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

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

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

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

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

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

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

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

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

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

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

Last Friday I attended a fascinating conference hosted by the Duke Law School’s Center for Innovation Policy about television regulation and competition. It’s remarkable how quickly television competition has changed and how online video providers are putting pressure on old business models.

I’ve been working on a project about competition in technology, communications, and media and one chart that stands out is one that shows increasing competition in pay television, below. Namely, that cable providers have lost nearly 15 million subscribers since 2002. Cable was essentially the only game in town in 1990 for pay television (about 100% market share). Yet today, cable’s market share approaches 50%. This competitive pressure accounts for some cable companies trying to merge in recent years.

Much of this churn by subscribers was to satellite providers but it’s the “telephone” companies providing TV that’s really had a competitive impact in recent years. Telcos went from about 0% market share in 2005 to 13% in 2014. This new competition can be tied to Congress finally allowing telephone companies to provide TV in 1996. However, these new services didn’t really get started until a decade ago when 1) digital and IP technology improved, and 2) the FCC made it clear by deregulating DSL ISPs that telephone companies could expect a market return for investing in fiber broadband nationwide.

UPDATE:

And below is market share data going back ten more years to 1994 using FCC data, which uses a slightly different measurement methodology (hence the kink around 2003-2004). I’ve also omitted market share of Home Satellite Dish (those large dishes you sometimes see in rural areas). Though HSD has negligible market share today, it had a few million subscribers in the mid-1990s. I may add HSD later.

Shortly after Tom Wheeler assumed the Chairmanship at the Federal Communications Commission (FCC), he summed up his regulatory philosophy as “competition, competition, competition.” Promoting competition has been the norm in communications policy since Congress adopted the Telecommunications Act of 1996 in order to “promote competition and reduce regulation.” The 1996 Act has largely succeeded in achieving competition in communications markets with one glaring exception: broadcast television. In stark contrast to the pro-competitive approach that is applied in other market segments, Congress and the FCC have consistently supported policies that artificially limit the ability of TV stations to compete or innovate in the communications marketplace.

Radio broadcasting was not subject to regulatory oversight initially. In the unregulated era, the business model for over-the-air broadcasting was “still very much an open question.” Various methods for financing radio stations were proposed or attempted, including taxes on the sale of devices, private endowments, municipal or state financing, public donations, and subscriptions. “We are today so accustomed to the dominant role of the advertiser in broadcasting that we tend to forget that, initially, the idea of advertising on the air was not even contemplated and met with widespread indignation when it was first tried.”

Section 303 of the Communications Act of 1934 thus provided the FCC with broad authority to authorize over-the-air subscription television service (STV). When the D.C. Circuit Court of Appeals addressed this provision, it held that “subscription television is entirely consistent with [the] goals” of the Act. Analog STV services did not become widespread in the marketplace, however, due in part to regulatory limitations imposed on such services by the FCC. As a result, advertising dominated television revenue in the analog era.

The digital television (DTV) transition offered a new opportunity for TV stations to provide STV services in competition with MVPDs. The FCC had initially hoped that “multicasting” and other new capabilities provided by digital technologies would “help ensure robust competition in the video market that will bring more choices at less cost to American consumers.”

Despite the agency’s initial optimism, regulatory restrictions once again crushed the potential for TV stations to compete in other segments of the communications marketplace. When broadcasters proposed offering digital STV services with multiple broadcast and cable channels in order to compete with MVPDs, Congress held a hearing to condemn the innovation. Chairmen from both House and Senate committees threatened retribution against broadcasters if they pursued subscription television services — “There will be a quid pro quo.” Broadcasters responded to these Congressional threats by abandoning their plans to compete with MVPDs.

It’s hard to miss the irony in the 1996 Act’s approach to the DTV transition. Though the Act’s stated purposes are to “promote competition and reduce regulation, it imposed additional regulatory requirements on television stations that have stymied their ability to innovate and compete. The 1996 Act broadcasting provision requires that the FCC impose limits on subscription television services “so as to avoid derogation of any advanced television services, including high definition television broadcasts, that the Commission may require using such frequencies,” and prohibits TV stations from being deemed an MVPD. The FCC’s rules require TV stations to “transmit at least one over-the-air video programming signal at no direct charge to viewers” because “free, over-the-air television is a public good, like a public park, and might not exist otherwise.

