Last week the Federalist Society’s Regulatory Transparency Project released a podcast Adam and I recorded with FCC Chairman Pai:

Tech Roundup 9 – COVID-19 and the Internet: A Conversation with Ajit Pai

A few highlights: Chairman Pai’s legacy is still being written, but I suspect one of his lasting marks on the agency will be his integrating more economics and engineering in the FCC’s work.

He points out that that in recent decades, the FCC’s work has focused on the legal and policy aspects of telecommunications. My take: much of the dysfunctional legalism and regulatory arcana that’s built up in communications law is because Congress refuses to give the FCC a clean slate. Instead, communications laws have piled on to communications laws for 80 years. The regulatory thicket gives attorneys and insiders undue power in telecom policy. With the creation of the Office of Economics and Analytics and Engineering Honors program, Chairman Pai is creating institutions within the FCC to shift some expertise and resources to the economists and engineers.

We also discussed Marc Andreessen’s It’s Time to Build essay. A thought-provoking polemic (Adam has a response) that offers a challenge:

[T]o everyone around us, we should be asking the question, what are you building? What are you building directly, or helping other people to build, or teaching other people to build, or taking care of people who are building? If the work you’re doing isn’t either leading to something being built or taking care of people directly, we’ve failed you, and we need to get you into a position, an occupation, a career where you can contribute to building.

As we discuss in the podcast, the FCC has outperformed most public institutions on this front. The FCC in the past few years has untangled itself from the nonstop legal trench warfare of net neutrality regulation–an immense waste of time–to focus on making it faster and easier to build networks. As a result, the US is seeing impressive increases in network investment, coverage, and capacity relative to peer countries.

The COVID-19 crisis has been a stress test for the FCC and the broadband industry, and we’re grateful the Chairman took the time to discuss the agency, industry trends, and more with us.

Federal Communications Commission (FCC) Chairman Ajit Pai today announced plans to expand the role of economic analysis at the FCC in a speech at the Hudson Institute. This is an eminently sensible idea that other regulatory agencies (both independent and executive branch) could learn from.

Pai first made the case that when the FCC listened to its economists in the past, it unlocked billions of dollars of value for consumers. The most prominent example was the switch from hearings to auctions in order to allocate spectrum licenses. He perceptively noted that the biggest effect of auctions was the massive improvement in consumer welfare, not just the more than $100 billion raised for the Treasury. Other examples of the FCC using the best ideas of its economists include:

• Use of reverse auctions to allocate universal service funds to reduce costs.
• Incentive auctions that reward broadcasters for transferring licenses to other uses – an idea initially proposed in a 2002 working paper by Evan Kwerel and John Williams at the FCC.
• The move from rate of return to price cap regulation for long distance carriers.

More recently, Pai argued, the FCC has failed to use economics effectively. He identified four key problems:

1. Economics is not systematically employed in policy decisions and often employed late in the process. The FCC has no guiding principles for conduct and use of economic analysis.
2. Economists work in silos. They are divided up among bureaus. Economists should be able to work together on a wide variety of issues, as they do in the Federal Trade Commission’s Bureau of Economics, the Department of Justice Antitrust Division’s economic analysis unit, and the Securities and Exchange Commission’s Division of Economic and Risk Analysis.
3. Benefit-cost analysis is not conducted well or often, and the FCC does not take Regulatory Flexibility Act analysis (which assesses effects of regulations on small entities) seriously. The FCC should use Office of Management and Budget guidance as its guide to doing good analysis, but OMB’s 2016 draft report on the benefits and costs of federal regulations shows that the FCC has estimated neither benefits nor costs of any of its major regulations issued in the past 10 years. Yet executive orders from multiple administrations demonstrate that “Serious cost-benefit analysis is a bipartisan tradition.”
4. Poor use of data. The FCC probably collects a lot of data that’s unnecessary, at a paperwork cost of $800 million per year, not including opportunity costs of the private sector. But even useful data are not utilized well. For example, a few years ago the FCC stopped trying to determine whether the wireless market is effectively competitive even though it collects lots of data on the wireless market.

To remedy these problems, Pai announced an initiative to establish an Office of Economics and Data that would house the FCC’s economists and data analysts. An internal working group will be established to collect input within the FCC and from the public. He hopes to have the new office up and running by the end of the year. The purpose of this change is to give economists early input into the rulemaking process, better manage the FCC’s data resources, and conduct strategic research to help find solutions to “the next set of difficult issues.”

Can this initiative significantly improve the quality and use of economic analysis at the FCC?

There’s evidence that independent regulatory agencies are capable of making some decent improvements in their economic analysis when they are sufficiently motivated to do so. For example, the Securities and Exchange Commission’s authorizing statue contains language that requires benefit-cost analysis of regulations when the commission seeks to determine whether they are in the public interest. Between 2005 and 2011, the SEC lost several major court cases due to inadequate economic analysis.

In 2012, the commission’s general counsel and chief economist issued new economic analysis guidance that pledged to assess regulations according to the principal criteria identified in executive orders, guidance from the Office of Management and Budget, and independent research. In a recent study, I found that the economic analysis accompanying a sample of major SEC regulations issued after this guidance was measurably better than the analysis accompanying regulations issued prior to the new guidance. The SEC improved on all five aspects of economic analysis it identified as critical: assessment of the need for the regulation, assessment of the baseline outcomes that will likely occur in the absence of new regulation, identification of alternatives, and assessment of the benefits and costs of alternatives.

Unlike the SEC, the FCC faces no statutory benefit-cost analysis requirement for its regulations. Unlike the executive branch agencies, the FCC is under no executive order requiring economic analysis of regulations. Unlike the Federal Trade Commission in the early 1980s, the FCC faces little congressional pressure for abolition.

But Congress is considering legislation that would require all regulatory agencies to conduct economic analysis of major regulations and subject that analysis to limited judicial review. Proponents of executive branch regulatory review have always contended that the president has legal authority to extend the executive orders on regulatory impact analysis to cover independent agencies, and perhaps President Trump is audacious enough to try this. Thus, it appears Chairman Pai is trying to get the FCC out ahead of the curve.

The FCC has signaled that it may vote to overhaul the Lifeline program this month. Today, Lifeline typically provides a $9.25 subsidy for low-income households to purchase landline or mobile telephone service from eligible providers. While Lifeline has problems–hence the bipartisan push for reform–years ago the FCC structured Lifeline in a way that generally improves access and mitigates abuse (the same cannot be said about the three other major universal service programs).

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

Programs structured this way make transfers fairly transparent, which makes them an easy target for criticism but also promotes government accountability, and gives low-income households the ability to consume these services according to their preferences. If you want to attend a small Christian college, not a state university, Pell grants enable that. If you want to purchase rice and tomatoes, not bread and apples, SNAP enables that. The alternative, and far more costly, ways to improve consumer access to various services is to subsidize providers, which is basically how Medicare the rural telephone programs operate, or command-and-control industrial policy, like we have for television and much of agriculture.

Because the FCC is maintaining the consumer subsidy and expanding the menu of Lifeline options to include wired broadband, mobile broadband, and wifi devices, there’s much to commend in the proposed reforms.

Lifeline Broadband Subsidies

Ironically, despite tech activist declarations that 10 Mbps is not “real broadband,” the FCC considers 10 Mbps broadband totally adequate as low-income families’ sole connection to the digital world. If the proposals stand, Lifeline subsidies can be used for 10 Mbps wireline and wireless subscriptions.

The confusion about “real broadband” echoed from tech activists, some tech reporting, and a presidential candidate arises because the FCC has at least three different conceptions of “broadband,” essentially based on whatever definition will increase its regulatory control. For Title II purposes, even a mere 1 Mbps is “broadband” because the FCC wants to be inclusive and regulate all providers. For Section 706, defining “broadband” as high as practical increases the agency’s regulatory powers, so it’s not “real broadband” unless it’s 25 Mbps. For universal service and (apparently) Lifeline subsidies, 10 Mbps is “broadband” because setting it too high would be too restrictive for the consumers and carriers who benefit from a moderate standard.

Wireless Substitution

Expanding Lifeline to mobile broadband suggests an increasing awareness by the FCC that, for many Americans, wireless broadband is a substitute for wireline broadband. This is a little surprising because the FCC decided in January 2016 that “fixed and mobile broadband services are not functional substitutes.” The available data, however, shows that wireless is a substitute for the millions of homes that don’t contain avid Netflix watchers. While popular broadband offerings have monthly limits of 300 GB or more, based on Sandvine data, the typical US home with a wired Internet connection probably uses under 30 GB per month.

Pew surveys also reveal many Americans who substitute wireless for wireline. Of those in the growing number of smartphone-only households, 65% said their smartphones allow them to do everything online they need. Note also that, of those with no home broadband connection–which includes smartphone-only households–only 25% are interested in subscribing. This is why it’s good the FCC doesn’t simply subsidize carriers–most nonadopters simply have no interest in home Internet. Certainly there are some in these groups who don’t realize that their lives would be enriched by a wired broadband connection, but that is mainly a question of digital literacy and education.

Concerns and Reforms

While I support the FCC expanding the menu of Lifeline options and improving the eligibility process, I’m wary of some of the proposed reforms. More details will come out later but Commissioner O’Rielly has pointed out several potential problems with the direction this is going. For one, the eligibility process has always been a mess, in part because it’s based on a patchwork of federal and state programs. The largest problem is the FCC is proposing a major increase in the Lifeline budget, which will increase most Americans’ phone bills. Until the FCC gets its Lifeline house in order, it’s premature to increase the fund so substantially.

Further, I’d like to see satellite broadband on the “menu” of options for Lifeline consumers. Based on the preliminary reports, it’s not clear that satellite broadband will be eligible. Satellite broadband satisfies the speed requirement (10 Mbps) but the FCC plans to require a 150 GB allowance for fixed connections. Satellite is considered a fixed connection. However, satellite broadband providers generally have a low data allowance during daytime hours. On the other hand, they often have unmetered, unlimited data in off-peak hours. Arguably, because data is unmetered every day, satellite broadband should qualify. It would give low-income rural households, who have very low Internet penetration, one more option to be connected.

Finally, one possible reform to ensure the truly needy are benefiting would be to simultaneously increase substantially the $9.25 monthly subsidy but disallow subsidies to households with subscription TV. The most recent data I can find is a 2010 FCC report that 80% of Internet non-adopters have satellite or “cable premium” television. Tightening the requirements means fewer households are eligible but it would increase public support for the program and I think the FCC could then afford to be more generous with the Lifeline subsidy.

Those of us with deep reservations about the push for ever more unlicensed spectrum are having many of our fears realized with the new resistance to novel technologies using unlicensed spectrum. By law unlicensed spectrum users have no rights to their spectrum; unlicensed spectrum is a managed commons. In practice, however, existing users frequently act as if they own their spectrum and they can exclude others. By entertaining these complaints, the FCC simply encourages NIMBYism in unlicensed spectrum.

The general idea behind unlicensed spectrum is that by providing a free spectrum commons to any device maker who complies with certain simple rules (namely, Part 15’s low power operation requirement), device makers will develop wireless services that would never have developed if the device makers had to shell out millions for licensed spectrum. For decades, unlicensed spectrum has stimulated development and sale of millions of consumer devices, including cordless phones, Bluetooth devices, wifi access points, RC cars, and microwave ovens.

Now, however, many device makers are getting nervous about new entrants. For instance, Globalstar is developing a technology, TLPS, based on wifi standards that will use some unlicensed spectrum at 2.4 GHz and mobile carriers would like to market an unlicensed spectrum technology, LTE-U, based on 4G LTE standards that will use spectrum at 5 GHz.

This resistance from various groups and spectrum incumbents, who fear interference in “their” spectrum if these new technologies catch on, was foreseeable, which makes these intractable conflicts even more regrettable. As Prof. Tom Hazlett wrote in a 2001 essay, long before today’s conflicts, when it comes to unlicensed devices, “economic success spells its own demise.” Hazlett noted, “Where an unlicensed firm successfully innovates, open access guarantees imitation. This not only results in competition…but may degrade wireless emissions — perhaps severely.”

On the other hand, the many technical filings about potential interference to existing unlicensed devices are red herrings. Prospective device makers in these unlicensed bands have no duty to protect existing users. Part 15 rules say that unlicensed users like wifi and Bluetooth “shall not be deemed to have any vested or recognizable right to continued use of any given frequency by virtue of prior registration or certification of equipment” and that “interference must be accepted.” These rules, however, put the FCC in a self-created double bind: the agency provides no interference protection to existing users but its open access policy makes interference conflicts likely.

