Congress is considering reforming television laws and solicited comment from the public last month. On Friday, I submitted a letter encouraging the reform effort. I attached the paper Adam and I wrote last year about the current state of video regulations and the need for eliminating the complex rules for television providers.

As I say in the letter, excerpted below, pay TV (cable, satellite, and telco-provided) is quite competitive, as this chart of pay TV market share illustrates. In addition to pay TV there is broadcast, Netflix, Sling, and other providers. Consumers have many choices and the old industrial policy for mass media encourages rent-seeking and prevents markets from evolving.

Dear Chairman Upton and Chairman Walden:

Thank you for the opportunity to respond to the Committee’s December 2014 questions on video regulation.

…The labyrinthine communications and copyright laws governing video distribution are now distorting the market and therefore should be made rational. Congress should avoid favoring some distributors at the expense of free competition. Instead, policy should encourage new entrants and consumer choice.

The focus of the committee’s white paper on how to “foster” various television distributors, while understandable, was nonetheless misguided. Such an inquiry will likely lead to harmful rules that favor some companies and programmers over others, based on political whims. Congress and the FCC should get out of “fostering” the video distribution markets completely. A light-touch regulatory approach will prevent the damaging effects of lobbying for privilege and will ensure the primacy of consumer choice.

Some of the white paper’s questions may actually lead policy astray. Question 4, for instance, asks how we should “balance consumer welfare and the rights of content creators” in video markets. Congress should not pursue this line of inquiry too far. Just consider an analogous question: how do we balance consumer welfare and the interests of content creators in literature and written content? The answer is plain: we don’t. It’s bizarre to even contemplate.

Congress does not currently regulate the distribution markets of literature and written news and entertainment. Congress simply gives content producers copyright protection, which is generally applicable. The content gets aggregated and distributed on various platforms through private ordering via contract. Congress does not, as in video, attempt to keep competitive parity between competing distributors of written material: the Internet, paperback publishers, magazine publishers, books on tape, newsstands, and the like. Likewise, Congress should forego any attempt at “balancing” in video content markets. Instead, eliminate top-down communications laws in favor of generally applicable copyright laws, antitrust laws, and consumer protection laws.

As our paper shows, the video distribution marketplace has changed drastically. From the 1950s to the 1990s, cable was essentially consumers’ only option for pay TV. Those days are long gone, and consumers now have several television distributors and substitutes to choose from. From close to 100 percent market share of the pay TV market in the early 1990s, cable now has about 50 percent of the market. Consumers can choose popular alternatives like satellite- and telco-provided television as well as smaller players like wireless carriers, online video distributors (such as Netflix and Sling), wireless Internet service providers (WISPs), and multichannel video and data distribution service (MVDDS or “wireless cable”). As many consumers find Internet over-the-top television adequate, and pay TV an unnecessary expense, “free” broadcast television is also finding new life as a distributor.

The New York Times reported this month that “[t]elevision executives said they could not remember a time when the competition for breakthrough concepts and creative talent was fiercer” (“Aiming to Break Out in a Crowded TV Landscape,” January 11, 2015). As media critics will attest, we are living in the golden age of television. Content is abundant and Congress should quietly exit the “fostering competition” game. Whether this competition in television markets came about because of FCC policy or in spite of it (likely both), the future of television looks bright, and the old classifications no longer apply. In fact, the old “silo” classifications stand in the way of new business models and consumer choice.

Therefore, Congress should (1) merge the FCC’s responsibilities with the Federal Trade Commission or (2) abolish the FCC’s authority over video markets entirely and rely on antitrust agencies and consumer protection laws in television markets. New Zealand, the Netherlands, Denmark, and other countries have merged competition and telecommunications regulators. Agency merger streamlines competition analyses and prevents duplicative oversight.

Finally, instead of fostering favored distribution channels, Congress’ efforts are better spent on reforms that make it easier for new entrants to build distribution infrastructure. Such reforms increase jobs, increase competition, expand consumer choice, and lower consumer prices.

Thank you for initiating the discussion about updating the Communications Act. Reform can give America’s innovative telecommunications and mass-media sectors a predictable and technology neutral legal framework. When Congress replaces industrial planning in video with market forces, consumers will be the primary beneficiaries.

Sincerely,

Brent Skorup Research Fellow, Technology Policy Program Mercatus Center at George Mason University

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

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

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

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

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

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

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

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

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

More Information

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

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.

Adam and I recently published a Mercatus research paper titled Video Marketplace Regulation: A Primer on the History of Television Regulation And Current Legislative Proposals, now available on SSRN. I presented the paper at a Silicon Flatirons academic conference last week.

We wrote the paper for a policy audience and students who want succinct information and history about the complex world of television regulation. Television programming is delivered to consumers in several ways, including via cable, satellite, broadcast, IPTV (like Verizon FiOS), and, increasingly, over-the-top broadband services (like Netflix and Amazon Instant Video). Despite their obvious similarities–transmitting movies and shows to a screen–each distribution platform is regulated differently.

The television industry is in the news frequently because of problems exacerbated by the disparate regulatory treatment. The Time Warner Cable-CBS dispute last fall (and TWC’s ensuing loss of customers), the Aereo lawsuit, and the Comcast-TWC proposed merger were each caused at least indirectly by some of the ill-conceived and antiquated TV regulations we describe. Further, TV regulation is a “thicket of regulations,” as the Copyright Office has said, which benefits industry insiders at the expense of most everyone else.

We contend that overregulation of television resulted primarily because past FCCs, and Congress to a lesser extent, wanted to promote several social objectives through a nationwide system of local broadcasters:

1) Localism 2) Universal Service 3) Free (that is, ad-based) television; and 4) Competition

These objectives can’t be accomplished simultaneously without substantial regulatory mandates. Further, these social goals may even contradict each other in some respects.

For decades, public policies constrained TV competitors to accomplish those goals. We recommend instead a reliance on markets and consumer choice through comprehensive reform of television laws, including repeal of compulsory copyright laws, must-carry, retransmission consent, and media concentration rules.

At the very least, our historical review of TV regulations provides an illustrative case study of how regulations accumulate haphazardly over time, demand additional “correction,” and damage dynamic industries. Congress and the FCC focused on attaining particular competitive outcomes through industrial policy, unfortunately. Our paper provides support for market-based competition and regulations that put consumer choice at the forefront.

The Mercatus Center at George Mason University has released a new working paper by Daniel A. Lyons, professor at Boston College Law School, entitled “Innovations in Mobile Broadband Pricing.”

In 2010, the FCC passed net neutrality rules for mobile carriers and ISPs that included a “no blocking” provision (since struck down in FCC v. Verizon). The FCC prohibited mobile carriers from blocking Internet content and promised to scrutinize carriers’ non-standard pricing decisions. These broad regulations had a predictable chilling effect on firms trying new business models. For instance, Lyons describes how MetroPCS was hit with a net neutrality complaint because it allowed YouTube but not other video streaming sites on its budget LTE plan (something I’ve written on). Some critics also allege that AT&T’s Sponsored Data program is a net neutrality violation.

In his paper, Lyons explains that the FCC might still regulate mobile networks but advises against a one-size-fits-all net neutrality approach. Instead, he encourages regulatory humility in order to promote investment in mobile networks and devices and to allow new business models. For support, he points out that several developing and rich countries have permitted commercial arrangements between content companies and carriers that arguably violate principles of net neutrality. Lyons makes the persuasive argument that these “non-neutral” service bundles and pricing decisions on the whole, rather than harming consumers, expand online access and ease non-connected populations into the Internet Age. As Lyons says,

The wide range of successful wireless innovations and partnerships at the international level should prompt U.S. regulators to rethink their commitment to a rigid set of rules that limit flexibility in American broadband markets. This should be especially true in the wireless broadband space, where complex technical considerations, rapid change, and robust competition make for anything but a stable and predictable business environment.

Further,

In the rapidly changing world of information technology, it is sometimes easy to forget that experimental new pricing models can be just as innovative as new technological developments. By offering new and different pricing models, companies can provide better value to consumers or identify niche segments that are not well-served by dominant pricing strategies.

Despite the January 2014 court decision striking down the FCC’s net neutrality rules, it’s an issue that hasn’t died. Lyons’ research provides support for the position that a fixation on enforcing net neutrality, however defined, distracts policymakers from serious discussion of how to expand online access. Rules should be written with consumers and competition in mind. Wired ISPs get the lion’s share of scholars’ attention when discussing net neutrality. In an increasingly wireless world, Lyon’s paper provides important research to guide future US policies.

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.

Last week, the House held a hearing about the so-called IP Transition. The IP Transition refers to the telephone industry practice of carrying all wire-based consumer services–voice, Internet, and television–via faster, better fiber networks and not on the traditional copper wires that had fewer capabilities. Most consumers have not and will not notice the change. The completed IP Transition, however, has enormous implications for how the FCC regulates. As one telecom watcher said, “What’s at stake? Everything in telecom policy.”

For 100 years or so, phone service has had a special place in regulatory law given its importance in connecting the public. Phone service was almost exclusively over copper wires, a service affectionately called “plain old telephone service” (POTS). AT&T became the government-approved POTS national monopolist in 1913 (which ended with the AT&T antitrust breakup in the 1980s). The deal was: AT&T got to be a protected monopolist while the government got to require AT&T provide various public benefits. The most significant of these is universal service–AT&T had to serve virtually every US household and charge reasonable rates even to remote (that is, expensive) customers.

