it:

This exercise—searching for snippets and threads of regulatory authority over a communications medium as significant as the Internet in multiple, unrelated statutory provisions—should signal to the Commission that no credible source of authority to regulate Internet services exists.

All I have to say is, thank God for checks and balances. I believe the courts will put a stop to this nonsense, but it will take some time.  Until then, I suppose the FCC will continue to act like a rogue agency, hell-bent and tossing the constitution to the wind and concocting asinine theories about why they should be allowed to do anything they want. But there are signs that the courts are ready to start holding the FCC more accountable. Continue reading →

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Deleted Scene from my NPRM Filing

by on January 14, 2010 · 10 comments

In my researching the wireless competitive picture for my comments on the FCC Network Neutrality NPRM, one of my contacts was kind enough to point me to a Bank of America/Merrill Lynch paper that used the Herfindahl-Hirschman Index (HHI) to compare the market concentration of wireless service providers in the 26 Organization for Economic Co-Operation and Development (OECD) countries.  HHI is one of the metrics used by the Department of Justice to determine market concentration. It is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. For example, for a market consisting of four firms with shares of 30, 30, 20, 20 percent, the HHI is 2600 (302 + 302 + 202 + 202 = 2600). The higher the number, the greater the market concentration. When the formula is applied to the U.S. wireless market share percentages determined by Bank of America/Merrill Lynch (28.5, 26.7, 18.2. 12.1 and 14.5), the U.S. HHI is the smallest at 2213. This number is substantially less than the HHIs for all the other OECD companies with the exception of the U.K.  Otherwise, no other HHI is under 2900.

Here’s the OECD market share data for Q4 2007 as it appears in the Bank of America/Merrill Lynch’s Global Wireless Matrix.

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Is This What Market Failure Looks Like?

by on January 5, 2010 · 12 comments

As the annual Winter Consumer Electronics Show (CES) is set to convene in Las Vegas tomorrow, it will be interesting to see the temper of the policy climate. On the federal and state policy level, the hostility towards every facet of the high-tech sector has done nothing but grow. Not too long ago, politicians were extolling America’s high-tech leadership as the its primary vehicle for continued global economic leadership. Now it seems the entire tech sector, from semiconductors to wireless phones to TV is under attack from the White House, to Congress to state-level bureaucrats.

Just this week, as Adam reported, the left-leaning Free Press has inexplicably gone on the offensive against the idea of pushing TV to wireless devices. Such activists are no doubt emboldened by the example of the current administration, which has launched an antitrust campaign against Intel (just as the European Union was all but surrendering its own),  and continues to press for antitrust action against Google before, as antitrust chief Christine Varney has freely admitted, it is “too late”— that is, the speed of technology change undermines the government’s case, as it did in in the Clinton era Microsoft suit over browser bundling.

Add to this the California Energy Commission’s ban on big screen TVs, the FCC’s push for sweeping new Internet  regulations under the guise of “network neutrality,”and the Internet, in general, being blamed for everything from the decline of newspapers to postal rate increases to weight gain in teenage girls (for more, type “Internet blamed for” into the search engine of your choice), and one might expect the mood at the show, at least in the policy sessions to be dour. Even if I am watching from afar (Adam will descend into the CES maelstrom on our behalf), I await to see if this will be the case.

The Left has been drumbeating about high-tech market failure for more than 10 years (plus ça change: see this rebuttal paper from 2001). The big difference is that today’s Washington technocrats have bought in, despite all the evidence to the contrary.  Berin provided some solid data on mobile OS competition earlier today. Here’s some more data courtesy of Digital Society as to the growth of applications and revenues in this alleged stagnant, failing sector:

– Number of e-mails sent per day in 2000: 12 billion
– Number of e-mails sent per day in 2009: 247 billion
– Revenues from mobile data services in the first half of 2000: $105 million
– Revenues from mobile data services in the first half of 2009: $19.5 billion
– Number of text messages sent in the U.S. per day in June 2000: 400,000
– Number of text messages sent in the U.S. per day in June 2009: 4.5 billion
– Number of pages indexed by Google in 2000: 1 billion
– Number of pages indexed by Google in 2008: 1 trillion
– Amount of hard-disk space $300 could buy in 2000: 20 to 30 gigabytes
– Amount of hard-disk space $300 could buy in 2009: 2,000 gigabytes (2 terabytes)

Metrics such as these are the best weapon against attempts at regulation, especially from an administration keen to find a “market failure” rationale wherever it looks. High-tech consumer electronics remains a bright spot in what has been a down economy. It is best left on its own to thrive.