There is a concerted effort, then, by some wireless industry associations, tech journalists, and tech-focused nonprofits to ignore the Part 15 rules and suggest that open access no longer applies. In particular, there are suggestions that LTE-U must or should comply with wifi-like listen-before-talk mechanisms before using the unlicensed commons. Chris Lewis at Public Knowledge insinuated as much in a blog post on the issue. He states the correct but legally irrelevant fact that early versions of LTE-U don’t use listen-before-talk protocols and then adds a confusing non sequitur, “This is in violation of basic Wi-Fi standards.”

The notion that LTE-U or any other new technology must employ the wifi industry’s preference, listen-before-talk, is wrong. There are tens of millions of Part 15 devices that don’t use listen-before-talk, including cordless phones, garage door openers, Bluetooth devices, and RC toys. There are different sharing etiquettes and the FCC has generally been hands-off regarding what etiquette device makers should use since, first, the strict Part 15 power limits mitigate most problems and second, interference is typically reciprocal and parties have an incentive to coordinate.

Interestingly, the FCC has required some unlicensed devices to employ listen-before-talk protocols in the unlicensed PCS band. Never heard of it? The band is a wireless graveyard. Aside from a few cordless telephones, it’s had very little use, in part because the FCC required a complex listen-before-talk etiquette that raises the cost of producing equipment. In light of this failed experiment, the FCC probably has little appetite (or aptitude) for predicting via technology mandates which sharing etiquette will most benefit consumers.

Further, unlicensed spectrum incumbents show a selective sensitivity to interference considering their unlicensed devices face interference daily. It’s impossible to approximate the severity and regularity of everyday interference but focusing on potential interference from new services like LTE-U or TLPS, which use spectrum sharing etiquettes, and ignoring the effects of, say, poorly configured or legacy wifi access points or microwave ovens in the 2.4 GHz band is akin to complaining about hearing your next-door neighbor’s TV volume when there’s a rock concert playing in your front yard. Microwave ovens are powerful emitters, typically around 400 to 800 watts compared to a 1-watt wifi device. While microwave ovens are built to shield most emissions from escaping, none are perfect and they are a frequent source of wireless interference in households and offices around the country. Relatedly, in apartments, condos, or dormitories with unmanaged wifi systems, interference occurs regularly.

The FCC sends very mixed signals regarding unlicensed policy. It formally provides no interference protection to unlicensed users but frequently solicits comment about possible harms to these existing users. No wonder, then, that some Wall Street investors have strenuously opposed Globalstar’s multi-year attempt to get approval for its TLPS technology to provide wifi-like Internet access. Why would a hedge fund take an interest in the intricacies of Part 15 rules? Recent tech reporting is suggestive.

Bloomberg BNA reported that one intervenor who has filed comments against Globalstar’s TLPS application “runs a hedge fund [and has] said he is short-selling Globalstar’s stock, so he has been very active in the Globalstar TLPS FCC proceeding.” The New York Times similarly reports on another frequent filer in the TLPS proceeding, “a little-known activist investor [who] has declared war on the multibillion-dollar satellite communications company Globalstar, contending that it is worthless.” Existing device makers likewise may see a competitive threat from new devices that provide similar services, as Hazlett notes, and pile on in these proceedings.

Singling out a company with important business before a regulatory agency is not unheard of but the FCC only encourages financial gamesmanship by requesting that parties weigh in on interference potential for users that formally aren’t entitled to interference protection. Is this how the spectrum commons dies?

The most effective tactic to use when the FCC is likely to do something you dislike is to induce regulatory delays. The public interest groups can see much of this and their responses have been relatively muted relative to the commercial interests. I suspect many are deeply uncomfortable with what is occurring because it undermines the idea of a commons and the intent of the Part 15 rules. Nevertheless, they favor the status quo because wifi works pretty well and consumers have reliance interests. Knowing that the Part 15 rules don’t help them, they typically resort to asking for more studies about interference potential. It sounds like an innocuous request but anyone following telecom policy knows that “more study” from the FCC is the kiss of death because it simply gives time for opponents to agitate for reinforcements (like powerful members of Congress) and to scare off investment.

Congress, by the way, foresaw this risk–pressure groups compelling the FCC to kill entrants with delay–and in 1983 added the little-known Section 7 of the Communications Act, which requires the FCC to approve new technologies within a year. By requesting parties weigh in on interference potential and delaying indefinitely Part 15 approvals for TLPS and LTE-U (assuming they show they comply with Part 15) the FCC violates the spirit of the law. The agency has a statutory duty to companies with new technologies to make a decision quickly, but these lengthy unlicensed proceedings send a chilling message to the tech industry (so much so the IEEE asked then-Chairman Genachowski for Section 7 guidance in 2011).

The FCC knows spectrum NIMBYism is a big, developing problem. The unlicensed incumbents are agitating more and more as new technologies encroach on “their” spectrum. It should be enough for the FCC to respond that these unlicensed device makers knew the tradeoff going in–you can avoid expensive licensure and use spectrum freely but you cannot object when interfered with. Firms that want interference protection and higher QoS are free to spend millions or billions of dollars on licensed spectrum. Increasingly, however, by largely remaining silent and delaying approvals, the FCC gets bogged down in proceedings and undermines the purpose of unlicensed spectrum–encourage innovators to experiment with new wireless technologies. If the delays in approving TLPS and foreseeable delays for LTE-U are any indication, the FCC is quietly slipping towards de facto beauty contests, the infamous practice of picking technology winners and losers.

Many readers will recall the telecom soap opera featuring the GPS industry and LightSquared and the subsequent bankruptcy of LightSquared. Economist Thomas W. Hazlett (who is now at Clemson, after a long tenure at the GMU School of Law) and I wrote an article published in the Duke Law & Technology Review titled Tragedy of the Regulatory Commons: Lightsquared and the Missing Spectrum Rights. The piece documents LightSquared’s ambitions and dramatic collapse. Contrary to popular reporting on this story, this was not a failure of technology. We make the case that, instead, the FCC’s method of rights assignment led to the demise of LightSquared and deprived American consumers of a new nationwide wireless network. Our analysis has important implications as the FCC and Congress seek to make wide swaths of spectrum available for unlicensed devices. Namely, our paper suggests that the top-down administrative planning model is increasingly harming consumers and delaying new technologies.

Read commentary from the GPS community about LightSquared and you’ll get the impression LightSquared is run by rapacious financiers (namely CEO Phil Falcone) who were willing to flaunt FCC rules and endanger thousands of American lives with their proposed LTE network. LightSquared filings, on the other hand, paint the GPS community as defense-backed dinosaurs who abused the political process to protect their deficient devices from an innovative entrant. As is often the case, it’s more complicated than these morality plays. We don’t find villains in this tale–simply destructive rent-seeking triggered by poor FCC spectrum policy.

We avoid assigning fault to either LightSquared or GPS, but we stipulate that there were serious interference problems between LightSquared’s network and GPS devices. Interference is not an intractable problem, however. Interference is resolved everyday in other circumstances. The problem here was intractable because GPS users are dispersed and unlicensed (including government users), and could not coordinate and bargain with LightSquared when problems arose. There is no feasible way for GPS companies to track down and compel users to use more efficient devices, for instance, if LightSquared compensated them for the hassle. Knowing that GPS mitigation was unfeasible, LightSquared’s only recourse after GPS users objected to the new LTE network was through the political and regulatory process, a fight LightSquared lost badly. The biggest losers, however, were consumers, who were deprived of another wireless broadband network because FCC spectrum assignment prevented win-win bargaining between licensees.

Our paper provides critical background to this dispute. Around 2004, because satellite phone spectrum was underused, the FCC permitted satellite phone licensees flexibility to repurpose some of their spectrum for use in traditional cellular phone networks. (Many people are appalled to learn that spectrum policy still largely resembles Soviet-style command-and-control. The FCC tells the wireless industry, essentially: “You can operate satellite phones only in band X. You can operate satellite TV in band Y. You can operate broadcast TV in band Z.” and assigns spectrum to industry players accordingly.) Seeing this underused satellite phone spectrum, LightSquared acquired some of this flexible satellite spectrum so that LightSquared could deploy a nationwide cellular phone network in competition with Verizon Wireless and AT&T Mobility. LightSquared had spent $4 billion in developing its network and reportedly had plans to spend $10 billion more when things ground to a halt.

In early 2012, the Department of Commerce objected to LightSquared’s network on the grounds that the network would interfere with GPS units (including, reportedly, DOD and FAA instruments). Immediately, the FCC suspended LightSquared’s authorization to deploy a cellular network and backtracked on the 2004 rules permitting cellular phones in that band. Three months later, LightSquared declared bankruptcy. This was a non-market failure, not a market failure. This regulatory failure obtains because virtually any interference to existing wireless operations is prohibited even if the social benefits of a new wireless network are vast.

This analysis is not simply scholarly theory about the nature of regulation and property rights. We provide real-world evidence that supports our notion that, had the FCC assigned flexible, de facto property rights to GPS licensees like the FCC does in some other bands, rather than fragmented unlicensed users, LightSquared might be in operation today serving millions with wireless broadband. Our evidence comes, in fact, from LightSquared’s deals with non-GPS parties. Namely, LightSquared had interference problems with another satellite licensee on adjacent spectrum–Inmarsat.

Inmarsat provides public safety, aviation, and national security applications and hundreds of thousands of devices to government and commercial users. The LightSquared-Inmarsat interference problems were unavoidable but because Inmarsat had de facto property rights to its spectrum, it could internalize financial gains and coordinate with LightSquared. The result was classic Coasian bargaining. The two companies swapped spectrum and activated an agreement in 2010 in which LightSquared would pay Inmarsat over $300 million. Flush with cash and spectrum, Inmarsat could rationalize its spectrum and replace devices that wouldn’t play nicely with LightSquared LTE operations.

These trades avoided the non-market failure the FCC produced by giving GPS users fragmented, non-exclusive property rights. When de facto property rights are assigned to licensees, contentious spectrum border disputes typically give way to private ordering. The result is regular spectrum swaps and sales between competitors. Wireless licensees like Verizon, AT&T, Sprint, and T-Mobile deal with local interference and unauthorized operations daily because they have enforceable, exclusive rights to their spectrum. The FCC, unfortunately, never assigned these kinds of spectrum rights to the GPS industry.

The evaporation of billions of dollars of LightSquared funds was a non-market failure, not a market failure and not a technology failure. The economic loss to consumers was even greater than LightSquared’s. Different FCC rules could have permitted welfare-enhancing coordination between LightSquared and GPS. The FCC’s error was the nature of rights the agency assigned for GPS use. By authorizing the use of millions of unlicensed devices adjacent to LightSquared’s spectrum, the FCC virtually ensured that future attempts to reallocate spectrum in these bands would prove contentious. Going forward, the FCC should think far less about which technologies they want to promote and more about the nature of spectrum rights assigned. For tech entrepreneurs and policy entrepreneurs to create innovative new wireless products, they need well-functioning spectrum markets. The GPS experience shows vividly what to avoid.

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

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

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

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

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

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

Last week, I participated in a program co-sponsored by the Progressive Policy Institute, the Lisbon Council, and the Georgetown Center for Business and Public Policy on “Growing the Transatlantic Digital Economy.”

The complete program, including keynote remarks from EU VP Neelie Kroes and U.S. Under Secretary of State Catherine A. Novelli, is available below.

