Last week, it was my great honor to speak at the 2011 State of the Net 2011 event, where I participated in a panel discussion about the future of the online video marketplace.  In an earlier essay, I mentioned how some of the discussion that day revolved around the Comcast-NBCU merger, which had just been approved by the FCC, but with unprecedented strings being attached.  The heart of the panel discussion, however, was a debate about the future of online video and regulation of the video marketplace more generally. Also joining me on the panel were Susan Crawford of Cardozo Law School, William Lehr of MIT, Marvin Ammori of Nebraska Law School, and Richard Bennett of ITIF.

During my response time on the panel, which begins around 28:45 of the video, I made a couple of key points:

• We’re living in the golden age of video. In considering the state of the video marketplace, we need to put things in some historical context. We should appreciate just how far we’ve come from the “age of scarcity,” in which we only had access to a handful of VHF and UHF broadcast channels in most communities, compared to present day. Indeed, we are today blessed today to live in a world of information abundance. By the FCC’s last count, 565 cable or satellite channels exist today and those channels and programs are available over more platforms (cable, satellite, telco, online, mail, etc) than ever before.
• Deregulation (or light-touch) rules helped. Video distribution and program diversity thrived as the FCC gradually loosened the regulatory chains or forebore from regulating emerging video platforms or programs.  By contrast, in the highly-regulated past, innovation, competition, and diversity were stagnant.
• “Gatekeeper” control fears are bunk. Content continues to flow over multiple platforms in an unprecedented manner. That only makes sense since content creators and distributors have every incentive to get as much content pushed out on as many platforms as possible in order to make money! No one ever got rich in this space by locking up all their content. Moreover,  vertical integration of programming by MVPDs is at its lowest point in the past 20 years. The percentage of channels owned by video distributors has fallen from 50% in 1990 to around 15% today.
• Youngsters today don’t “watch TV” anymore. They watch YouTube, Hulu, Netflix, Apple TV, Google TV, Amazon, XBox Live, PlayStation, Roku, etc.  The video market is highly dynamic and subject to seemingly constant disruptive technological change.
• Level the playing field in favor of more freedom. To the extent there is a regulatory asymmetry at work between the old media marketplace and the online or Internet video world, and to the extent policymakers are looking to “level the regulatory playing field” between them, I argued we should level the playing field in favor of freedom.
• Clean up the old mess now. Therefore, the old rules need to go. Those rules would include must carry mandates and other carriage requirements / compulsory licensing rules, retransmission consent rules, “localism” and other program content mandates, set-tob box regs, advertising limitations, etc.
• Or, at least don’t extend old mess to new world. If lawmakers refuse to get rid of the old rules, however, we should erect a high and tight firewall between the old and new worlds and not muck up the new online video ecosystem with rules and regulations that would stifle the wonderful developments and diversity we are witnessing today.

See the entire State of the Net 2011 panel on YouTube here.

The Ticketmaster-Live Nation antitrust saga has come to a bittersweet end. Earlier this week the Justice Department finally approved the merger between the two firms, just shy of one year after it was announced.

While a number antitrust experts had speculated that the Justice Department might seek an injunction to block the deal outright, the DoJ ultimately opted to approve the deal while subjecting Ticketmaster-Live Nation to several conditions that are supposed to promote competition in the events marketplace. Under the terms of the consent decree, the combined firm will be required to license its ticketing software to competitor Anschutz Entertainment Group and divest Paciolan, a ticketing subsidiary of Ticketmaster. Ticketmaster-Live Nation also faces ten years of monitoring by antitrust officials to “prevent anticompetitive bundling of services.”

Ticketmaster has long been a controversial firm among concertgoers, frequently drawing consumers’ ire for charging hefty “convenience” fees and offering customer service that’s not exactly stellar. But it’s important to remember that today’s entertainment market is more fragmented than ever, and consumers have a huge array of choices for listening to music and viewing live events. Even YouTube is getting into the business of airing live events. The video site has broadcast several live events already, including U2’s Rose Bowl performance in October 2009, and is eyeing the pay-per-view live streaming market as well.