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Cutting the Video Cord: “Apple TV” 2.0 + Disney & CBS

by on December 22, 2009 · 7 comments

By Adam Thierer & Berin Szoka

The Wall Street Journal reports (see Financial Times, too) that “CBS Corp. and Walt Disney Co. are considering participating in Apple Inc.’s plan to offer television subscriptions over the Internet, according to people familiar with the matter, as Apple prepares a potential new competitor to cable and satellite TV.”

If Apple signs up enough networks to launch a viable service—still a very big if—it could ultimately alter the economics of the television business. The service could undermine the big bundles of channels that cable, satellite and telecommunications companies, including Comcast Corp. and DirecTV Inc., have traditionally sold in packages to subscribers.

And Brian Stelter of The New York Times says of the plan:

Broadband Internet subscriptions to TV networks could potentially destabilize the bedrock of the television business, which relies on subscribers paying for dozens of bundled channels.

As we have noted have noted here in our ongoing “Cutting the Video Cord” series, it’s just another sign that the video marketplace is vibrantly competitive and experiencing unprecedented innovation. So, why is Washington regulating this marketplace like we still live in the disco era?

The New York Times itself seems to be of two minds on this: Brian seems to recognize that the rise of Internet television means that cable providers no longer have any sort of special “gatekeeper” or “bottleneck” control over the programming available to consumers, just as his colleague Nick Bilton at the Times‘ BITS blog recently declared that “Cable Freedom Is a Click Away.” And yet, as Berin recently noted, when the DC Circuit struck down the FCC’s outdated 30% cap on the number of homes a single cable provider could serve (based on “gatekeeper” concerns) back in September, the  Times editorial page bemoaned the decision and demanded further regulation of the cable industry—even as Internet TV is fundamentally changing the marketplace for video programming and rendering moot “gatekeeper” concerns far more effectively than any law could ever do.

“Right hand, meet Left hand. Howyadoinnicetameetcha!”

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Cutting the Video Cord: Pro-Regulatory NYT Realizes “Cable Freedom Is a Click Away”

by on December 15, 2009 · 25 comments

Three months ago, when the DC Circuit struck down the FCC’s “Cable Cap”—which prevented any one cable company from serving more than 30% of US households out of fear that he larger cable companies would use their “gatekeeper” power to restrict programming—the New York Times bemoaned the decision:

The problem with the cap is not that it is too onerous, but that it is not demanding enough.

Even with the cap — and satellite television — there is a disturbing lack of price competition. The cable companies have resisted letting customers choose, a la carte, the channels they actually watch….

[The FCC] needs to ensure that customers have an array of choices among cable providers, and that there is real competition on price and program offerings.

Perhaps the Times‘ editors should have consulted with the Lead Technology Writer of their excellent BITS blog.  Nick Bilton might have told him the truth: “Cable Freedom Is a Click Away.”  That’s the title of his excellent survey of devices and services (Hulu, Boxee, iTunes, Joost, YouTube, etc.) that allow users to get cable television programming without a cable subscription.

Nick explains that consumers can “cut the video cord” and still find much, if not all, their favorite cable programming—as well as the vast offerings of online video—without a hefty monthly subscription.  (Adam recently described how Clicker.com is essentially TV guide for the increasing cornucopia of Internet video.)  This makes the 1992 Cable Act’s requirement that the FCC impose a cable cap nothing more than the vestige of a bygone era of platform scarcity, predating not just the Internet, but also competing subscription services offered by satellite and telcos over fiber.  That’s precisely what we argued in PFF’s amicus brief to the DC Circuit a year ago, and largely why the court ultimately struck down the cap.

Bilton notes that “this isn’t as easy as just plugging a computer into a monitor, sitting back and watching a movie. There’s definitely a slight learning curve.”  But, as he describes, cutting the cord isn’t rocket science.  If getting used to using a wireless mouse is the thing that most keeps consumers “enslaved” to the cable “gatekeepers” the FCC frets so much about, what’s the big deal?  Does government really need to set aside the property and free speech rights of cable operators to run their own networks just because some people may not be as quick to dump cable as Bilton?  Is the lag time between early adopters and mainstream really such a problem that we would risk maintaining outdated systems of architectural censorship (Chris Yoo’s brilliant term) that give government control over speech in countless subtle and indirect ways? Continue reading →

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Genachowski Widens the Net Neutrality Loophole

by on December 2, 2009 · 7 comments

FCC Chairman Julius Genachowski linked spectrum management, universal service and network neutrality in a speech yesterday at the Innovation Economy Conference in Washington, and in the process may have signaled some comprehension of the negative consequences network neutrality regulation may have.