These and other draconian legislative and regulatory limitations have forced TV stations to follow the analog television business model into the 21st Century while the rest of the communications industry innovated at a furious pace. As a result of this government-mandated broadcast business model, TV stations must rely on advertising and retransmission consent revenue for their survival.

Though the “public interest” status of TV stations may once have been considered a government benefit, it is rapidly becoming a curse. Congress and the FCC have both relied on the broadcast public interest shibboleth to impose unique and highly burdensome regulatory obligations on TV stations that are inapplicable to their competitors in the advertising and other potential markets. This disparity in regulatory treatment has increased dramatically under the current administration — to the point that is threatening the viability of broadcast television.

Here are just three examples of the ways in which the current administration has widened the regulatory chasm between TV stations and their rivals:

• In 2012, the FCC required only TV stations to post “political file” documents online, including the rates charged by TV stations for political advertising; MVPDs are not required to post this information online. This regulatory disparity gives political ad buyers and incentive to advertise on cable rather than broadcast channels and forces TV stations to disclose sensitive pricing information more widely than their competitors.
• This year the FCC prohibited joint sales agreements for television stations only; MVPDs and online content distributors are not subject to any such limitations on their advertising sales. This prohibition gives MVPDs and online advertising platforms a substantial competitive advantage in the market for advertising sales.
• This year the FCC also prohibited bundled programming sales by broadcasters only; cable networks are not subject to any limitations on the sale of programming in bundles. This disparity gives broadcast networks an incentive to avoid limitations on their programming sales by selling exclusively to MVPDs (i.e., becoming cable networks).

The FCC has not made any attempt to justify the differential treatment — because there is no rational justification for arbitrary and capricious decision-making.

Sadly, the STELA process in the Senate is threatening to make things worse. Some legislative proposals would eliminate retransmission consent and other provisions that provide the regulatory ballast for broadcast television’s government mandated business model  without eliminating the mandate. This approach would put a quick end to the administration’s “death by a thousand cuts” strategy with one killing blow. The administration must be laughing itself silly. When TV channels in smaller and rural markets go dark, this administration will be gone — and it will be up to Congress to explain the final TV transition.

The Federal Communications Commission (FCC) recently sought additional comment on whether it should eliminate its network non-duplication and syndicated exclusivity rules (known as the “broadcasting exclusivity” rules). It should just as well have asked whether it should eliminate its rules governing broadcast television. Local TV stations could not survive without broadcast exclusivity rights that are enforceable both legally and practicably.

The FCC’s broadcast exclusivity rules “do not create rights but rather provide a means for the parties to exclusive contracts to enforce them through the Commission rather than the courts.” (Broadcast Exclusivity Order, FCC 88-180 at ¶ 120 (1988)) The rights themselves are created through private contracts between TV stations and video programming vendors in the same manner that MVPDs create exclusive rights to distribute cable network programming.

Local TV stations typically negotiate contracts for the exclusive distribution of national broadcast network or syndicated programming in their respective local markets in order to preserve their ability to obtain local advertising revenue. The FCC has long recognized that, “When the same program a [local] broadcaster is showing is available via cable transmission of a duplicative [distant] signal, the [local] broadcaster will attract a smaller audience, reducing the amount of advertising revenue it can garner.” (Program Access Order, FCC 12-123 at ¶ 62 (2012)) Enforceable broadcast exclusivity agreements are thus necessary for local TV stations to generate the advertising revenue that is necessary for them to survive the government’s mandatory broadcast television business model.

The FCC determined nearly fifty years ago that it is an anticompetitive practice for multichannel video programming distributors (MVPDs) to import distant broadcast signals into local markets that duplicate network and syndicated programming to which local stations have purchased exclusive rights. ( See First Exclusivity Order, 38 FCC 683, 703-704 (1965)) Though the video marketplace has changed since 1965, the government’s mandatory broadcast business model is still required by law, and MVPD violations of broadcast exclusivity rights are still anticompetitive.

