In the past couple weeks, three bills addressing the legality of cell phone unlocking have been introduced in the Senate:

• Sens. Leahy, Grassley, Franken, and Hatch’s “Unlocking Consumer Choice and Wireless Competition Act” (S.517)
• Sen. Ron Wyden’s “Wireless Device Independence Act” (S.467)
• Sen. Amy Klobuchar’s “Wireless Consumer Choice Act” (S.481)

This essay will explain how these bills would affect users’ ability to lawfully unlock their cell phones.

Background

If you buy a new cell phone from a U.S. wireless carrier and sign a multi-year service contract, chances are your phone is “locked” to your carrier. This means if you want to switch carriers, you’ll first need to unlock your phone. Your original carrier may well be happy to lend you a helping hand—but, if not, unlocking your phone may violate federal law.

The last few months have seen an explosion of public outcry over this issue, with a recent White House “We the People” petition calling for the legalization of cell phone unlocking garnering over 114,000 signatures—and a favorable response from the Obama administration. The controversy was sparked in October 2012, when a governmental ruling (PDF) announced that unlocking cell phones purchased after January 26, 2013 would violate a 1998 federal law known as the Digital Millennium Copyright Act (the “DMCA”).

Under this law’s “anti-circumvention” provisions (17 U.S.C. §§ 1201-05), it is generally illegal to “circumvent a technological measure” that protects a copyrighted work. Violators are subject to civil penalties and, in serious cases, criminal prosecution.

However, the law includes an escape valve: it empowers the Librarian of Congress, in consultation with the Register of Copyrights, to periodically determine if any users’ “ability to make noninfringing uses . . . of a particular class of copyrighted works” is adversely affected by the DMCA’s prohibition of tools that circumvent access controls. Based on these determinations, the Librarian may promulgate rules exempting categories of circumvention tools from the DMCA’s ban.

One such exemption, originally granted in 2006 and renewed in 2010, permits users to unlock their cell phones without their carrier’s permission. (You may be wondering why phone unlocking is considered an access control circumvention—it’s because unlocking requires the circumvention of limits on user access to a mobile phone’s bootloader or operating system, both of which are usually copyrighted.)

But late last year (2012), when the phone unlocking exemption came up for its triennial review, the landscape had evolved regarding a crucial legal question: do cell phone owners  own a copy of the operating system software installed on their phone, or are they merely licensees of the software?

Until a few years ago, the leading authority on what it means to own a copy of a computer program was the 2nd Circuit’s 2005 opinion in Krause v. Titleserv, Inc., 402 F.3d 119. There, the court held that a person owns a copy of software if he “exercises sufficient incidents of ownership over a copy of the program to be sensibly considered the owner of the copy . . . .” As the Copyright Office noted in its 2012 recommendation to the Librarian of Congress, the 2006 and 2010 rules exempting cell phone unlocking from the DMCA reflected an understanding, based in part on the holding in Krause, that a typical cell phone owner exercises a level of dominion over her device (and its digital contents) more akin to traditional property ownership than the licensed use of property owned by another.

But in 2010, the 9th Circuit took a very different approach in  Vernor v. Autodesk, Inc., 621 F.3d 1102, in which the court held that a “software user is a licensee rather than an owner of a copy where the copyright owner (1) specifies that the user is granted a license; (2) significantly restricts the user’s ability to transfer the software; and (3) imposes notable use restrictions.” Because a typical cell phone owner is bound by a “click-wrap” agreement that significantly restricts her ownership rights in her phone’s operating system, she’s arguably a licensee of the software—not an owner of a copy—according to Vernor.

In light of the  Vernor-Krause circuit split, combined with pronounced trend toward more permissive carrier unlocking policies in recent years, the Librarian of Congress substantially curtailed the exemption for cell phone unlocking for all new phones purchased after January 26, 2013. Today, an owner of a new phone may unlock it only if “the operator of the wireless communications network to which the handset is locked has failed to unlock it within a reasonable period of time following a request by the owner of the wireless telephone handset, and when circumvention is initiated by the owner, an individual consumer, who is also the owner of the copy of the computer program in such wireless telephone handset . . . .”

So it is that cell phone unlocking is now in many cases a violation of federal law. (For more background, check out the writings of Timothy Lee at Ars Technica, Derek Khanna at The Atlantic, and Mike Masnick at Techdirt.)

How would the bills recently introduced in Congress address the cell phone unlocking issue? Let’s take a look at each bill.

The Unlocking Consumer Choice and Wireless Competition Act

To begin with the simplest of the cell phone unlocking bills, Sens. Leahy, Grassley, Franken, and Hatch’s Unlocking Consumer Choice and Wireless Competition Act (S.517) would simply amend the Code of Federal Regulations, replacing the pertinent paragraph from the Librarian of Congress’s 2012 rulemaking (codified at 37 C.F.R. § 201.40(b)(3)) with its more permissive 2010 analogue. The bill also tasks the Librarian of Congress with determining whether to extend the unlocking exemption to other wireless devices (e.g., mobile broadband-enabled tablets), based on the DMCA’s usual rulemaking criteria.

By restoring the broad DMCA exemption for phone unlocking in force from 2006 to 2012, S.517 addresses the problem at hand without going too far. It neither forces carriers to help users unlock their phones, nor limits carriers’ ability to recover damages from subscribers who breach their contracts. Rather, the bill would simply shield users who unlock their cell phones from the DMCA’s harsh penalties. In striking this balance, S.517 deserves credit for aiming to solve a discrete problem with a narrowly-tailored solution.

But would S.517’s fix last? Given that “[n]othing in [the] Act alters . . . the authority of the Librarian of Congress under [the DMCA],” S.517 would presumably leave unchanged the substantial deference enjoyed by the Librarian regarding his decisions about which circumvention tools to exempt—including cell phone unlocking tools. If, three years from now, the Librarian boldly decides that his 2012 decision to curtail the phone unlocking exemption was correct, and thus restores the language currently in force, Congress will be back at square one.

For a more lasting solution, Congress could act under the Congressional Review Act (“CRA”) to pass a resolution expressing its disapproval of the Librarian’s 2012 rule. If both houses of Congress were to pass such a resolution, and the President were to sign it, the narrow cell phone unlocking rule would be nullified—permanently. And the Librarian couldn’t simply reissue the rule, as a rule nullified under the CRA “may not be reissued in substantially the same form.” 5 U.S.C. § 801(b)(2).

Admittedly, this would be a novel use of the CRA. Congress has historically used the law’s disapproval procedure to review rules promulgated by “ordinary” federal agencies (i.e., agencies that are entirely within the Executive Branch). Nevertheless, the Library of Congress is arguably an “agency” for purposes of the CRA insofar as it promulgates rules of general applicability. As the D.C. Circuit recently held in Intercollegiate Broad. Sys., Inc. v. Copyright Royalty Bd., when the Library of Congress exercises its “powers . . . to promulgate copyright regulations . . . the Library is undoubtedly a ‘component of the Executive Branch.'” 684 F.3d 1332, 1341-42 (D.C. Cir. 2012) (citing Free Enterprise Fund v. Public Company Accounting Oversight Bd., 130 S.Ct. 3138, 3163 (2010)).

The Wireless Device Independence Act

Sen. Ron Wyden’s Wireless Device Independence Act (S.467) is the only cell phone unlocking bill that actually amends the DMCA. It would add to section 1201 a clause specifying that modifying software on a mobile device so that it operates on a different network is exempt from the law. While his colleagues dance around the underlying problem—the DMCA itself—Sen. Wyden tackles it head-on. To his credit, this approach embodies Congress exercising its proper constitutional role. If the legislative branch is dissatisfied with how an agency has exercised its statutorily delegated authority, the legislature ought to respond by amending the agency’s enabling statute.

However, S.467 contains a potentially massive loophole: it only exempts from DMCA liability “user[s] [who] legally own[] a copy of the computer program” installed on their mobile phone. In other words, the bill would do nothing for users who are mere licensees of the software installed on their phone. This may not matter for residents of the three states under the jurisdiction of the Second Circuit, where Krause controls—but for cell phone owners in the Ninth Circuit, where Vernor controls, S.467 is unlikely to offer much relief. Because most mobile operating systems are accompanied by click-wrap contracts that impose significant use and transfer restrictions on users, under Vernor these users are considered licensees, rather than owners of a copy of the operating system.

If the Wireless Device Independence Act were enacted, therefore, most Americans wishing to unlock their cell phones would still face significant legal uncertainty regarding their potential liability under the DMCA. To remedy this, the bill could extend its safe harbor to encompass cell phone unlocking by licensees, as well as owners, of software.

The Wireless Consumer Choice Act

Sen. Amy Klobuchar, along with Sens. Mike Lee and Richard Blumenthal, take a very different approach from their colleagues in their Wireless Consumer Choice Act (S.481). The bill’s full text is worth posting (PDF):

Pursuant to its authorities under title III of the Communications Act of 1934 . . . the [FCC], not later than 180 days after the date of enactment of this Act, shall direct providers of commercial mobile services and commercial mobile data services to permit the subscribers of such services, or the agent of such subscribers, to unlock any type of wireless device used to access such services. Nothing in this Act alters, or shall be construed to alter, the terms of any valid contract between a provider and a subscriber.

Note the absence of any explicit amendments to the DMCA or related regulations, or any mention of circumvention tools. Instead, the bill empowers the FCC to regulate carriers’ unlocking policies, yet leaves the DMCA intact. This drafting decision has led some commentators to pan the legislation, questioning its effectiveness and scope.

While I too have serious concerns about S.481, I think Sina Khanifar (who started the White House petition about cell phone unlocking) may be incorrect to suggest the bill “doesn’t do anything at all.” It seems to me that S.481 would alter the DMCA’s unwritten contours, albeit in narrow ways.

How can a law that doesn’t even mention the DMCA effectively “rewrite” its anti-circumvention provisions? Consider that S.481 and the DMCA’s section 1201 both purport to deal with the subject of cell phone unlocking. To borrow a term from legal Latin, the two laws are in pari materia (“upon the same subject”). While section 1201 focuses on the general issue of circumvention of copyright access controls without mentioning cell phone unlocking, S.481 specifically and exclusively addresses cell phone unlocking.

So how would a court reconcile S.481 with section 1201 if a mobile subscriber were sued for unlocking his cell phone despite his full compliance with the carrier’s service contract? Here’s an excerpt from the leading treatise on statutory interpretation, Sutherland Statutory Construction, summarizing how courts have historically sought to reconcile incompatible statutes:

Where one statute deals with a subject in general terms and another deals with a part of the same subject in a more detailed way, the two should be harmonized if possible. But if two statutes conflict, the general statute must yield to the specific statute involving the same subject . . . .

2B Sutherland Statutory Construction § 51:5 (7th ed.) (internal citations omitted).

The DMCA, it seems, must yield to S.481—at least as far as contractually-authorized cell phone unlocking is concerned. As Sean Flaim points out, if you unlock your phone with help from your carrier, it cannot be said that you’ve “circumvented” a technological measure. Thus, under S.481, carriers would lose their existing ability under the DMCA (17 U.S.C. § 1203) to sue a subscriber who has unlocked his phone without breaching his service contract. Similarly, the law might deny the DMCA’s civil remedies to other rights holders—say, mobile operating system creators—against consumers who unlock their phones without breaching any contractual provisions. S.481 also purports to eliminate criminal liability in such situations; as Sen. Mike Lee explained in a joint statement announcing the bill, “[c]onsumers shouldn’t have to fear criminal charges if they want to unlock their cell phones and switch carriers.”

But courts could just as well construe S.481 to effect none of these changes. There is no such thing as  stare decisis  when it comes to statutory construction. If Congress wanted to alter the DMCA, courts might reason, Congress would have done just that. S.481 simply requires that carriers help off-contract subscribers unlock their phones, so why read into the statute a meaning that conflicts with other laws?

Perhaps there are persuasive reasons for trying to tweak the DMCA without actually amending the law, but I’m not aware of any. Given how widely courts vary in interpreting vague statutes, it’s awfully risky to gamble on judges who review S.481 correctly divining Congress’s intent if it enacts the law.

Another worrisome aspect of S.481 is its expansion of the FCC’s regulatory authority to encompass cell phone unlocking. While this grant of authority may seem innocuous, Congress should think twice before involving the FCC in mobile carriers’ decisions about when to permit subscribers to unlock their phones. If the FCC is tasked with policing carriers’ policies regarding cell phone unlocking, the agency might interpret this narrow grant of jurisdiction as a grant of  “ancillary authority” to dictate the contours of mobile service contracts (not that the FCC isn’t already eager to regulate this space). The FCC is notorious for taking an extremely broad view of its own powers; as the Electronic Frontier Foundation has warned, the FCC’s willingness to overreach “raises the specter of discretionary FCC regulation of the Internet not just in the area of net neutrality, but also in a host of other areas.”

Given the FCC’s historically limited understanding of how markets work, unleashing it on the wireless industry is especially unwise. This isn’t a market in need of regulation; in fact, consumers enjoy plenty of choices among devices, carriers, and payment plans. If you want to buy the latest smartphone sans carrier lock, chances are you can order it today and have it on your doorstep tomorrow. If anything, Congress should be exploring ways to shrink  the FCC’s role in the mobile communications space, among others.