My remarks reviewed worrying signs of old-style interventionist trade practices creeping into the digital economy in new guises, and urged traditional governments to stay the course (or correct it) on leaving the Internet ecosystem largely to its own organic forms of regulation and market correctives:

Vice President Kroes’s comments underscore an important reality about innovation and regulation. Innovation, thanks to exponential technological trends including Moore’s Law and Metcalfe’s Law, gets faster and more disruptive all the time, a phenomenon my co-author and I have coined “Big Bang Disruption.” Regulation, on the other hand, happens at the same pace (at best). Even the most well-intentioned regulators, and I certainly include Vice President Kroes in that list, find in retrospect that interventions aimed at heading off possible competitive problems and potential consumer harms rarely achieve their objectives, and, indeed, generate more harmful unintended consequences. This is not a failure of government. The clock speeds of innovation and regulation are simply different, and diverging faster all the time. The Internet economy has been governed from its inception by the engineering-driven multistakeholder process embodied in the task forces and standards groups that operate under the umbrella of the Internet Society.   Innovation, for better or for worse, is regulated more by Moore’s Law than traditional law. I happen to think the answer is “for better,” but I am not one of those who take that to the extreme in arguing that there is no place for traditional governments in the digital economy. Governments have and continue to play an essential part in laying the legal foundations for the remarkable growth of that economy and in providing incentives if not funding for basic research that might not otherwise find investors. And when genuine market failures appear, traditional regulators can and should step in to correct them as efficiently and narrowly as they can. Sometimes this has happened. Sometimes it has not. Where in particular I think regulatory intervention is least effective and most dangerous is in regulating ahead of problems—in enacting what the FCC calls “prophylactic rules.” The effort to create legally sound Open Internet regulations in the U.S. has faltered repeatedly, yet in the interim investment in both infrastructure and applications continues at a rapid pace—far outstripping the rest of the world. The results speak for themselves. U.S. companies dominate the digital economy, and, as Prof. Christopher Yoo has definitively demonstrated, U.S. consumers overall enjoy the best wired and mobile infrastructure in the world at competitive prices. At the same time, those who continue to pursue interventionist regulation in this area often have hidden agendas. Let me give three examples: 1.  As we saw earlier this month at the Internet Governance Forum, which I attended along with Vice President Kroes and 2,500 other delegates, representatives of the developing world were told by so-called consumer advocates from the U.S. and the EU that they must reject so-called “zero rated” services, in which mobile network operators partner with service providers including Facebook, Twitter and Wikimedia to provide their popular services to new Internet users without use applying to data costs. Zero rating is an extremely popular tool for helping the 2/3 of the world’s population not currently on the Internet get connected and, likely, from these services to many others. But such services violate the “principle” of neutrality that has mutated from an engineering concept to a nearly-religious conviction. And so zero rating must be sacrificed, along with users who are too poor to otherwise join the digital economy. 2.  Closer to home, we see the wildly successful Netflix service making a play to hijack the Open Internet debate into one about back-end interconnection, peering, and transit—engineering features that work so well that 99% of the agreements involved between networks, according to the OECD, aren’t even written down. 3.  And in Europe, there are other efforts to turn the neutrality principle on its head, using it as a hammer not to regulate ISPs but to slow the progress of leading content and service providers, including Apple, Amazon and Google, who have what the French Digital Council and others refer to as non-neutral “platform monopolies” which must be broken. To me, these are in fact new faces on very old strategies—colonialism, rent-seeking, and protectionist trade warfare respectively. My hope is that Internet users—an increasingly powerful and independent source of regulatory discipline in the Internet economy—will see these efforts for what they truly are…and reject them resoundingly. The more we trust (but also verify) the engineers, the faster the Internet economy will grow, both in the U.S. and Europe, and the greater our trade in digital goods and services will strengthen the ties between our traditional economies. It’s worked brilliantly for almost two decades. The alternatives, not so much.

There’s a small but influential number of tech reporters and scholars who seem to delight in making the US sound like a broadband and technology backwater. A new Mercatus working paper by Roslyn Layton, a PhD fellow at a research center at Aalborg University, and Michael Horney a researcher at the Free State Foundation, counter that narrative and highlight data from several studies that show the US is at or near the top in important broadband categories.

For example, per Pew and ITU data, the vast majority of Americans use the Internet and the US is second in the world in data consumption per capita, trailing only South Korea. Pew reveals that for those who are not online the leading reasons are lack of usability and the Internet’s perceived lack of benefits. High cost, notably, is not the primary reason for infrequent use.

I’ve noted before some of the methodological problems in studies claiming the US has unusually high broadband prices. In what I consider their biggest contribution to the literature, Layton and Horney highlight another broadband cost frequently omitted in international comparisons: the mandatory media license fees many nations impose on broadband and television subscribers.

These fees can add as much as $44 to the monthly cost of broadband. When these fees are included in comparisons, American prices are frequently an even better value. In two-thirds of European countries and half of Asian countries, households pay a media license fee on top of the subscription fees to use devices such as connected computers and TVs. …When calculating the real cost of international broadband prices, one needs to take into account media license fees, taxation, and subsidies. …[T]hese inputs can materially affect the cost of broadband, especially in countries where broadband is subject to value-added taxes as high as 27 percent, not to mention media license fees of hundreds of dollars per year.

US broadband providers, the authors point out, have priced broadband relatively efficiently for heterogenous uses–there are low-cost, low-bandwidth connections available as well as more expensive, higher-quality connections for intensive users.

Further, the US is well-positioned for future broadband use. Unlike many wealthy countries, Americans typically have access, at least, to broadband from telephone companies (like AT&T DSL or UVerse) as well as from a local cable provider. Competition between ISPs has meant steady investment in network upgrades, despite the 2008 global recession. The story is very different in much of Europe, where broadband investment, as a percentage of the global total, has fallen noticeably in recent years. US wireless broadband is also a bright spot: 97% of Americans can subscribe to 4G LTE while only 26% in the EU have access (which partially explains, by the way, why Europeans often pay less for mobile subscriptions–they’re using an inferior product).

There’s a lot to praise in the study and it’s necessary reading for anyone looking to understand how US broadband policy compares to other nations’. The fashionable arguments that the US is at risk of falling behind technologically were never convincing–the US is THE place to be if you’re a tech company or startup, for one–but Layton and Horney show the vulnerability of that narrative with data and rigor.

The outrage over the FCC’s attempt to write new open Internet rules has caught many by surprise, and probably Chairman Wheeler as well. The rumored possibility of the FCC authorizing broadband “fast lanes” draws most complaints and animus. Gus Hurwitz points out that the FCC’s actions this week have nothing to do with fast lanes and Larry Downes reminds us that this week’s rules don’t authorize anything. There’s a tremendous amount of misinformation because few understand how administrative law works. Yet many net neutrality proponents fear the worst from the proposed rules because Wheeler takes the consensus position that broadband provision is a two-sided market and prioritized traffic could be pro-consumer.

Fast lanes have been permitted by the FCC for years and they can benefit consumers. Some broadband services–like video and voice over Internet protocol (VoIP)–need to be transmitted faster or with better quality than static webpages, email, and file syncs. Don’t take my word for it. The 2010 Open Internet NPRM, which led to the recently struck-down rules, stated,

As rapid innovation in Internet-related services continues, we recognize that there are and will continue to be Internet-Protocol-based offerings (including voice and subscription video services, and certain business services provided to enterprise customers), often provided over the same networks used for broadband Internet access service, that have not been classified by the Commission. We use the term “managed” or “specialized” services to describe these types of offerings. The existence of these services may provide consumer benefits, including greater competition among voice and subscription video providers, and may lead to increased deployment of broadband networks.

I have no special knowledge about what ISPs will or won’t do. I wouldn’t predict in the short term the widespread development of prioritized traffic under even minimal regulation. I think the carriers haven’t looked too closely at additional services because net neutrality regulations have precariously hung over them for a decade. But some of net neutrality proponents’ talking points (like insinuating or predicting ISPs will block political speech they disagree with) are not based in reality.

We run a serious risk of derailing research and development into broadband services if the FCC is cowed by uninformed and extreme net neutrality views. As Adam eloquently said, “Living in constant fear of hypothetical worst-case scenarios — and premising public policy upon them — means that best-case scenarios will never come about.” Many net neutrality proponents would like to smear all priority traffic as unjust and exploitative. This is unfortunate and a bit ironic because one of the most transformative communications developments, cable VoIP, is a prioritized IP service.

There are other IP services that are only economically feasible if jitter, latency, and slow speed are minimized. Prioritized traffic takes several forms, but it could enhance these services:

VoIP. This prioritized service has actually been around for several years and has completely revolutionized the phone industry. Something unthinkable for decades–facilities-based local telephone service–became commonplace in the last few years and undermined much of the careful industrial planning in the 1996 Telecom Act. If you subscribe to voice service from your cable provider, you are benefiting from fast lane treatment. Your “phone” service is carried over your broadband cable, segregated from your television and Internet streams. Smaller ISPs could conceivably make their phone service more attractive by pairing up with a Skype- or Vonage-type voice provider, and there are other possibilities that make local phone service more competitive.

Cloud-hosted virtual desktops. This is not a new idea, but it’s possible to have most or all of your computing done in a secure cloud, not on your PC, via a prioritized data stream. With a virtual desktop, your laptop or desktop PC functions mainly as a dumb portal. No more annoying software updates. Fewer security risks. IT and security departments everywhere would rejoice. Google Chromebooks are a stripped-down version of this but truly functional virtual desktops would be valued by corporations, reporters, or government agencies that don’t want sensitive data saved on a bunch of laptops in their organization that they can’t constantly monitor. Virtual desktops could also transform the device market, putting the focus on a great cloud and (priority) broadband service and less on the power and speed of the device. Unfortunately, at present, virtual desktops are not in widespread use because even small lag frustrates users.

TV. The future of TV is IP-based and the distinction between “TV” and “the Internet” is increasingly blurring, with Netflix leading the way. In a fast lane future, you could imagine ISPs launching pared-down TV bundles–say, Netflix, HBO Go, and some sports channels–over a broadband connection. Most ISPs wouldn’t do it, but an over-the-top package might interest smaller ISPs who find acquiring TV content and bundling their own cable packages time-consuming and expensive.

Gaming. Computer gamers hate jitter and latency. (My experience with a roommate who had unprintable outbursts when Diablo III or World of Warcraft lagged is not uncommon.) Game lag means you die quite frequently because of your data connection and this depresses your interest in a game. There might be gaming companies out there who would like to partner with ISPs and other network operators to ensure smooth gameplay. Priority gaming services could also lead the way to more realistic, beautiful, and graphics-intensive games.

Teleconferencing, telemedicine, teleteaching, etc. Any real-time, video-based service could reach critical mass of subscribers and become economical with priority treatment. Any lag absolutely kills consumer interest in these video-based applications. By favoring applications like telemedicine, providing remote services could become attractive to enough people for ISPS to offer stand-alone broadband products.

This is just a sampling of the possible consumer benefits of pay-for-priority IP services we possibly sacrifice in the name of strict neutrality enforcement. There are other services we can’t even conceive of yet that will never develop. Generally, net neutrality proponents don’t admit these possible benefits and are trying to poison the well against all priority deals, including many of these services.

Most troubling, net neutrality turns the regulatory process on its head. Rather than identify a market failure and then take steps to correct the failure, the FCC may prevent commercial agreements that would be unobjectionable in nearly any other industry. The FCC has many experts who are familiar with the possible benefits of broadband fast lanes, which is why the FCC has consistently blessed priority treatment in some circumstances.

Unfortunately, the orchestrated reaction in recent weeks might leave us with onerous rules, delaying or making impossible new broadband services. Hopefully, in the ensuing months, reason wins out and FCC staff are persuaded by competitive analysis and possible innovations, not t-shirt slogans.

Google’s announcement this week of plans to expand to dozens of more cities got me thinking about the broadband market and some parallels to transportation markets. Taxi cab and broadband companies are seeing business plans undermined with the emergence of nimble Silicon Valley firms–Uber and Google Fiber, respectively.

The incumbent operators in both cases were subject to costly regulatory obligations in the past but in return they were given some protection from competitors. The taxi medallion system and local cable franchise requirements made new entry difficult. Uber and Google have managed to break into the market through popular innovations, the persistence to work with local regulators, and motivated supporters. Now, in both industries, localities are considering forbearing from regulations and welcoming a competitor that poses an economic threat to the existing operators.

Notably, Google Fiber will not be subject to the extensive build-out requirements imposed on cable companies who typically built their networks according to local franchise agreements in the 1970s and 1980s. Google, in contrast, generally does substantial market research to see if there is an adequate uptake rate among households in particular areas. Neighborhoods that have sufficient interest in Google Fiber become Fiberhoods.

Similarly, companies like Uber and Lyft are exempted from many of the regulations governing taxis. Taxi rates are regulated and drivers have little discretion in deciding who to transport, for instance. Uber and Lyft drivers, in contrast, are not price-regulated and can allow rates to rise and fall with demand. Further, Uber and Lyft have a two-way rating system: drivers rate passengers and passengers rate drivers via smartphone apps. This innovation lowers costs and improves safety: the rider who throws up in cars after bar-hopping, who verbally or physically abuses drivers (one Chicago cab driver told me he was held up at gunpoint several times per year), or who is constantly late will eventually have a hard time hailing an Uber or Lyft. The ratings system naturally forces out expensive riders (and ill-tempered drivers).

Interestingly, support and opposition for Uber and Google Fiber cuts across partisan lines (and across households–my wife, after hearing my argument, is not as sanguine about these upstarts). Because these companies upset long-held expectations, express or implied, strong opposition remains. Nevertheless, states and localities should welcome the rapid expansion of both Uber and Google Fiber.

The taxi registration systems and the cable franchise agreements were major regulatory mistakes. Local regulators should reduce regulations for all similarly-situated competitors and resist the temptation to remedy past errors with more distortions. Of course, there is a decades-long debate about when deregulation turns into subsidies, and this conversation applies to Uber and Google Fiber.

That debate is important, but regulators and policymakers should take every chance to roll back the rules of the past–not layer on more mandates in an ill-conceived attempt to “level the playing field.” Transportation and broadband markets are changing for the better with more competition and localities should generally stand aside.

The Internet is abuzz with news that Federal Communications Commission Chairman Tom Wheeler favors a case-by-case approach to addressing Internet competition issues. It is the wisest course, and perhaps the most courageous. Some on the right will say he is going too far, and some on the left will say he isn’t going far enough. That is one reason Wheeler’s approach should be commended. Staunch disagreements about net neutrality and other Internet governance issues reflect the uncertainty inherent in a dynamic market.