To create more phone competitors to the Baby Bells–the phone companies spun off from the AT&T break-up in the 1980s–the Congress passed the 1996 Telecom Act and the FCC put burdens on the Baby Bells to allow new phone companies to lease the Baby Bells’ AT&T-created copper wires at regulated rates. The market changed in ways never envisioned in the 1990s however. Today, phone companies face competition–not from the new phone companies leasing the old monopoly infrastructure but from entirely different technologies. You can receive voice service from your cable company (“digital voice”), your “phone” company (POTS), your wireless company, and even Internet-based providers like Vonage and Skype. Increasingly, households are leaving POTS behind in favor of voice service from cable or wireless providers. Yet POTS providers–like Verizon and AT&T (which also offer wireless service)–must abide by monopoly-era regulations that their cable and wireless competitors–Comcast, Sprint, and others–don’t have to abide by.

Understanding the significance of the IP Transition requires (unfortunately) knowing a little bit about Title I and Title II of the Communications Act. “Telecommunications services,” which are the phone companies with copper networks, are heavily regulated by the FCC under Title II. On the other hand, “information services,” which includes Internet service, are lightly regulated under Title I. This division made some sense in the 1990s. It is increasingly under stress now because burdened “telecommunications” companies like AT&T and Verizon are offering “information services” like Internet via DSL, FiOS, and U-Verse. Conversely, lightly-regulated “information services” companies like Comcast, Charter, and Time-Warner Cable are entering the regulated telephone market but face few of the regulatory burdens.

Which brings us to the IP Transition. As Title II phone companies replace their copper wires with fiber and deploy broadband networks to compete with cable companies, their customers’ phone service is being carried via IP packets. Functionally, these new networks act like a heavily-regulated Title II service since they carry voice, but they also act like the Title I broadband networks that cable providers built. So should these new fiber networks be burdened like Title II services or deregulated like Title I services? Or is it possible to achieve some middle ground using existing law? Those are the questions before the FCC and policymakers. Billions of dollars of investment will be accelerated or slowed and many firms will live or die depending on how the FCC and Congress act. Stay tuned.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

There is renewed interest in unlicensed spectrum as the FCC approaches the TV white space issue (again). Tim B. Lee reports on some of the unlicensed supporters,

Activists at the South by Southwest Interactive festival in Austin, TX, built a free wireless network to help publicize the power of unlicensed “white spaces” technology. The project is part of a broader campaign to persuade the FCC not to auction off this spectrum for the exclusive use of wireless carriers.

Unlicensed spectrum for high-powered devices has been called Super Wifi (“wifi” in this context is used loosely; Super Wifi is a PR term and has nothing to do with the wifi technical standard). Frankly, there are many reasons to be cautious about assigning more unlicensed spectrum, especially given the confusing information out there about the technology. (For instance, despite a popular rumor, Super Wifi would not provide free Internet access to everyone with a device, as Matt Yglesias and Jon Brodkin point out.)

The unlicensed/licensed debate is several years old and often technical. I won’t rehash the old issues here, but there is a point I’d like to highlight about the nature of unlicensed spectrum: In spectrum assignments, you generally want to create “apartments, not condos.” Like most, I favor unlicensed spectrum under certain circumstances. However, we should be aware of the rigidity unlicensed spectrum imposes on future reassignments.

If you’re a property developer in a city and you want to raze and build on property occupied by a residential high-rise, you want that high-rise to be an apartment complex, not a condominium building. With apartments, you can bargain with the property management company and, with time, all tenants can be cleared out. Not so with condos, many urban developers are finding. Even if most condo owners in a building are contacted and compensated for leaving, the remaining owners have an effective veto over the new development.

Similarly, unlicensed device users can veto the future reassignment or transfer of the spectrum they occupy. Smartphone and satellite radio users, for example, have no veto ability–they are “apartments,” essentially leasing space from a spectrum “owner.” Like real property, you really need small-numbers bargaining to transfer and lease spectrum for its highest-valued use. Many unlicensed “owners” in a band creates a tragedy of the anticommons. Control over devices drives most unlicensed spectrum advocates mad, but it is also what permits technology upgrades and relatively fast spectrum transfers. (Mobile phones with 1G (analog) are long gone. Not so with old baby monitors, cordless phones, and garage door openers, which are all unlicensed. There’s no spectrum manager to clear these old devices out.) Once unlicensed devices populate a band, the spectrum almost certainly cannot be transferred and used for other technologies.

The time will come when–not if–a brand new social need arises that requires substantial amounts of spectrum as an input. If the FCC wanted to reassign spectrum in the future for, say, driverless car technology, Super Wifi bands are out of the question. It’s simply impractical to locate all the (mobile and transient) high-powered Super Wifi devices that will be using the band, install a new radio, and move them to another band. Even if you could identify most of them, people who buy or sell devices–many of whom will be powerful institutions like public safety, transportation, and tech companies–will have built business models based on the unlicensed spectrum. Entrenched users will not relinquish their spectrum easily after making substantial investments in the technology.

Ideally, you want a spectrum manager that can be compensated to discontinue services or move their users to another band when better uses come along. This is not to say we should not have “Super Wifi” or other unlicensed bands. But we should hesitate before creating these spectrum condos, particularly in the valuable bandwidth under 1 GHz. By permitting unlicensed operators, future spectrum reassignment of unlicensed bands moves from the marketplace to lengthy administrative resolution* by the FCC and NTIA because of the fragmented and numerous users–which is what the Congress and the FCC have tried to avoid for the past 20 years with auctions and secondary markets. Instead of negotiation and compensation, the reassignment becomes a shouting match between interested parties and their lobbyists. In the end, consumers typically lose.

* Recent history is illuminating. Just look at LightSquared’s dealings with Inmarsat (apartments) versus GPS users (condos). Conflicts with GPS users killed LightSquared’s new nationwide LTE network because there were too many GPS parties to bargain with. For another example, observe how NextNav is running into interference problems with WISPs (condos).

By Geoffrey Manne & Berin Szoka

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

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

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

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

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

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

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

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

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

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

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

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

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

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

So much for not blithely regulating the Internet, Senator!

[Cross-posted at Truth on the Market]

The findings and recommendations of the PCAST described above are an obvious attempt by the Administration to usurp Congressional authority and muscle it out of its constitutional jurisdiction over commercial spectrum use.

And one would expect that some in Congress would be downright angry that the Chairman of the FCC, an independent agency, is supporting a Presidential power grab.

The House Energy and Commerce Committee’s Subcommittee on Communications and Technology is holding a hearing this morning to examine how federal agencies and commercial wireless companies might benefit from more efficient government use of spectrum. The hearing is intended to address a report issued by the President’s Council of Advisors on Science and Technology (PCAST) that rejects the Constitutional role of Congress in managing our nation’s spectrum resources and neuters the FCC. The issues raised in the PCAST report should be subject to further study and not implemented through an unconstitutional Presidential memorandum. Only Congress can delegate this authority.

It appears President Obama is engaged in an aggressive strategy to increase presidential authority. After the Republican Party gained control of the House of Representatives in 2010, Obama responded by directing his staff to “push the envelope in finding things we can do on our own.” According to a White House official, “The president isn’t going to be stonewalled by politics,” which is a polite way of saying he plans to ignore Congress and the separation of powers in the U.S. Constitution.

The President began by refusing or selectively enforcing laws that he doesn’t like, such as laws restricting illegal immigration and advancing educational achievement. This has been an effective tactic in instances when Congress refuses to change existing laws, but is unavailing when the President believes a new law should be enacted. Emboldened by his early success with selective enforcement of existing laws, Obama has expanded his Congressional nullification strategy to the creation of new laws by presidential fiat.

A recent example of this new, more imperialistic approach to the presidency involves spectrum – the electromagnetic waves that empower the mobile Internet. The National Broadband Plan issued by the Federal Communications Commission (FCC) in 2010 recommended that 300 MHz of spectrum be made available for mobile Internet use by 2015. The plan also asked Congress to grant the FCC authority to conduct incentive auctions to allocate additional spectrum to mobile use.

There was bipartisan support for incentive auctions in Congress, but House Republicans and Senate Democrats disagreed on the best way to allocate and assign additional spectrum. The Senate preferred an approach that would allocate substantial amounts of spectrum for shared use on an unlicensed basis. The House preferred a licensed approach that would assign all reallocated spectrum through auctions. FCC Chairman Genachowski lobbied publicly against the House bill on this issue and lost. The incentive auction legislation adopted by Congress in February 2012 preserved the FCC’s authority to allocate some spectrum on an unlicensed basis, but required that the bulk of reallocated spectrum be licensed.

The incentive auction legislation also amended the Commercial Spectrum Enhancement Act, which provides auction funding for the relocation of federal wireless systems when federal spectrum is reallocated for commercial use on a licensed basis. Congress also required the National Telecommunications and Information Administration (NTIA), a unit of the Department of Commerce, to submit a report to the President identifying 15 MHz of spectrum between 1675 and 1710 MHz for reallocation from federal to commercial use, which the FCC is required to auction within three years. These provisions make clear that Congress expected federal spectrum would continue to be reallocated for commercial use on a licensed basis.

The Administration, however, decided to create its own spectrum policies by establish a new process through PCAST. In July 2012, PCAST issued a report finding that “the traditional practice of clearing government-held spectrum of Federal users and auctioning it for commercial use is not sustainable.” The report recommends the President issue a memorandum stating, “it is the policy of the U.S. government to share underutilized Federal spectrum to the maximum extent possible.” It should be no surprise that PCAST “believe[s] this shift in direction will also require increased White House involvement” and recommends that the Executive Branch manage this “wholly new approach to Federal spectrum architecture.” The Secretary of Commerce would determine the “conditions of use” that would apply to all users of shared federal spectrum, including commercial users.