Conclusion

Like co-liberator Jerry Brito, I think the ideal public policy approach to cell phone unlocking is fairly straightforward. If I own a cell phone, I should be free to modify its software (or hardware) so that it works on any carrier’s network—unless I’ve agreed in contract not to unlock my phone. If I go ahead and unlock my phone anyway, I owe my carrier compensation for its damages resulting from my breach—which are typically specified in advance in the form of an early termination fee. If the contract doesn’t specify an early termination fee, I owe my carrier damages equal to the amount necessary to put the carrier in the same position it would have ended up had I held up my end of the bargain. This is the common law in action, simple yet elegant.

Notice that the approach I’ve outlined makes no mention of the Copyright Act. That a particular type of wrongful conduct happens to involve a copyrighted work doesn’t necessarily make it proper to invoke the copyright laws. While I support robust copyright protection, tweaking the operating software installed on my own phone so that it will operate on my preferred mobile carrier is a far cry from actionable copyright infringement. The potential market for Apple’s iOS, Google’s Android, or Windows Phone 8 suffers no adverse effect if a user unlocks her smartphone so she can switch carriers. As the Copyright Office explained in 2006:

[T]he access controls do not appear to actually be deployed in order to protect the interests of the copyright owner or the value or integrity of the copyrighted work; rather, they are used by wireless carriers to limit the ability of subscribers to switch to other carriers, a business decision that has nothing whatsoever to do with the interests protected by copyright.

This is not to say that carriers are wrong to limit some subscribers’ ability to switch networks. To the contrary, American consumers enjoy substantial benefits thanks to the availability of carrier-subsidized, locked cell phones, as George Ford, Thomas Koutsky, and Larry Spiwak argue in A Policy and Economic Exploration of Wireless Carterfone Regulation, 25 Santa Clara Computer & High Tech. L.J. 647 (2009). The question is thus not whether consumers should be permitted to unlock their cell phones, but what legal regime(s) should deter wrongful unlocking. As Jerry rightly argues, contract law affords mobile carriers a far more appropriate set of remedies for wrongful unlocking than the Copyright Act does.

Cell phone unlocking may be a fairly clear-cut issue, but the broader debate over whether, and to what extent, federal laws should ban tools that circumvent technological measures protecting copyrighted works is anything but straightforward. Critics of the DMCA’s anti-circumvention provisions offer powerful arguments why Congress shouldn’t be in the business of banning technologies, but there remains a fine line between selling lock picking tools and helping people unlawfully pick locks. In a forthcoming essay, I’ll explore the anti-circumvention debate in greater detail.

For a scholarly treatment of the interplay between the DMCA and cell phone unlocking, check out Daniel J. Corbett’s article,  Would You Like That iPhone Locked or Unlocked?: Reconciling Apple’s Anticircumvention Measures with the DMCA, 8 U. Pitt. J. Tech. L. Pol’y 8 (2008).

Conservatives and libertarians believe strongly in property rights and contracts. We also believe that businesses should compete on a level playing field without government tipping the scales for anyone. So, it should be clear that the principled position for conservatives and libertarians is to oppose the DMCA anti-circumvention provisions that arguably prohibit cell phone unlocking.

Indeed it’s no surprise that it is conservatives and libertarians—former RSC staffer Derek Khanna and Rep. Jason Chaffetz (R–Utah)—who are leading the charge to reform the laws.

In it’s response to the petition on cell phone unlocking, the White House got it right when it said: “[I]f you have paid for your mobile device, and aren’t bound by a service agreement or other obligation, you should be able to use it on another network.”

Let’s parse that.

If you have paid for your mobile device, it’s yours, and you should be able to do with it whatever you want. That’s the definition of property rights. If I buy a bowling ball at one bowling alley, I don’t need anyone’s permission to use it in another alley. It’s mine.

Here comes the caveat, though. I don’t need anyone’s permission unless I have entered into an agreement to the contrary. If I got a great discount on my bowling ball in exchange for a promise that for the next two years I’d only use it at Donny’s Bowling Alley, then I am bound to that contract and I can’t very well go off and use it at Walter’s Alley. But once those two years are up, the ball is mine alone and I can do with it whatever I want. Again, that’s the definition of property, and the same should be true for cell phones or any other device.

So how is it that after you have paid for a phone, and you no longer have a contractual obligation with a carrier, that they can still prevent you from using it on another network? The answer is that they are manipulating copyright law to gain an unfair advantage.

For one thing, it’s a bit of a farce. In theory the DMCA’s anti-circumvention provisions exist to protect copyrighted works by making it illegal to circumvent a digital lock that limits access to a creative work. That kind of makes sense when it comes to, say, music that is wrapped in DRM (and indeed the DMCA was targeted at piracy). But what is the creative work that is being protected in cell phones? It’s not clear there is any, but ostensibly it’s the phone’s baseband firmware. It doesn’t pass the laugh test to say that Americans are clamoring to unlock their phones in order to pirate the firmware.

No, Americans don’t want to pirate firmware. They simply want to use their phones as they see fit and carriers and phone makers are misusing the DMCA to make out-of-contract and bought-and-paid-for phones less valuable. That’s bad enough, but what should really upset conservatives and libertarians is that they are employing the power of the state to gain this unfair advantage.

If I use my bowling ball at Walter’s Alley while I’m still under contract to Donny’s, the only remedy available to Donny is to sue me for breach. If he was smart, Donny probably included an “early termination” clause in the contract that spelled out the damages. What Donny can’t do is call the police and have me arrested, nor will he have access to outsized statutory damages. Yet that’s what the DMCA affords device makers and carriers. They are using the power of the state to deny the property rights of others and to secure for themselves rights they could not get through contract law.

Where the White House’s response gets it wrong, however, is in involving the FCC and the NTIA. This is not a telecommunications policy issue; it’s a copyright issue. It’s not just cell phone makers and carriers that are misusing the DMCA. Device makers are employing the same technique to garage door openers, printers, and other devices. Yet that’s how it seems the White House is approaching the issue. From their petition response:

The Obama Administration would support a range of approaches to addressing this issue, including narrow legislative fixes in the telecommunications space that make it clear: neither criminal law nor technological locks should prevent consumers from switching carriers when they are no longer bound by a service agreement or other obligation.

If Congress acts to fix this mess, it should not limit itself to just a narrow provision that exempts cell phone unlocking from the DMCA. In fact, this is an opportunity for conservatives and libertarians in Congress to act on principle and propose a comprehensive fix to the DMCA in the name of respecting property rights. I for one would love to see that challenge put the President.

Finally, it should be made clear that contrary to what some folks are suggesting, by involving the FCC the White House is not endorsing a “Carterfone for wireless”—the idea that carriers should not be allowed to limit how consumers can use their devices, even through contract. The White House response was quite clear that agreements that bind consumers to a particular carrier should still be allowed. And it makes perfect sense.

Today Verizon announced that it activated a record 6.2 million iPhones in its fourth quarter. What accounts for this feat? CFO Fran Shammo explains:

This past fourth quarter, you … had really one thing happen that never happened before, especially with Verizon Wireless, and that was for the first time ever, because of the iPhone 5 launch, we had the 4 at free. So it was the first time ever you could get a free iPhone on the Verizon Wireless network.

A free iPhone is a great deal for consumers who can’t or don’t want to pay for the $450 device up front. The only way carriers can make these offers is in exchange for a promise from the consumer to stay with the carrier for a fixed amount of time and to pay a penalty if they don’t. That’s a win-win-win for the consumer, the carrier and the phone maker—and it’s possible just with the contract law we know and love.

Believe it or not, this argument is being trotted out as part of the pressure from consumer activist groups against AT&T’s proposed acquisition of T-Mobile. The subject of a Senate Judiciary Hearing on the merger, scheduled for May 11, even asks, “Is Humpty Dumpty Being Put Back Together Again?”

It seems because the deal would leave AT&T and Verizon as the country’s two leading wireless service providers, the blogosphere is aflutter with worries that we are returning to the bad old days when AT&T pretty much owned all of the country’s telecom infrastructure.

It is true that AT&T and Verizon trace their history back to the six-year antitrust case brought by the Nixon Justice Department, which ended in the 1984 divestiture of then-AT&T’s 22 local telephone operating companies, which were regrouped into seven regional holding companies.

Over the last 28 years, there has been gradual consolidation, each time accompanied by an uproar that the Bell monopoly days were returning. But those claims miss the essential goal of the Bell break-up, and why, even though those seven “Baby Bell” companies have been integrated into three, there’s no going back to the pre-divestiture AT&T.

The Bell System monopoly was vertically integrated. Not only did it have a monopoly on local services, it operated the only long-distance company, it handled all incoming and outgoing international calls, and, most important, its wholly-owned subsidiaries, Bell Labs and Western Electric, developed, manufactured and sold all network equipment from the switches and cable to the phone in your home and office.

The claim that that AT&T and T-Mobile merger will remake the Bell System is undone by recalling why AT&T was broken up in the first place. It had little to do with it being a monopoly provider of residential telephone service. Remember, in the final judgment, the seven spin-off companies retained their local monopolies.

The problem was that AT&T was its own supply chain. As such, in the 1960s and 70s, as the computer industry was going through massive upheaval because of rapid and disruptive strides being made by semiconductor companies, AT&T remained insulated in a bubble. Since AT&T only bought from AT&T, AT&T could dictate the pace of telecom technology evolution, say from mechanical switches, to electronic to digital. This was virtually opposite the situation that was happening with computers and data networking, where central mainframe-based architectures were disintermediated by distributed computing. IBM and Sperry were giving way to Digital Equipment Corp. and Wang, and ultimately Microsoft and Apple.

It’s arguable, at least, that the demand for faster data networking, driven by the trend toward distributed intelligence, created the policy pressure for the Bell break-up and competitive telecom in general. MCI, which provided the first long distance alternative for businesses, appeared on the scene in the late 70s. At the same time, spurred by the 1968 Carterfone decision that permitted end-users to attach their own terminal equipment to AT&T network, intense competition broke out for office phone systems, especially those that could integrate data networking. More and more, it seemed as if AT&T’s ironclad grip on the U.S. public network was an obstacle to innovation, not the enabler it had purported itself to be for decades (and one of the legs on which it rested its whole “natural monopoly” argument).

In fact, conventional wisdom at the time was that the government was going to force AT&T to divest Western Electric and Bell Labs in order to create a competitive market for network infrastructure. Divestiture accomplished this somewhat, because it separated local exchange infrastructure from AT&T’s control. Ironically, it was market forces that accomplished what regulators had hoped to, when, in 1996, AT&T divested Western Electric, because by then, AT&T itself was the Bell companies’ biggest competitor, and that was straining its ability to sell into that segment.

So while the divested Bell companies have re-merged, even to the point of consuming their former parent, they have no control over the supply chain, and therefore, cannot control prices or product development the way AT&T did pre-break-up.

Keeping things in the context of wireless for now, as that’s what’s driving the AT&T and T-Mobile deal, it’s clear consumers are impatient for the latest smartphone models. Even as merged unit, AT&T and T-Mobile cannot arbitrarily choose when and where to release new technology like the Bell System once could. Quite the opposite, there continues to be an ongoing race as to which company can deliver the most popular phones on the best terms. Case in point was the hoopla surrounding Verizon’s introduction of the iPhone earlier this spring. That was accompanied by price cuts as well as hints of the new iPhone model expected in the fall. In the meantime, a geek war has broken out over the utility and relative benefits of Apple’s iOS-based iPhone and Google’s Android operating system. Certainly the debate gets confusing, overwrought and tiresome, but that’s because consumers can vote with their pocketbook. In the Bell System days, there were no such dialogues because there was no such choice.

Most other arguments fall apart, too. Size by itself is not an antitrust argument. Nor is duopoly or triopoly. It takes a certain level of capital and heft to operate a nationwide network, and the fact that post-merger, there will still be three national companies competing alongside regional players speaks to the competitiveness of the industry. AT&T and Verizon have similar market share numbers, and although Sprint lags, it has a healthy share of the government sector. It is not as weak as the media suggests.

Market share also is an imprecise measure of competition and consumer harm. A company with 80 percent market share may be doing nothing illegal. It can be holding that level because low prices and innovative products yield loyal customers. Cisco Systems, which makes Internet routers and switches, is a great example. It dominates the segment, yet does through aggressive innovation, quality products and strong customer support.

At the same time, we have seen companies whose market shares pundits have deemed unassailable wilt in the face of a newcomer who can provide more utility or expose a weakness. Witness Firefox against Explorer; Facebook against MySpace, and in wireless devices, Apple against Nokia.

Others have raised the customer service issue–that AT&T consistently ranks low in customer service surveys. This metric itself cannot be used as a “customer harm” because there is no predicting how this might change with the mix of T-Mobile (which has good customer satisfaction ratings). Measurements are also subjective. Everyone complains about the phone company. Yet, in AT&T’s case, the equally measurable popularity of the iPhone seems to offset those complaints. It also undermines the market share argument–begging the question of why a company whose service is reportedly so inferior poses such a threat to competition. But just to be skanky, if antitrust approval hinged on customer service, United Airlines would never been allowed to merge with Continental.