So it’s not hard to see why consolidation is taking place in the event ticketing and promotion markets. Economists have demonstrated that vertical integration, done properly, often results in sizable efficiencies, translating into overall welfare gains for consumers. Together, Ticketmaster and Live Nation are in a stronger position than before to offer value to event venues and promote concerts and shows. And as much we all hate service fees, in industries characterized by high fixed costs and declining marginal unit costs – like ticketing – big per-unit “markups” are often necessary to induce businesses to compete and innovate. While Ticketmaster may not be the most innovative company in the world, the firm faces an uncertain future as its contracts with venues come up for renewal. If Ticketmaster really is harming concertgoers – and by the way, there’s no clear evidence that it is – it will be disciplined not only by concert lovers, but by venues and artists as well. Derailing a potentially efficient business arrangement simply because it might not work out, whether in the event ticketing market or the cable television market, results in harm to consumers.

Interestingly, Susan Crawford, a law professor and former White House Special Assistant for Science, Technology, and Innovation Policy, tweeted yesterday, “Notice [the] unbundling conditions on [the] Ticketmaster merger.” It’s curious that Crawford chose the term ‘unbundling,’ which typically refers to essential facilities regulation whereby government forces utilities to share their last-mile facilities with competitors. Crawford happens to be a staunch advocate of local loop unbundling, which requires incumbent telecom providers to share their local facilities with competitive carriers at “just and reasonable” prices – as determined by regulators, of course. (The 1996 Telecom Act imposed local loop unbundling rules in the U.S., although subsequent FCC rulings relaxed unbundling requirements to a significant extent.)

Despite the seeming similarities between the Ticketmaster conditions and unbundling regulations, the two rules are rooted in distinct regulatory frameworks. Ticketmaster is only required to share a peripheral element of its business, ticketing software, with a single rival for ten years. But U.S. telecom firms governed by local loop unbundling rules must sell a core element of their business, last-mile access, to all comers, at rates that regulators deem reasonable. Ticketmaster acquired its market share by competing in the free market and, to a lesser extent, by acquiring smaller firms. Telecom incumbents have significant market share in no small part thanks to nationwide infrastructure established long ago by the long-dissolved Ma Bell monopoly. Moreover, forced unbundling of essential facilities is a network regulation, rather an antitrust regulation. U.S. antitrust laws are deeply flawed, but thanks in large part to the courts, at least antitrust regulation is fundamentally rooted in actual economics and aims to maximize consumer welfare. The FCC, on the other hand, assesses policies using the “public interest” standard, an ambiguous, arbitrary framework that incorporates economics only when convenient.

The legitimacy of merger licensing conditions is independent from the legitimacy of local loop unbundling. More to the point, bad antitrust laws are no justification for bad communications laws.

Panel #2 at this year’s “State of the Net” pre-conference featured a lively debate about net neutrality and investment. It included a debate between Hal Singer of Empiris LLC and Michael Livermore of the New York University Law School. It also featured the comments of Markham Erickson of the Open Internet Coalition and Christopher Yoo of the University of Pennsylvania Law School.  The panel was ably moderated by Susan Crawford.  Here are some highlights of what proved to be a fun and feisty debate, which began with the comments of Hal Singer:

Hal Singer, Empiris LLC

• FCC wants to constrain pricing flexibility for networks
• Not clear we need price regulation for service delivery in absence of clear market power
• FCC offers novel “collective action” theory to justify regulation, but doesn’t make sense and doesn’t apply here
• Investment at edge of network will not decline in absence of Net neutrality regulation
• Outlawing priority delivery would discourage investment in new networks AND applications
• “Net neutrality would harm the very folks it seeks to protect”; end users will see price hikes
• Investment at core is crucial

Michael Livermore, New York University Law School

• says there is market failure that justifies Net Neutrality regulation + positive externalities with regs
• w/o Net neutrality rules there will be under-investment at both core and edge
• govt subsidies are 1 way to subsidize infrastructure & content, or can use pricing rule / regulation
• need a pricing rule to protect content creators and encourage investment
• will need to ensure fair returns for ISPs as part of regulation

H. Singer

• says that Livermore’s theories about Net Neutrality and investment are equivalent of “bunch of crap”!
• if you lower the expected return on an investment, you will see less investment

M. Livermore

• flips it, says we will see less investment from content providers with regulation of infrastructure providers

Susan Crawford

• what are the “harms”?