The findings and recommendations of the PCAST described above are an obvious attempt by the Administration to usurp Congressional authority and muscle it out of its constitutional jurisdiction over commercial spectrum use. Although the report frequently mentions the FCC, the independent agency would have no meaningful role in this “new architecture.” Downsizing the role of the FCC – and by extension, Congress – in the management of federal spectrum would be a win for this Administration, FCC Chairman Genachowski, and all federal agencies that use spectrum.

• The Administration wins by giving significant supporters access to additional spectrum on an unlicensed basis. It’s no coincidence that the only industry representatives on the PCAST, Google and Microsoft, were also the biggest proponents of unlicensed spectrum in the dispute between the House and Senate during the incentive auction debate. The recommendations in the PCAST report would turn their loss before Congress into a win before the President.
• FCC Chairman Genachowski wins by pursuing his preferred spectrum policies without having to subject them to a vote of a bi-partisan panel of Congressionally-confirmed Commissioners. The PCAST report recommends that an Executive Branch agency — the Commerce Department — decide how commercial companies would share federal spectrum, and the Chairman would be the FCC’s sole representative on spectrum matters before the Executive Branch. The Chairman could also count shared federal spectrum toward achieving the spectrum promises made in the National Broadband Plan.
• Federal spectrum users win by ensuring that they won’t have to vacate their spectrum ever again. The PCAST report assumes commercial users would be required to work around existing and future federal systems.

If the PCAST report’s recommendations were implemented as is, the biggest losers would be Congress, the FCC Commissioners, and the American people. The PCAST report’s rejection of the “traditional” approach to federal spectrum management as “unsustainable” should be a shock to Congress, who mandated a specific policy approach only a few months before the PCAST report was released. It’s certainly surprising that experts recommended the President ignore Congressional legislation and constitutional authority.  And one would expect that some in Congress would be downright angry that the Chairman of the FCC, an independent agency, is supporting a Presidential power grab.

Congress is the governmental branch with constitutional authority to manage our nation’s spectrum. Congress delegated exclusive jurisdiction over non-federal use of spectrum to the FCC. (47 U.S.C. § 303) Congress delegated jurisdiction to the Executive branch over the federal use of spectrum only. (47 U.S.C. § 305) Although the Assistant Secretary of NTIA and the Chairman of the FCC meet biannually to conduct “joint spectrum planning,” Congress specified that the purpose of these joint planning meetings is to determine (1) whether spectrum licenses can be auctioned for commercial use, (2) future spectrum requirements, (3) future spectrum allocations, and (4) actions to promote the efficient use of spectrum, including shared use of spectrum to increase commercial access. (47 U.S.C. § 922) Congress thus requires the agencies to consider the reallocation of federal spectrum for licensed use as well as spectrum sharing on a biannual basis. When the agencies recommend significant changes to existing spectrum allocations and assignments, however, Congress has traditionally enacted legislation to implement the recommendations.

The recommendations of the PCAST report would abolish this statutory scheme through a single Presidential memorandum. Whatever its merits, the Constitution requires, and the American people should expect, that the PCAST proposal be subjected to open debate in Congress. The people did not choose the PCAST experts, but they did vote for their Congressional representatives. That still means something, doesn’t it?

[Cross posted from Huffington Post]

Does the First Amendment allow the FCC to censor “indecent” content like the occasional curse word or a brief glimpse of a bare butt on broadcast TV? The Supreme Court hears arguments on this question Tuesday in FCC v. Fox—the first time in more than 30 years the Court will squarely confront this constitutional question. The case stems from the use of “fleeting” expletives by Nicole Richie and Cher at the Billboard Music Awards Show nearly a decade ago, which prompted a draconian crackdown on broadcasters by the Bush FCC in 2004.

Our five organizations—which differ widely on many issues—have filed a joint amicus brief urging the Court to recognize that the Constitution demands an end to FCC censorship of television, given the fundamental transformation of the media landscape. In its 1978 FCC v. Pacifica decision, the Court gave broadcasting less protection than other media (like newspapers) because it was both “pervasive” in American culture and “invasive”—an “intruder” in the home from which parents were powerless to protect their children. But that rationale long ago disintegrated.

When a federal appellate court struck down the FCC’s indecency rules last year, it hit the nail on the head: “we face a media landscape that would have been almost unrecognizable in 1978.” Back then, nearly all Americans relied on broadcasting to deliver a limited range of video media to their homes. Today, only 8 to 15% percent of American households rely on over-the-air broadcasting, with the majority subscribing to cable or satellite service. More and more Americans are getting video content online from Netflix, Hulu, YouTube, and countless other sites. These services are not “intruders” in the home, but invited guests.

More importantly, a wide range of tools empower parents to decide what broadcast content their children can access. Since 2000, every television larger than 13 inches has come with the V-Chip. This free technology empowers parents to block content based on ratings that include age-based designations as well as several specific content descriptors (coarse language, sex, violence, etc.). A wide variety of other tools have empowered parents, such as DVD players, digital video recorders and video-on-demand services, which allow parents to build, and even pre-screen, libraries of preferred programming for their children. Similar tools are available for cable content, video games, movies, and the Internet.

Today’s world of converged, customizable video media would have seemed like science fiction to the Pacifica court 31 years ago. But it is precisely the kind of world the Supreme Court contemplated in a 2000 opinion, boldly declaring: “Technology expands the capacity to choose; and it denies the potential of this revolution if we assume the Government is best positioned to make these choices for us.”

The last decade has vindicated this vision, with parental empowerment tools flourishing even as the media landscape changed dramatically. In a dynamic world, technological tools and parental control methods need not be perfect to be preferable to government regulation.

The Supreme Court has already decided as much for cable television: in 2000, the Court struck down a law that had caused cable operators to restrict adult content on subscription channels to between the hours of 10pm and 6am. While operators scrambled these channels for non-subscribers, Congress worried that children might still be able to see or hear something on these channels during the day. But the Court insisted that total preemption of adult content was excessive, because concerned parents could request targeted blocking of the adult channels:

“[I]t is no response that voluntary blocking requires a consumer to take action, or may be inconvenient, or may not go perfectly every time. A court should not assume a plausible, less restrictive alternative would be ineffective; and a court should not presume parents, given full information, will fail to act.”

That’s precisely the right standard for the digital “revolution.” Anything less will allow the continuation of censorship of a bygone era—and help to validate censorship in countries like China, which is often justified as protecting children. We urge the Supreme Court to affirm that this standard applies just as much to broadcasting as to the Internet or newspapers. That means striking down Pacifica’s double-standard.

Invalidating the FCC’s indecency rules doesn’t mean government can do nothing. It can still assist in improving parental controls, promote awareness of existing tools and methods, and punish companies that fail to live up to their voluntary content labels. But our Constitution requires that government focus on helping parents—rather than choosing for them.

Berin Szoka is President of TechFreedom. Ilya Shapiro is Senior Fellow in Constitutional Studies at the Cato Institute. Emma Llanso is a Policy Counsel at the Center for Democracy & Technology. Lee Tien is a Senior Staff Attorney at the Electronic Frontier Foundation. John Bergmayer is a Senior Staff Attorney at Public Knowledge. All five organizations are public interest non-profits with a focus in technology policy.

[Cross posted at Truth on the Market]

As everyone knows by now, AT&T’s proposed merger with T-Mobile has hit a bureaucratic snag at the FCC. The remarkable decision to refer the merger to the Commission’s Administrative Law Judge (in an effort to derail the deal) and the public release of the FCC staff’s internal, draft report are problematic and poorly considered. But far worse is the content of the report on which the decision to attempt to kill the deal was based.

With this report the FCC staff joins the exalted company of AT&T’s complaining competitors (surely the least reliable judges of the desirability of the proposed merger if ever there were any) and the antitrust policy scolds and consumer “advocates” who, quite literally, have never met a merger of which they approved.

In this post I’m going to hit a few of the most glaring problems in the staff’s report, and I hope to return again soon with further analysis.

As it happens, AT&T’s own response to the report is actually very good and it effectively highlights many of the key problems with the staff’s report. While it might make sense to take AT&T’s own reply with a grain of salt, in this case the reply is, if anything, too tame. No doubt the company wants to keep in the Commission’s good graces (it is the very definition of a repeat player at the agency, after all). But I am not so constrained. Using the company’s reply as a jumping off point, let me discuss a few of the problems with the staff report.

First, as the blog post (written by Jim Cicconi, Senior Vice President of External & Legislative Affairs) notes,

We expected that the AT&T-T-Mobile transaction would receive careful, considered, and fair analysis. Unfortunately, the preliminary FCC Staff Analysis offers none of that. The document is so obviously one-sided that any fair-minded person reading it is left with the clear impression that it is an advocacy piece, and not a considered analysis. In our view, the report raises questions as to whether its authors were predisposed. The report cherry-picks facts to support its views, and ignores facts that don’t. Where facts were lacking, the report speculates, with no basis, and then treats its own speculations as if they were fact. This is clearly not the fair and objective analysis to which any party is entitled, and which we have every right to expect.

OK, maybe they aren’t pulling punches. The fact that this reply was written with such scathing language despite AT&T’s expectation to have to go right back to the FCC to get approval for this deal in some form or another itself speaks volumes about the undeniable shoddiness of the report.