A valid antitrust case must show the merger will allow AT&T to illegally or unfairly limit options for consumers. In U.S. antitrust law, this usually means determining whether a dominant company can it use its size to undermine or drive out otherwise healthy competitors by controlling access to other parts of the supply chain—such as manufacturing, transportation or distribution. In modern antitrust jurisprudence, leveraging size to speed innovation, respond to market needs, or lure investment dollars is not seen as unfair or illegal. This distinction guards against the use of courts to protect or prop up uncompetitive companies. (European antitrust, however, is a different animal).

The AT&T/T-Mobile merger is a sign of maturing market, not the reconstitution of a monopoly that existed 30 years ago in an environment very different from today. Bottom line, economies of scale could not sustain seven regional telecommunications companies. Far from “unthinkable,” as one-time FCC Chairman Reed Hundt once declared, their consolidation was inevitable. A few prescient analysts, including Victor Schnee and Allan Tumolillo in the landmark study “Taking Over Telephone Companies,” predicted this very thing as far back as 1990.

Broadly speaking, we are entering a new phase of service provision, where wireless stands to be a much more competitive “last mile” technology for broadband. This will shuffle the players and the stakes again. The former AT&T companies dominate wireless, to be sure, but on the wireline side, cable companies have the competitive advantage. The right approach to this merger would be to view it in the context of the evolving broadband market. With this perspective, AT&T and T-Mobile won’t be one wireless company among three, but one national broadband player among six or seven.

Let the competition grow.

At the last possible moment before the Christmas holiday, the FCC published its Report and Order on “Preserving the Open Internet,” capping off years of largely content-free “debate” on the subject of whether or not the agency needed to step in to save the Internet.

In the end, only FCC Chairman Julius Genachowski fully supported the final solution.  His two Democratic colleagues concurred in the vote (one approved in part and concurred in part), and issued separate opinions indicating their belief that stronger measures and a sounder legal foundation were required to withstand likely court challenges.  The two Republican Commissioners vigorously dissented, which is not the norm in this kind of regulatory action.  Independent regulatory agencies, like the U.S. Courts of Appeal, strive for and generally achieve consensus in their decisions.

So for now we have a set of “net neutrality” rules that a bi-partisan majority of the last Congress, along with industry groups and academics, strongly urged the agency not to adopt, and which were deemed unsatisfactory by four of the five Commissioners.  It’s hardly a moment of pride for the agency, which has been distracted by the noise around these proceedings since Genachowski was first confirmed by the Senate.  Important work freeing up radio spectrum for wireless Internet, reforming the corrupt Universal Service Fund, and promoting the moribund National Broadband Plan have all been sidelined.

How did we get here?  In October, 2009, the agency first proposed new rules, but their efforts were sidetracked by a May court decision that held the agency lacked authority to regulate broadband Internet.  After flirting with the dangerous (and likely illegal) idea of “reclassifying” broadband to bring it under the old telephone rules, sanity seemed to return.  Speaking to state regulators in mid-November, the Chairman made no mention of net neutrality or reclassification, saying instead that “At the FCC, our primary focus is simple: the economy and jobs.”

Just a few days later, at a Silicon Valley event, the Chairman seemed to reverse course, promising that net neutrality rules would be finalized.  He also complimented the “very smart lawyers” in his employ who had figured out a way to do it without the authorization of Congress, which has consistently failed to pass enabling legislation since the idea first surfaced in 2003.  (Most recently, Democratic Congressman Henry Waxman floated a targeted net neutrality bill days before the mid-term elections, but never introduced it.)

From then until the Commission’s final meeting before the new Congress comes to town in January, Commissioners and agency watchers lobbied hard and feinted outrage with the most recent version of the rules, which the agency did not make public until after the final vote was taken on Dec. 21.  In oral comments delivered at the December meeting, two commissioners complained that they hadn’t seen the version they were to vote on until midnight the night before the vote.  Journalists covering the event didn’t have the document all five Commissioners referenced repeatedly in their spoken comments, and had to wait two more days for all the separate opinions to be collated.

Why the Midnight Order?  FCC Commissioners do not serve at the whim of Congress or the President, so the mid-term election results technically had no effect on the chances of agency action.  Chairman Genachowski has had the votes to approve pretty much anything he wants to all along, and will for the remainder of his term.

Even with a Republican House, legislation to block or overturn FCC actions is unlikely.  The Republicans would have to get Democratic support in the Senate, and perhaps overcome a Presidential veto.

But Republicans could use net neutrality as a bargaining chip in future negotiations, and the House can make life difficult for the agency by holding up its budget or by increasing its oversight of the agency, forcing the Chairman to testify and respond to written requests so much as to tie the agency in knots.

So doing something as Congress was nearly adjourned and too busy to do much but bluster was perhaps the best chance the Chairman had for getting something—anything—on the Federal Register.

More likely, the agency was simply punting the problem.  Tired of the rancor and distraction of net neutrality, the new rules—incomplete, awkward, and without a solid legal foundation—move the issue from the offices of the FCC to the courts and Congress.  That will still tie up agency resources and waste even more taxpayer money, of course, but now the pressure of industry and “consumer advocate” groups will change its focus.  Perhaps this was the only chance the Chairman had of getting any real work done.

The Report and Order

Too much ink has already been spilled on both the substance and the process of this order, but there are a few tidbits from the documents that are worth calling out.  In this post, I look at the basis for issuing what the agency itself calls “prophylactic rules.”  In subsequent posts, I’ll look at the final text of the rules themselves and compare them to the initial draft, as well as to alternatives offered by Verizon and Google and Congressman Waxman.  Another post will review the legal basis on which the rules are being issued, and likely legal challenges to the agency’s authority.  I’ll also examine the FCC’s proposed approach to enforcement of the rules.

“Prophylactic” Rules

Even the FCC acknowledges that the “problem” these new rules solve doesn’t actually exist…yet.  The rules are characterized as “prophylactic” rules—a phrase that appears eleven times in the 87-page report.  The report fears that the lack of robust broadband competition in much of the U.S. (how many sets of redundant broadband infrastructure do consumer advocates want companies to build out, anyway?) could lead to ISPs using their market influence to squeeze content providers, consumers, or both.

This hasn’t happened in the ten years broadband Internet has been growing in both capability and adoption, of course, but still, there’s a chance.  As the report (¶ 21) puts it in challenged grammar, “broadband providers potentially face at least three types of incentives to reduce the current openness of the Internet.”

We’ll leave to the side for now the undiscussed potential that these new rules will themselves cause unintended negative consequences for the future development or deployment of technologies built on top of the open Internet.  Instead, let’s look at the sum total of the FCC’s evidence, collected over the course of more than a year with the help of advocates who believe the “Internet as we know it” is at death’s door, that broadband providers are lined up to destroy the technology that, ironically, is the source of their revenue.

To prove that these “potential” incentives are neither “speculative or merely theoretical,” the FCC cites precisely four examples between 2005 and 2010 where it believes broadband providers have threatened the open Internet (¶ 35).   These are:

1.      A local ISP that was “a subsidiary of a telephone company” settled claims it had interfered with Voice over Internet Telephony (VoIP) applications used by its customers.

2.      Comcast agreed to change its network management techniques when the company was caught slowing or blocking packets using the BitTorrent protocol (the subject of the 2010 court decision holding the agency lacked jurisdiction over broadband Internet).

3.      After a mobile wireless provider contracted with an online payment service, the provider “allegedly” blocked customers’ attempts to use competing services to pay for purchases made with mobile devices.

4.      AT&T initially restricted the types of applications—including VoIP and Slingbox—that customers could use on their Apple iPhone.

In the world of regulatory efficiency, this much attention being focused on just four incidents of potential or “alleged” market failures is a remarkable achievement indeed.  (Imagine if the EPA, FDA, or OSHA reacted with such energy to the same level of consumer harm.)

But in legal parlance, regulating on such a microscopically thin basis goes well beyond mere “pretense”—it’s downright embarrassing the agency couldn’t come up with more to justify its actions.  Of the incidents, (1) and (2) were resolved quickly through existing agency authority, (3) was merely alleged and apparently did not even lead to a complaint filed with the FCC (the footnote here is to comments filed by the ACLU, so it’s unclear who is being referenced) and (4) was resolved—as the FCC acknowledges–when customers put pressure on Apple to allow AT&T as the sole iPhone network provider to allow the applications.

Even under the rules adopted, (2) would almost surely still be allowed.  The Comcast case involved use of the BitTorrent protocol.  Academic studies performed since 2008 (when the protocol has been expanded to more legal uses, that is), find that over 99% of BitTorrent traffic still involves unlicensed copyright infringement.  Thus the vast majority of the traffic involved is not “lawful” traffic and, therefore, is not subject to the rules.  The no blocking rule (§8.5) only prohibits blocking of “ lawful content, applications, services or non-harmful devices.”  (emphasis added)

Indeed, the FCC encourages network providers to move more aggressively to block customers who use the Internet to violate intellectual property law.  In ¶ 111, the Report makes crystal clear that the new rules “do not prohibit broadband providers from making reasonable efforts to address the transfer of unlawful content or unlawful transfers of content…..open Internet rules should not be invoked to protect CR infringement….” (Perhaps the FCC, which continues to refer to BitTorrent as an “application” or believes it to be a website, simply doesn’t understand how the BitTorrent protocol actually works.)

Under the more limited wireless rules adopted, (3) and (4) would probably still be allowed as well.  We don’t know enough about (3) to really understand what is “alleged” to have happened, but the no-blocking rule (§ 8.5) says only that mobile broadband Internet providers “shall not block consumers from accessing lawful websites, subject to reasonable network management; nor shall such person block applications that compete with the provider’s voice or video telephony service, subject to reasonable network management.”

A mobile payment application wouldn’t seem to be included in that limitation, and in the case of the iPhone, it was Apple, not AT&T, that wanted to limit VoIP.

Even so, the Report makes clear that the wireless rule (¶ 102) doesn’t apply to app stores: “The prohibition on blocking applications that compete with a broadband provider’s voice or video telephony services does not apply to a broadband provider’s operation of application stores or their functional equivalent.”  So if the software involved in incidents (3) and (4) involved rejection of proposed apps for the respective mobile devices, there would still be no violation under the new rules.

And the caveat for “reasonable network management” (§8.11(d)) says only that a practice is “reasonable if it is appropriate and tailored to achieving a legitimate network purpose, taking into account the particular network architecture of the broadband Internet access service.”  Voice and video apps, depending on how they have been implemented, can put particular strain on a wireless broadband network.  Blocking particular VoIP or apps like Slingbox might be allowed, in other words.

So that’s it.  Only four or fewer actual examples of non-open behavior by ISPs in ten years.  And the rules adopted to curb such behavior would probably only apply, at best, to the single case of Madison River (1), a local telephone carrier with six hundred employees, in a case the FCC agreed to drop without a formal finding of any kind nearly six years ago.

But maybe these aren’t the real problems.  Maybe the real problem is, as many regulatory advocates argue vaguely, the lack of “competition” for broadband.  Since the first deployment of high-speed Internet, multiple technologies have been used to deliver access to consumers, including DSL (copper), coaxial cable, satellite, cellular (3G and now 4G), wireless (WiFi and WiMax), and broadband over power lines.  According to the National Broadband Plan, 4% of the U.S. population still doesn’t have access to any of these alternatives.  In many parts of the country, only two providers are available and in others, the offered speeds of alternatives vary greatly, leaving high-bandwidth users without effective alternatives.

If lack of competition is the problem, though, why not solve that problem?  Well, perhaps the FCC would rather sidestep the issue, since it has demonstrated it is the wrong agency to encourage more competition.  The FCC, for example, has supported legal claims by states that they can prohibit municipalities from offering wireless service, and has dragged its feet on approving trials for broadband over power lines—the best hope for much of the 4% who today have no broadband option, most of whom live in rural areas which already have power line infrastructure.

Indeed, if there are anti-competitive behaviors now or in the future, existing antitrust law, enforceable by either the Department of Justice or the Federal Trade Commission, provide much more powerful tools both to prosecute and remedy activities that genuinely harm consumers.

It’s hard, by comparison, to find many examples in the long history of the FCC where it has used its sometimes vast authority to solve a genuine problem.  The Carterfone decision, which Commissioner Copps cites enthusiastically in his concurrence, and (finally) the opening of long distance telephony to competition, certainly helped consumers.  But both (and other examples) could also be seen as undoing harm caused by the agency in the first place.  And both dealt with technologies and applications that were mature.  Why does anyone believe the FCC can “prophylactically” solve a problem dealing with an emerging, rapidly-evolving new technology that has thrived in the last decade in part because it was unregulated?

The new rules, which are aimed at ensuring “edge” providers do not need to get “permission to innovate” from ISPs, may have the unintended effect of requiring ISPS—and edge providers—to get “permission to innovate” from the FCC.  That hardly seems like a risk worth taking for a problem that hasn’t presented itself.

Former TLF blogger Tim Lee returns with this guest post. Find him most of the time at the Bottom-Up blog.

Thanks to Jim Harper for inviting me to return to TLF to offer some thoughts on the recent Adam Thierer–Tim Wu smackdown. I’ve recently finished finished reading The Master Switch, and I didn’t have have my friend Adam’s viscerally negative reactions.

To be clear, on the policy questions raised by The Master Switch, Adam and I are largely on the same page. Wu exaggerates the extent to which traditional media has become more “closed” since 1980, he is too pessimistic about the future of the Internet, and the policy agenda he sketches in his final chapter is likely to do more harm than good. I plan to say more about these issues in future writings; for now I’d like to comment on the shape of the discussion that’s taken place so far here at TLF, and to point out what I think Adam is missing about The Master Switch.