The FCC adopted broadcast exclusivity procedures to ensure that broadcasters, who are legally prohibited from obtaining direct contractual relationships with viewers or economies of scale, could enjoy the same ability to enforce exclusive programming rights as larger MVPDs. The FCC’s rules are thus designed to “allow all participants in the marketplace to determine, based on their own best business judgment, what degree of programming exclusivity will best allow them to compete in the marketplace and most effectively serve their viewers.” (Broadcast Exclusivity Order at ¶ 125.)

When it adopted the current broadcast exclusivity rules, the FCC concluded that enforcement of broadcast exclusivity agreements was necessary to counteract regulatory restrictions that prevent TV stations from competing directly with MVPDs. Broadcasters suffer the diversion of viewers to duplicative programming on MVPD systems when local TV stations choose to exhibit the most popular programming, because that programming is the most likely to be duplicated. ( See Broadcast Exclusivity Order at ¶ 62.) Normally firms suffer their most severe losses when they fail to meet consumer demand, but, in the absence of enforceable broadcast exclusivity agreements, this relationship is reversed for local TV stations: they suffer their most severe losses precisely when they offer the programming that consumers desire most.

The fact that only broadcasters suffer this kind of [viewership] diversion is stark evidence, not of inferior ability to be responsive to viewers’ preferences, but rather of the fact that broadcasters operate under a different set of competitive rules. All programmers face competition from alternative sources of programming. Only broadcasters face, and are powerless to prevent, competition from the programming they themselves offer to viewers. (Id. at ¶ 42.)

The FCC has thus concluded that, if TV stations were unable to enforce exclusive contracts through FCC rules, TV stations would be competitively handicapped compared to MVPDs. ( See id. at ¶ 162.)

Regulatory restrictions effectively prevent local TV stations from enforcing broadcast exclusivity agreements through preventative measures and in the courts: (1) prohibitions on subscription television and the use of digital rights management (DRM) prevent broadcasters from protecting their programming from unauthorized retransmission, and (2) stringent ownership limits prevent them from obtaining economies of scale.

Preventative measures may be the most cost effective way to protect digital content rights. Most digital content is distributed with some form of DRM because, as Benjamin Franklin famously said, “an ounce of prevention is worth a pound of cure.” MVPDs, online video distributors, and innumerable Internet companies all use DRM to protect their digital content and services — e.g., cable operators use the CableCard standard to limit distribution of cable programming to their subscribers only.

TV stations are the only video distributors that are legally prohibited from using DRM to control retransmission of their primary programming. The FCC adopted a form of DRM for digital television in 2003 known as the “broadcast flag”, but the DC Circuit Court of Appeals struck it down.

The requirement that TV stations offer their programming “at no direct charge to viewers” effectively prevents them from having direct relationships with end users. TV stations cannot require those who receive their programming over-the-air to agree to any particular terms of service or retransmission limitations through private contract. As a result, TV stations have no way to avail themselves of the types of contractual protections enjoyed by MVPDs who offer services on a subscription basis.

The subscription television and DRM prohibitions have a significant adverse impact on the ability of TV stations to control the retransmission and use of their programming. The Aereo litigation provides a timely example. If TV stations offered their programming on a subscription basis using the CableCard standard, the Aereo “business” model would not exist and the courts would not be tying themselves into knots over potentially conflicting interpretations of the Copyright Act. Because they are legally prohibited from using DRM to prevent companies like Aereo from receiving and retransmitting their programming in the first instance, however, TV stations are forced to rely solely on after-the-fact enforcement to protect their programming rights — i.e., protected and uncertain litigation in multiple jurisdictions.

Localism policies make after-the-fact enforcement particularly cost for local TV stations. The stringent ownership limits that prevent TV stations from obtaining economies of scale have the effect of subjecting TV stations to higher enforcement costs relative to other digital rights holders. In the absence of FCC rules enforcing broadcast exclusivity agreements, family owned TV stations could be forced to defend their rights in court against significantly larger companies who have the incentive and ability to use litigation strategically.

In sum, the FCC’s non-duplication and syndication rules balance broadcast regulatory limitations by providing clear mechanisms for TV stations to communicate their contractual rights to MVPDs, with whom they have no direct relationship, and enforce those rights at the FCC (which is a strong deterrent to the potential for strategic litigation). There is nothing unfair or over-regulatory about FCC enforcement in these circumstances. So why is the FCC asking whether it should eliminate the rules?

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.