Cicconi goes on to detail five areas where AT&T thinks the report went seriously awry: “Expanding LTE to 97% of the U.S. Population,” “Job Gains Versus Losses,” “Deutsche Telekom, T-Mobile’s Parent, Has Serious Investment Constraints,” “Spectrum” and “Competition.” I have dealt with a few of these issues at some length elsewhere, including most notably here (noting how the FCC’s own wireless competition report “supports what everyone already knows: falling prices, improved quality, dynamic competition and unflagging innovation have led to a golden age of mobile services”), and here (“It is troubling that critics–particularly those with little if any business experience–are so certain that even with no obvious source of additional spectrum suitable for LTE coming from the government any time soon, and even with exponential growth in broadband (including mobile) data use, AT&T’s current spectrum holdings are sufficient to satisfy its business plans”).

What is really galling about the staff report—and, frankly, the basic posture of the agency—is that its criticisms really boil down to one thing: “We believe there is another way to accomplish (something like) what AT&T wants to do here, and we’d just prefer they do it that way.” This is central planning at its most repugnant. What is both assumed and what is lacking in this basic posture is beyond the pale for an allegedly independent government agency—and as Larry Downes notes in the linked article, the agency’s hubris and its politics may have real, costly consequences for all of us.

Competition

But procedure must be followed, and the staff thus musters a technical defense to support its basic position, starting with the claim that the merger will result in too much concentration. Blinded by its new-found love for HHIs, the staff commits a few blunders. First, it claims that concentration levels like those in this case “trigger a presumption of harm” to competition, citing the DOJ/FTC Merger Guidelines. Alas, as even the report’s own footnotes reveal, the Merger Guidelines actually say that highly concentrated markets with HHI increases of 200 or more trigger a presumption that the merger will “enhance market power.” This is not, in fact, the same thing as harm to competition. Elsewhere the staff calls this—a merger that increases concentration and gives one firm an “undue” share of the market—“presumptively illegal.” Perhaps the staff could use an antitrust refresher course. I’d be happy to come teach it.

Not only is there no actual evidence of consumer harm resulting from the sort of increases in concentration that might result from the merger, but the staff seems to derive its negative conclusions despite the damning fact that the data shows that wireless markets have seen considerable increases in concentration along with considerable decreases in prices, rather than harm to competition, over the last decade. While high and increasing HHIs might indicate a need for further investigation, when actual evidence refutes the connection between concentration and price, they simply lose their relevance. Someone should tell the FCC staff.

This is a different Wireless Bureau than the one that wrote so much sensible material in the 15th Annual Wireless Competition Report. That Bureau described a complex, dynamic, robust mobile “ecosystem” driven not by carrier market power and industrial structure, but by rapid evolution and technological disruptors. The analysis here wishes away every important factor that every consumer knows to be the real drivers of price and innovation in the mobile marketplace, including, among other things:

1. Local markets, where there are five, six, or more carriers to choose from;
2. Non-contract/pre-paid providers, whose strength is rapidly growing;
3. Technology that is making more bands of available spectrum useful for competitive offerings;
4. The reality that LTE will make inter-modal competition a reality; and
5. The reality that churn is rampant and consumer decision-making is driven today by devices, operating systems, applications and content – not networks.

The resulting analysis is stilted and stale, and describes a wireless industry that exists only in the agency’s collective imagination.

There is considerably more to say about the report’s tortured unilateral effects analysis, but it will have to wait for my next post. Here I want to quickly touch on a two of the other issues called out by Cicconi’s blog post.

Jobs

First, although it’s not really in my bailiwick to comment on the job claims that have been such an important aspect of the public conversations surrounding this merger, some things are simple logic, and the staff’s contrary claims here are inscrutable. As Cicconi suggests, it is hard to understand how the $8 billion investment and build-out required to capitalize on AT&T’s T-Mobile purchase will fail to produce a host of jobs, how the creation of a more-robust, faster broadband network will fail to ignite even further growth in this growing sector of the economy, and, finally, how all this can fail to happen while the FCC’s own (relatively) paltry $4.5 billion broadband fund will somehow nevertheless create approximately 500,000 (!!!) jobs. Even Paul Krugman knows that private investment is better than government investment in generating stimulus – the claim is that there’s not enough of it, not that it doesn’t work as well. Here, however, the fiscal experts on the FCC’s staff have determined that massive private funding won’t create even 96,000 jobs, although the same agency claims that government funding only one half as large will create five times that many jobs. Um, really?

Meanwhile the agency simply dismisses AT&T’s job preservation commitments. Now, I would also normally disregard such unenforceable pronouncements as cheap talk – except given the frequency and the volume with which AT&T has made them, they would suffer pretty mightily for failing to follow through on them now. Even more important perhaps, I have to believe (again, given the vehemence with which they have made the statements and the reality of de facto, reputational enforcement) they are willing to agree to whatever is in their control in a consent decree, thus making them, in fact, legally enforceable. For the staff to so blithely disregard AT&T’s claims on jobs is unintelligible except as farce—or venality.

Spectrum

Although the report rarely misses an opportunity to fail to mention the spectrum crisis that has been at the center of the Administration’s telecom agenda and the focus of the National Broadband Plan, coincidentally authored by the FCC’s staff, the crux of the report seems to come down to a stark denial that such a spectrum crunch even exists. As I noted, much of the staff report amounts to an extended meditation on why the parties can and should run their businesses as the staff say they can and should. The report’s section assessing the parties’ claims regarding the transition to LTE (para 210, ff.) is remarkable. It begins thus:

One of the Applicants’ primary justifications for the necessity of this transaction is that, as standalone firms, AT&T and T-Mobile are, and will continue to be, spectrum and capacity constrained. Due to these constraints, we find it more plausible that a spectrum constrained firm would maximize deployment of more spectrally efficient LTE, rather than limit it. Transitioning to LTE is primarily a function of only two factors: (1) the extent of LTE capable equipment deployed on the network and (2) the penetration of LTE compatible devices in the subscriber base. Although it may make it more economical, the transition does not require “spectrum headroom” as the Applicants claim. Increased deployment could be achieved by both of the Applicants on a standalone basis by adding the more spectrally efficient LTE-capable radios and equipment to the network and then providing customers with dual mode HSPAILTE devices. . . .

Forget the spectrum crunch! It is the very absence of spectrum that will give firms the incentive and the ability to transition to more-efficient technology. And all they have to do is run duplicate equipment on their networks and give all their customers new devices overnight. And, well, the whole business model fits in a few paragraphs, entails no new spectrum, actually creates spectrum, and meets all foreseeable demand (as long as demand never increases which, of course, the report conveniently fails to assess).

Moreover, claims the report, AT&T’s transition to LTE flows inevitably from its competition with Verizon. But, as Cicconi points out, the staff is unprincipled in its disparate treatment of the industry’s competitive conditions. Somehow, without T-Mobile in the mix, prices will skyrocket and quality will be degraded—let’s say, just for example, by not upgrading to LTE (my interpretation, not the staff’s). But 100 pages later, it turns out that AT&T doesn’t need to merge with T-Mobile to expand its LTE network because it will have to do so in response to competition from Verizon anyway. It would appear, however, that Verizon’s power over AT&T operates only if T-Mobile exists separately and AT&T has a harder time competing. Remove T-Mobile and expand AT&T’s ability to compete and, apparently, the market collapses. Such is the logic of the report.

There is much more to criticize in the report, and I hope to have a chance to do so in the next few days.

The Senate might vote this week on Sen. Hutchison’s resolution of disapproval for the FCC’s net neutrality rules.  If ever there was a regulation that showed why independent regulatory agencies ought to be required to conduct solid regulatory analysis before writing a regulation, net neutrality is it.

For more than three decades, executive orders have required executive branch agencies to prepare a Regulatory Impact Analysis accompanying major regulations.  One of the first things the agency is supposed to do is identify the market failure, government failure, or other systemic problem the regulation is supposed to solve. The agency ought to demonstrate a problem actually exists to show that a regulation is actually necessary.

But the net neutrality rules have virtually no analysis of a systemic problem that actually exists, and no data demonstrating that the problem is real.  Instead, the FCC’s order outlines the incentives Internet providers might face to treat some traffic differently from other traffic, in a discussion heavily freighted with “could’s” and “may’s”.  Then it offers up just four familiar anecdotes that have been used repeatedly to support the claim that non-neutrality is a significant threat  (all four fit in paragraph 35 of the order).  The FCC asserts without support that Internet providers have incentives to do these things even if they lack market power, and indeed in a footnote it dispenses with the need to consider market power: “Because broadband providers have the ability to act as gatekeepers even in the absence of market power with respect to end users, we need not conduct a market power analysis.” (footnote 87)

Thus far, no administration of either party has sought to apply Regulatory Impact Analysis requirements to independent agencies. If administrations won’t, Congress should.

On Wednesday, November 9th, the Mercatus Center will be hosting an event on “A New Framework for Broadband and the FCC.” It will take place at the Reserve Officers Association from 10:00am – 11:30am. At the event, telecom experts Raymond Gifford, Jeffrey Eisenach, and Howard Shelanski that will examine if a new framework might be needed for broadband policy and the possibility of reforming the Federal Communications Commission. Both Eisenach and Gifford will be presenting new papers at the event and Shelanski will be offering commentary. RSVP here to hold a seat.  Complete event summary follows.

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Broadband policy continues to be a contentious subject of debate with many policymakers and advocates suggesting that a new framework might be needed to foster increased competition, innovation, higher speeds, greater coverage, and lower prices. Meanwhile, there’s talk in Washington once again of reforming the Federal Communications Commission (FCC) to bring the agency into the information age.