Chairman Wheeler’s comments this week echoed Socrates (“I’m not smart enough to know what comes next [in innovation]”) and, to my surprise, Virginia Postrel (the Chairman favors addressing Internet issues “in a dynamic rather than a static way”). He recognizes that, in a two-sided market, there is no reason to assume that ISPs will necessarily have the ability to charge content providers rather than the other way around. The potential for strategic behavior on the Internet today is radically different than in the dial-up Internet era, and the Chairman appears prepared to consider those differences in his approach to communications regulation.

The Chairman also noted that section 706 gives the FCC authority over the entire Internet. Though my friends at TechFreedom have expressed alarm that the Chairman thinks this is positive, an approach that recognizes the potential for strategic behavior by so-called edge providers is preferable to the one-sided approach embodied in net neutrality. The FCC’s decision to impose strict limitations on only one side of the two-sided Internet marketplace was bound to create market distortions and always smacked of cronyism. A broader approach, fairly applied, is more likely to discourage strategic behavior and protect consumers than the FCC’s previous net neutrality rules, which were designed to protect the commercial interests of edge providers.

To be clear, I remain unconvinced that intervention is necessary. But that is the virtue of the common law approach. If anticompetitive behavior occurs, the FCC would have the ability to take action. If not, the market would have the freedom to experiment with new business models and service arrangements. In comparison, a  per se rule “will almost always favor one group over another.”

There is another reason the Chairman should be commended for not rushing to reinstate the invalidated net neutrality rules – respect for the role of Congress. As Commissioner Pai noted in his statement on the DC Circuit’s decision striking down the rules, it was “the second time in four years” that the court had ruled that the agency exceeded its authority in attempting to regulate the Internet. In the meantime, Congress has begun a #CommActUpdate process to modernize the statute for the Internet era. In these circumstances, comity counsels that the FCC defer to Congress on Internet rules. A case-by-case approach would give the FCC flexibility to address any serious anti-competitive or consumer issues that might arise while avoiding the issuance of comprehensive rules in the face of a Congressional rewrite. That is indeed wise.

Join TechFreedom on Thursday, December 19, the 100th anniversary of the Kingsbury Commitment, AT&T’s negotiated settlement of antitrust charges brought by the Department of Justice that gave AT&T a legal monopoly in most of the U.S. in exchange for a commitment to provide universal service.

The Commitment is hailed by many not just as a milestone in the public interest but as the bedrock of U.S. communications policy. Others see the settlement as the cynical exploitation of lofty rhetoric to establish a tightly regulated monopoly — and the beginning of decades of cozy regulatory capture that stifled competition and strangled innovation.

So which was it? More importantly, what can we learn from the seventy year period before the 1984 break-up of AT&T, and the last three decades of efforts to unleash competition? With fewer than a third of Americans relying on traditional telephony and Internet-based competitors increasingly driving competition, what does universal service mean in the digital era? As Congress contemplates overhauling the Communications Act, how can policymakers promote universal service through competition, by promoting innovation and investment? What should a new Kingsbury Commitment look like?

Following a luncheon keynote address by FCC Commissioner Ajit Pai, a diverse panel of experts moderated by TechFreedom President Berin Szoka will explore these issues and more. The panel includes:

• Harold Feld, Public Knowledge
• Rob Atkinson, Information Technology & Innovation Foundation
• Hance Haney, Discovery Institute
• Jeff Eisenach, American Enterprise Institute
• Fred Campbell, Former FCC Commissioner

Space is limited so RSVP now if you plan to attend in person. A live stream of the event will be available on this page. You can follow the conversation on Twitter on the #Kingsbury100 hashtag.  

When: Thursday, December 19, 2013 11:30 – 12:00Registration & lunch 12:00 – 1:45Event & live stream

The live stream will begin on this page at noon Eastern.

Where: The Methodist Building 100 Maryland Ave NE Washington D.C. 20002

Questions? Email contact@techfreedom.org.

The decision to forgo distribution is referred to as a “blackout” in the cable context and “blocking” in the Internet context, but the economic considerations affecting such negotiations are substantially the same.

The American Television Alliance (ATVA), a coalition comprised primarily of cable and satellite TV operators, is using the playbook of net neutrality proponents in abid to convince the Federal Communications Commission (FCC) to regulate prices for broadcast television content. The goal of ATVA’s cable and satellite members is to increase their profit margins by convincing the government to artificially lower the cost of programming they resell to consumers. I suspect the goal of ATVA’s non-profit members, e.g., Public Knowledge and New America Foundation, is to solidify the FCC’s flawed rationale for adopting net neutrality rules in 2010, which imposed restrictions on market arrangements between Internet Service Providers (ISPs) and Internet content providers without finding a market failure.

Many of ATVA’s cable members are also ISPs that have routinely argued against the imposition of net neutrality regulations in the market for Internet services. By supporting ATVA, these same companies appear to have abandoned the intellectual foundation for opposition to net neutrality. Are they now signaling their intent to embrace net neutrality regulation of the Internet?

An analysis of the similarities between the cable and Internet services markets illuminates this apparent inconsistency. Both cable and Internet services exhibit the characteristics of two-sided markets, and the economic relationships among the participants in both of these markets are substantially similar. All else being equal, consumers prefer distribution platforms (i.e., cable or ISP networks) that provide access to more rather than less content, and content providers prefer distribution on platforms with more rather than less users. As a result, either side of the market has the potential to behave anticompetitively, but only if it has substantial market power relative to the other. Recent economic literature demonstrates that, in the absence of market failure, permitting full pricing flexibility on both sides of two-sided communications markets maximizes consumer welfare by increasing investment in both network infrastructure and content.

Prominent ATVA members who are also ISPs recognized as much in their fight against net neutrality at the FCC. In its comments opposing net neutrality, Time Warner Cable argued that the “critical gap in the [FCC]‘s selective proposal to regulate broadband Internet access service providers is the absence of any assertion that they possess  market power—without which, it is unclear that even manifestly harmful discrimination would warrant regulatory intervention.” (Time Warner Cable Comments at 27 (emphasis in original)) Yet, the ATVA petition, filed by Time Warner Cable at the FCC, fails to provide any economic analysis or cite any precedent finding that broadcasters exercise market power warranting government intervention in retransmission consent negotiations.

The core of ATVA’s argument is a straightforward attack on the ordinary functioning of any two-sided market –  the same attack on the previously unregulated Internet made by net neutrality proponents. ATVA argues that, when a cable operator asks a broadcaster for consent to retransmit broadcast content (which is known as “retransmission consent”), the cable operator must either agree to pay the broadcasters or forgo distribution of that broadcaster’s content. Net neutrality advocates similarly argue that, if an Internet content provider were required to pay an ISP for Internet content distribution, the Internet content provider would either have to agree to pay the ISP or forgo distribution of its content. The decision to forgo distribution is referred to as a “blackout” in the cable context and “blocking” in the Internet context, but the economic considerations affecting such negotiations are substantially the same.

ATVA’s attack on retransmission consent agreements suffers from the same infirmity as the net neutrality attack on ISPs: It is a “solution in search of a problem.” As Time Warner Cable noted in its comments on net neutrality:

“Consumers have to come to expect that they can access the content and services they want, when they want. Service providers almost invariably meet those expectations, and in those isolated instances when they have not, the marketplace has exerted the discipline necessary to rectify matters.” (Time Warner Cable Comments at 18)

Those who believe in free markets should exhibit the same trust in the marketplace when addressing the issue of “black outs” for video content as they do when addressing the issue of “blocking” Internet content. Broadcasters have no greater incentive to “black out” cable viewers (and potentially lose advertising revenue) than ISPs have to “block” Internet content (and potentially lose subscription revenue).

Of course, ATVA doesn’t complain about blackouts,  per se. Every blackout to date has been resolved by the marketplace without restrictive FCC rules, and even if they weren’t, consumers could still access broadcast programming over the air free of charge. ATVA’s real complaint is that broadcasters are demanding “excessive” retransmission consent fees due to the popularity of their programming – an allegation that is uncomfortably similar to the “gatekeeper” theory the FCC relied on in its net neutrality order. There, the FCC concluded that an ISP could “force” edge providers to pay “inefficiently high fees” because that ISP is “typically” an Internet content provider’s “only option” for reaching a particular end user. Both theories reflect a desire to intervene in the ordinary pricing mechanisms of two-sided markets without engaging in a thorough market power analysis. They also ignore the fact that, in a two-sided market, charging for content distribution “may well have important pro-competitive effects.” (Time Warner Cable Comments at 31)

The apparent inconsistency of ATVA members who support regulation of retransmission consent agreements while opposing net neutrality is not a new or surprising phenomenon in Washington. It is essential, however, for those who believe in liberty to recognize the danger that ATVA’s theory represents to free market principles: An ATVA win on retransmission consent would continue the expansion of FCC authority unbounded by rigorous analysis that began with the net neutrality order. With a rewrite of the Communications Act on the horizon, free market advocates cannot afford to lose this battle. If we do, we risk losing the war before it even begins.

Yesterday’s decision requiring AT&T to continue offering seven-year term discounts on POTS lines while the FCC conducts a meritless investigation is more than a drag – it is a government shackle on the deployment of modern IP-based infrastructure to rural and low-income consumers.

In early 2010, the Federal Communications Commission (FCC) issued the National Broadband Plan (Plan) to ensure that all people of the United States have access to broadband Internet communications. The Plan concluded that “broadband is a foundation for economic growth, job creation, global competitiveness and a better way of life” and urged that everyone “must now act and rise to our era’s infrastructure challenge.” (Plan at XI, XV) Yesterday the FCC threatened to turn its back on this call to action when it suspended revisions to AT&T tariffs that sought to stop offering term discount plans of five to seven years for 1960s era “Plain Old Telephone Service” (POTS) technology using circuit switched “special access” lines. The FCC suspended the tariff revisions for five months to investigate their “lawfulness” (even though the remaining tariff rates have already been conclusively presumed to be just and reasonable).

Ironically, at the open Commission meeting on Thursday, the Technology Transitions Policy Task Force will provide a status update on the National Broadband Plan’s recommendation that the FCC eliminate—within the next five to seven years—the requirement that AT&T and other carriers offer POTS technologies using circuit-switched networks (known as the “IP transition”).

Why would the FCC open a five-month investigation on  Monday to determine whether it is “lawful” for AT&T to stop providing long-term discounts for services using outdated technologies the FCC will discuss eliminating altogether at its meeting on Thursday?

The most plausible answer is that the FCC intends to use its regulatory leverage to pressure AT&T into renegotiating its tariffed rates for outdated special access services while the agency decides how to proceed with the IP transition. That might provide some short-term benefits to AT&T competitors who would prefer to avoid investing in their own infrastructure, but in the long-term, the uncertainty created by this regulatory overreach might also forestall investment in the IP infrastructure necessary to fulfill the goals of the National Broadband Plan.

Neither possibility would benefit residential consumers in rural and low-income areas that don’t have access to broadband. The transition from POTS circuit-switched networks to all Internet Protocol networks was a key recommendation of the National Broadband Plan for achieving universal broadband access. The Plan noted that legacy regulation requiring certain carriers to maintain POTS—a requirement the Plan concluded is not sustainable—leads to investments in stranded assets that siphon funding away from IP networks and services. (Plan at 59) Consistent with previous technology transitions, the Plan recommended that the FCC ensure that legacy regulations and services do not become a drag on the transition to a more modern and efficient communications infrastructure while ensuring that consumers don’t lose services they need and businesses can plan for and adjust to the new standards. ( Id.) “The challenge for the country is to ensure that as IP-based services replace circuit-switched services, there is a smooth transition.” (Id.)

It’s been nearly four years since the FCC recognized the need to ensure that legacy regulations and services do not become a drag on the IP transition. Yesterday’s decision requiring AT&T to continue offering seven-year term discounts on POTS lines while the FCC conducts a meritless investigation is more than a drag – it is a government shackle on the deployment of modern IP-based infrastructure to rural and low-income consumers. Most special access lines are not capable of providing broadband Internet services, and they are almost never used to provide services to residential consumers. Other carriers typically lease special access lines from AT&T at government-regulated rates in order to provide phone lines and narrowband data services to businesses – a regressive policy framework that subsidizes corporate telephony at the expense of investment in high-speed broadband services for residential consumers.