Aereo’s antenna system is frequently characterized perjoratively as a Rube Goldberg contraption, including in the Supreme Court oral arguments. Funny enough, Preston Padden, a veteran television executive, has characterized the legal system producing over-the-air broadcast television–Aereo’s chief legal opponents–precisely the same way. It’s also ironic that Aereo is in a fight for its life over alleged copyright violations since communications law diminishes the import of copyright law and makes copyright almost incomprehensible. Larry Downes calls the legal arguments for and against Aereo a “tangled mess.” David Post at the Volokh Conspiracy likewise concluded the situation is “pretty bizarre, when you think about it” after briefly exploring how copyright law interacts with communications law.

I agree, but Post actually understates how distorted the copyright law becomes when TV programs pass through a broadcaster’s towers, as opposed to a cable company’s headend. In particular, a broadcaster, which is mostly a passive transmitter of TV programs, gains more control over the programs than the copyright owners. It’s nearly impossible to separate the communications law distortions from the copyright issues, but the Aereo issue could be solved relatively painlessly by the FCC. It’s unfortunate copyright and television law intertwine like this because a ruling adverse to Aereo could potentially–and unnecessarily–upend copyright law.

This week I’ve seen many commentators, even Supreme Court justices, mischaracterize the state of television law when discussing the Aereo case. This is a very complex area and below is my attempt to lay out some of the deeper legal issues driving trends in the television industry that gave rise to the Aereo dispute. Crucially, the law is even more complex than most people realize, which benefits industry insiders and prevents sensible reforms.

The FCC, and Congress to a lesser extent, has gone to great lengths to protect broadcasters from competition from other television distributors, as the Copyright Office has said. There is nothing magical about free broadcast television. It’s simply another distribution platform that competes with several other TV platforms, including cable, satellite, IPTV (like AT&T U-Verse), and, increasingly, over-the-top streaming (like Netflix and Amazon Prime Instant Video).

Hundreds of channels and thousands of copyrighted programs are distributed by these non-broadcast distributors (mostly) through marketplace negotiations.

Strange things happen to copyrights when programs are delivered via the circuitous route 1) through a broadcast tower and 2) to a cable/satellite operator. Namely, copyright owners, by law, lose direct control over their intellectual property when local broadcasters transmit it. At that point, regulators, not copyright holders, determine the nature of bargaining and the prices paid.

Distribution of non-local broadcast programming

Right away, an oddity arises. Copyright treatment of local broadcasts differs from distant (non-local) broadcasts. Cable and satellite companies have never paid copyright royalties for signals from a local broadcast. (This is one reason the broadcast lawyer denied that Aereo is a cable company during Supreme Court oral arguments–Aereo merely transmits local broadcast signals.) But if a cable or satellite company retransmits signals from a non-local (“distant”) broadcaster, the company pays the Copyright Office for a copyright license. However, this license is not bargained for with the copyright holder; it is a compulsory license. Programmers are compelled to license their program and in return receive the price set by the panel of Copyright Office officials.

The Copyright Office has asked Congress for over 30 years to eliminate the compulsory license system for distant broadcasts. There are few major distant broadcasters carried by cable companies but the most popular is WGN, a Chicago broadcaster that is carried on many cable systems across the country. The programmers complain they’re underpaid and the Copyright Office has the impossible task of deciding a fair price for a compulsory copyright license. Alleged underpayment is partly why TBS, in 1998, converted from a distant broadcast network to a pure cable network, where TBS could bargain with cable and satellite companies directly.

Distribution of local broadcast programming

Yet things get even stranger when you examine how local broadcasts are treated. Copyright is, as best as I can tell, a nullity when a program is broadcast by a local broadcaster and then retransmitted by a cable company. Until 1992, no payments passed from cable companies to either the broadcaster or copyright holder of broadcast programs. Congress made the retransmission of locally-broadcasted programs royalty-free. Cable companies captured the free over-the-air signals and sold those channels along with cable channels to subscribers.

Why would broadcasters and programmers stand for this? They tolerated this for decades because the FCC requires broadcasts to be “free”–that is, funded by ads. Local broadcasters and programmers benefited from cable distribution because cable TV reaches more viewers that broadcasters can’t reach.