These issues are explored in new studies by Raymond Gifford, a Partner at the law firm of Wilkinson Barker Knauer, LLP, and by Jeffrey Eisenach, a Managing Director and Principal at Navigant Economics and an Adjunct Professor at George Mason University Law School. In a new Mercatus Center working paper, Gifford outlines what substantive FCC reform would entail and considers what antitrust agencies and enforcement can teach us about the way the FCC should work going forward.  In a similar vein, Eisenach’s new study considers how competition oversight of broadband markets could be modeled after modern antitrust principles.

Gifford and Eisenach will outline these alternative approaches to broadband policy and FCC reform in a Mercatus Center event on Wednesday, November 9 ^th at 10:00am at the Reserve Officers Association. Also joining us for the discussion will be Howard Shelanski, Professor of Law at Georgetown Law School who previously served as Chief Economist for the Federal Communications Commission and as a Senior Economist for the President’s Council of Economic Advisers at the White House. Register for the event here.

Federal Communications Chairman Genachowski previewed the universal service reform plan the commissioners are discussing in a speech today.

The speech offers a masterful summary of the myriad inefficiencies created by the current universal service subsidies and intercarrier compensation payments. Most of the examples highlight plain old-fashioned waste. The universal service program collects billions of dollars from telephone subscribers, then simply wastes a goodly portion of it by subsidizing telephone competition in places where unsubsidized service from cable or satellite already exists, subsidizing multiple mobile wireless competitors, and subsidizing local phone companies that have little incentive for cost containment because they are still subject to rate-of-return regulation. The intercarrier compensation system uses per-minute charges to collect billions of dollars from telephone subscribers and hands it to phone companies that sometimes charge as little as $8 a month for phone service. There’s also a race to game this system as the companies that benefit seek new ways to inflate the regulated charges they collect, and the companies that pay seek clever ways to avoid paying.

It’s a powerful brief for reform. Never thought I’d live to see the day whan an FCC chairman would say so many things that are substantiated by economic research.

Nevertheless, a few parts of the speech give me cause for concern about the solutions the FCC commissioners may be discussing.

First, the chairman claims that 18 million Americans live in areas without access to broadband — up from the 14 million estimated in the National Broadband Plan.  The size of this figure suggests to me that the FCC is still over-estimating the number of people without access by defining “broadband” as a speed fast enough to exclude 3G wireless, many small rural Wireless Internet Service Providers, and satellite. Absent an adjustment in the definition of broadband, the subsidy program will be larger than it needs to be, and so telephone consumers will pay excessive universal service charges.

Second, the FCC still seems bent on subsidizing at least two broadband competitors in rural areas through the Connect America Fund and a separate Mobility Fund. This essentially presumes that fixed wireless service  and 4G mobile are, and always will be, separate services, and every rural customer is entitled to both. If the goal is basic broadband connectivity in places that allegedly have no broadband at all, why not make all technologies compete for a single subsidy in these places before proceeding to subsidize two?

Third, there’s a certain amount of technological favoritism.  Wireless subsidies will be awarded based on competitive bidding from the outset.  Subsidies for (fixed) service to homes and businesses will transition from current payments to competitive bidding — faster for phone companies subject to price caps, slower for phone companies under rate-of-return regulation. Satellite is mentioned just once — in a sentence discussing how service will be extended to the most remote areas. This continues the pattern set in the National Broadband Plan, which viewed satellite as a special-purpose technology suitable only for remote areas. For reasons unexplained, the plan assumed that wired and wireless broadband could expand capacity in response to subsidies, but satellite could not.

In summary: The speech gave a great diagnosis of the problem and sketched out solutions that will surely improve things compared to the way they are now.  But given that opportunities to actually achieve universal service reform (as opposed to just talking about it) come around rarely, there’s still room for improvement.

I can’t help but think that there might be  a big advantage of having the AT&T-T-Mobile merger go to court.  For once, the high-profile action everyone pays attention to will occur in an antitrust forum where the decision criterion is the effects of the merger on consumer welfare, period.   Regardless of what one thinks about the merger, it’s nice to see that we’ll finally have a knock-down, drag-out fight based on whether a big telecommunications merger harms consumers and competition.  That’s the antitrust standard the Department of Justice has to satisfy in order to prevent the merger. 

This will be a refreshing change from the Federal Communications Commission’s “public interest” standard, which allows the commission to object on grounds other than consumer welfare and demand all manner of concessions that have nothing to do with remedying anticompetitive effects of a deal. Case in point: Comcast must now offer broadband service for $9.95 per month to low-income households as a condition for getting approval to buy 51 percent of NBCUniversal. Now, I’m all for seeing low-income households get access to broadband, but subsidizing one subset of customers has little to do with mitigating any possible anticompetitive effects of allowing a cable company to own NBCUniversal. As FCC Commissioners McDowell and Baker said in their statement on that transaction, “Any proposed remedies should be narrow and transaction specific, tailored to address particular anti-competitive harms. License transfer approvals should not serve as vehicles to extract from petitioners far-reaching and non-merger specific policy concessions that are best left to broader rulemaking or legislative processes.” 

In short, if AT&T wins in court, the FCC should approve the merger promptly without additional conditions.

A couple days before Congress announced a debt deal, half a dozen telecommunications companies filed a plan on July 29 with the Federal Communications Commission that attempts to resolve a much longer-running set of negotiations over big bucks.  The “America’s Broadband Connectivity” Plan seeks to replace Universal Service Fund subsidies for telephone service in rural areas with subsidies for broadband in rural areas.

Like the federal budget negotiations, the never-ending negotiations over USF get bogged down in arguments over distribution: who gets what.  Indeed, it’s almost exclusively an argument over which companies get what. But federal telecommunications policy is supposed to advance the overall public interest, not just haggle over what corporate interest gets what piece of my pie. Here is a quick take on the biggest strengths and weaknesses of the plan in terms of advancing overall consumer welfare. By “consumer welfare,” I mean not just the welfare of the folks receiving subsidized services, but also the welfare of the majority who are paying a 15 percent charge on interstate phone services to fund the USF.

BIGGEST STRENGTHS

Fixed-term commitment: Rural phone subsidies have become a perpetual entitlement with no definition of when the subsidies can end because the problem is considered solved.  The ABC plan proposes a 10-year commitment to rural broadband subsidies.  By 2022 the FCC should assess whether any further high-cost universal service program is needed. This idea remedies a significant deficiency in the current high-cost subsidy program, which doesn’t even have outcome goals or measures. (That’s why I like to sing the final verse from “And the Money Kept Rolling In” from Evita when I talk about universal service.  Free State Foundation President Randy May asked me for an encore of this at the end of the foundation’s July 13 program on universal service, available here.)

Intercarrier compensation: “Intercarrier compensation” refers to the per-minute charges communications companies pay when they hand off phone traffic to each other. The plan proposes to ramp down all intercarrier charges to a uniform rate of $0.0007/minute.  Economists who study telecommunications have pointed out for decades that high per-minute charges reduce consumer welfare by discouraging consumers from communicating as much as they otherwise would.  MIT economist Jerry Hausman, in a paper prepared for the filing, estimates that low, uniform intercarrier charges would increase consumer welfare by about  $9 billion annually.

Legacy obligations: Public utility regulation traditionally forced regulated companies to offer certain services or serve certain markets at a loss, then charge profitable customers higher prices to cover the losses. Judge Richard Posner referred to this opaque practice as “Taxation by Regulation“: the customers paying inflated prices get “taxed” to accomplish a public purpose, but they don’t know it.  Some of these obligations continue today as federal requirements applied to “Eligible Telecommunications Carriers” or state “Carrier of Last Resort” obligations.  The plan would remove these obligations for companies that are not receiving USF subsidies.

BIGGEST WEAKNESSES

Definition of broadband: The plan would continue to inflate the cost of rural broadband subsidies by defining “broadband” as 4 megabytes per second download and 768 kilobytes per second upload.  This means 3G wireless, satellite, and some wireless Internet service providers do not count as “broadband.” This decision more than doubles the number of households considered “unserved” and rules out some lower-cost technologies.  Jerry Brito and I have written extensively about both the economics and the legality of this.  Interestingly, the ABC coalition’s legal white paper arguing that the commission has legal authority to adopt the plan makes no effort to show that the commission has authority to subsidize 4 mbps broadband; it only shows the commission has authority to subsidize some form of broadband.

Alternative cost technology threshold: The plan includes an “alternative cost technology” threshold that allows substitution of satellite broadband for customers who would cost more than $256/month to serve.  Inclusion of a threshold is actually a strength. But the $256/month figure is way too high.  Satellite broadband with speeds of 1-2 mbps is now available for $60 – $110 per month.  Consumers who pay a 15 percent surcharge on their local phone bills to fund USF should not be expected to provide a subsidy of more than $200 per month.

Mobility: The plan appears to advocate subsidies for mobile broadband service in places where it is not currently available.  So now the rural entitlement expands to include not just basic broadband service in the home to stay connected, but also a mobile service that a lot of Americans don’t even buy unless their employers pay for it! I question whether mobile broadband satisfies the 1996 Telecommunications Act’s criteria for universal service subsidies, such as “essential” (not just nice) for education or public safety, or subscribed to by a “substantial majority” of households. These questions should be thoroughly examined before anyone receives subsidies for mobile broadband. At a minimum, households should be eligible for only one broadband subsidy — wireline or mobile — but not both.

It might be tempting to laugh at France’s ban on words like “Facebook” and Twitter” in the media. France’s Conseil Supérieur de l’Audiovisuel recently ruled that specific references to these sites (in stories not about them) would violate a 1992 law banning “secret” advertising. The council was created in 1989 to ensure fairness in French audiovisual communications, such as in allocation of television time to political candidates, and to protect children from some types of programming.