M. Livermore

• says harms deal with externalities and need to have regs to incentivize positive externalities

H. Singer

• fears of quality of service (QOS) prioritization are overblown

M. Livermore

• while some may benefit, problem with QOS is that some users are left less well off
• ISPs will set the price point incorrectly and harm other parties

H. Singer

• who is harmed?
• will carriers be forced to get permission to innovation

M. Livermore

• new entrants into marketplace will be harmed w/o regulation to ensure “open system”
• big boys will prioritize service and drive little guys away

H. Singer

• priority service is being mistakenly conflated with general access to networks
• we should strive for equality of opportunity, not outcome
• Net neutrality proponents keep creating new rationales for regulation, but no showing of harm

Markham Erickson – Open Internet Coalition

• The way the Net works now is relatively efficient
• Equate prioritization with a “tax” on providers
• don’t want to encourage ISPs to be getting returns though QOS efforts

Christopher Yoo – Univ. of Penn. Law School

• Big surprise with FCC Net Neutrality docket was how many comments were AGAINST regulation
• Most understood connection between regulation and investment
• NN debate often looks too much to the past
• Internet as we know it today (layered model) is fine, but network is evolving and flexibility is needed for new network applications (ex: multicasting, mobility, security, interactive video)
• Shouldn’t regulate to address ambiguous harms; will have unintended consequences
• wireless networks are particular problem since they operate differently; NN regs would hurt
• horror stories driving debate… remember AOL-Time Warner?  ended up being no big deal (Indeed!)

M. Erickson

• fears “slow lane” for most edge providers
• says ISPs will not re-invest “fast lane” money

C. Yoo

• raises First Amendment implications for Net Neutrality regulation
• some intermediaries will filter content to help focus people of best content; Is that allowed?

Audience Questions

• is there a third way that doesn’t “destroy the Internet?”
• what about negative externalities? (esp. congestion) (Livermore says change price structure for end users)

As someone who follows the federal regulatory process, I was amazed to see this in a recent American Spectator post about White House technology advisor Susan Crawford’s return to the University of Michigan Law School:

But White House sources say that she ran afoul of senior White House economics adviser Larry Summers, who claimed he and other senior Obama officials were unaware of how radical the draft Net Neutrality regulations were when they were initially internally circulated to Obama administration officials several weeks ago … In the end, the proposed regulations were slightly moderated from the original language FCC chairman Julius Genachowski, a Crawford ally, circulated.

Unlike regulatory agencies that are considered part of the executive branch, the Federal Communications Commission is an “independent” regulatory agency — which means the president cannot fire its five commissioners. Before executive branch agencies can propose a regulation, it must be reviewed by the Office of Management and Budget’s Office of Information and Regulatory Affairs (OIRA). No administration has yet tried to bring independent agencies like the FCC under OIRA review.

Typically, congressional and private watchdogs scream bloody murder when they see the White House trying to influence independent agencies. But I haven’t heard any barking about this one.

Personally, I think independent agencies’ regulations should be subject to OIRA review. I don’t mind letting the president and his advisors have their say on regulations proposed by people he appointed. But I’d like to see it happen through the formal OIRA review process, where the public knows it’s happening and knows what the rules are.

For example: If you want to know which proposed regulations OIRA has reviewed, go here.  If you want to know the standards OIRA uses to review regulations, go here. If you want to know what outside parties have met with OIRA to discuss regulations, go here.

Another chapter in the seemingly never-ending saga of the Child Online Protection Act (COPA) of 1998 was written this week when the Third Circuit Court of Appeals upheld a lower court ruling striking down COPA, which would require Web operators to restrict access to large amounts of online speech and expression. [The Third Circuit’s full decision is here. And I penned a 3-part series on the lower court ruling by Judge Lowell Reed Jr., senior judge of the U.S. District Court for the Eastern District of Pennsylvania, here, here, and here].