Here’s the thing: my copy of the book is 319 pages long. Adam’s critique focuses almost entirely on the final third of the book, (pages 205-319) in which Wu tells the history of the last 30 years and makes some tentative policy suggestions. If Wu had published pages 205-319 as a stand-alone monograph, I would have been cheering along with Adam’s response to it.

But what about the first 200-some pages of the book? A reader of Adam’s epic 6-part critique is mostly left in the dark about their contents. And that’s a shame, because in my view those pages not only contain the best part of the book, but they’re also the most libertarian-friendly parts.

Those pages tell the history of the American communications industries—telephone, cinema, radio, television, and cable—between 1876 and 1980. Adam only discusses this history in one of his six posts. There, he characterizes Wu as blaming market forces for the monopolization of the telephone industry. That’s not how I read the chapter in question. Although Wu certainly suggests that market forces tended toward consolidation (which seems obviously correct), he also makes it clear that the government played an active role in the process, through the patent system, the Kingsbury Commitment, turning a blind eye to industrial sabotage, and later through explicit pro-monopoly regulation. Adam’s only specific quibble with Wu’s history is his failure to mention the nationalization of the telephone network during World War I. Maybe that’s an important oversight, but I’m not sure it would have changed Wu’s story very much. Certainly I think characterizing this section of the book as an anti-free-market screed is unfair.

The Master Switch takes an even more explicitly libertarian tone in its discussion of broadcasting. Wu makes it plain that everything about the radio (and later television) industries post-1927 was the result of heavy-handed government regulation. He tells how federal regulations robbed the inventor of FM radio of the opportunity to commercialize his invention, and how the FCC delayed the introduction of television by more than a decade to give RCA (then the dominant radio firm) time to perfect its own television technology.

It’s easy to imagine chapters 5, 9, and 10 being published by Cato or the Mercatus Center. Consider, for example, this passage describing the FCC’s decision to delay the introduction of television (p. 144):

Consider for a moment the oddness of this phenomenon in the putatively free-market economy. The government was deciding, in effect, when a product that posed no hazard to the public health would be “ready” for sale. Consider, too, how incongruous this was in a society under the First Amendment: a medium with great potential to further the exercise of free speech was being stalled until such time as the government could agree it had attained an acceptable technical standard. Rather than letting the market decide what a technology in its present state was worth, a federal agency—not even a democratically elected body—was to forbid its sale outright.

Whatever else you might say about this passage, it’s certainly not blaming anything on market forces!

One of Wu’s central points is that during the 20th century, the communications policy world was divided along different ideological lines. On one hand were the champions of monopoly and central planning—Wu chooses legendary AT&T president Theodore Vail as its intellectual father. On the other hand were champions of choice and competition. It’s worth emphasizing that Adam and Wu are on the same side of this ideological battle. In 1930, 1950, or 1970, all of us would have been teaming up to oppose monopolistic regulations.

We would have regarded AT&T, RCA, and other state-sponsored monopolists as our common enemy. If we’d submitted amicus briefs in the Carterfone or MCI proceedings, we would have made largely the same arguments. Of course, we wouldn’t have agreed perfectly on our long-term policy agenda, but we would have regarded that as a relatively minor area of disagreement compared to the pressing problem of repealing blatantly monopolistic government policies and bringing some degree of competition to communications markets. And for most of the 20th century we would have been the underdogs. In 1950, the monopolists were not only utterly dominant in Washington, D.C., but their ideology still had a great deal of cachet with the intellectual class.

Vail’s corporatist ideology has fallen so far out of favor that today it’s hard to find anyone who’s willing to defend it forthrightly. The remnants of the once-great monopolists have been forced to adopt the rhetoric of the free market and pretend to care about choice and competition. And it’s only in this new intellectual environment that Adam can plausibly portray Wu a “cyber-collectivist” at the opposite end of the ideological spectrum from me and Adam. The Master Switch reminds us that much less separates Adam from Wu than separates either of them from Theodore Vail and David Sarnoff.

Adam began his first post by stating that he “disagrees vehemently with Wu’s general worldview and recommendations, and even much of his retelling of the history of information sectors and policy.” This is kind of silly. In fact, Adam and Wu (and I) want largely the same things out of information technology markets: we want competitive industries with low barriers to entry in which many firms compete to bring consumers the best products and services. We all reject the prevailing orthodoxy of the 20th century, which said that the government should be in the business of picking technological winners and losers. Where we disagree is over means: we classical liberals believe that the rules of property, contract, and maybe a bit of antitrust enforcement are sufficient to yield competitive markets, whereas left-liberals fear that too little regulation will lead to excessive industry concentration. That’s an important argument to have, and I think the facts are mostly on the libertarians’ side. But we shouldn’t lose sight of the extent to which we’re on the same side, fighting against the ancient threat of government-sponsored monopoly.

My friend Kerry Howley coined the term “state-worship” to describe libertarians who insist on making the government the villain of every story. For most of history, the state has, indeed, been the primary enemy of human freedom. Liberals like Wu are too sanguine about the dangers of concentrating too much power in Washington, D.C. But to say the state is an important threat to freedom is not to say that it’s the only threat worth worrying about. Wu tells the story of Western Union’s efforts to use its telegraph monopoly to sway the election of 1876 to Republican Rutherford B. Hayes. That effort would be sinister whether or not Western Union’s monopoly was the product of government interference with the free market. Similarly, the Hays code (Hollywood’s mid-century censorship regime) was an impediment to freedom of expression whether or not the regime was implicitly backed by the power of the state. Libertarians are more reluctant to call in the power of the state to combat these wrongs, but that doesn’t mean we shouldn’t be concerned with them.

By casting every argument in terms of a Manichean struggle between “cyber-libertarians” and “cyber-collectivists,” Adam misses a lot of the value of The Master Switch. Many of the stories Wu tells are too complicated to fit comfortably at either end of the free-market-vs-regulation spectrum. For example, until I read The Master Switch, I didn’t realize how important, and harmful, patents were to the early development of communications markets. Should these stories make libertarians more skeptical of patent law? I’d be interested to hear Adam take, but he was too busy railing against Wu’s alleged cyber-collectivism to discuss the topic.

Tim Wu: Not Looking Happy about Being So Wrong

Three years ago this month, Columbia University Law School professor Tim Wu released a controversial white paper in conjunction with the New America Foundation entitled, “Wireless Net Neutrality: Cellular Carterfone and Consumer Choice in Mobile Broadband.” It contained a litany of accusations regarding supposed corporate shenanigans in the mobile marketplace, including: intentional crippling of features and functionality; refusal to allow 3rd party attachments or intentional curtailment of a market for 3rd party application developers; and various concerns about “discrimination” of one sort or another.

Here at the TLF, we responded quite forcefully. I think every one of us piled on this study in one way or another. (ex: Hance, Jerry, James, Tim Lee, me x 2, + a podcast).  I called his proposal “a declaration of surrender” since Prof. Wu was essential calling the game early and raising the white flag on mobile competition. Further, I argued he was essentially asking for “the forced commoditization of cellular networks” which “would necessitate at return to the rate-of-return regulatory methods of the past.”  Others were a bit more kind to him, but we were all pretty skeptical of his gloomy claims. However, each of us here also argued that the wireless market (especially the applications side of the market) was still developing and that we’d have to check back in a few years to see how well the hands-off approach worked out.

Well, thankfully, we now know for certain that Tim Wu’s was much too lugubrious in his outlook and far too quick to call for regulatory intervention to solve a non-crisis. On the occasion of the 3rd anniversary of the release of Prof. Wu’s paper, CTIA-The Wireless Association filed a short paper with the FCC taking stock of just how far the mobile marketplace has come in just three short years. The results are really quite remarkable, as CTIA’s letter notes:

Contrary to the professor’s view of how the ecosystem would evolve, in the absence of regulation, every element of the wireless ecosystem has expanded. Today, the fact that there are over six hundred devices in the U.S. offering hundreds of different capabilities for consumers, over 170,000 applications, more open networks with open developer initiatives and software development kits, the sale of phones through numerous online and retail outlets, multiple operating systems, and the launch of the newest and most innovative handsets first in the United States demonstrates that the mobile wireless ecosystem continues to evolve to serve customers, contrary to Professor Wu’s arguments.

The filing goes on to examine each of the complaints Prof. Wu had articulated and then discusses current marketplace realities. Here’s the summary:

• Professor Wu asserted that carriers had a “near lock” on the retailing of mobile devices that, presumably, would only be altered through regulatory intervention. Today, consumers can purchase handsets from carriers, directly from manufacturers, through brick-and-mortar retail chains, via Internet discounters, and through a healthy secondary market. For example, Best Buy, Target, Wal-Mart, TigerDirect.com, Amazon.com, LetsTalk.com, Apple, Nokia, Google, Motorola and many others all sell handsets directly to consumers. The recent Best Buy catalog alone lists over a hundred wireless devices for sale. • Professor Wu argued that the U.S. market had only “a small fraction of the phones available [elsewhere],” implying that carriers restricted the diversity of handsets. Today, the U.S. market has over 630 devices manufactured by 33 different companies, including the BlackBerry® Tour 9630, Samsung Omnia, HTC TouchPro, Motorola Droid, Apple  iPhone 3GS, Motorola Karma QA1, BlackBerry® Bold, Motorola Cliq, myTouch 3G, G1, BlackBerry® Pearl Flip, HTC Touch Pro2, Palm Pre, HTC Hero, Samsung Instinct S30, Cricket TXTM8, Motorola Evoke QA4, Samsung JetSet, Motorola Hint, Samsung Finesse, Samsung Messager, LG Tritan, Samsung TwoStep, and the LG Rhythm. Of note, almost every one of the phones listed above was first launched in the United States. • Professor Wu painted a picture of a “stalled” application market where developers were unable to create applications for mobile devices. Today, a vibrant “apps” market exists where over 170,000 applications are available for popular operating systems, and where developers as young as age 9 can navigate the approval process to become highly successful. At least seven different companies, none of whom are affiliated with wireless carriers, market the overwhelming majority of these applications. • Professor Wu criticized carriers’ control over handset design. Today, all major carriers, and most of the other carriers in the country, have extensive open network development platforms for devices and software. Intra-industry groups have developed the Open Handset Alliance (which has created the Android operating system), and several other operating systems have moved to an open platform. Additionally, as discussed above, numerous handset manufacturers are selling directly to consumers. • Professor Wu stated that the “oligopoly” in handset sales resulted in a market where consumer-friendly capabilities, such as Bluetooth, Wi-Fi, and picture distribution, were “crippled.” Today, all of these capabilities, and hundreds more that reflect a broad array of consumer desires, are available to U.S. consumers. With the wealth of options, consumers can make buying decisions based on a range of factors. This is exactly the market that consumers want, and regulators should encourage.

Now, I’m sure some folks will say, “hey, we can’t trust industry to report on this stuff,” but these are facts, folks. CTIA hasn’t made anything up here. If anything, I think they’ve actually gone too easy on Tim and underplayed just how revolutionary the changes we’ve seen over the last 3 years have been.

That’s especially the case on the operating system front.  This war among Apple, Google, Microsoft, RIM (Blackberry), Palm, Symbian, and others has actually forced me to ask if we have, “Too Much Platform Competition” in this arena. App developers must now craft their offerings for so many platforms that it has become a significant developmental hassle and expense. But hey, from a consumer perspective, this is great! And it shocking how vibrant that OS-level competition continues to be. (For more details, see Berin’s post on “The Fiercely Competitive Mobile OS & Device Markets.”)

And then there’s the applications market. As I have noted in my essays repeatedly hammering Jonathan Zittrain’s equally dismal view of the digital world, today’s market for 3rd party mobile applications would have been virtually unfathomable just a few years ago. Can you even remember 2005 when we had none of those apps at our disposal? Today, by contrast, Apple’s App Store alone has over 100,000 apps in 20 different categories (available in 77 countries) to choose from. Android and Windows Mobile apps are also exploding. Frankly, I get exhausted trying to filter through the thousands and thousands of apps in the Android marketplace I now have to choose from. Again, we had zip, zero, zilch, nadda, N-O-T-H-I-N-G to choose from just a few years ago.  Folks, that is called progress—insane, amazing, beautiful, miraculous progress!

The following GigaOm chart was intended to show average app prices but also includes total app figures for each of the five leading mobile operating systems:

So, will Tim Wu come out and admit that his pessimism was unwarranted? Somehow I doubt it. But allow me to offer him a way to save face: I remember debating Tim about these issues in New York a few years back and he told me that he really didn’t want to see the feds jump in and start aggressively regulating most high-tech markets. Instead, he just wanted to shake things up and put the fear of God in the hearts of private operators so they would change their ways for the better in an effort to avoid the sledgehammer of federal regulation. (Tim, if you are reading this and have forgetting that conversation, it was at that FOSI dinner in New York where we were also debating who was a bigger Dungeons & Dragons nerd back in our childhood. I think you at least had the better of me in that debate!)

So, to save face here, Tim should declare victory and go home.  He should tell the world he single-handled revolutionized the wireless world with his vociferous agitation for a comprehensive federal regulatory regime for mobile and that it has blessed us one of the great capitalist success stories of our time.