Sure, laugh at the French. But not for too long. The United States has similarly busy-bodied regulators, who, for example, have primly regulated such advertising themselves. American regulators carefully oversee non-secret advertising, too. Our government nannies equal the French in usurping parents’ decisions about children’s access to media. And the Federal Communications Commission endlessly plays footsie with speech regulation.

In the United States, banning words seems too blatant an affront to our First Amendment, but the United States has a fairly lively “English only” movement. Somehow, regulating an entire communications protocol doesn’t have the same censorious stink.

So it is that our Federal Communications Commission asserts a right to regulate the delivery of Internet service. The protocols on which the Internet runs are communications protocols, remember. Withdraw private control of them and you’ve got a more thoroughgoing and insidious form of speech control: it may look like speech rights remain with the people, but government controls the medium over which the speech travels.

The government has sought to control protocols in the past and will continue to do so in the future. The “crypto wars,” in which government tried to control secure communications protocols, merely presage struggles of the future. Perhaps the next battle will be over BitCoin, an online currency that is resistant to surveillance and confiscation. In BitCoin, communications and value transfer are melded together. To protect us from the scourge of illegal drugs and the recently manufactured crime of “money laundering,” governments will almost certainly seek to bar us from trading with one another and transferring our wealth securely and privately.

So laugh at France. But don’t laugh too hard. Leave the smugness to them.

Is it “insane” for free market oriented thinkers to support the AT&T/T-Mobile merger?  Although AT&T says there are five choices of wireless providers to choose from in 18 of 20 major markets, Milton Mueller argues that 93 percent of wireless subscribers prefer a seamless, nationwide provider.  If the merger is approved, there would only be three such providers.

A market dominated by three major providers is neither competitive nor noncompetitive as a definitional matter.  Factual analysis is necessary to determine competitiveness.

And it may be premature to conclude that there is no competitive significance either to the fact there are over a hundred providers currently delivering nationwide service on the basis of voluntary roaming agreements that are common in the industry, or to assume that the possibility the FCC will double the amount of spectrum available for wireless services will not impact the structure of the industry.

The trouble with antitrust generally is the possibility that government will choose to protect weak or inefficient competitors, thus preventing meaningful competition that attracts private investment which leads to innovation, better services and lower prices.  Antitrust is supposed to protect consumers, not politically influential producers.  Although this sounds simple in theory, it can get confusing in practice.  As free market oriented thinkers, we do not want government picking winners and losers.

As Larry Downes correctly points out, if concentration leads to higher prices there will be more profits for competitors and more competition.  Schumpeter teaches that short-run monopolies come and go, while long-run monopolies are exceedingly rare – unless “buttressed by public authority.”

Mueller makes a couple other important points that reflect the thinking of a lot of people.  One is AT&T’s customer satisfaction ratings, prices and network performance.   This merger would provide extra spectrum the carrier needs to address each of these issues, however.

Although there are other ways to increase network capacity, they won’t be enough.  The National Broadband Plan notes that data traffic on AT&T’s mobile network increased 5,000% between 2006 and 2009.  According to the chairman of the FCC, “We need to tackle the looming spectrum crunch by dramatically increasing the new spectrum available for mobile broadband, and the efficiency of its use.”  That’s why the broadband plan is proposing to double the amount of spectrum available for wireless, a process that could take several years.  Historically, it has taken 6-13 years to reallocate spectrum.

Mueller also points out that AT&T cited network capacity issues when it opposed microwave-based competition in long-distance (in the 1960s).  AT&T has been criticized for the advocacy it used in those days.  The real problem the company faced then was being saddled with a pricing structure that was incompatible with competition, but policymakers were not about to change that.  Regulation mandated that AT&T charge high prices for long-distance to subsidize “affordable” ( i.e., at-or-below cost) local service.  That set up an attractive cream-skimming opportunity for potential competitors such as MCI.  The new entrant’s business plan was to compete for the fat long-distance profits and not get stuck with money-losing local service obligations.  That was a real problem.

Finally, Mueller suggests limited government intervention as a preventative for excessive government intervention.

If you support a competitive industry where one can reasonably expect the public and legislators to rely on market forces as the primary industry regulator, this merger has to be stopped. On the other hand, if you welcome the growing pressures for regulating carriers and making them the policemen and chokepoints for network control, a bigger AT&T is just what the doctor ordered.

A similar argument was made in the early 1980s with regard to local and long-distance service.  Regulate local so long-distance can be free.  This is so defeatist.  As free market thinkers, we need to stand for principle.  Unwarranted government intervention in the free market should be opposed.

If the FTC, Department of Justice and/or FCC do find that such a merger would substantially lessen competition, they could also impose specific conditions to ameliorate the impact – making it unnecessary to block a merger outright.  Minimum intervention ought to be the first choice for free market thinkers.

While most folks have been obsessing over their income taxes the past few weeks, Jerry Brito and I have been obsessing about a non-tax: the universal service assessments on our phone bills.

More specifically, the Federal Communications Commission has asked for comments on its plan to gradually turn the current phone subsidy program in high-cost rural areas into a broadband subsidy program in high-cost rural areas. This opens up a big tangled can of worms.  Comments are due Monday.  We deal with two issues in our comment:

Definition of broadband: Thankfully, the FCC is asking for comments on its proposal to define broadband as 4 Mbps download/1 Mbps upload. This is an important decision with a big effect on the size of the program. The 4 Mbps definition more than doubles the number of households considered “unserved,” because it doesn’t count 3G wireless or slower DSL or slower satellite broadband as broadband. It also raises the cost of the subsidies by requiring more expensive forms of broadband.

The definition fails to fit the factors the 1996 Telecom Act says the FCC is supposed to consider when determining what communications services qualify for universal service subsidies.  A download speed of 4 Mbps is not “essential” for online education; most online education providers say any broadband speed or even dialup is satisfactory. Nor is that speed “essential” for public safety; the biggest barrier to public safety broadband deployment is creation of an interoperable public safety network, which has nothing to do with USF subsidies. And the proposed speed is not subscribed to by a “substantial majority” of US households.  The most recent FCC statistics indicate that the fastest broadband download speed subscribed to by a “substantial majority” of US households is probably 768 kbps.

Definition of performance measures: Fifteen years after passage of the legislation that authorized the high cost universal service subsidies, the FCC has proposed to measure the program’s outcomes.  Actually, the FCC wants to measure intermediate outcomes like deployment, subscribership, and urban-rural rate comparability — not ultimate outcomes like expanded economic and social opportunities for people in rural areas.  But it’s a start …  provided that the FCC actually figures out how the subsidies have affected these intermediate outcomes, rather than just measuring trends and claiming the universal service subsidies caused any positive trends observed.  We have some suggestions on how to do this.  

Our full comment is available here.

In previous posts, I’ve criticized the Federal Communications Commission for arbitrarily jacking up the speed in its definition of broadband (to 4 mbps download/1mbps upload) so that third generation wireless does not count as broadband. This makes broadband markets appear less competitive.  It also expands the “need” for universal service subsidies for broadband, since places that have 3G wireless but not wired broadband get counted as not having broadband.

The FCC’s definition is based on the speed necessary to support streaming video.  I rarely watch video on my computer. But tonight I had a chance to test the wisdom of the FCC’s definition.  I’m in rural southern Delaware with broadband access only via a 3G modem. I wanted to watch more State of the Union coverage than the broadcast channels out here carried. So, I fired up the old PC and watched things on CNN.com.  The video showed up fine and smooth, and it didn’t even burp when I opened another window to start working on this post.

So now I have not just analysis that questions the FCC’s definition of broadband, but that most precious of commodities in Washington regulatory debates: AN ANECDOTE!!!

I’m going to close out my series of essays about Tim Wu’s new book, The Master Switch: The Rise and Fall of Information Empires, by discussing his proposed solutions.  In the first five essays in the series, [1, 2, 3, 4, 5] I’ve critiqued Wu’s look at information history as well as his use of terms like “market failure,” “laissez-faire” and “open” vs. “closed.”  I argued there’s a great deal of over-simplification, even outright distortion, in his use of those terms throughout the book.

Anyway, let’s run through the basics of the book once more before getting to Wu’s proposed solutions.  By my reading of The Master Switch, Wu’s argument essentially goes something like this:

• Information industries go through cycles. After a period of “openness” and competition, they tend to drift toward “closed,” corporate-controlled, anti-consumer models and outcomes.
• The resulting “monopolists” then block much innovation, competition, and free speech.
• Consequently, “the purely economic laissez-faire approach… is no longer feasible.”
• Moreover, information industries are more important than all others (“information industries… can never be properly understood as ‘normal’ industries”) and even traditional forms of regulation, including antitrust, “are clearly inadequate for the regulation of information industries.” (p. 303).
• Thus, special rules should apply to information-related sectors of our economy.

Again, I’ve challenged some of these assertions in my previous essays, specifically, Wu’s incomplete history of cycles and the fact that he greatly underplays the role of governments in “locking-in” sub-optimal market structures or, worse yet, creating those structures through misguided public policies or regulatory capture.  Wu discusses some of those factors in his book, but he tends to regard them as secondary to the inquiry, whereas I believe they are crucial to understanding how most “closed” or anti-competitive scenarios develop or endure. Instead, Wu simplistically suggests that “the purely economic laissez-faire approach… is no longer feasible,” even though no such state of affairs has ever existed within communications or media industries. They have been subjected to varying levels of indirect influence or direct control almost since their inception.

Regardless, what does Tim Wu want done about the problems he has (mis-)diagnosed?