In addition to being bad policy, suspending tariff revisions in order to protect competitors and shift costs from corporations to consumers is bad law. The current AT&T tariffs have already been “deemed lawful,” which means that AT&T’s tariffed rates for special access services offered for terms of three years or less have been conclusively presumed to be “just and reasonable” within the meaning of section 201(b) of the Communications Act. ( See Virgin Islands Tele. Corp. v. FCC, 444 F.3d 666 (DC Circ. 2006)) Those rates cannot be deemed unjust and unreasonable merely because AT&T is no longer offering discounts for longer-term arrangements. The Communications Act does not require a carrier to offer any term discounts at all. (See BellSouth v. FCC, 469 F.3d 1052 (D.C. Cir. 2006))

Of course, as noted above, I suspect the FCC’s decision to suspend this tariff was not driven by concerns about the reasonableness of AT&T’s rates (which have already been deemed lawful). It was likely driven by the desire to obtain additional regulatory leverage over services that benefit particular competitors and to buy time for an express decision on the timeline for the IP transition. Even if those were appropriate regulatory goals (and the former certainly is not), bending tariff laws and procedures is not an appropriate means of achieving them.

One year ago I wrote that conservatives were the leading voices in technology policy. Conservative leadership on tech policy issues became even more apparent last week, when House Energy and Commerce Committee Chairman Fred Upton (R-MI) and Communications and Technology Subcommittee Chairman Greg Walden (R-OR) announced plans to update the Communications Act for the Internet era (#CommActUpdate). Virtually everyone recognizes that the Act, which Rep. Walden noted was “written during the Great Depression and last updated when 56 kilobits per second via dial-up modem was state of the art,” is now hopelessly out of date. But it was conservative leadership that was willing to begin the legislative process necessary to update it.

Although the term “progressive” literally means “advocating progress, change, improvement, or reform, as opposed to wishing to maintain things as they are,” some political progressives have focused their communications advocacy on maintaining the status quo. In response to the #CommActUpdate, Free Press said, “We’re not going to get a better act than we have now.” (Communications Daily, Dec. 5, 2013 (subscription required)) Free Press, which describes itself as a “movement to change media and technology policies,” also told Comm Daily, “The IP transition should be governed by the laws on the books today.”

The “do-nothing” approach advocated by Free Press is symptomatic of the regressive policies pursued by some communications advocates today. The laws Free Press seeks to preserve unreasonably discriminate among similar networks providing substantially the same services based solely on their historical identity. Among other things, this discriminatory statutory framework artificially shifts the costs of communications services provided to corporations to residential consumers, inhibits investment in the modern communications infrastructure to serve rural and low-income areas, and distorts competition.

When did self-described “progressives” start believing that Congress cannot improve such painfully outdated laws?

I have more faith in the legislative process than Free Press. I am confident that Congress can work in a bipartisan way to improve laws that are unfairly subsidizing business services at the expense of residential consumers, inhibiting investment in modern communications infrastructure, and distorting competition. Previous revisions to the Communications Act have not provoked partisan rancor, and this one shouldn’t either. Policymakers and advocates from both right and left of center understand the importance of ensuring that consumer-focused communications laws provide a level playing field for all market participants and foster the investment necessary to bring high-speed Internet services to every American.

Of course, improving the act will require that Congress conduct a thorough examination of the current communications market and retain only those policies that have proven successful – which is why the #CommActUpdate announcement is so important. Reviewing the Communications Act will take time, and in a global economy, we have no more time to waste.

There is bipartisan agreement that the 1996 Telecom Act was antiquated only shortly after President Clinton’s signature had dried on the legislation. There is also consensus that spectrum policy, still largely grounded in the 1934 communications statute, absolutely distorts today’s wireless markets. And there is frequent criticism from thought leaders, right and left, that the FCC has been, for decades, too accommodating to the firms it regulates and too beholden to the status quo (economist Thomas Hazlett quips the agency’s initials stand for “Forever Captured by Corporations”).

For these reasons, members of Congress every few years announce their intention to reform the 1934 and 1996 communications laws and modernize the FCC. Yesterday, some powerful House members unexpectedly reignited hopes that Congress would overhaul our telecom, broadband, and video laws. In a Google Hangout (!), Reps. Fred Upton and Greg Walden said they wanted to take on the ambitious task of passing a new law in 2015.

Much depends on next year’s elections and the composition of Congress, but hopefully the announcement spurs a major re-write that eliminates regulatory distortions in communications, much as airlines and transportation were deregulated in the 1970s–an effort led by reformist Democrats.

About ten years ago, more than fifty scholars and technologists crafted reports which constituted the Digital Age Communications Act (or DACA) that is largely deregulatory (a majority of the group had served in Democratic administrations, interestingly enough). In 2005, then-Sen. Jim DeMint proposed a bill similar to the working group’s proposals. The working group’s recommendations aged very well in eight years–which you can’t say about the 1996 Act–and represents a great starting point for future legislation.

As Adam has said the DACA reports have five primary reform objectives:

– Replacing the amorphous “public interest” standard with a consumer welfare standard, which is more well-established in field of antitrust law – Eliminate regulatory silos and level the playing field through deregulation – Comprehensively reform spectrum not just through more auctioning but through clear property rights – Reform universal service by either voucherizing it or devolving it to the States and let them run their own telecom welfare programs; and – Significantly reforming & downsizing the scope of the FCC’s power of the modern information economy

DACA redefines the FCC as a specialized competition agency for the communications sector. The FCC largely sees itself as a competition agency today but the current statutes don’t represent that gradual change in purpose. The FCC is slow, arbitrary, Balkanizes industries artificially, and attempts to regulate in areas it isn’t equipped to regulate–the agency has a notoriously bad record in federal courts. These characteristics create a poor environment for substantial investments in technology and communications infrastructure. The DACA proposals aren’t perfect but it is a resilient framework that minimizes the effect of special interests in communications and encourages investments that improve consumers’ lives.

Jon Brodkin at Ars Technica and Brian Fung at The Switch have posts featuring a New America Foundation study, The Cost of Connectivity 2013, comparing international prices and speeds of broadband. As I told Fung when he asked for my assessment of the study, I was left wondering whether lower prices in some European and Asian cities arise from more competition in those cities or unacknowledged tax benefits and consumer subsidies that bring the price of, say, a local fiber network down.

The report raised a few more questions in my mind, however, that I’ll outline here.

The NAF report concludes that US consumers would see lower prices if there was more competition. Or, as Brodkin says,

What’s the takeaway from all this data? It’s not a surprising one: lack of competition makes for bad choices.

I don’t disagree with the sentiment but the report makes no mention of competition data that would tend to support their broad conclusion. How many wireline competitors are there in Paris, Seoul, NYC, and Prague? Is there correlation between more competitors and lower (quality-adjusted) prices? NAF never tells us.

I raise this because the US actually has more market fragmentation (measured by HHI, an established tool used by antitrust agencies) for wireless carriers than many European countries, yet higher prices. If the cause of relatively higher prices is lack of competition, per NAF, wouldn’t we expect lower advertised prices in the US for wireless subscriptions because there is more competition? The fact that the US has higher prices indicates there are other factors besides number of competitors that drive price.

This lack of discussion of competition data is the major gap of the NAF study. Despite concluding that lack of competition is the problem in the US, the authors seem uninterested in rigorously examining the state of competition in the cities and countries they highlight (but perhaps this will be taken up in their promised forthcoming full report).

Another problem is that the report mostly consists of documenting advertised download speeds. While sensible since it’s easily available, this reliance on advertised speeds warrants a warning. The FCC publishes an annual report comparing international broadband offerings and noted in its 2012 report that advertised speeds are a troublesome metric that often misrepresent what consumers actually see. Recently in the UK, for instance, broadband packages with an advertised speed of 24 Mbps featured an actual speed around 5 Mbps for the typical customer. (Recent truth-in-advertising reforms have made this problem less likely–but only in the UK.) Different countries have different methodologies and advertising standards, and the US carriers tend to have more “honest” advertised speeds. Unlike the FCC, which carefully notes issues with these sorts of measurements, NAF makes no mention of possible discrepancies despite letting advertised speeds do a lot of the work that leads to their conclusion.

My final dispute is with the inclusion of “triple play” subscriptions (combination voice, Internet, television service). Documenting the price for this bundle is next to worthless because the quality of the television package is a substantial reason for buying. For example, what do we learn from the fact that you can get phone service, 20 Mbps Internet speeds, and a television package in Riga, Latvia for $22? Is the $99 price in San Francisco high because of a lack of competition or because the television package is so much better than the channels offered in Riga? Or because of regulatory distortions in US television policy? (Retrans, anyone?) Without some measure of quality-adjusted price, the triple play comparisons are just noise.

Over on Forbes today, I have a very long post inspired by Monday’s oral arguments in Verizon’s challenge of the FCC’s Open Internet rules, passed in 2010

I say “inspired” because the post has nothing to say about the oral arguments which, in any case, I did not attend.  Mainstream journalists can’t resist the temptation to try to read into the questions asked or the mood of the judges some indication of how the decision will come out

But as anyone who has ever worked in a court or followed appellate practice  well knows, the tone of oral arguments signals nothing about a judge’s point-of-view.  Often, the harshest questioning is reserved for the side a judge is leaning towards supporting, perhaps because the briefs filed were inadequate.  Bad briefs create more work for the judge and her clerks.

I use the occasion of the hearing to take a fresh look at the net neutrality “debate,” which has been on-going since at least 2005, when I first started paying attention to it.  In particular, I try to disentangle the political term “net neutrality” (undefined and, indeed, not even used in the 2010 Open Internet order) from the engineering principles of packet routing.

According to advocates for government regulation of broadband access, the political argument for net neutrality regulation is simply a codification of the Internet’s design.  But regardless of whether it would even make sense to transform the FCC into the governing body of engineering protocols for the network (the Internet Society and the its engineering task forces are and always have been doing a fine job, thanks very much), the reality is that the political argument has almost nothing to do with the underlying engineering.

Indeed, those most strongly advocating for more government regulation either don’t understand the engineering or intentionally mischaracterize it, or both.  That’s clear from the wide range of supposed competitive problems that have been lumped together under the banner of “net neutrality” issues over the years–almost none of which have anything to do with packet routing.

Fortunately, very little of the larger political agenda of the loose coalition of net neutrality advocates is reflected in the rules ultimately passed by a bare majority of the FCC in 2010.  Even so, those rules, limited as they were, face many challenges.

For one thing, the FCC, despite over a year of dedicated attention to the problem, could identify only four incidents that suggested any kind of market failure, and only one of which (the Comcast-BitTorrent incident) was ever actually considered in detail by the Commission.  (Two of the others never even rose to the level of a complaint.)  The agency was left to regulate on the basis of “preserving” the Open Internet through what it called (nearly a dozen times) “prophylactic” rules.

Second, and of particular interest in the D.C. Circuit proceeding, Congress has never authorized the FCC to issue rules dealing with broadband Internet access.  Though many authorizing bills have circulated over the years, none have ever made it out of committee.  With no legal basis to regulate, the agency was left pointing to irrelevant provisions of the existing Communications Act–most of which were already rejected by the same court in the Comcast case.  Nothing in the law has changed since Comcast, and on that basis, regardless of the merits of Internet regulation, the FCC is very likely to lose.  Which the Commission surely knew in passing the rules in 2010.

The piece ends by describing, as I did in my testimony before the House Judiciary Committee in early 2011, how the Report and Order betray the technical reality that from an engineering standpoint, even the supposed neutrality of packet routing is largely a sentimental myth.  The FCC identified and exempted a dozen network management technologies, practices, and protocols that they acknowledged do not follow the neutrality principle, but which are essential to effective and efficient management of the network.  There is no “neutral” Internet to preserve, and never was.

The agency was right to exempt these practices.  But the problem with the rules as written is that they could not and did not extend to future innovations that new applications and new users will certainly make as essential as today’s management techniques.

If the rules stand, network engineers, application developers, device makers and others in the vibrant, dynamic Internet ecosystem will be forced to seek permission to innovate from the FCC, which will both slow the high-speed world of Internet design to a crawl and introduce a decision maker with no technical expertise and lots of political baggage.

That of course was the kind of counter-productive and unnecessary regulatory intrusion that Internet users successfully rose up against last year when the UN’s International Telecommunications Union threatened to assert itself in basic Internet governance, or the year before that when Congress, without technical understanding of the most basic variety, tried to re-architect the Internet  on behalf of media companies in the failed SOPA and PIPA legislation.

If the FCC gains a foothold in broadband access with the Open Internet rules or other efforts to gain oversight where Congress has delegated none, expect a similar reaction.  Or, in any case, hope for one.

Last week on The Diane Rehm Show, Susan Crawford, former special assistant to President Obama for science, technology, and innovation policy, claimed that China “makes us look like a backwater when it comes to [broadband] connectivity.” When she was asked how this could be, Ms. Crawford responded:

It happened because of [Chinese industrial] policy. You can call that overregulation. It’s the way we make innovation happen in America.

Ms. Crawford is wrong on the facts and the philosophy.