The DOJ will likely appeal the decision, yet again, to the Supreme Court. I can’t be certain, but I know of no other free speech-related law that has made THREE trips to the Supreme Court for review. (If readers know of any laws that can match that record, please let me know). It really is quite amazing, and even a little outrageous, when you think about it. After all, just think of all the time, energy and money that has gone into this 10-year legal fiasco. I know it is the DOJ’s job to defend congressional enactments before the courts, but how might we have spent that time and money if all this litigating wasn’t going on?? Regulation always has opportunity costs and in this case those costs have been 10 years of wrangling among lawyers. Those resources could have been used to educate parents and kids about online safety; to create and disseminate more and better private screening tools; and so on. Alas, we instead have mounds of paper piling up in the courts and millions being spent with nothing to show for it. Anyway, Declan has an excellent summary of the 3rd Circuit’s ruling here, and my friends at CDT have a statement here. But Susan Crawford has the best analysis of the decision in her essay on “Understanding COPA’s Journey.” She begins by summarizing the key findings:

The Third Circuit yesterday announced a host of reasons why COPA is insufficiently narrowly tailored, many based on the terms of the statute. The coverage of the HTM [“harm to minors”] definition is vague, the court felt, and so publishers won’t be able to tell in advance whether their operations are all subject to the COPA constraint (what if only a tiny portion of a web site has arguably HTM material on it?) or what fits within the HTM definition (are you supposed to be protecting 3 year-olds as well as 16 year-olds?). The court also found that having to implement credit card, debit account etc. shields would burden the providers of free web sites whose operations are nonetheless “commercial” and so covered by COPA. This was another instance of insufficient tailoring. But the key element here is that the Third Circuit held that the government had to carry the burden of showing that filters were less effective than COPA, and it failed to do that. In fact, it appears that filters are both less restrictive and more effective than the operation of the statute, based on extensive findings of fact by the district court below.

So, what will the Supreme Court say about that argument when COPA makes its unprecedented 3rd appearance before the judges? Susan says:

This approach may be difficult for the current Supreme Court to agree with. It was difficult enough the last time. The analytical framework adopted by the Third Circuit follows what Justice Kennedy said then – that it is the Court’s job to consider what alternatives are out there in the world to help parents, and to decide whether they’re more effective/less restrictive than COPA. The point, Justice Kennedy said, is to is ‘‘to ensure that speech is restricted no further than necessary,’’ not to consider ‘‘whether the challenged restriction has some effect in achieving Congress’ goal, regardless of the restriction it imposes.’’ So the court’s job is not to ask whether COPA would provide government with another tool to address harmful speech in the name of protecting kids. That standard would justify any restriction on speech. Instead, the inquiry should be ‘‘whether the challenged regulation is the least restrictive means among available, effective alternatives.’’ Right now, filters are more effective and less restrictive than COPA (or, at least, the government didn’t prove that they weren’t), and so the government loses. Never mind that filters are voluntary and that a lot of parents choose not to use them – that’s the parents’ choice. Filters are available. The government’s argument to the Third Circuit, and probably to the Supreme Court, will be that this is a maddeningly flawed analytical approach. The government would like to see a more protective, quasi-parental approach (on the assumption that parents are busy shoring up the failing economy and can’t be counted on to be watching their kids or caring what they see). Justice Breyer was very sympathetic to that view the last time around. His point is that filtering doesn’t count as an alternative to COPA. (‘‘The presence of filtering software is not an alternative legislative approach to the problem of protecting children.”) Doing nothing, legislatively, will always be less restrictive than doing something. He also thinks COPA isn’t much stronger than the Miller obscenity test and would only modestly burden adult access to legal adult speech. Veteran SCT-watchers will count noses, in this case as in Fox v. FCC, and try to figure out what will happen next. Last time around, Justice Kennedy’s majority opinion was joined by Stevens, Souter, Thomas, and Ginsburg, all of whom are still there. Justice Stevens wrote a concurring opinion, which was joined by Justice Ginsburg. Justice Scalia filed a dissent, as did Justice Breyer, who was joined by Chief Justice Rehnquist (now Roberts) and Justice O’Connor (now Alito). So maybe the 5-4 will stay in place. But if Thomas goes over to the dissenting side, and Justice Breyer’s analytic approach (”what do you mean, filtering is an alternative?”) gathers steam, COPA could survive its third trip to the SCT and be upheld.

So, it remains to be seen whether the third time is the charm for the DOJ and they are able to finally convince the Supreme Court to enforce COPA. And Susan is right in noting that all eyes will be on the decision in Fox v. FCC since that will be the next major free speech case before the Court.

As Susan rightly concludes: “This case is a big deal because it turns on the question whether private, edge-based solutions to speech issues should be taken seriously. I think they can, and I don’t want to see a lot of government tinkering with the sources of speech…. Let’s hope the government drops the COPA effort, which has now stretched on for almost ten years.”

Indeed.