What Wu Wants: A “Constitutional” Approach to Private Regulation

Broadly speaking, Wu wants to counter what he regards as “the danger of private power,” “the Lockean sanctification of private property,” and the fact that “American economic life [has] been built mostly on freewheeling capitalism.” (p. 300)  More specifically, he wants to end the “cycle” he describes of markets moving from supposedly open to closed.

To do so, he proposes what he calls a “constitutional” approach to private marketplace regulation.  In reality, it would be a massive, unprecedented, and highly destructive information sector industrial policy that would substitute the Rule of Man for the Rule of Law.  But let’s hear how Wu describes it:

What I propose is not a regulatory approach but rather a constitutional approach to the information economy. By that I mean a regime whose goal is to constrain and divide all power that derives from the control of information. Specifically, what we need is something I would call a Separations Principle for the information economy. A Separations Principle would mean the creation of a salutary distance between each of the major functions or layers in the information economy. It would mean that those who develop information, those who control the network infrastructure on which it travels, and those who control the tools or venues of access must be kept apart from one another. At the same time, Separations Principle stipulates one other necessity: that the government also keep its distance and not intervene in the market to favor any technology, network monopoly, or integration of the major functions of an information industry.”  (p. 302, emphasis in original)

Wu calls this a “constitutional approach” because he models it on the separations of power found in the U.S. Constitution, such as the separation of church and State, as well as the separation of powers between branches of government.  Wu makes a few additional assertions:

• “[T]he Separations Principle accepts in advance that some of the benefits of concentration and unified action will be sacrificed, even in ways that may seem painful or costly.” (p. 305)
• But Wu believes that pain or cost is worth it because of the “corrupting effect of vertically integrated power.” (p. 305)
• “You cannot serve two masters, and the objectives of creating information are often at odds with those of disseminating it,” he says. (p. 305)
• Specifically, he claims the Separations Principle would better protect free speech and entrepreneurial freedom. On the former: “It is a recognition that the disposition of firms and industries is, if anything, more critical than the actions of the state in controlling who gets heard.” On the latter: “The Separations Principle protects entrepreneurial freedom by preventing stagnation and repression of business innovation, especially with the help of the state.” (p. 306)

There’s a lot to unpack here including Wu’s stunning claim that his Separations Principle doesn’t represent a regulatory regime, as well as his rather incredible belief that government meddling and machinations could be kept in check under this regime.

First, however, Wu deserves credit for coming clean about just how radical his proposal is.

Constitutional Limits on Governments vs. Private Actors

Wu admits that “It would be quite radical today even to contemplate imposing on the economy the kind of safeguards that the Constitution places on the political system.” (p. 301)  A few pages later he notes that “The Separations Principle… requires a certain breadth and ambition in its application.” (p. 308)

I’m glad Wu was willing to at least acknowledge the radicalness of his proposal.  But, as he is prone to do throughout the book, he raises an important potential objection only to quickly walk away from it.  In this case, however, it’s completely understandable why Wu wouldn’t want to continue this inquiry: His proposal really is “quite radical” since it is completely at odds with America’s constitutional heritage of individual liberty and limited government.

Let’s go back to Civics 101.  We require that governments live under certain constraints and the Rule of Law because we recognize that governments possess the unique ability to fine, punish, and imprison citizens.  Moreover, escape from government’s tentacles is difficult, if not impossible. A constitutional system is required, therefore, to limit government’s role over our lives and the economy.

By contrast, we do not impose similar constraints on individuals — or on individuals when they work collaboratively in organizations or corporations — primarily because we believe there should be a presumption of liberty in most human affairs.  Freedom is the default position.  We value freedom because it allows humans to exercise their free will and live a life of their own choosing — and that includes the freedom to pursue happiness by making money in a business venture.  Our nation’s founders saw the wisdom in this even before we had a grand historical clash between communism and capitalist systems.  From that experience, however, we now have undisputed proof that social and economic freedoms are closely linked, and that when humans are free, they prosper.  The other reason we default to freedom for private individuals and organizations is because the possibility of “escape” exists from undesirable social or economic situations.

Wu doesn’t bother slowing down to appreciate these distinctions. He gives occasional lip service to the dangers of excessive government power:

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

Quite right. Yet, as I pointed out in this earlier essay, there’s seemingly never any serious lesson to be drawn from that conclusion.  Wu just marches right along in his narrative and ignores that “disgrace” and its relationship to “the cycle.”

The crucial point here is that Wu doesn’t fully appreciate the qualitative difference between State power and corporate power.  Instead — consistent with many “media access” theorists who came before him — he largely equates those forms of power or even makes private power out to be the more significant threat to personal liberties and freedom of speech.  Again, we hear statements like “the disposition of firms and industries is, if anything, more critical than the actions of the state in controlling who gets heard.”

The problem with this is that (a) history shows it’s simply not true and (b) the corrective remedies such a theory counsels would require a massive enhancement of State power to counter the supposed threats of private power, which (c) would create an even bigger threat to human liberty since only the State can fine, imprison, and truly foreclose speech.

So, I’ll stick with traditional “constitutionalism,” thank you very much!  Tim Wu’s “constitutionalism,” by contrast, is the Rule of Man, not the Rule of Law.  Specifically, it would be the rule of a handful of unelected men (and women) down at the Federal Communications Commission, the Federal Trade Commission, or whatever other regulatory bureaucracies Wu would empower under this approach.   And, as we’ll see next, that approach is truly audacious in its scope.

Practical Considerations: An Unprecedented Information Control Regime

OK, let’s forget about all that philosophical and legalistic mumbo-jumbo.  After all, most people these days don’t really give a hoot about constitutional limitations or the first principles associated with our nation’s founding. Let us instead explore the Bold New World of information regulation that Wu wants imposed on the high-tech economy and consider its complexity and costs.  Wu is a bit short on details about how policymakers should go about constructing a “Separations” regime, or how it will work in practice, but he does suggest that Net neutrality regulation and expanded antitrust oversight are at least two of the core elements. But he says that will not be enough.

Despite the fact that Wu admits the FCC “has on occasion let itself become the enemy of the good, effectively a tool of repression,” Wu seems to suggest the agency will continue to have “day-to-day authority over the information industries.” (p. 309) Of course, the FCC’s role is currently limited mostly to older sectors of the information economy, but Wu seems to suggest that role should be expanded considerably.  Yet, FCC oversight isn’t enough either, Wu says.  He argues that “what is needed is not only an FCC institutionally committed to a Separations Principle but also a structural arrangement to guard against such deviations, including congressional oversight as well as attention and corrections from other branches of government.”

Here the “breadth and ambition in its application” associated with Wu’s Separations Principal becomes more apparent. We are talking about layers upon layers of regulation. More importantly, the key attribute of Wu’s Separations Principle is that it is preemptive and prophylactic in character.  He explicitly rejects the idea that marketplace experimentation should be allowed and that ex post administrative proceedings or antitrust enforcement will be good enough. “[T]here is the problem of taking an after-the-fact approach to a commodity so vital to our basic liberties,” he argues. (p. 204) Thus, Wu’s approach represent a return to the sort of anticipatory, “Mother, May I” regulatory regime America was supposed to be turning away from following the passage of the Telecommunications Act of 1996.

What’s most bizarre about Wu’s call for such a preemptive “Separations” approach is his insistence that it is not a regulatory approach.  It’s hard to know whether this is an astonishing bit of hubris or just plain naiveté.  I hate to suggest it, but I think Wu is perfectly aware of just how regulatory his system would be in practice; he just doesn’t want to admit it.  After all, for there to be “separations” of various segments of the information sector, someone would need to determine who and what belongs in which bucket.  Wu suggests we’ll need at least three buckets. To repeat, he says his Separations Principle “would mean that those who develop information, those who control the network infrastructure on which it travels, and those who control the tools or venues of access must be kept apart from one another.”  Let’s put some labels on these buckets:

• Bucket #1: Information Creators
• Bucket #2: Information Distributors
• Bucket #3: Information Hardware Makers

These would essentially become three of the new “titles” (or regulatory sections) of a forthcoming “Information Economy Separations Act.” (I’m assuming Wu understands it would take an act of Congress to implement this sweeping regime, although he never makes that clear.  Or perhaps he would just prefer the FCC “reclassify” the entire information economy by regulatory fiat? Who knows.  Again, he never really sweats the details on this important point.)

Regardless, the problem with these conceptually neat classifications is that don’t conform to our fast-paced, highly dynamic Information Age economy.  There is a fluidity of innovation and market activity that Wu utterly fails to appreciate.  I suppose it’d be easy to throw a couple of players into these buckets and tell them to stay put.  We could tell T-Mobile, for example, that they could be a wireless information distributor and absolutely nothing else; we could tell Discovery Networks, they could be a content creator and absolutely nothing else; and we could tell Intel, you can be a chip maker and absolutely nothing else.