Thank you Professor Wu for making the world a better place!

Braden has noted the release of John McCain’s tech policy–rightly decrying McCain’s socialistic community broadband concept.  But far more outrageous, in my view is this bit of doublethink.  First, the good part we should all applaud:

John McCain Has Fought to Keep the Internet Free From Government Regulation The role of government in the Innovation Age should be focused on creating opportunities for all Americans and maintaining the vibrancy of the Internet economy. Given the enormous benefits we have seen from a lightly regulated Internet and software market, our government should refrain from imposing burdensome regulation. John McCain understands that unnecessary government intrusion can harm the innovative genius of the Internet. Government should have to prove regulation is needed, rather than have entrepreneurs prove it is not.

Amen!  Even a hardened Ron Paul/Bob Taft/Grover Cleveland/Jack Randolph-survivalist/libertarian-crank like me can rally behind that banner.  But then this self-styled champion of deregulation pulls a really fast one:

John McCain Will Preserve Consumer Freedoms. John McCain will focus on policies that leave consumers free to access the content they choose; free to use the applications and services they choose; free to attach devices they choose, if they do not harm the network; and free to chose among broadband service providers.

That sure sounds nice, but it’s all Wu-vian code for re-regulation, not de-regulation.  You might recognize that McCain is talking obliquely here about the FCC’s 1968 Carterfone doctrine, which has consumed much attention on the TLF (see this piece in particular).

McCain then insists that he will be a bold leader for “good” regulations:

When Regulation Is Warranted, John McCain Acts. John McCain does not believe in prescriptive regulation like “net-neutrality,” but rather he believes that an open marketplace with a variety of consumer choices is the best deterrent against unfair practices…

What would you call requiring “openness” but “prescriptive regulation” against business models that require closed networks?  McCain deserves credit for rejecting, at least on a rhetorical level, “net neutrality” mandates, but what is Skype/Carterfone but “Wireless Net Neutrality?”  Whatever fine distinctions one may draw between these two ideas (both spawned from the hyperactive brain of Tim Wu), one finds no such nuance here–just the intellectually contradictory acceptance of a very politically popular position (“openness” for network devices) with the rejection of a closely related, if not inseparable, concept.  Indeed, if McCain weren’t such a saintly model of philosophical and political consistency, one might wonder whether his campaign was simply trying have the best of both worlds by appealing to the tech-policy center-left while paying lip-service to the free market community by denouncing the loathsomely anti-free market concept of “net neutrality.”

John McCain has always believed the government’s role must be rooted in protecting consumers. He championed laws that penalized fraudulent marketing practice…

Indeed, where would we be today without John McCain championing the FTC’s ability to punish unfair and deceptive trade practices–which dates back to 1914?  Still, it’s certainly a good sign that McCain at least listed is this second (after his idea of requiring openness through regulation as a way of decreasing the need for other forms of regulation).  Show me the tech policy issue that can’t be adequately addressed by simple enforcement of privacy policies and we can have a real tech policy debate!

…protected kids from harmful Internet content…

Really?  Did McCain help right all the software tools that let parents control what their kids can access online?  If not, I’m not sure what he’s referring to here other than Internet censorship.

… secured consumer privacy, and sought to minimize spam.

Ah yes, if it weren’t for the CAN-SPAM Act, we’d all be getting deluged with spam.  Oh, wait, it’s spam-filters and not legislation that have actually “minimized” this problem.”

When businesses struggled to assess the legal role of electronic signatures, John McCain led legislative efforts to ensure that these Innovation Age signatures were legally sufficient so that e-commerce could thrive. His record reflects the careful balance between protecting the essential elements of the Internet and securing the Internet as a safe tool of commerce, education and entertainment for our citizens. Offering simple common sense solutions to real problems is at the core of the McCain’s innovation agenda.

It’s hard to argue with “balance” and “common sense.”  Both would be a welcome change of pace from the the current chicken-little-ism by which so many Internet policy debates are driven by vague, unsubstantiated fears and shameless scare-tactics by the advocates of regulation.

But what’s ominous about McCain’s Internet policy is that he doesn’t even mention “free speech” or the “first amendment.”  This omission from the man who so famously said (about his relentless efforts to restrict political speech in the name of “campaign finance reform”):

I would rather have a clean government than one where quote First Amendment rights are being respected that has become corrupt. If I had my choice, I’d rather have the clean government.

I, for one, find it pretty troubling that McCain’s idea of “balance” when it comes to the Internet is all about “safety” and (mandatory) “openness” without so much as a mention of freedom of expression.

McCain deserves credit for opposing Internet taxation and “net neutrality” (among other things), and Obama’s alternative isn’t exactly Mises 2.0 either.  But you don’t have to be much of a libertarian to scan down the list of the government programs and regulations he supports–especially “Internet Access For All Americans”–and realize that he is, at best, a fair-weather free-marketeer.  If free-marketeers have learned anything from Kevin Martin’s reign of terror at the FCC, it’s that a “free-market” Republican president can appoint regulators who pay lip-service to free market ideas while selling them out at (almost) every turn–especially when it comes to content Republican voters don’t like.

I won’t hold my breath for a de-regulatory tech policy agenda under a McCain presidency, but “hope springs eternal in the human breast.”  Should McCain win, we can only hope that the current vagaries of his tech policy ( e.g., “openness” and “protecting children”) will be resolved in favor of McCain’s de-regulatory talk, and that his current re-regulatory positions will either “evolve” for the better or at least not becomes priorities of his administration.  As for the good aspects of his policies, let us all remember Regan’s dictum:  “Trust, but verify.”

Global handset manufacturing giant Nokia has purchased the shares they didn’t already own in Symbian, Ltd., the company formed in 1998 as a partnership among Ericsson, Nokia, Motorola and Psion and the developer of the Symbian mobile operating system, by far the world’s leading OS for “smart mobile” phones with 67% of the market, followed by Microsoft on 13%, with RIM on 10% (source).

But wait, there’s more (per Engadget)!

Here’s where it gets interesting, though: rather than taking Symbian’s intellectual private for Nokia’s own benefit, the goods will be turned over to the Symbian Foundation, a nonprofit whose sole goal will be the advancement of the Symbian platform in its many flavors. Motorola and Sony Ericsson have signed up to contribute UIQ assets, while NTT DoCoMo (which uses Symbian-based wares in a number of its phones) will be donating code as well. Other Symbian Foundation members include Texas Instruments, Vodafone, Samsung, LG, and AT&T (yep, the same AT&T that currently sells precisely one Symbian-based phone), so things could get interesting. The move clearly seems to be a preemptive strike against Google’s Open Handset Alliance, LiMo, and other collaborative efforts forming around the globe with the goal of standardizing smartphone operating systems; the writing was on the wall, and Symbian didn’t want to miss the train. Total cash outlay for the move will run Nokia roughly €264 million — about $410 million in yankee currency.

Other reports note that the Symbian Foundation will eventually take Symbian open source, and that this move is as much as response to Apple’s closed iPhone platform as it is to Gogole’s open Android and LiMo platforms.  (Although it is intriguing to note that AT&T, Apple’s exclusive U.S. partner for the iPhone, is among the backers of the new Symbian Foundation, perhaps indicating that even AT&T is hedging its bets.)

The fact that we will soon see three open source platforms (counting Google’s Android and LiMo) competing for market share provides yet another measure of the exceptionally high degree of competition in the wireless industry.  Even FCC Chairman Kevin Martin, hardly a “regulatory skeptic,” has recognized the significance of this aspect of wireless competition and widespread availability of wireless carrier choice in his recent statements indicating his intent to dismiss Skype’s Petition to impose open access requirements a la the FCC’s 1968 Carterfone decision, calling “wireless … the poster child for competition” and noting that “95 percent of the people in the U.S. can choose form at least three wireless operators competing to offer them service.”

Cumulatively, the increased competitiveness–and openness-of the wireless industry mitigates strongly against recent proposals for Carterfone-style requirements (see Tim Wu’s June 2007 piece); banning exclusive relationships between handset manufacturers and wireless carriers, as my colleague Barabara Esbin and I noted in our recent paper (PDF); heavy-handed regulation of early termination fees, as dicussed by Barbara (PDF) and other attempts to impose unnecessary regulations on an industry that is already the most competitive within the FCC’s purview and one in which open standards should facilitate continued innovation.

Nokia’s move is, in some respects, reminiscent of AOL’s 2003 decision to create the Mozilla Foundation.  If Symbian achieves even a fraction of Mozilla’s success with Firefox in growing a developer community that can build a strong product, the pace of wireless innovation could increase still further.

I love my iPhone. Despite what others might say, it is the most innovative mobile phone in a decade. I also think innovators should be rewarded, which is why I’m fine with the iPhone being locked to AT&T’s network. As a result, Apple gets a cut of my (and every other iPhone owner’s) wireless bill.

France might be left behind when it comes to this innovation, however. That country has laws similar to the wireless Carterfone rules Tim Wu, Skype, and others have advocated for the U.S. Locked phones in France must be unlocked by the carrier upon user request, and wireless carriers must also sell unlocked versions of their mobile phones. As a result, Apple is considering keeping the iPhones off French shelves indefinitely.

To me it’s clear that forced access laws limit innovation. I think folks who propose such rules want to have their cake and eat it, too. That is, they want the innovation that comes from entrepreneurs acting in a free market (and often fueled by exclusive deals such as the one between Apple and AT&T), and they also want the forced openness of networks. They think that the latter will have no impact on the former; that innovators will innovate regardless of the incentives. The iPhone snag in France, however, shows that incentives do matter.

Cord makes some good points about the disadvantages of open networks, but I think it’s a mistake for libertarians to hang our opposition to government regulation of networks on the contention that closed networks are better than open ones. Although it’s always possible to find examples on either side, I think it’s pretty clear that, all else being equal, open networks tend to be better than closed networks.

There are two basic reasons for this. First, networks are subject to network effects—the property that the per-user value of a network grows with the number of people connected to the network. Two networks with a million people each will generally be less valuable than a single network with two million people. The reason TCP/IP won the networking wars is that it was designed from the ground up to connect heterogeneous networks, which meant that it enjoyed the most potent network effects.

Second, open networks have lower barriers to entry. Here, again, the Internet is the poster child. Anybody can create a new website, application, or service on the Internet without asking anyone’s permission. There’s a lot to disagree with in Tim Wu’s Wireless Carterfone paper, but one thing the paper does is eloquently demonstrate how different the situation is in the cell phone world. There are a lot of innovative mobile applications that would likely be created if it weren’t so costly and time-consuming to get the telcos permission to develop for their networks.

Most of the problems Cord cites with open networks are by-products of their greater usefulness. The reason computers crash more than cell phones is that computers have a lot more functionality. There is more spam on the Internet because the barriers to entry to getting an email account is much lower. You could easily build a dumb-terminal computer that never crashed or a closed email platform that had no spam, but few people would want to use them because they would be much less useful.

Which isn’t to say that regulations mandating open networks is a good idea. A poorly-designed open network will often be worse than a well-designed closed network, and the regulatory process is not known for making great technical decisions. Moreover, bringing politics into the process leads to wasteful rent-seeking behaviors and opens the risk of regulatory capture. But just as our opposition to drug prohibition doesn’t necessarily mean that it’s a good idea to use cocaine, we shouldn’t fall into the trap of reflexively arguing against open networks simply because our ideological opponents are for them. It’s perfectly consistent to believe that open networks are a good idea, but regulations mandating them are not.

One point that I think libertarians in particular ought to appreciate is that if you want the benefits of a closed network, you can always build one atop an open network. People can create websites like Late Night Shots to exclude the riff-raff. They can create virtual private networks to prevent their ISPs or others from snooping on their network traffic. There’s a close parallel here to Nozick’s concept of a “framework for utopias”: if you want to live in closed community, you an voluntarily set one up within a larger open society. But you cannot do the converse. Precisely the same insight applies to networks: you can build a closed network atop an open platform, but you cannot do hte reverse. Which means that all else being equal, it’s preferable for basic infrastructure to be open, leaving users with maximum freedom to make their own decisions about how much they want to interoperate with others.

Over at Ars, Ken, Jacqui, and Clint have written their magnum opus on the iPhone. On page 9 (yes, the review is more than 10 pages long), we get an interesting tidbit about the visual voicemail feature:

Visual voicemail is a new feature introduced by AT&T and Apple with the iPhone that currently only “works” over AT&T’s network. Instead of requiring the user to dial up the carrier’s voicemail number and listen to his or her voicemails in the order that they were received, visual voicemail lists each message out in visual format on the iPhone, almost like e-mail. It displays who the voicemail is from (and if it doesn’t recognize the number, it will analyze the area code and tell you what geographical area it’s from, which is helpful), and the user can tap whichever one in the list that he or she wants, no matter its position in the list. When the voicemail is playing, the user can pause it, scrub back and forth in the message, or skip. The way it works is actually not as magical as AT&T might like you to believe, although the technology is still AT&T-specific. The iPhone actually downloads sound clips of the voicemail messages off of AT&T’s server, presumably over EDGE, and stores them in temporary files on the iPhone’s flash storage. This allows the iPhone user to select messages to listen to out of order, because all he or she is doing is listening to an audio file. This is also what enables the user to scrub with the touchscreen and listen to different parts of the message. It’s a nifty bit of technology, but really only required AT&T’s voicemail servers to tell the iPhone when to download a new message, and then the iPhone takes care of the rest. In our tests, visual voicemail worked as advertised, and we had no trouble with it. It is, however, a feature that we would be more than willing to sacrifice if we had the opportunity to use an unlocked iPhone on another network. That said, Ken believes that this is a very significant development in the world of voicemail, and he hopes and prays that this becomes standard everywhere.