The Actual Facts

Two months ago, Ms. Crawford’s former employer, the Office of Science and Technology Policy, released a report with these conclusions:

• “Broadband networks at a baseline speed of >10 megabits per second now reach more than 94% of U.S. homes.”

• “In 2012, North America’s average mobile data connection speed was 2.6 Mbps, the fastest in the world, nearly twice that available in Western Europe, and over five times the global average.”

• “Just two of the largest U.S. telecommunications companies account for greater combined stateside investment than the top five oil/gas companies, and nearly four times more than the big three auto companies combined.”

• “The average connection speed in the United States in the fourth quarter of 2012 was 7.4 Mbps, the eighth fastest among all nations, and the fastest when compared to other countries with either a similar population or land mass.”

In comparison, the same source used in the President’s report indicates that China’s average connection speed in the fourth quarter of 2012 was only 1.8 Mbps – seventy-five percent slower than in the United States.

Although our average connection speeds lag those in South Korea and Japan, the differences in speed are less significant from a consumer perspective (7.4 Mbps is enough to delivery high definition video, 1.8 Mbps is not) and reflect differences in population densities and landmass.

The Winning Philosophy

Ms. Crawford believes government intervention “makes free markets and free speech possible.” The facts recited above and the First Amendment to our Constitution – written when government intervention in mass communications was commonplace – both refute that philosophy. Whatever you call it, this type of government intervention “has a record of failure so blatant that only an intellectual could ignore or evade it.”

In the communications context, that record of failure includes government-sanctioned telephone and cable monopolies that policymakers have spent the last two decades unwinding through market-based policies.

The results of that effort demonstrate that it is liberty – the absence of overregulation – that drives innovation in America. The market-based approach to communications regulation pioneered by the Clinton Administration in the 1990s yielded massive investment in new technologies, competition among communications networks, an explosion in new media, and unprecedented consumer choice. We don’t need government intervention for private sector innovation and investment to continue flourishing – we need continued government restraint.

The Progressive Policy Institute has released a new and remarkable broadband report. In it, PPI explicitly distances itself from the Crawford/Wu wing of the left-of-center telecommunications conversation. A money quote from the introduction:

What should the progressive agenda be? Are our choices either to embrace this aggressive regulatory agenda or to accede to conservative laissez-faire? This essay argues that there is a third, and far more promising, option for such a progressive broadband policy agenda. It balances respect for the private investment that has built the nation’s broadband infrastructure with the need to realize the Internet’s full promise as a form of social infrastructure and a tool for individual empowerment. It turns away from problems we may reasonably fear but that simply do not exist—most importantly, the idea that the provision of broadband services is dominated by an anti-competitive “duopoly” that stifles the broad dissemination of content.

On “cage match” competition in the telecom sector:

So perhaps the greatest paradox inherent in “cage match” competition is that, while advocates champion more intrusive regulation, the signal providers are in the fight of their business lives. The benefits of their innovation and investment are being appropriated by the devices and services that use the signal; their stock values and capitalizations are listless compared to the companies that make devices and applications; they have made commitments in the tens of billions to build infrastructure that cannot be reversed. And they are trapped in a vicious circle: they innovate to improve signal quality and availability, these innovations make possible new devices, applications, and services that capture consumer allegiance, these other aspects of the broadband experience appropriate value and make signal more commodity-like in the eyes of consumers, which forces the providers to further improve their product, perpetuating the cycle. They are the economy’s front line for investing in and innovating for our broadband infrastructure, and perhaps they benefit from that investment and innovation the least.

From the section entitled  “Neutrality,” “Unbundling,” and other progressive policy failures:

The weight of the evidence, therefore, suggests the activist agenda leads progressives to a dead end. It addresses a problem that doesn’t exist—the absence of competition in broadband—and compromises another and more important objective—investment in broadband leading to ubiquitous broadband access. In reality, access providers have made massive investments in high-fixed cost broadband wired and wireless capacity that they can only justify by competing for market share and that are continually improving. The case that they are suppressing or might suppress content—either editorially or competitively—is virtually nonexistent.

This analysis is spot on. While I don’t agree with every policy proposal in the report (though I do agree with some, such as liberating spectrum from the broadcasters and DoD), PPI deserves a lot of credit for its excellent study of the state of telecommunications competition.

“In today’s globally competitive era, the United States cannot continue to delay its transition to Internet-enabled infrastructure.”

Last week the Department of Defense (DoD) filed comments with the FCC in its proceeding examining the transition from outdated telephone technologies to Internet Protocol (the “IP-transition”). The comments, which were filed “on behalf of the consumer interests” of the DoD by a civilian attorney in the Army’s Regulatory Law Office (emphasis added), ask the FCC to “consider potential adverse consequences on public safety and national security” of requiring federal agencies to “prematurely transition to different technologies.”

What are these potential adverse consequences? The italicized “interests” of the DoD provide the answer: It wants to avoid incurring any costs to upgrade its outdated telephone technologies to modern, Internet Protocol technologies when its current communications contracts expire in 2017.

While that may be a legitimate concern for DoD procurement plans, federal budgetary pressures are not a legitimate regulatory concern. The FCC cannot require private companies to maintain outdated technologies in order to reduce DoD budgetary pressure or give it additional leverage in its future contract negotiations. The appropriate forum for addressing federal budgetary concerns is Congress, not the FCC.

The DoD filing nevertheless asks the FCC to consider the impact of the IP-transition on federal contracts with private companies for communications services that use legacy telephone technologies. Most of these contracts are administered by the Government Services Administration through its “Networx” contracting program, which is “set to expire” in 2017. The replacement program, which is considering the use of “standardized IP” infrastructure, is entitled “Network Services 2020”. The obvious implication of this date is that the federal government is considering extending the “Networx” program beyond its set expiration and is concerned that the IP-transition could hinder its negotiations.

Though the federal government is free to seek an extension of its Networx contract until 2020, it cannot use federal regulation to increase its negotiating leverage. The FCC has a “longstanding policy” of declining to adjudicate private contractual issues – a policy that is particularly appropriate when the federal government is a party to the contract. It would not serve the public interest to deny consumers additional access to modern technologies merely to give the federal government additional leverage in its contract negotiations.

That does not mean the FCC should ignore public safety and national security. It should honor the DoD request to participate in the trial selection process and coordinate with it and other government agencies throughout the IP-transition to avoid disruption to critical communications.

It should also recognize, however, that the other concerns raised by the DoD are primarily commercial in nature. The DoD filing carefully avoids saying that the legacy telephone network is technologically necessary to meet its operational demands. It instead “embraces advances in telecommunications technologies and services” and “applauds” efforts to pursue “more efficient, reliable and functionally robust” networks – so long as the DoD isn’t required to “prematurely” (i.e., prior to 2020) expend any funding on such networks.

These budgetary concerns are misplaced. The capabilities offered by the all-IP networks of the future will ultimately enhance public safety and national security, while improving education and healthcare, and significantly contributing to our Nation’s economy. In today’s globally competitive era, the United States cannot continue to delay its transition to Internet-enabled infrastructure. The longer we wait to begin our transition, the more likely it is that another nation’s flag will greet us when we finally reach its end.

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

Download

Related Links

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

Gina Keating, author of Netflixed: The Epic Battle for America’s Eyeballs, discusses the startup of Netflix and their competition with Blockbuster.

Keating begins with the history of the company and their innovative improvements to the movie rental experience. She discusses their use of new technology and marketing strategies in DVD rental, which inspired Blockbuster to adapt to the changing market.

Keating goes on to describe Netflix’s transition to internet streaming and Blockbuster’s attempts to retain their market share.

Download

Related Links

• Netflixed: The Epic Battle for America’s Eyeballs, Keating
• Gina Keating’s New Book about the Rise of Netflix, Babayan
• ‘Netflixed,’ Book by Gina Keating, Describes CEO Reed Hastings As a Nasty Boss’ Liedtke

As the “real-world” continues its inexorable march toward our all-IP future, the FCC remains stuck in the mud fighting the regulatory wars of yesteryear, wielding its traditional weapon of bureaucratic delay to mask its own agenda.

Late last Friday the Technology Transitions Policy Task Force at the Federal Communications Commission (FCC) issued a Public Notice proposing to trial three narrow issues related to the IP transition (the transition of 20^th Century telephone systems to the native Internet networks of the 21^stCentury). Outgoing FCC Chairman Julius Genachowski says these “real-world trials [would] help accelerate the ongoing technology transitions moving us to modern broadband networks.” Though the proposed trials could prove useful, in the “real-world”, the Public Notice is more likely to discourage future investment in Internet infrastructure than to accelerate it.

First, the proposed trials wouldn’t address the full range of issues raised by the IP transition. As proposed, the trials would address three limited issues: VoIP interconnection, next-generation 911, and wireless substitution. Though these issues are important, the FCC proposals omit the most important issue of all – the transition of the wireline network infrastructure itself. As a result, they would yield little, if any, data about the challenges of shutting down the technologies used by the legacy telephone network.

Second, the proposed trials are unlikely to yield significant new information. As Commissioner Pai noted in his statement last week, all three issues are already being trialed in the “real-world” by the industry, consumers, and state regulators.

Finally, and perhaps most importantly, all three issues are already the subject of ongoing FCC proceedings and don’t raise any new issues (e.g., issues that would implicate FCC regulatory forbearance).

If the FCC truly wanted to accelerate the transition to all-IP infrastructure, why would it propose studies of three limited issues that it is already addressing? I expect the FCC was unwilling to propose a comprehensive trial that could jeopardize its assertion of regulatory jurisdiction over the Internet, especially its potential authority to impose Title II regulations if it loses the net neutrality case pending in the DC Circuit. The language in the Public Notice indicates it is no coincidence that the narrow issues the FCC intends to study do not implicate its forbearance authority or (at least directly) the scope of its jurisdiction. For example, the Public Notice states that VoIP interconnection involves, among other things, “pricing” and “quality of service” issues, and that the FCC wants to structure any trial to provide it with “data to evaluate which policies may be appropriate” for VoIP interconnection. This language clearly indicates that the FCC is contemplating Title II pricing regulation of VoIP interconnection.

The Public Notice also seeks additional comment on the more comprehensive approach to the IP transition originally proposed by Commissioner Ajit Pai in July 2012, but in a way that sends all the wrong signals to investors.

When Commissioner Pai proposed the establishment of a Task Force for the IP transition nine months ago, his intent was the removal of regulatory barriers to infrastructure investment, including unpredictability at the FCC. He suggested that the FCC send a clear signal that new IP networks built in competitive markets will not be subject to “broken, burdensome economic regulations” designed for monopoly telephone networks.

Last Friday’s Public Notice does just the opposite. It signals that even the worst excesses of legacy telephone regulation are still an option for the Internet. Specifically, the Public Notice “invites” telephone companies that are interested in comprehensive trials to submit a comprehensive plan listing, at a minimum:

(1) all of the services currently provided by the carrier in a designated wire center that the carrier would propose to phase out; (2) estimates of current demand for those services; and (3) what the replacement for those services would be, including current prices and terms and conditions under which the replacement services are offered.

It is telling that none of these enumerated questions are aimed at the potential technical issues posed by the IP transition (which is a forgone conclusion economically). They are aimed at economic issues relevant to the FCC’s traditional Title II price regulation of communications services.

In the nine months since Commissioner Pai began leading the IP transition, the FCC has signaled nothing more than its intent to continue bureaucratic business as usual. As the “real-world” continues its inexorable march toward our all-IP future, the FCC remains stuck in the mud fighting the regulatory wars of yesteryear, wielding its traditional weapon of bureaucratic delay to mask its own agenda. There it will remain until the FCC has a Chairman with a vision for the future, not the past.

I plan to write more about broadband competition and the impact of Google Fiber but in the meantime, there is a New York Times article on the subject that I’ll briefly address.

The author, Eduardo Porter, misdiagnoses why tiered pricing in broadband exists, giving readers the impression that only monopolies price discriminate:

That means that in most American neighborhoods, consumers are stuck with a broadband monopoly. And monopolies don’t strive to offer the best, cheapest service. Rather, they use speed as a tool to discriminate by price — coaxing consumers who are willing to pay for high-speed broadband into more costly and profitable tiers.

Consumer advocacy groups regularly–and wrongly–equate price discrimination with monopoly. Price discrimination–where firms price different customers different prices because of their willingness to pay–tells us nothing about the existence of monopoly (and little about market power). Firms lacking monopoly–in industries like airlines, clothing retail, movie theaters, and restaurants–use price discrimination. No one alleges monopoly in these industries, so I don’t know why the author makes this connection between monopoly and price discrimination. Had Porter thought about it, this paragraph makes little sense since even in the urban areas that have 2 or 3 high-speed broadband providers you still see tiered pricing. This should be a tip-off that tiered pricing does not arise from monopoly.