Then in 1992, as cable TV grew, Congress decided to rebalance the competitive scales. Congress created a new property right that ensured local broadcasters got paid by cable companies–the retransmission right. Congress did not require a copyright royalty payment. So cable (and later satellite) still didn’t pay copyright royalties for local broadcasts. The “retransmission right” is held by, not the copyright owner, but the owner of the broadcast tower. This is a bizarre situation where, as the Copyright Office says, Congress accords a “licensee of copyrighted works (broadcasters) greater proprietary rights than the owner of copyright.”

Welcome to the bizarro world of broadcast television that Aereo finds itself. On the bright side, perhaps the very public outcry over Aereo means the laws that permitted Aereo’s regulatory arbitrage will be scrutinized and rationalized. In the short term, I’m hoping the Supreme Court, as Downes mentions, punts the case to a lower court for more fact-finding. Aereo is a communications law case disguised as a copyright case. These issues really need to be before the FCC for a determination about what is a “cable operator” and an “MVPD.” A finding that Aereo is either one would end this copyright dispute.

After yesterday’s FCC meeting, it appears that Chairman Wheeler has a finely tuned microscope trained on broadcasters and a proportionately large blind spot for the cable television industry.

Yesterday’s FCC meeting was unabashedly pro-cable and anti-broadcaster. The agency decided to prohibit television broadcasters from engaging in the same industry behavior as cable, satellite, and telco television distributors and programmers. The resulting disparity in regulatory treatment highlights the inherent dangers in addressing regulatory reform piecemeal rather than comprehensively as contemplated by the #CommActUpdate. Congress should lead the FCC by example and adopt a “clean” approach to STELA reauthorization that avoids the agency’s regulatory mistakes.

The FCC meeting offered a study in the way policymakers pick winners and losers in the marketplace without acknowledging unfair regulatory treatment. It’s a three-step process.

• First, the policymaker obfuscates similarities among issues by referring to substantively similar economic activity across multiple industry segments using different terminology.
• Second, it artificially narrows the issues by limiting any regulatory inquiry to the disfavored industry segment only.
• Third, it adopts disparate regulations applicable to the disfavored industry segment only while claiming the unfair regulatory treatment benefits consumers.

The broadcast items adopted by the FCC yesterday hit all three points.

“Broadcast JSAs”

The FCC adopted an order prohibiting two broadcast television stations from agreeing to jointly sell more than 15% of their advertising time using the three-step process described above.

• First, the FCC referred to these agreements as “JSA’s” or “joint sales agreements”.
• Second, the FCC prohibited these agreements only among broadcast television stations even though the largest cable, satellite, and telco video distributors sell their advertising time through a single entity.
• Third, FCC Chairman Tom Wheeler said all the agency was “doing [yesterday was] leveling the negotiating table” for negotiations involving the largely unrelated issue of “retransmission consent”, even though the largest cable, satellite, and telco video distributors all sell their advertising through a single entity.

If the FCC had  acknowledged that cable, satellite, and telcos jointly sell their advertising, and had the FCC included them in its inquiry as well, Chairman Wheeler could not have kept a straight face while asserting that all the agency was doing was leveling the playing field. Hence the power of obfuscatory terminology and artificially narrowed issues.

“Broadcast Exclusivity Agreements”

The FCC also issued a further notice yesterday seeking comment on broadcast “non-duplication exclusivity agreements” and “syndicated exclusivity agreements.” These agreements, which are collectively referred to as “broadcast exclusivity agreements”, are a form of territorial exclusivity: They provide a local television station with the exclusive right to transmit broadcast network or syndicated programming in the station’s local market only.

Unlike cable, satellite, and telco television distributors, broadcast television stations are  prohibited by law from entering into exclusive programming agreements with other television distributors in the same market: The Satellite Television Extension and Localism Act (STELA) prohibits television stations from entering into exclusive retransmission consent agreements — i.e., a television station must make its programming available to all other television distributors in the same market. Cable, satellite, and telco distributors are legally permitted to enter into exclusive programming agreements on a nationwide basis — e.g., DIRECTV’s NFL Sunday Ticket.

If the FCC is concerned by the limited form of territorial exclusivity permitted for broadcasters, it should be even more concerned about the broader exclusivity agreements that have always been permitted for cable, satellite, and telco television distributors. But the FCC nevertheless used the three-step process for picking winners and losers to limit its consideration of exclusive programming agreements to broadcasters  only.