This is a question we’ve discussed several times here: how much special support is required on the network side to make visual voicemail work? The answer seems to be “some, but not as much as you might think.” That is, the network does have to notify the phone of when new messages are available, provide them for download to the phone, and accept status change notifications from the phone when the user has listened to or deleted them. But there doesn’t need to be tight integration between the phone and the network when the user is actually listening to the messages.

Come to think of it, another advantage this approach presumably has is that you shouldn’t have to be connected to the network to listen to your voicemail messages. Once they’re downloaded to your phone, you should be able to listen to them anywhere, even if you’re in a location that doesn’t get good reception.

Alex Curtis of Public Knowledge sent me the following, which I’m re-posting with his permission:

I was listening to the conversation you were having with Tim Wu on the Tech Policy Weekly podcast. The visual voicemail feature of the iPhone actually doesn’t require anything special on the provider side of things. It’s essentially a VOIP voicemail service, which you can find on their own all over the Internet (Callwave is a good example), formatted with a GUI on a mobile phone. To me, it speaks to the innovation that can come about when services are built to open standards.

I asked whether this means that messages on the iPhone are stored on Apple’s servers, rather than Verizon’s. He replied:

No, for AT&T’s (or any other provider’s) voicemail, messages are probably stored somewhere on their servers. My point is that voicemail is just a service (like email) that doesn’t require a phone to necessarily use the service that their provider gives/sells to them. As a hobby, I write for a blog called the MacCast, and a while back I wrote on a service/app from CallWave that allows via a widget/gadget (read–web-accessible) for much of what Apple plans to provide on the iPhone. You can also easily reprogram your phone to use their voicemail as default. Again, I’d encourage you to try out CallWave, I’m going to try to contact the people there to learn more. For the iPhone, I’m guessing that after the device is notified of a new message (which can include basic information like caller id), the voicemail audio is actually downloaded to the iPhone itself, once a message has been selected. In the iPhone demos on their website, you can see the “load swirl” when the user selects the message, meaning that it may be downloading it in real-time. Sorry, I’m an Apple fanboy, so I obsess about some of this stuff.

It’s an interesting example. One of the lessons of Carterfone was that even in a network with a recalcitrant network owner, clever engineers can often find ways to squeeze out unexpected functionality. I doubt the FCC was expecting to get fax machines or modems when they decided Carterfone, but that’s what they got. I think it’s a safe bet that in the next decade, some smart hacker is going to figure out some really cool uses for the cellular networks that none of us are expecting.

The policy question is whether getting the FCC involved will make this more or less likely. It’s already possible to swap phones on the GSM carriers, and it’s conceivable that all the attention this issue is getting will convince one or more carriers to voluntarily open their networks further. It’s not obvious to me that getting telecom lawyers more involved will speed up the process any.

The podcast is considerably longer than usual this week because it featured an extremely productive discussion with Prof. Tim Wu on the merits of his “wireless Carterfone” proposal. Normally, we try to keep the podcast under half an hour, but one of the great things about podcasting is that here’s no reason we have to stick to the same length for every episode. In this case, the discussion was just too good to truncate. I encourage you to listen in—we’ve got a handy in-browser listening widget—and if you like what you hear you should subscribe.

One point I want to clarify: around minute 11, I observed that forcing unwilling incumbents to open their markets is usually an “expensive and messy procedure.” Wu responded that this amounted to preemptive surrender, and that we shouldn’t shy away from enacting good policy simply because it faces entrenched opposition.

Which is a good point, but let me expand a bit on what I meant. Obviously, if the problem were simply that the carriers don’t like a given proposal and will lobby against it, that’s not a good rationale for opposing it. However, I think two additional considerations are relevant. First, regulatory uncertainty is always bad. When the rules are unclear, existing firms will be reluctant to invest and new firms will be hesitant to enter the market. Moreover, those firms that do enter the market sometimes get the rug pulled out from under them when the regulatory body changes course—think of the way the CLECs got hosed in the 1990s.

Secondly, and perhaps more importantly, incumbents facing open access regulations often engage in economically destructive activities as part of their campaign to resist the regulations. We see this with the CableCARD, for example: the first-generation cable card spec included a raft of baroque “security” requirements while simultaneously omitting some important features that new entrants need to compete on a level playing field with the traditional set-top box. And the incumbents in the DSL unbundling wars became experts at putting petty logistical obstacles in the way of CLECs seeking access to their facilities.

In most of these battles, one of the claims the incumbent almost always makes is that more open networks are impossible/impractical/too expensive/unreliable/etc. They sometimes exaggerate the difficulties involved. One of the side effects is often that the incumbents will rule out any voluntary opening of their networks—even opening that’s otherwise in their interest—for fear the FCC will seize on it as evidence that openness isn’t as difficult as the incumbent claims, and perhaps use it as a basis to mandate still further opening. So to head off that danger, incumbents often go into a bunker mentality in which any increase in network openness is greeted with suspicion, even if the business case for it is otherwise quite sound.

The point here is that in some cases, such obstructionism doesn’t just delay the introduction of a good policy and waste the incumbents’ lobbying resources. In many cases, the incumbents tactics in opposing the policy can lead to perverse behavior that makes consumers worse off than they would have been if the incumbent had merely left well enough alone.

Or to put it another way, the political process inevitably generates rent-seeking, and the wider the scope of regulatory powers, the more resources we should expect to see devoted to seeking advantage in the regulatory arena. There are obviously some instances where the effort is worth the costs, but it’s foolish to ignore the costs in weighing different policy options.

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You should be sure to check out Tim Wu’s smart comments on my Wireless Carterfone article.

In the latest installment of TechKnowledge, I critique Tim Wu’s recent article on “wireless Carterfone”:

True, a government-designed standard is not impossible, but “not impossible” is a long way from a good idea. Indeed, Wu seems to be implicitly conceding that it is far from the “simple requirement” he touts in his Forbes article. He seems to be proposing that the FCC dictate to wireless carriers what network services they must offer, who may access them, on what terms, and at what price. History suggests that such efforts often end badly. Even when a government-created monopoly situation makes public utility regulation unavoidable, as in the Carterfone case, it can take a decade or longer for the dust to settle. The Clinton-era FCC attempted to create competition in the telephone and DSL markets by requiring Baby Bells to “unbundled” their local phone lines and lease them at FCC-determined prices to competitors. The Bells ultimately killed the plan using a combination of lobbying, litigation, and foot-dragging. But for the nine years between the passage of the Telecom Act in 1996 and the Supreme Court’s Brand X decision in 2005, telecommunications firms spent tens of millions of dollars on lawyers and lobbyists to seek advantage in the regulatory arena.

An even better example is the seemingly interminable battle over the CableCARD, a credit-card-sized device that allows televisions to decode cable signals without a set-top box. It, too, was prompted by the 1996 Telecom Act, which instructed the FCC to create regulations opening the market for cable set-top boxes. The CableCARD fight is closely analogous to Wu’s proposal because the FCC ordered the cable industry to develop a standard interface that could be used to build third-party set-top boxes. Like the Bells, the cable industry has done everything in its power to slow the progress of the CableCARD effort because it prefers to continue using proprietary set-top boxes. As a result, after more than a decade of bickering, the CableCARD continues to be a niche product. Even the Carterfone decision itself shows that forcing owners to open their networks is not a simple process. Wu is right that Carterfone was a landmark decision exposing a government-backed monopolist to much-needed competition in the market for telephone equipment. But it took a long time to come about, much less have an impact. Thomas Carter began selling the Carterfone in 1959. Soon after, he sued AT&T on antitrust grounds. He got a favorable court ruling in 1966, and the FCC released the Carterfone decision in 1968. But the FCC didn’t formally codify the principles behind that decision until 1975.

I agree with Wu that it would probably be good for technological progress if at least some of the carriers adopted more open policies for their wireless networks. But I think he is overestimating how easy it would be for the FCC to pry those networks open by regulatory fiat. And given that any FCC intervention is likely to stretch well into the next decade, it seems premature to be declaring the market competition a failure after just 3 years of competition in the 3G marketplace. This isn’t exactly a market that’s standing still, and there’s every reason to think that one of the incumbents could be persuaded that a more open network would be profitable.

Tom Coseven left a comment making some good points about last week’s podcast and wireless Carterfone. I also got an email raising some of the same objections, so let me see if I can address them.

First, in response to Tom’s first point, I didn’t mean to give the impression that Carterfone was an antitrust decision. My point was simply that the policy rationale for regulatory intervention is much stronger when you have a single, government-protected monopoly than it is when there are four (relatively) lightly regulated incumbents. Whether or not you want to call them an “oligopoly,” it’s clearly more likely that market competition will discipline network operators in a 4-firm industry than in a 1=firm industry. And on the margin, that makes the case for regulatory intervention weaker.

Here’s Tom again:

On the subject of implementation of an open access requirement, it could be done quite easily. The GSM and CDMA standards allow for very transparent connectivity at the device level with no affect on your visual voice feature you use as an example. Those kind of widgets sit at a higher layer on the phone. Either the phone has the software or it doesn’t (sort of like a downloaded game).

Part of the problem here is that I have yet to see a specific explanation of what a “Wireless Carterfone” rule would actually say. If we’re just talking about a rule that says “network operators must allow any GSM or CDMA (as the case may be) phone to connect to their network,” that’s certainly a pretty clear rule, and it may not lead to any problems. However, I have the impression that two of the four carriers (the GSM ones) already respect this rule. So if that’s all we’re talking about, the rule seems kind of superfluous. Anyone who wants the freedom to attach the phone of their choice can sign up with T-Mobile or AT&T.

However, I have the impression that Wu is talking about something more ambitious than that. One problem is suggested by the visual voicemail example. Right now, visual voicemail is only available as a proprietary feature of iPhones. The question is: if another phone vendor wants to implement visual voicemail on its phones, will a wireless Carterfone rule compel AT&T to open up its visual voicemail APIs to support other phone vendors? If the answer is no, then third-party phones will still be second-class citizens in some sense (although maybe a clever phone vendor will be able to reverse-engineer the VV protocol). If the answer is yes, then the FCC is going to have to get into messy questions about what the API has to look like, how much AT&T is allowed to charge for the service, etc.

At some points, however, Wu hints that what he’s proposing is much more ambitious than a simple “don’t discriminate among GSM phones” rule. For example, he gives the example of a fob that will tell you where your keys are regardless of where they are on the planet. Now, it’s not likely that a consumer is going to want to pay the $30/month it costs for a cell phone plan in order to obtain connectivity for his key fob. Which seems to suggest that under Wu’s plan, the FCC would have to get involved in dictating what kind of data plans the wireless carriers would have to offer and how much they can charge for them.

Now, again, this is all speculation on my part. Maybe I’m misunderstanding Wu and he’s got all these details worked out in a way that I haven’t thought of. But from what I’ve been able to find so far, I’m having trouble seeing how the rule could be as simple as Wu claims.

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Lots going on this week on the wireless Net neutrality front. You will recall that a couple of weeks ago several of us here were blasting the new paper by Tim Wu and the petition by Skype asking the FCC to impose Carterfone-like regulatory mandates on the wireless industry. This new battle is now just known as “the wireless Net neutrality fight” here in Washington. And this week some important studies have been released opposing it by the CTIA, the wireless industry’s trade association, and economists from the American Enterprise Institute, Brookings Institution, and the Phoenix Center. I don’t have time to summarize them, but here are the links to each major report if you are interested:

(1) Filing of CTIA – The Wireless Association In the Matter of Skype Communications Petition to Confirm A Consumer’s Right to Use Internet Communications Software and Attach Devices to Wireless Networks (April 30, 2007).

(2) Robert W. Hahn, Robert E. Litan, and Hal J. Singer, “The Economics of ‘Wireless Net Neutrality,'” AEI-Brookings Joint Center for Regulatory Studies, AEI-Brookings Joint Center Working Paper No. RP07-10, (April 2007).

(3) George S. Ford, Thomas M. Koutsky and Lawrence J. Spiwak, “Wireless Net Neutrality: From Carterfone to Cable Boxes,” PHOENIX CENTER POLICY BULLETIN No. 17 (April 2007).

Carlo of TechDirt has posted a detailed deconstruction of the Wu “Wireless Net Neutrality” paper and Skype “Carterfone for Wireless” petition that we have spent so much time writing about here. I highly recommend you read the entire thing because Carlo is covering some new ground that we haven’t hit here yet. Specifically, Carlo picks up on a theme that I was planning on discussing in a follow-up post this week, namely, the myth that the wireless sector is dominated by walled gardens that restrict content flows, and which will only disappear with regulation. Carlo destroys this argument:

Walled gardens have, for the most part, disappeared from the landscape (once, again, Verizon proving the exception). If customers desire open net access on their mobile phone, they have multiple options available to get it. When nearly every other operator takes a different route than Verizon in this area, are regulations really necessary to bring it in line with its rivals? Wu’s calls for neutrality regulations are premature and unnecessary. The walled garden model isn’t sustainable–the web model he’s so fond of has proven that. Part of the reason that it’s been able to persist in mobile is that few people really care enough to make it an issue. Most people care about price and coverage–everything else is incidental. This does have a bit of chicken-and-egg feel to it, since a stifled environment for innovation means there are a limited number of compelling applications and services to make the general public more interested in mobile data services. But, as subscriber growth slows and operators become more focused on increasing non-voice spending, they will need to fix this, and remove many of the barriers to innovation and new services that exist in the market. Walled gardens and locked-down devices won’t cut it, as the competitive market–and yes, it really is pretty competitive, all things considered–simply won’t allow it. The move towards operators fully embracing openness is happening–slowly, but it’s happening.