His most significant statement was a concession that network management will be required to keep wireless networks and services economically sustainable. The FCC’s Notice of Proposed Rulemaking on network neutrality seeks to apply a “non-discrimination” principle to wireless—that is, to prohibit service providers such AT&T, Sprint, T-Mobile and Verizon Wireless from using network intelligence from grooming, partitioning or prioritizing data to ensure quality performance of voice, data, gaming or video applications.

Yet yesterday, as reported by Wireless Week, Genachowski acknowledged that the explosion of data use was placing “unsustainable strains” on operators’ wireless networks.

“[There] are real congestion and network management issues that operators must address, particularly around wireless networks, and we must allow reasonable network management…,” he said, emphasizing the importance of developing policies that “encourage investment and the development of successful business models.”

While the NPRM does allow for “reasonable network management,” it never really defines what that may be. In light of this, Genachowski’s injection of “investment” and “business models” into his side of the debate is both startling and welcome.

For one, it acknowledges the rising chorus of critics (examples here and here), who, independent of ideology, have questioned the economic wisdom of barring carriers from recouping their investment in intelligent network technology from large applications providers who generate these necessary costs. A recent conference on Capitol Hill, sponsored by the American Consumer Institute (full disclosure: I was a participant), featured comments a number of economists who said mandated non-discrimination was a recipe for higher consumer prices, lower quality and ultimately, declining investment in broadband infrastructure. Much of the Q&A discussion focused on whether numerous wireless data services and applications that have arisen out of innovations such as the iPhone, because of the continual network management they require, would be possible under a network neutrality regime.

Genachowski also deserves credit for tying the network neutrality issue in with spectrum management and universal service. Previous commissions have tended to pursue these issues separately, as if the policies addressing one had no effect on the others. Contemporary telecom policy must be holistic, understanding how spectrum allocation affects wireless network management, and how allowing the industry greater freedom to formulate the business models and partnerships can yield the investment needed to deliver universal service.

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Who’s Going Mobile (on the Internet)?

by on December 1, 2009 · 12 comments

We all know those “hyper-users” that are constantly connected with their cell phones, smartphones, or other mobile device. Often, they’re the person next to you on the metro or standing in line. Often, they’re young. And according to a new Pew report, most of these young hyper-users are young Latinos and blacks.

NPR had a great segment this morning about the Pew Hispanic Center study. It discussed the “digital divide” and the lack of computers in homes of minority populations. In an interesting twist, the Pew study says that many minorities are just skipping the home computer and upgrading their cell phone plans for data use.

Mobile devices are a great example of leapfrog technology. Who needs a desktop or a laptop when your phone is almost as powerful (and arguably even more useful)?

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Is the FCC Becoming the Federal Cloud Commission?

by on November 19, 2009 · 32 comments

Federal Cloud CommissionHmmm… What am I missing? I cannot lay my finger on a single line in the Communications Act of 1934, the Telecommunications Act of 1996, or any statute in between that gives the Federal Communications Commission (FCC) the authority to regulate cloud computing.  And yet, like any good stickler for jurisdictional authority, my PFF colleague Barbara Esbin keeps bringing to my attention little FCC chirps here and there which suggest that the agency is slowly positioning itself to become the Federal Cloud Commission. For example, back in September, Barbara brought to my attention this passage in the Commission’s recent Wireless Innovation and Investment Notice of Inquiry, (paragraph 60, pg. 21):

As other approaches, such as cloud computing, evolve, will established standards or de facto standards become more important to the applications development process? For example, can a dominant cloud computing position raise the same competitive issues that are now being discussed in the context of network neutrality? Will it be necessary to modify the existing balance between regulatory and market forces to promote further innovation in the development and deployment of new applications and services?

In my earlier essay about this, I noted that these questions should serve as a wake-up call for Google and other cloud-based providers who think that “neutrality” mandates will end at the infrastructure layer of the Net.  As Berin Szoka and I argued in our paper on “high-tech mutually assured destruction,” regulatory regimes grow but almost never contract.  And I’m even less optimistic about the FCC limiting its regulatory aspirations after the latest thing Barbara Esbin brought to my attention.

Today, as part of the Commission’s ongoing effort to develop a National Broadband Plan, the FCC released a request for information “on data portability and its relationship to broadband.”  (NBP Public Notice #21) “The Commission seeks tailored comment on broadband and portability of data and their relation to cloud computing, transparency, identity, and privacy,” the notice says.  Here was the second item on the list of things the Commission said it was investigating: Continue reading →

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