Porter makes another error, which I think just signals the sloppy reporting in this piece:

The preferred strategy seems to involve more cooperation than competition. In 2011, Verizon tried to cobble together agreements with the nation’s major cable firms to jointly market each others’ services — offering itself as the wireless complement to cable’s wireline plans. It was foiled only because the Justice Department slapped the deals down as anticompetitive.

As Gigi Sohn (who generally agrees with the author) points out on Twitter, this is not right either.

Great @nytimes piece on why US #broadband is mediocre: nytimes.com/2013/05/08/bus…Correction: DoJ did *not* block Verizon-cable spectrum deal

— Gigi Sohn (@gigibsohn) May 8, 2013

The agreements to jointly market others’ products were not in any meaningful sense “foiled.” Those agreements were approved with conditions, namely, that Verizon couldn’t market a cable company’s service where FiOS is available.

I don’t think these are minor nitpicks. The fact is, journalists and advocates regularly employ loose definitions of “monopoly,” often intentionally in order to increase the urgency to further some political end. And the portion about the Verizon deal gives readers the distinct impression that Verizon was doing something colluding and nefarious that was stopped by the DOJ, and that’s just not true.

If broadband Internet infrastructure had been built to the same extent as public water-supply systems , more than twice as many Americans would lack fixed broadband Internet access.

After abandoning the “information superhighway” analogy for the Internet, net neutrality advocates began analogizing the Internet to waterworks. I’ve previously discussed the fundamental difference between infrastructure that distributes commodities (e.g., water) and the Internet, which distributes speech protected by the First Amendment – a difference that is alone sufficient to reject any notion that governments should own and control the infrastructure of the Internet. For those who remain unconvinced that the means of disseminating mass communications (e.g., Internet infrastructure) is protected by the First Amendment, however, there is another flaw in the waterworks analogy: If broadband Internet infrastructure had been built to the same extent as public water-supply systems, more than twice as many Americans would lack fixed broadband Internet access.

Advocates who would prefer that the government (whether local, state, or federal) own and operate the Internet often use the lack of broadband access in rural America as a justification. They point to an FCC report finding that 19 million Americans (6% of the population) lack access to a fixed broadband network and that less than 1% of Americans lack access to a mobile broadband network. Government broadband advocates fail to acknowledge, however, that more than twice as many Americans lack access to public water-supply systems. According to the most recent report from the US Geological Survey,* 43 million Americans (14% of the population) lack access to public water-supply systems and instead must self-supply their own water (e.g., they have to drill a well on their property).

Self-supplied water systems are common in rural areas and neighborhoods that lie outside the jurisdictional boundaries of a municipality. The Virginia Department of Health notes that the “majority of households in 60 of Virginia’s 95 counties rely on private water supply systems” and that in “52 counties, the number of households using private wells is increasing faster than the number of households connecting to public water supply systems.” For example, my neighborhood in northern Virginia, which is served by two fixed broadband providers and several mobile broadband providers, has no access to a public water-supply system. In my neighborhood, every homeowner must drill their own well (at a cost ranging from $3,500 to over $50,000 depending on geological conditions and local regulations).

The jurisdictional limitations of municipal water-supply systems can be overcome by self-supply in most areas of the United States because the value of a water system to a particular household is not directly increased by interconnecting it with another water system. In contrast, the Internet is a network of networks (the term “Internet” was shortened from internetwork) that exhibits both positive and negative direct network effects – i.e., its value for all users is affected by the addition of new users or content to the internetwork. By definition, an individual homeowner cannot self-supply Internet access without interconnecting with at least one other network.

This fundamental difference between waterworks and the Internet is critical to understanding why state legislatures often treat municipal waterworks differently than municipal broadband networks. In addition to the First Amendment issues that are involved when local governments own and control the primary means of mass communications, many states have recognized the potential for municipal broadband networks to result in a form of “cherry picking.” If every municipality built its own broadband network, substantial portions of most states would still lack access to broadband, but the ability of private broadband network operators to profitably serve those areas would likely be reduced. As noted above, public water-supply systems cover significantly less population than private broadband networks.

Of course, advocates who would prefer that the government own and operate the Internet typically don’t mention the jurisdictional limitations of municipalities or the potential impact of municipal broadband networks on citizens who don’t live in a municipality. Some of these advocates actually imply that cronyism must be the primary motivation for state legislation governing municipal broadband networks. Fortunately, state legislators representing citizens who lack access to municipal services have a better understanding of the needs of their citizens than some urban lobbyists and bureaucrats living in Washington.

*                      *                      *

*Note that the broadband data in the FCC report is current through mid-2011, and the public water-supply data in the US Geological Survey report is current only through 2005. The US Geological Survey releases its water use reports every five years, but does not intend to release its 2010 water use report until fiscal year 2014. Based on previous trends, however, it is unlikely that the percentage of Americans who have access to public water-supply systems has increased significantly in the last six years, if at all. The percentage of Americans that self-supplied their water dropped only three percentage points in the twenty-year period from 1985 (17%) to 2005 (14%).

The Information Economy Project at the George Mason University School of Law is hosting a conference tomorrow, Friday, April 19. The conference title is From Monopoly to Competition or Competition to Monopoly? U.S. Broadband Markets in 2013. There will be two morning panels featuring discussion of competition in the broadband marketplace and the social value of “ultra-fast” broadband speeds.

We have a great lineup, including keynote addresses from Commissioner Joshua Wright, Federal Trade Commission and from Dr. Robert Crandall, Brookings Institution.

The panelists include:

Eli Noam, Columbia Business School

Marius Schwartz, Georgetown University, former FCC Chief Economist

Babette Boliek, Pepperdine University School of Law

Robert Kenny, Communications Chambers (U.K.)

Scott Wallsten, Technology Policy Institute

The panels will be moderated by Kenneth Heyer, Federal Trade Commission and Gus Hurwitz, University of Pennsylvania, respectively. A continental breakfast will be served at 8:00 am and a buffet lunch is provided. We expect to adjourn at 1:30 pm. You can find an agenda here and can RSVP here. Space is limited and we expect a full house, so those interested are encouraged to register as soon as possible.

Why did the government impose a completely different funding mechanism on the Internet than on the Interstate Highway System? There is no substantive distinction between the shared use of local infrastructure by commercial “edge” providers on the Internet and shared use of the local infrastructure by commercial “edge” providers (e.g., FedEx) on the highways.

In Part 1 of this post, I described the history of government intervention in the funding of the Internet, which has been used to exempt commercial users from paying for the use of local Internet infrastructure. The most recent intervention, known as “net neutrality”, was ostensibly intended to protect consumers, but in practice, requires that consumers bear all the costs of maintaining and upgrading local Internet infrastructure while content and application providers pay nothing. This consumer-funded commercial subsidy model is the opposite of the approach the government took when funding the Interstate Highway System: The federal government makes commercial users pay more for their use of the highways than consumers. This fundamental difference in approach is why net neutrality advocates abandoned the “information superhighway” analogy promoted by the Clinton Administration during the 1990s.

The Interstate Highway System was authorized by the Federal Aid Highway Act of 1956, which created the Highway Trust Fund (HTF) to finance the new “superhighway.” The HTF is a user-supported fund that derives hypothecated tax revenues from excise taxes on motor fuels and heavy commercial vehicles, which are the primary source of revenue for federal-aid highways. When it was designing this funding mechanism, the government recognized that the additional congestion and road damage caused by the commercial trucking industry imposes additional costs on highway infrastructure. Although all users contribute to the HTF through fuel taxes, the commercial trucking industry pays higher excise taxes than consumer users. Diesel fuel, which is used primarily by the commercial trucking industry, is taxed at a higher rate than gasoline (diesel is taxed at 24.3 cents per gallon, gasoline is taxed at 18.3 cents per gallon). The HTF also receives revenues produced by excise taxes imposed exclusively on tires used for heavy vehicles, the retail sale of heavy highway vehicles (e.g., semi-trucks), and from the heavy vehicle use tax. These taxes are intended to “better reflect the cost responsibility of heavy trucks” for shared use of the highway infrastructure.

If the theory of the ESP exemption and the net neutrality payment exemption were applied to the highways, commercial users wouldn’t pay any hypothecated taxes for their use of the Interstate Highway System. In net neutrality terms, FedEx uses the highways to offer an “edge” service to consumers who ask FedEx to deliver packages to their home using a shared highway infrastructure that FedEx doesn’t own or operate. If the government treated FedEx the same way it treats “over the top” Internet companies, the government would eliminate taxes on diesel fuel and, rather than charge a heavy vehicle use tax, the government would provide a heavy vehicle use exemption. As a result, consumers would have to pay higher gasoline taxes to make up for the funding lost when shipping companies stopped paying hypothecated taxes (similar to the way telephone subscribers paid for the ESP exemption with their phone bills). The higher gasoline taxes would impact every consumer who uses the highways – even consumers who never use FedEx. Any suggestion that FedEx pay its fair share for use of the highways would be deemed a “plot to block highway freedom” by threatening the “commercial model” of the “open highways” (the terms used by FCC Chairman Julius Genachowski to describe any suggestion that would eliminate the net neutrality payment exemption in the Internet context).

Why did the government impose a completely different “commercial model” on the Internet than on the Interstate Highway System? There is no substantive distinction between the shared use of local infrastructure by commercial “edge” providers on the Internet and shared use of the local infrastructure by commercial “edge” providers (e.g., FedEx) on the highways. The difference in treatment is a historical anomaly resulting from the initially “temporary” ESP exemption that has morphed into a desire to permanently subsidize the profits of “over the top” Internet companies in order to “preserve” the historical payment models of the Internet. In its order adopting net neutrality rules, the FCC exempted “edge” providers from paying for their use of local Internet infrastructure because ISPs “may have incentives to increase revenues by charging edge providers,” which the FCC believed would reduce incentives for edge providers to invest by reducing “the potential profit that an edge provider would expect to earn from developing new offerings.” (Emphasis added.) Excise taxes also reduce the potential profits of FedEx and other users of heavy commercial vehicles on the highways, but the federal government has not exempted them from the ordinary costs of doing business to encourage investment in new shipping offerings. To the contrary, a brochure released by the Department of Transportation (DOT) asks, “What can be done to enhance [heavy vehicle use tax] revenues?” The DOT views the heavy use vehicle tax as a way to “level the playing field” for consumers “by ensuring that operators of heavy trucks pay a little more for the highway network.” Of course, the FCC says net neutrality, which exempts commercial users from paying anything for their use of the local Internet, creates a “level playing field” for consumers too.

In an economic system based on capitalism, companies are not routinely exempted from the ordinary costs of doing business, including the use of shared infrastructure. Though the Interstate Highway System is not a free market, the government has at least attempted to correlate usage and costs. When FedEx uses heavy vehicles to deliver packages, it pays more for its use of the highways than consumers, even when consumers have requested FedEx deliveries. This has the effect of reducing the potential profits of FedEx – the “harm” to “edge” providers the FCC relied on to justify the net neutrality payment exemption on the Internet – but it also has the effect of encouraging FedEx to innovate and invest in more efficient methods of package delivery that cause less congestion and harm to the highways.

The FCC took the opposite approach with net neutrality. Its rules are designed to maximize the profits of commercial “edge” providers on the Internet while reducing their incentives to use bandwidth more efficiently. As a result, Internet consumers who never watch a video on the Internet nevertheless share a portion of the cost of upgrading local Internet infrastructure to deliver high definition video while “over the top” Internet companies – no matter how large or successful they become – pay nothing. No wonder net neutrality advocates have stopped talking about the “information superhighway.” If policymakers were to examine the analogy too closely, they might realize that net neutrality isn’t intended to “level the playing field” for consumers – it’s intended to protect the profits of commercial “edge” providers at the expense of consumers.

Many net neutrality advocates would prefer that the FCC return to the regulatory regime that existed during the dial-up era of the Internet. They have fond memories of the artificially low prices charged by the dial-up ISPs of that era, but have forgotten that those artificially low prices were funded by consumers through implied subsidies embedded in their monthly telephone bills.

Remember when the Internet was the “information superhighway”? As recently as 2009, the Federal Communications Commission (FCC) still referred to the broadband Internet as, “the interstate highway of the 21st century.” Highways remain a close analogy to the Internet, yet by 2010, net neutrality advocates had replaced Internet highway analogies with analogies to waterworks and the electrical grid. They stopped analogizing the Internet to highways when they realized their approach to Internet regulation is inconsistent with government management of the National Highway System, which has always required commercial users of the highways to pay more for their use than ordinary consumers. In contrast, net neutrality is only the latest in a series of government interventions that have exempted commercial users from paying for the use of local Internet infrastructure.