This is exactly right. Yet, when you read the Wu paper and Skype petition, you’re lead to believe that consumers are mindless sheep, locked into walled gardens that they don’t want to be grazing in. And only benevolent regulators can free us. It’s all quite silly. Most of the people who want to get around carrier-imposed restrictions can do so, as I documented in this earlier essay.

But, as Carlo correctly points out, most people just don’t give a hoot. And sometimes walled garden approaches have advantages for some subscribers. This gets to one of the biggest problems when techies and tech companies try to craft public policy based on their specific preferences. Wu and Skype want us to believe that the whole planet is up in arms because of walled gardens or locked phones. Nonsense.

It is easy for sophisticated users and academic digerati to imagine that they speak for the hoi polloi when it comes to these matters. They presume that their personal preferences would make sense for the broader universe of Internet / cell phone users. In reality, they speak only for that segment of our society who has more experience with high-speed networks, Internet technologies and online services.

Many wireless subscribers just want the basics: Reliable voice service and perhaps a few extras. It is hard to imagine how these consumers would be well-served by mandating that wireless carriers be forced to convert their networks into purely dumb pipes that prohibited them from offering any integrated intelligence or applications within their networks. As Andrew Odlyzko of the University of Minnesota’s Digital Technology Center, argues: “The ‘stupid network’ is only stupid in the core, and imposes huge burdens on end users. Many of those users might be willing to sacrifice some of the openness and flexibility in order to be relieved of the frustrating chore of being their own network administrators.”

What else explains the fact that, at the height of it’s success, America Online–the mother of all walled gardens–had over 30 million subscribers while charging $24 bucks a month? For those of us who have always been Net-savvy, AOL represented somewhat of a joke; almost an insult to our intelligence. Why in the world would someone want to have their Internet experience constrained in this fashion and then pay $24 bucks for it?! But that’s just it, we were not like everyone else. Many others, especially those of the pre-Net generation (like our parents) enjoyed the “guided tour” approach to Web surfing that AOL offered them. It was logical and comfortable.

Eventually, however, AOL’s popularity waned. People got tired of having their hands held while they walked through cyberspace. And so the walls around the garden started crumbling. AOL is now free for anyone to use. That being said, AOL (and other services like it) still exist to assist those who want their hand held to some extent. On balance, however, as the first generation of Net users ages, those approaches are likely to give way, even in the wireless world. Again, as Carlo argues, “The move towards operators fully embracing openness is happening–slowly, but it’s happening.”

In sum, open systems do have many advantages over closed systems, and if that is how markets naturally evolve, so be it. Other times, however, closed systems make all the sense in the world for some users. But policymakers should not tip the balance one way or the other. They should remain fundamentally agnostic with regard to network architecture and business model. In the end, wireless networks will probably have a mix of open and closed systems, with the open systems likely dominating over time.

Harold Feld has a long screed accusing “the Libertarian/anti-dereg crowd” (which I assume includes us, although I kind of thought we were the pro-dereg crowd) of failing to be suitably awestruck by the awesome power of regulations to improve consumer welfare.

I think it’s quite fitting that he invokes “the New Deal-type ideal of using regulatory power,” because he clearly hasn’t learned anything since the New Deal. Not, for example, the lesson of the ICC, which corporate shill Ralph Nader attacked in 1970 for operating a cozy transportation cartel at the expense of consumers. Nor the lesson of the CAB which that notorious right-winger Jimmy Carter (and a Democratic Congress) abolished in 1978. Nor, I suppose, the way that the broadcasters’ cartel has used its power with the FCC to enrich itself at the expense of competitors and consumers.

Nope, it’s still 1933, and government regulations can only do good. That’s why we can not only skip having a debate about whether to regulation, we don’t even have to spend much time talking about how to regulate, because we can adopt “network neutrality and network attachment rules precisely because they have worked so well in the past.” Never mind that modern cell phones are radically more complex than the old-fashioned telephony networks to which Carterfone was applied. We’ll just put Feld in charge, and he’ll figure all those nitpicking details out for us.

To his credit, Wu does not stake out this extreme and rather silly position. Wu argues that “regulation, if necessary, should be a last resort.” He seems to recognize that new regulations do not always work out precisely the way their authors intended, and so it’s important to weigh costs and benefits and proceed with caution.

Fundamentally, Feld is guilty of what Will Wilkinson dubs the “fallacy of asymmetric idealization” (yes, Will, is a giant nerd). Feld attacks libertarians for blind faith in the efficacy of the market, while simultaneously demonstrating precisely the same kind of blind faith in the regulatory process. In the real world, both the market and the regulatory process have flaws. Our task as policy analysts is to compare the two and try to figure out which of them is likely to have more flaws in any given situation.

We libertarians are more apt to see flaws in the regulatory process, while those on the left are more apt to find flaws in the market. That’s part of healthy debate. But Feld is clearly not interested in a serious comparison of the strengths and weaknesses of different policy options. He’s already made up his mind that more regulation always increases consumer welfare, and the only question before us is whether we have the political will to use it.

Two days ago, I posted a short essay expressing my strong reservations about the new Skype petition requesting that the FCC impose Carterfone-like regulations on wireless operators. James Gattuso followed up yesterday with a piece of his own. And this followed last week’s series of essays about Tim Wu’s “Wireless Net Neutrality” paper by Jerry Brito, Hance Haney, James Gattuso, Tim Lee, Scott Wallsten, and Randy May. (The Skype petition essentially asks the FCC to implement Prof. Wu’s ideas into law, so for purposes of this essay I will treat them as the same proposal.) I wanted to elaborate a bit more on this proposal because I think this issue is profoundly important to the future of innovation and competition in the wireless sector.

Burning the Village to Save It? The fundamental question raised by the Skype-Wu proposal is whether America will continue to allow competition in wireless network architectures and business models to see which systems and plans (a) consumers truly prefer and that also (b) allow carriers to recoup fixed capital costs while (c) expanding and innovating to meet future needs. The Skype-Wu proposal would foreclose such marketplace experimentation by essentially converting cellular networks into a sort of quasi-commons and forcing private network operators to provide network access or services on someone else’s terms. That someone else, of course, is the Federal Communications Commission (FCC), which will be tasked with devising rules and price regulations to ensure “fair and non-discriminatory” access / interconnection pricing.

In my opinion, when you get right down to it, this proposal is a declaration of surrender. That is, Skype and Prof. Wu almost seem to be saying that while it’s nice we’ve seen innovation at the core of the wireless sector over the past two decades, we now need to get on with the important business of establishing rules to ensure the maximum amount of output or innovation at the edge of networks while largely ignoring what happens at the core, or even prohibiting certain things from happening at the core. In other words, to maximize the freedom to innovate at the edge of networks, we must now restrict the freedom to innovate at the core in some ways.

In essence, therefore, this proposal represents a call for the forced commoditization of cellular networks and would necessitate at return to the rate-of-return regulatory methods of the past. It would freeze network innovation in place and stop of the clock on one of the great American success stories of the past quarter century. For these reasons, I will argue that it is essential it be rejected.

Assume-a-Platform Thinking The core of the problem here is that the Skype-Wu proposal–like other Net neutrality / open access regulatory proposals that have come before it–falls into what might most appropriately be called the “assume-a-platform” school of thinking. That is, proponents of forced access regulation seem to ignore market evolution and discount the potential for sudden technological change. They instead adopt a static mindset preoccupied with micro-managing an existing platform regardless of the implications for innovation on the existing networks or the development of future networks.

This static, zero-sum mentality dominates much of the thinking over Net neutrality regulation and explains why commons proponents are preoccupied with demand side concerns (i.e., who gets access and at what price) while they blithely assume away supply side considerations (i.e., how networks get funded, built, expand and innovate).

It’s clear that Net neutrality proponents feel quite passionately about the question of innovation at the edge of the network. But where is their concern for innovation at the core of the network, or the innovation and investment needed to bring about entirely new network infrastructures and architectures? Apparently content with the networks of the present, Wu and Skype seeming feel comfortable imposing regulations on existing network operators to ensure that innovation is maximized at the edge of those existing systems.

But what about other platforms? Is it completely unreasonable to expect that other platforms might be developed? Should regulators merely regulate existing platforms to ensure consumers get as much out of them as possible? But what will that mean for those existing networks and the ability of those providers to innovate?

Consider what would have happened if policymakers would have adopted this mindset a decade ago. Clearly, almost none of the “edge” applications and technologies that are on the market today–including, most notably, Skype itself–would have functioned on the cellular networks or handsets of the past. How is it that we got where we are at today? Was it magic? Did these sophisticated networks fall to Earth like manna from heaven?

No, it was the result of innovation at the core of networks to enable a robust and sophisticated new infrastructure that could support the new edge applications. The clunky phones and rudimentary networks of the past were ill-suited for the business and consumer applications that were coming, and wireless operators knew it. And so they invested. Billions. As a result, the networks grew–both in scale and sophistication. But they only grew because the legal / marketplace conditions and incentives were properly aligned. The necessary prerequisites for innovation were present. By contrast, the Skype-Wu proposal would upend those incentives and undermine the foundations of future network investment, innovation and expansion.

Calling the Game Too Early Like other Net neutrality proponents, Skype and Prof. Wu largely choose to just ignore these questions about dynamic innovation at the core of networks and the incentives that make it possible. About the closest Prof. Wu gets to a serious discussion of these issues comes toward the end of his is paper when he notes:

The future of the industry, of course, is hard to predict. There is a chance that ongoing spectrum auctions may lead to greater market entry. Smaller firms, like Clearwire Communications, which offers wireless broadband services in some markets, may attempt to provide services that compete with the major carriers. Yet the current trend is in the opposite direction. The industry is a textbook oligopoly–premised on a bottleneck resource–with four major players. While no one should discount the possibility of new entrants, we must also look at the facts as they are, not as how we might imagine them to be.

Oh, I get it, Tim. You’ve called the game! Even though you admit that “the future of the industry.. is hard to predict,” you’re saying that there’s no need to wait around to see what happens next. Let’s just get on with the business of slicing up the fixed pie of networks and services that we have now.

Well, not so fast.

Prof. Wu is way off-base about both the current and future state of affairs in this market. As Hance Haney, Tim Lee, and Scott Wallsten, made clear in their earlier posts, there’s a lot more competition at work in this market than he’s giving it credit for. And even if it was just a 4-firm “oligopoly,” that doesn’t mean the market can’t be vibrantly competitive under such a state of affairs. There are all sorts of 4-firm markets in this world and the sky in not falling there or here.

And, looking toward the future, the pessimism about future technological development is similarly unwarranted. Ours is an innovative culture, and few sectors have been more innovative over the past decade than the wireless sector. New technologies and services have been developed in the past, and will continue to be developed in the future, but, again, only if the innovators: (1) believe they can reap the fruits of the significant investments they will need to make and, (2) are not directly or indirectly prohibited by government from entering new markets, providing new services or experimenting with different business models and even network architectures.

This is why it is absolutely essential that we allow competition in network architectures and business models to see what consumers truly prefer. If we instead convert networks into giant commons and forbid such marketplace experimentation, then not only will we be unable to determine which systems or models are most efficient, but we will create pernicious investment / innovation disincentives, for both existing and potential infrastructure operators.

Against Infrastructure Socialism In sum, the Skype-Wu proposal would essentially tell infrastructure operators and potential future operators of wireless networks: your networks are yours in name only and the larger community of wireless users–through the FCC or other regulatory bodies–will be free to set the parameters of how your infrastructure will be used in the future. Hearing that message, it is fair to ask why a network operator (or potential operator) would ever want to invest another penny of risk capital in a sector that was essentially governed as a monolithic commons or public good.

If we want innovation and investment to take place at the core of wireless networks, operators must have the right to make determinations about how to configure, package and price their goods and services. By contrast, if we leave it the regulators to do it on behalf of other users or interests (like Skype) who are more interested in maximizing benefits at the edge of the network at the expense of core innovation, the results will be disastrous. As Stanford University economists Bruce Owen and Gregory Rosston have argued in the context of Net neutrality for wireline networks (but it’s equally applicable here):

The difficulty is that if we assign property rights in access to users rather than suppliers, resulting in an efficient price of access (zero), there will be no long run supply of Internet services. A zero price yields zero revenues–a lesson many dotcoms learned too late. While the benefits of the Internet can be made available to a particular user at zero cost, they cannot be made available to all users at zero cost.

And the same could be said of wireless networks and services as well. Of course, Skype and Prof. Wu have not suggested that wireless networks be given away free-of-charge, but they have not answered the difficult questions about how network access and services would be priced under their model to ensure future investment and innovation is not retarded. Applications or software providers that ride on top of existing networks will obviously want access prices to be as low, or close to zero, as is possible. But what if the carriers want to impose a small charge to help offset the burden on the network or to pay down their initial fixed cost of capital investment?