• First, the FCC uses unique terminology to refer to “broadcast” exclusivity agreements (i.e., “non-duplication” and “syndicated exclusivity”), which obfuscates the fact that these agreements are a limited form of exclusive programming agreements.
• Second, the FCC is seeking comment on exclusive programming agreements between broadcast television stations and programmers only even though satellite and other video programming distributors have entered into exclusive programming agreements.
• Third, it appears the pretext for limiting the scope of the FCC’s inquiry to broadcasters will again be “leveling the playing field” between broadcasters and other television distributors — to benefit consumers, of course.

“Joint Retransmission Consent Negotiations”

Finally, the FCC prohibited a television broadcast station ranked among the top four stations (as measured by audience share) from negotiating “retransmission consent” jointly with another top four station in the same market if the stations are not commonly owned. The FCC reasoned that “the threat of losing programming of two more top four stations at the same time gives the stations undue bargaining leverage in negotiations with [cable, satellite, and telco television distributors].”

As an economic matter, “retransmission consent” is essentially a substitute for the free market copyright negotiations that could occur absent the “compulsory copyright license” in the 1976 Copyright Act and an earlier Supreme Court decision interpreting the term “public performance”. In the absence of retransmission consent, compensation for the use of programming provided by broadcast television stations and programming networks would be limited to the artificially low amounts provided by the compulsory copyright license.

To the extent retransmission consent is merely another form of program licensing, it is indistinguishable from negotiations between cable, satellite and telco distributors and cable programming networks — which typically involve the sale of  bundled channels. If bundling two television channels together “gives the stations undue bargaining leverage” in retransmission consent negotiations, why doesn’t a cable network’s bundling of multiple channels together for sale to a cable, satellite, or telco provider give the cable network “undue bargaining leverage” in its licensing negotiations? The FCC avoided this difficultly using the old one, two, three approach.

• First, the FCC used the unique term “retransmission consent” to refer to the sale of programming rights by broadcasters.
• Second, the FCC instituted a proceeding seeking comment only on “retransmission consent” rather than all programming negotiations.
• Third, the FCC found that lowering retransmission consent costs could lower the prices consumers pay to cable, satellite, and telco television distributors — to remind us that it’s all about consumers, not competitors.

If it were really about lowering prices for consumers, the FCC would also have considered whether prohibiting channel bundling by cable programming networks would lower consumer prices too. For reasons left unexplained, cable programmers are permitted to bundle as many channels as possible in their licensing negotiations.

“Clean STELA”

After yesterday’s FCC meeting, it appears that Chairman Wheeler has a finely tuned microscope trained on broadcasters and a proportionately large blind spot for the cable television industry. To be sure, the disparate results of yesterday’s FCC meeting could be unintentional. But, even so, they highlight the inherent dangers in any piecemeal approach to industry regulation. That’s why Congress should adopt a “clean” approach to STELA reauthorization and reject the demands of special interests for additional piecemeal legislative changes. Consumers would be better served by a more comprehensive effort to update video regulations.

Some recent tech news provides insight into the trajectory of broadband and television markets. These stories also indicate a poor prognosis for a net neutrality. Political and ISP opposition to new rules aside (which is substantial), even net neutrality proponents point out that “neutrality” is difficult to define and even harder to implement. Now that the line between “Internet video” and “television” delivered via Internet Protocol (IP) is increasingly blurring, net neutrality goals are suffering from mission creep.

First, there was the announcement that Netflix, like many large content companies, was entering into a paid peering agreement with Comcast, prompting a complaint from Netflix CEO Reed Hastings who argued that ISPs have too much leverage in negotiating these interconnection deals.

Second, Comcast and Apple discussed a possible partnership whereby Comcast customers would receive prioritized access to Apple’s new video service. Apple’s TV offering would be a “managed service” exempt from net neutrality obligations.

Interconnection and managed services are generally not considered net neutrality issues. They are not “loopholes.” They were expressly exempted from the FCC’s 2010 (now-defunct) rules. However, net neutrality proponents are attempting to bring interconnection and managed services to the FCC’s attention as the FCC crafts new net neutrality rules. Net neutrality proponents have an uphill battle already, and the following trends won’t help.