But not every existing information sector actor or technology is so neatly compartmentalized. Moreover, Wu’s framework also begs the question: Would firms that currently have integrated operations and investments in multiple fields be forced to divest control of various operations to come in line with Wu’s Separations Principle?   Here are a few scenarios to consider (and with each example, ask yourself the question: What’s the harm here to would justify the sort of “separations” regime Wu proposes?):

• Cox Enterprises has a wide variety of content and distribution properties including: broadband services, cable TV channels and distribution systems, newspapers, radio stations, advertising and direct mail divisions, and AutoTrader.com.  How many pieces does the firm need to be split into to comply with Wu’s new “Separations” regime?
• Should an ISP be allowed to develop or offer (or directly integrate into their service) free anti-virus software and parental control technologies since that’s not part of the underlying distribution service? Nearly every major ISP does so already today.
• Even though the experiment was ultimately a failure, should Google have been allowed to break out of the search market and give the handheld device business a shot with the Nexus One?  Likewise, should Google be allowed to continue its experiment with local fiber or wi-fi networks even though it is so clearly outside their traditional line of business?  Finally, should the FCC have disallowed Google’s bid in the 700 MHz spectrum auction back in 2008 since it would have meant the firm was formally entering the information distribution business?
• Which bucket is Microsoft in as a traditional OS and software provider?  Regardless, was it a mistake to allow them to jump into the video game console marketplace with the Xbox many years ago?   Should MS have been forbidden from creating the Zune since it too was a digital device outside of Microsoft’s core field?  Should MS be allowed to have a content division that develops games or other content for its operating systems even though they might be considered two separate information markets?
• Sony produces movie and video game content but also develops hardware (video game consoles, televisions, music players, phones, etc.) on which that content can be played. Should that be illegal? Would they have to divest some of these divisions once Wu’s system went into effect?
• Apple is the ultimate example of an information hardware manufacturer that has not only diversified its hardware offerings from PCs to iPods, iPhones and iPads, but also become a (if not the) leading information distributor for digital music, movies, television shows, podcasts, books and audiobooks through iTunes.  The company’s Apps store also makes it a key distributor of software.  What bucket is it in?
• Should Amazon be allowed to be both the biggest online marketplace as well as the manufacturer of a device (the Kindle) that offers access to that store?

I could go on and on, but here’s the crucial point: Creating firewalls between the buckets Wu proposes would be a nightmare and would entail incessant regulatory interventions to make sure the walls weren’t breached.  As suggested above, the very act of regulatory line-drawing would be mind-bogglingly complex.  More importantly, each new information sector innovation would suddenly be subjected to a regulatory classification proceeding.

Wu is essentially saying there are few integrative efficiencies or other economic benefits associated with cross-sector deals or cross-platform technological developments.  Again, he dismisses the notion with one line: “[T]he Separations Principle accepts in advance that some of the benefits of concentration and unified action will be sacrificed, even in ways that may seem painful or costly.” (p. 305)  Well, that’s nice… except that this regulatory system would upend the U.S. information economy as we know it!  His Separations Principle is an unprecedented regulatory wrecking ball that would do untold destruction to the American economy in the name of creating a system of information apartheid. Wu also completely ignores the litigation nightmare that would ensue once the government started forcing the divestiture of various lines of business.  After all, many companies would likely have valid “takings” claims here under the Fifth Amendment.

But even if we could get beyond all that, we’d have to consider how this regime would work going forward.  Let’s consider a hypothetical example.  Virtual reality is an emerging field of our information economy that promises to experience rapid growth in coming years.  A number of companies are currently developing content and devices that will help bring a veritable Star Trek holodeck experience to our living rooms sometime very soon.  The market is still in a great deal of flux and it remains unclear which technologies will prevail or which developers and device makers will prosper.  One thing we know for certain, however: it’s a hugely complex and expensive undertaking.  VR technologies aren’t like creating a YouTube video of your cat playing a piano. There are significant costs associated with developing VR content and devices. Distributing VR bits over networks will, no doubt, be quite complicated as well.  Now, imagine two scenarios (which, for all I know, may already be playing out in the marketplace today):

• Scenario 1: A partnership is announced between some cutting-edge VR companies that have different core competencies in this field.  One of the companies is developing holographic imaging devices to project immersive environments directly into your living room or workspace.  Another of the partners is developing games that would take advantage of those new holographic imaging innovations.  And a third partner in the deal is developing software that will help manage the real-time, high-bandwidth flow of VR bits across broadband lines.  Under Wu’s Separations Principle, would this deal be illegal?
• Scenario 2: All of the activities discussed above are being handled by a single, integrated firm.  Is that illegal under Wu’s Separations Principle?

Now, it would be easy to dismiss this scenario with a casual wave of the hand and a ‘we’ll-figure-it-out-later’ attitude.  But consider the fact that deals and developments like this are happening every single minute of the day our modern information economy.  One wonders how regulators would even be expected to keep track of it all.  And they would have to keep track of it all because, again, Wu’s Separations Principle is preemptive and prophylactic in character.  His regulatory regime is going to have to come to grips with that fact that innovation happens. Markets evolve. People want to experiment and do bold new things. They tinker. They develop. They pitch. They deal. And so on.  As that dynamic process unfolds every day across the high-tech economy, Wu’s Separations Principle will be put to the test and necessitate a regulatory proceeding of some sort to determine what is permitted and what is verboten.  Meanwhile, the very uncertainty associated with Wu’s regime would delay and discourage investment in the field and formation of the partnership/venture necessary to successfully bring VR to market

Astonishingly, however, Wu argues that “a Separations regime would take much of the guesswork and impressionism, and indeed the influence trafficking, out of the oversight of information industries.” (p. 307) That’s a doozy of a claim.  To the extent his Separations Principle eliminates “guesswork” and creates more regulatory certainty, it would only do so by creating rigid artificial barriers to market entry and innovation across the information economy.  That’s “certainty” that we can live without.

Conclusion

Over on Amazon.com, I was interested to see Tim Wu post a glowing review of Kevin Kelly’s important new book, What Technology Wants (which I will be reviewing here next).  Kelly’s book argues that we should think of technology, or what he calls “the Technium,” as a “force” or even a living “organism” that has a “vital spirit” and which “has its own wants” and “a noticeable measure of autonomy.”  I think Kelly goes a bit far, but to the extent one buys into the notion that technology is like an organism, Tim Wu’s Information Industrial Policy would kill that organism.  Or, it would at least severely stunt its continued growth and evolution.

Because his information industry policy is every bit as “radical” as he suggests and would require, as he also admits, “a certain breadth and ambition in its application,” it is essential we reject this innovation-killing regulatory regime.  The health of the high-tech economy, the global competitiveness of the U.S. technology sector, and the long-term welfare of consumers depends upon it.

The Federal Communications Commission has established a new advisory group called the “Technological Advisory Council.” Among other things it will advise the agency on “how broadband communications can be part of the solution for the delivery and cost containment of health care, for energy and environmental conservation, for education innovation and in the creation of jobs.”

This is an agency that is radically overspilling its bounds. It has established goals that it has no proper role in fulfilling and that it has no idea how to fulfill. As we look for cost-cutting measures at the federal level, we could end the pretense that communications industry should be regulated as a public utility. Shuttering the FCC would free up funds for better purposes such as lowering the national debt or reducing taxes.

Stung by criticism of its site as the “worst in government”—that mighta been Jerry Brito talking—the FCC has rolled out a new set of sites under a “Reboot” brand.

When I first saw the presentation on it at today’s Gov 2.0 Summit, I thought that the FCC has merely redone its web site, but it appears to be releasing data that can be re-purposed in any number of ways for true public oversight of the agency.

Developers, check out FCC.gov/developer and let us know what you think of it.

In a 3-2 vote, the Federal Communications Commission recently decided to jack up its official definition of “broadband” from 200 kbps download to the 4 mbps dpwnload/1 mbps upload used as a benchmark in Our Big Fat National Broadband Plan. The three commissioners in the majority also declared that the definition of broadband will continue to evolve as consumers purchase faster connections to utilize new applications.

Several months earlier, the FCC launched a proceeding to figure out how to convert universal service subsidies for rural telephone service into universal service subsidies for rural broadband service.  Put these two decisions together, and it looks like the majority on the FCC is hell-bent on establishing rural broadband subsidies as a perpetual entitlement program that will never “solve” the rural availability problem because the goalposts will keep moving.

The current USF program taxes price-sensitive services (long distance and wireless) to subsidize a service that is not very price sensitive (local phone connections).  If the FCC takes a further step on the funding side and starts collecting universal service assessments from broadband, it will diminish broadband subscribership by taxing a service that is even more price sensitive: broadband connections. (I explained this a few months ago here.)

It’s time to get off this merry-go-round. The solution was suggested by MIT economist Jerry Hausman back when the FCC first started creating the current universal service programs in response to the Telecom Act of 1996: use revenues from spectrum auctions. 

Instead of having the FCC perpetually collect assessments from broadband or telephone services to subsidize broadband buildout in rural areas, Congress should earmark revenues from the next spectrum auction for one-time buildout grants in high-cost areas. The grants should be awarded via a competitive procurement auction that would force subsidy-seekers in different locations to compete with each other for the federal dollars. And Congress should explicitly wind down the universal service telephone subsidies in high cost areas and prohibit the FCC from using universal service assessments to fund broadband deployment in these places.

Using revenues from spectrum auctions would avoid the distortions and perverse consequences caused by ongoing universal service assessments on broadband or telephone services. One-shot deployment grants would ensure that the availability problem gets solved, so the federal government can declare victory and get out of the perpetual subsidy business.

Of course, some locations in the US are so expensive to serve that the potential revenues might not even cover the operating costs of broadband. But it does not follow that operators in these places need an ongoing stream of subsidies. When preparing their subsidy bids, they will have to calculate how large the one-shot payment needs to be to induce them to take on the capital costs and the ongoing operating costs. In other words, they can bank some of the one-shot subsidy and use it to cover the difference between revenues and operating costs.

This modest proposal does not address all aspects of the universal service fund. But it would achieve a clear objective — bringing broadband to rural areas — while allowing the FCC to extricate itself from the business of distributing $4.6 billion a year in subsidies. Let’s see a timetable for withdrawal!