That’s where price controls come into the picture. Every forced access regime necessitates the creation of pricing regulations. But as soon as you start playing that game, you run the risk of commoditizing the network since you deprive network operators of the ability to pay down costs and invest in upgrades. And so rate-of-return regulation must be brought into the picture as well to ensure prices are “fair and non-discriminatory” while also ensuring that carriers have at least some revenues to plow back into network investment / upgrades.

This is the dreadful regulatory model of the past that we have spent the last quarter century trying to dig ourselves out of. It became abundantly clear to everyone what a disaster this regime was for consumers and companies alike since it left little room for infrastructure innovation or competition.

But instead of relegating this nightmare of regulatory model to the ash heap of history, we’re now witnessing an effort to roll back the clock and put it all back on the books. If the sophisticated networks of the future that we will need are going to get funded, developed and deployed, then infrastructure socialism in all its forms must be rejected.

Don’t look now, but it may be time to dig out those old bell bottoms and love beads from your closet. The calendar may say its 2007, but in Washington regulatory circles it may soon be 1968 all over again. You may remember 1968 as a year of turmoil–with anti-war protests, assassinations, and the election of Richard Nixon. Forget all that. At the FCC, it was the year of the Carterfone decision, in which the Bell System was banned from restricting equipment consumers could put on their phone lines. The same year, the Commission allocated the first frequencies for cell phone service.

Both decisions revolutioned the communications world: Carterphone opened the first crack in the previously iron-clad, legally-protected Bell System monopoly to competition, and the cell phone allocation planting the seed for today’s wireless services, which shattered the idea of telephone monopolies at its root.

These two regulatory threads of 1968 are now on a collision course. Yesterday, Skype –the Internet phone company now owned by eBay– petitioned the FCC to apply the Carterfone decision to wireless carriers (see Adam’s excellent post on this.) The filing follows by less than a week a paper by Tim Wu, father of the term “net neutrality”, endorsing the same idea (discussed here, here, here, here and here.)

Skype–whose founders weren’t even born in 1968–see Carterfone in grand Jeffersonian terms, using the word “right” some 35 times. One practically expects to read of the right to life, liberty, and the right to use non-harmful devices and software on telecommunications networks. Carterfone, however, did not create a right. It created a regulation. A regulation that was justifed in the face of a legally-protected, comprehensive, vertically-integrated old-fashioned monopoly, but a regulation nonetheless. It makes no sense to saddle today’s competitive, innovative and growing cell phone market with the same regulation.

The battle over regulation of wireless networks promises to be a divisive one–in effect a new front in the larger war over neutrality regulation that has been raging for over a year At its heart are two vastly different visions of how best to create competition: one based on forced access and restrictions mandated by government, the other based on reducing barriers to the creation of alternative networks, with consumers–through the marketplace–deciding how they should best be run. Network managers throughout the economy–and consumers as well–should be watching this debate with interest.

It hasn’t even been a week since Tim Wu made such a splash with his “Wireless Net Neutrality” proposal and already a major corporation has run to the FCC asking for it to be implemented into law! (Tim, my old friend and occasional nemesis, you know how to get results!)

Today, Internet phone giant Skype filed a petition with the Federal Communications Commission “to confirm a consumer’s right to use Internet communications software and attach devices to wireless networks.” The 32-page filing repeats many of the arguments Tim Wu made in his paper about the supposed need for regulators to step in and impose Bell System-era device attachment rules to modern cell phone operators. Specifically, Skype wants the FCC “to create an industry-led mechanism to ensure the openness of wireless networks.” I’m not sure what that means but I am certain that entire forests will fall as the paperwork flies at the FCC in an attempt to interpret and implement these new regulations.

I disagree on so many levels with the Skype petition that I don’t know exactly where to begin, but luckily I don’t have to say much. I just need to point to the excellent critiques that my TLF colleagues and current and former PFF colleagues published last week in response to the Wu paper. Here’s a sampling:

• Jerry Brito – “Carterfone for Wireless“
• Hance Haney – “Tim Wu and Wireless Net Neutrality Regulation“
• James Gattuso – “Playing Chicken with Consumers“
• Tim Lee – “Do Wireless Tubes Need to be Neutral Too?”
• Scott Wallsten – “Wireless Net Neutrality“
• Randy May – “Back to 1968? No Way“

There are many common themes in these essays. In a nutshell, I think the primary reason that we’re all so uncomfortable with the Wu proposal and Skype’s call for such regulations is that Carterfone-like rules and corresponding FCC interconnection/attachment mandates are completely inappropriate for competitive markets. Those rules were handed down in an era of government-protected monopoly for telecommunications. But there are no longer any protected monopolies in this marketplace.

Rules structured for an environment of government-sanctioned monopoly are unnecessary in an environment characterized by open markets, competition, property rights, and freedom of contract. For example, there are no such “device attachment” regulations for the automotive industry or even the computer software sector. In those and countless other capitalist industries, competition, market negotiations, contracts and the common law–not preemptive government regulation–are left to sort out these matters.

In an environment free of government restraints on entry and characterized by rivalry and innovation that was almost unimaginable in past decades, there is no need for Carterfone-like mandates. Carterfone rules were thought to be necessary in the era of black rotary-dial telephones only because competition was thought to be impossible. In today’s modern marketplace, constant technological change and the threat of new entry provides the most important safeguards against the threat of consumer abuse.

Skype seems to think consumers are suffering from great harm, however, because there are some limits imposed on the use of the (heavily subsidized) cell phones that subscribers are given. For example, many cell phones are “locked” by carriers to ensure they are only used with their service. People aren’t exactly rioting in the streets to have their phones unlocked, but I can see how some people might want them unlocked at some point. Well, if your’re one of those people, then go get one! As my PFF colleague Scott Wallsten points out, Amazon.com has a page explaining how to use unlocked GSM phones and apparently offers 163 different phones for this purpose. (You can always pay a premium to unlock most phones, so I can believe that number). Also, just for kicks, type the phrase “unlocking your cell phone” into Google. When you get done reading through those 1.4 million webpages explaining how to do so, get back to me and let me know what the problem is here again.

Regardless, even if some phones are locked, I’m not sure why we need FCC bureaucrats imposing rules mandating that all phones work exactly the same way in light of the fact that consumers have options. What’s wrong with a mix of open and closed systems? Isn’t experimentation with different business models a good thing? Moreover, because many (most?) cell phones are heavily subsidized, consumers typically burn through their phones fairly quickly and upgrade to hip new models to make sure they’re not seen carrying yesterday’s clunker of phone around.

OK, but what about other attachments? Shouldn’t we as consumers have the unfettered right to access anything we want with our cell phones? We’re slowly getting to that point through market competition anyway, but I don’t see anything wrong with mobile operators striking exclusive partnerships with certain vendors or media providers for certain types of services. As service speeds continue to increase, service options will multiply and we’ll gain access to more and more stuff. I already get more sites and services through Verizon’s “EV-DO” service than I know what to do with. I have an LG “Chocolate” phone and can use it to access a huge amount of material from a wide variety of providers. So, again, I just don’t see the problem here.

And, by the way, there are some benefits to having a semi-walled garden approach. Right now, for example, I don’t get any spam on my mobile devices. That’s partially a function of a semi-walled garden approach to websurfing and device attachment. Moreover, many parents will shudder at the idea of everything on the Web being perfectly accessible from Junior’s phone in the name of cell phone “openness.” A semi-walled garden can make it easier for parents to limit a child’s access to objectionable materials. (Of course, many savvy kids will evade those walled gardens and find a way onto the Internet anyway!)

I’ll just conclude with a snippet from the Skype filing that I found particularly interesting. On page 6 of the filing, the company notes that “Skype recognizes that software applications such as Skype are part of an interdependent ecosystem of wireless carriers, mobile operating system developers and device manufacturers. These relationships are fast-moving and multi-dimensional.” I think that nicely captures just how dynamic this marketplace is today. But if this “interdependent ecosystem” is encumbered with meddlesome federal regulations, then I think we’ve seen the end of the “fast-moving and multi-dimensional” nature of this sector.

At the risk of making TLF the “All Wu All the TIme” blog, I wanted to pass on Randy May’s just-released commentary on Tim Wu’s wireless paper. May–president of the Free State Foundation in Maryland–focuses particularly on Wu’s support of a “Carterfone” rule for wireless. May’s reaction to this? “Back to 1968, No Way!”. (Bringing to mind mental images of Chicago police rounding up protesting free-market economists on the street…)

May provides some valuable perspective, contrasting the static Bell System monopoly that spawned Carterfone and the constantly-changing wireless industry of today:

“Just consider these differences. In touting the Carterfone model, Professor Wu refers to “the ability to build a device to a standardized network interface (the phone plug, known as an RJ-11)” as giving birth to a new equipment market. Obviously, at that time, the ubiquitous Bell System analog network was mostly standardized from a technical point of view. The network carried almost exclusively a subscriber’s own content. The network had been stable for decades and remained largely so. In this context, it was much easier to legislate standardization in regulations. Contrast this with today’s technologically-dynamic environment with multiple networks, changing rapidly, and carrying various applications, inclusing many with content that must be protected from piracy. The type of standardization that inherently is part and parcel of network neutrality regulation simply does not make sense today. It would stifle innovation and investment, rather than promote it.”

I’m not sure I’m willing to say that more standardization would not be a good thing for wireless. Nevertheless, May’s point is a good one–2007 is not 1968, and wireless is not Ma Bell.

I’ve got a write-up of Tim Wu’s paper over at Ars. Most of it’s a summary of Wu’s paper, but I do a bit of policy analysis near the end:

Surprisingly, Wu does not mention one reform that could alleviate what he identifies as the biggest barrier to entry in the wireless market: the high cost of spectrum. Various scholars have proposed that more spectrum be auctioned off to private firms for use in next-generation wireless services. That would make it feasible for more firms to enter the wireless marketplace, providing much-needed competition. Wu himself notes that the smallest of the national carriers, T-Mobile, also has the least restrictive policies. It is likely that if enough spectrum were made available to allow additional carriers to build nationwide networks, those carriers would tend to follow T-Mobile’s lead and build more open networks than the largest incumbents. Wu also does not spend much time considering the feasibility of enforcing open access rules on wireless carriers. Although Carterfone is widely regarded as a success, some more recent attempts by the FCC to force incumbents to open their networks to competition have not been so successful. The FCC unsuccessfully attempted to force the Baby Bells to share their DSL lines with competitors during the Clinton administration, sparking nearly a decade of litigation that only concluded with Supreme Court’s 2005 Brand X decision. And the cable industry is fiercely resisting the FCC’s attempts to open up the market for cable boxes, a process that has has been raging for close to a decade with no end in sight. It is likely that the wireless industry would be equally resistent to any effort to forcibly open its network to new entrants. With the debate over network neutrality regulations of wireline broadband providers sucking all the oxygen out of the room, it’s unlikely that Wu’s proposals will have an impact on the telecom debate during this session of Congress. But as wireless technologies become ever more ubiquitous, questions about whether and how to regulate the wireless industry will only become more frequent and more contentious.

I think the CableCard analogy would be particularly worth exploring in more detail. Wu actually cites it as a possible model for interoperability done right, but my reading of the situation is that so far, at least, it’s been less than a raging success. The first generation CableCard spec had an extremely limited feature set, and even more limited consumer interest. Approximately zero cable customers have actually requested CableCards from their cable companies. The FCC’s “integration ban” goes into effect this summer, which could enlarge the market for third-party CableCARD devices, but the jury is definitely still out, and it’s rather premature to be hailing it as a success. And remember that Congress first ordered the FCC to open up the set-top box market a decade ago.

Tim Wu will be presenting his paper “Wireless Net Neutrality” at an FTC workshop on network access tomorrow on Wednesday. (BTW: The workshop is free and open to the public.) Basically he’s arguing for Carterfone to be applied to the cell phone industry. The Washington Post has a write-up of the ideas behind the paper and reaction from both sides of the debate.

Until federal regulators issued a landmark ruling in 1968, Americans could not own the telephones in their homes, nor attach answering machines or other devices to them. Now, a growing number of academics and consumer activists say it’s time to deliver a similar groundbreaking jolt to the cellphone industry, possibly triggering a new round of customer options and technical innovations to rival the one that produced faxes, modems and the Internet. Wireless carriers, which limit what customers may do with their phones, say the move is unnecessary and potentially harmful. But in articles, blogs and speeches, a number of researchers are asking why the companies are allowed to force consumers to buy new handsets when they change carriers, pay a specified carrier to transfer photos from a camera phone, or download ring tones or music from one provider only.

Carterfone was a great decision when it applied to Ma Bell, the quintessential monopoly, and wouldn’t compute for today’s wireless carriers. True, cell phones are locked (except when they’re not, as the article points out, because carriers will often unlock them for you when your contract expires). The one thing the article doesn’t mention is that cell phones are also subsidized. You can always buy an unlocked phone for a premium. I would love to see a greater market in unlocked phones, but if there’s no demand from consumers, I’ll just have to wait along with the proponents of regulation. Question: Unlocked phones are the norm in Asia and Europe. How are they priced there? How do service plan prices compare to U.S.?