Vice President Gore popularized the term “information superhighway” in the 1990s as a way of garnering support for the Clinton Administration’s technology initiatives, including its Agenda for Action to promote the Internet (then dubbed the “National Information Infrastructure”). Gore believed the Internet would become the “Interstate Highway System of the 21st Century,” and he frequently analogized the Internet to a “network of highways – much like the Interstates begun in the ‘50s.” He envisioned networks as diverse as the nation’s roadways:

These are highways carrying information rather than people or goods. And I’m not talking about just one eight-lane turnpike. I mean a collection of Interstates and feeder roads made up of different materials in the same way that roads can be concrete or macadam – or gravel. Some highways will be made up of fiber optics. Others will be built out of coaxial or wireless.

Though the Administration recognized their similarities, it chose to fund the “21st Century technology infrastructure” of the Internet differently than highways. The Administration recognized the “fundamental fact” that the private sector was already investing approximately $50 billion annually in telecommunications infrastructure compared to the one to two billion the federal government was contributing. Based on this fact, the Administration determined that its first principle for government action should be to “promote private sector investment” in Internet infrastructure through tax incentives and communications reform legislation that would “encourage innovation and promote long-term investment.” The reform legislation referred to in the Agenda for Action became the Telecommunications Act of 1996.

As implemented by the FCC, however, the 1996 Act discouraged investment in local Internet infrastructure by shifting costs caused by “over the top” Internet service providers to consumers who subscribed to plain old telephone services. The 1996 Act distinguishes between:

• “Telecommunications carriers,” which provide switched voice telephone service and are subject to common carrier regulation, and
• “Information service providers,” which provide data and Internet communications services and are not subject to common carrier regulation.

The FCC concluded that these categories were equivalent to an existing FCC distinction between “basic” and “enhanced” services (with “telecommunications” equaling “basic” and “information” equaling “enhanced”) that was developed in the early 1970s when computing capabilities were new and the telephone system was still a monopoly.

When the telephone monopoly was dismantled in 1983, the FCC required that interstate carriers (e.g., long distance telephone companies and cellular carriers) pay “access charges” to local carriers to maintain the infrastructure of local telephone exchanges (which had previously been maintained through monopoly rents). The FCC temporarily exempted “enhanced service providers” from paying access charges to avoid a “bill shock” to data users. See MTS and WATS Market Structure, FCC 83-356 (1983). This “ESP exemption” was intended to be temporary, because it “forced [telephone subscribers] to bear a disproportionate share of the local [telephone] exchange costs that access charges [were] designed to cover.” See ESP Exemption Order, FCC 88-151 (1988). The FCC extended the ESP exemption permanently in the ESP Exemption Order – despite its discriminatory impact on telephone subscribers who didn’t use data services (which were mostly used by big businesses at that time) – because the market for data services was still emerging. The FCC concluded that, “to the extent the exemption for enhanced service providers may be discriminatory, it remains, for the present, not an unreasonable discrimination.”

After the 1996 Act was passed, the FCC converted the “ESP” exemption into the information service provider (or “ISP”) exemption, which exempted independent “dial-up” Internet service providers from paying access charges and the per-minute rates applicable to interstate telecommunications services (i.e., long distance telephone calls).  See Access Charge Reform, FCC 97-158 (1997). The FCC treated “over the top” dial-up ISPs as local “end user” customers and permitted them to lease lines from telephone companies at the significantly lower, flat monthly rates applicable to business lines used for local calls. Because dial-up ISPs could pay a flat monthly rate for unlimited data traffic rather than the per-minute charges that were then applicable to long distance telephone calls, ISPs offered unlimited dial-up Internet access to consumers at flat monthly rates that were artificially low in comparison to the rates charged for telephone service. As a result, consumers who subscribed to telephone services paid “subscriber line charges” and higher per-minute long distance rates to cover costs to local exchange networks that were caused by dial-up ISPs and their subscribers. Even telephone subscribers who were not using Internet services were in effect required by law to subsidize dial-up ISPs.

Although treating dial-up Internet traffic as “local” meant that ISPs didn’t have to pay access charges (which apply only to interstate calls), the 1996 Act introduced a new payment type – “reciprocal compensation” – that was designed to apply to the exchange of local calls. The states, which have jurisdiction only over local calls, interpreted this provision as requiring that dial-up ISPs pay reciprocal compensation for their share of the costs involved in maintaining local telephone exchanges. The FCC quickly issued an order preempting the states on jurisdictional grounds by concluding that dial-up ISP-bound traffic is inherently interstate.  See Inter-Carrier Compensation for ISP-Bound Traffic, FCC 99-38 (1999). The FCC concluded that the Internet could not be separated into an “intrastate telecommunications service” (the call from the consumer to the dial-up ISP’s local server) and an “interstate information service” (the Internet access provided by the ISP’s local server), because the definition of “information services in the 1996 Act recognizes the inseparability, for purposes of jurisdictional analysis, of the information service and the underlying telecommunications.” The FCC thus required states to treat dial-up ISP traffic as local for pricing purposes and as interstate (i.e., long distance) for jurisdictional purposes. The FCC justified this absurd result by noting the “strong federal interest in ensuring that regulation does nothing to impede the growth of the Internet – which has flourished to date under our ‘hands off’ regulatory approach – or the development of competition.” Of course, dictating that local telephone companies lease their lines at regulated prices to dial-up ISPs was not a “hands off” approach that any free market economist would recognize.

The FCC didn’t adopt a truly “hands-off” regulatory approach to the Internet until it classified broadband Internet access services as information services during the Bush Administration, a classification that prevented or eliminated mandatory wholesale requirements and government price regulations on cable modem (2002), DSL and Fiber (2005), broadband over power line (2006), and wireless broadband (2007). In its Cable Modem Order, the FCC relied on the same rationale used during the Clinton Administration to preempt the states from imposing reciprocal compensation on dial-up ISPs: The FCC concluded that broadband Internet access was an integrated service with “no separate offering of telecommunications service.” Although this rationale was consistent with the jurisdictional premise adopted by the FCC when it preempted the states to preserve the ISP exemption (not to mention the FCC’s tentative conclusion in the 1980s that enhanced service providers should be required to pay access charges), the transition of the Internet to a free market in which “over the top” Internet companies might have to pay their fair share for the use of local Internet infrastructure became the rallying cry for “net neutrality.”

Although the FCC claimed that the net neutrality rules it adopted in 2010 were intended to protect consumers, net neutrality is actually the intellectual descendant of the ESP exemption – a “temporary” exemption that became a permanent subsidy paid by consumers for the benefit of “over the top” Internet companies. Many net neutrality advocates would prefer that the FCC return to the regulatory regime that existed during the dial-up era of the Internet. They have fond memories of the artificially low prices charged by the dial-up ISPs of that era, but have forgotten that those artificially low prices were funded by consumers through implied subsidies embedded in their monthly telephone bills. Due to the drastic decline in telephone subscriptions, that subsidy model is no longer viable, which in part explains why the FCC issued a policy statement embracing net neutrality principles on the same day it deregulated broadband Internet access provided by telephone companies: Net neutrality became the alternative mechanism for forcing consumers to subsidize “over the top” providers of Internet services.

In many ways, the FCC’s net neutrality proceeding in 2010 was a replay of earlier proceedings involving the ESP exemption. In the ESP exemption proceeding, telephone companies, state public utility commissions and attorneys general (with the notable exception of California), and consumer groups (e.g., National Consumers League) generally supported eliminating the ESP exemption, whereas enhanced service providers, device manufacturers (e.g., Apple), and data users (primarily large enterprises at that time) opposed paying access charges to use local telephone networks. States and consumer groups argued that all users of the local telephone network should “pay a fair share of the costs of the local network,” including Internet companies, and that the ESP exemption resulted in telephone consumers subsidizing big data companies. Enhanced service providers argued that the exemption was necessary to promote further development of the “fragile” data services market that was still in its “infancy.” Similar players made similar arguments in the net neutrality proceeding (with the exception that many consumer groups switched sides), and the FCC used the same rationale for adopting net neutrality rules that it relied on in the ISP exemption proceeding. And, similar to the impact of the ESP and ISP exemptions, the FCC’s net neutrality rules have had the effect of spreading costs caused by some “over the top” Internet services to all Internet access subscribers – including those who don’t use the most data intensive services – by prohibiting the owners of local Internet infrastructure from charging fees to content and application providers that use local Internet infrastructure to reach consumers.

Although the Interstate Highway System is user funded, it has no analog to the consumer-funded commercial subsidy model that has supported US-based Internet companies since 1983. When the federal government funded the Interstate Highway System, it embraced the principle that all users of a shared resource should pay for its use and that heavy users should pay the most. This contradiction between the funding policies of the Internet and the Interstate Highway System is why net neutrality advocates had to abandon the “information superhighway” analogy.

Part 2 of this post describes the funding mechanisms used to build and maintain the Interstate Highway System and compares them to net neutrality in more detail.

Tuesday was a big day for the FCC.  The Senate Commerce, Science and Transportation Committee held an oversight hearing with all five Commissioners, the same day that reply comments were due on the design of eventual “incentive auctions” for over-the-air broadcast spectrum.  And the proposed merger of T-Mobile USA and MetroPCS was approved.

All this activity reflects the stark reality that the Commission stands at a crossroads.  As once-separate wired and wireless communications networks for voice, video, and data converge on the single IP standard, and as mobile users continue to demonstrate insatiable demand for bandwidth for new apps, the FCC can serve as midwife in the transition to next-generation networks.  Or, the agency can put on the blinkers and mechanically apply rules and regulations designed for a by-gone era.

FCC Chairman Julius Genachowski, for one, believes the agency is clearly on the side of the future.  In an op-ed last week in the Wall Street Journal, the Chairman took justifiable pride in the focus his agency has demonstrated in advancing America’s broadband advantage, particularly for mobile users.

Mobile broadband has clearly been a bright spot in an otherwise bleak economy.  Network providers and their investors, according to the FCC’s most recent analysis, have spent over a trillion dollars since 1996 building next-generation mobile networks, today based on 4G LTE technology.

These investments are essential for high-bandwidth smartphones and tablet devices and the remarkable ecosystem of voice, video, and data apps they have enabled.  This platform for disruptive innovation has powered a level of “creative destruction” that would do Joseph Schumpeter proud.

Mobile disruptors, however, are entirely dependent on the continued availability of new radio spectrum.  In the first five years following the 2007 introduction of the iPhone, mobile data traffic increased 20,000%.  No surprise, then, that the FCC’s 2010 National Broadband Plan conservatively estimated that mobile consumers desperately needed an additional 300 MHz. of spectrum by 2015 and 500 MHz. by 2020.

With nearly all usable spectrum long-since allocated, the Plan acknowledged the need for creative new strategies for repurposing existing allocations to maximize the public interest.  But some current licensees including over-the-air television broadcasters and the federal government itself are resisting Chairman Genachowski’s efforts to keep the spectrum pipeline open and flowing.

So far, despite bold plans from the FCC for new unlicensed uses of TV “white spaces” and the  passage early in 2012 of “incentive auction” legislation from Congress, almost no new spectrum has been made available for mobile consumers.  The last significant auction the agency conducted was in 2008, based on capacity freed up in the digital television transition.

The “shared” spectrum the agency has recently been touting would have to be shared with the Department of Defense and other federal agencies, which have so far stonewalled a 2010 Executive Order from President Obama to vacate its unused or underutilized allocations.  (The federal government is, by far, the largest holder of usable spectrum today, with as much as 60% of the total.)

And after over a year of on-going design, there is still no timetable for the incentive auctions.  Last week, FCC Commissioner Jessica Rosenworcel, speaking to the National Association of Broadcasters, urged her colleagues at least to pencil in some dates.  But even in the best-case scenario, it will be years before significant new spectrum comes online for mobile devices.  The statute gives the agency until 2022.

In the interim, the mobile revolution has been kept alive by creative use of secondary markets, where mobile providers have bought and sold existing licenses to optimize current allocations, and by mergers and acquisitions, which allow network operators to combine spectrum and towers to improve coverage and efficiency.  Many transactions have been approved, but others have not.  Efforts to reallocate or reassign underutilized satellite spectrum are languishing in regulatory limbo.  Local zoning bodies continue to slow or refuse permission for the installation of new equipment.  Delays are endemic.

So even as the FCC pursues its visionary long-term plan for spectrum reform, the agency must redouble efforts to encourage optimal use of existing resources.  The agency and the Department of Justice must accelerate review of secondary market transactions, and place the immediate needs of mobile users ahead of hypothetical competitive harms that have yet to emerge.

In conducting the incentive auctions, unrelated conditions and pet projects need to be kept out of the mix, and qualified bidders must not be artificially limited to advance vague policy objectives that have previously spoiled some auctions and unnecessarily depressed prices on others.

Let’s hope Congress holds Chairman Genachowski to his promise to “[keep] discussions focused on solving problems, and on facts and data….so that innovation, private investment and jobs follow.”  We badly need all three.

(A condensed version of this essay appears today in Roll Call.)