1. Interconnection becomes less about traffic burden and more about leverage.

The ostensible reason that content companies like Netflix (or third parties like Cogent) pay ISPs for interconnection is because video content unloads a substantial amount of traffic onto ISPs’ last-mile networks.

Someone has to pay for network upgrades to handle the traffic. Typically, the parties seem to abide by the equity principle that whoever is sending the traffic–in this case, Netflix–should bear the costs via paid peering. That way, the increased expense is incurred by Netflix who can spread costs across its subscribers. If ISPs incurred the expense of upgrades, they’d have to spread costs over its subscriber base, but many of their subscribers are not Netflix users.

That principle doesn’t seem to hold for WatchESPN, which is owned by Disney. WatchESPN is an online service that provides live streams of ESPN television programming, like ESPN2 and ESPNU, to personal computers and also includes ESPN3, an online-only livestream of non-marquee sports. If a company has leverage in other markets, like Disney does in TV programming markets, I suspect ISPs can’t or won’t charge for interconnection. These interconnection deals are non-public but Disney probably doesn’t pay ISPs for transmitting WatchESPN traffic onto ISPs’ last-mile networks. The existence of a list of ESPN’s “Participating Providers” indicates that ISPs actually have to pay ESPN for the privilege of carrying WatchESPN content.

Netflix is different from WatchESPN in significant ways (it has substantially more traffic, for one). However, it is a popular service and seems to be flexing its leverage muscle with its Open Connect program, which provided higher-quality videos to participating ISPs. It’s plausible that someday video sources like Netflix will gain leverage, especially as broadband competition increases, and ISPs will have to pay content companies for traffic, rather than the reverse. When competitive leverage is the issue, antitrust agencies, not the FCC, have the appropriate tools to police business practices.

2. The rise of managed services in video.

Managed services include services ISPs provide to customers like VoIP and video-on-demand (VOD). They are on data streams that receive priority for guaranteed quality assurance since customers won’t tolerate a jittery phone call or movie stream. Crucially, managed services are carried on the same physical broadband network but are on separate data streams that don’t interfere with a customer’s Internet service.

The Apple-Comcast deal, if it comes to fruition, would be the first major video offering provided as a managed service. (Comcast has experimented with managed services affiliated with Xbox and TiVo.) Verizon is also a potential influential player since it just bought an Intel streaming TV service. Future plans are uncertain but Verizon might launch a TV product that it could sell outside of the FiOS footprint with a bundle of cable channels, live television, and live sports.

Net neutrality proponents decry managed services as exploiting a loophole in the net neutrality rules but it’s hardly a loophole. The FCC views managed services as a social good that ISPs should invest in. The FCC’s net neutrality advisory committee last August released a report and concluded that managed services provide “considerable” benefits to consumers. The report went on to articulate principles that resemble a safe harbor for ISPs contemplating managed services. Given this consensus view, I see no reason why the FCC would threaten managed services with new rules.

3. Uncertainty about what is “the Internet” and what is “television.”

Managed services and other developments are blurring the line between the Internet and television, which makes “neutrality” on the Internet harder to define and implement. We see similar tensions in phone service. Residential voice service is already largely carried via IP. According to FCC data, 2014 will likely be the year that more people subscribe to VoIP service than plain-old-telephone service. The IP Transition reveals the legal and practical tensions when technology advances make the FCC’s regulatory silos–“phone” and “Internet”–anachronistic.

Those same technology changes and legal ambiguity are carrying over into television. TV is also increasingly carried via IP and it’s unclear where “TV” ends and “Internet video” begins. This distinction matters because television is regulated heavily while Internet video is barely regulated at all. On one end of the spectrum you have video-on-demand from a cable operator. VOD is carried over a cable operator’s broadband lines but fits under the FCC’s cable service rules. On the other end of the spectrum you have Netflix and YouTube. Netflix and YouTube are online-only video services delivered via broadband but are definitely outside of cable rules.

In the gray zone between “TV” and “Internet video” lies several services and physical networks that are not entirely in either category. These services include WatchESPN and ESPN3, which are owned by a cable network and are included in traditional television negotiations but delivered via a broadband connection.

IPTV, also, is not entirely TV nor Internet video. AT&T’s UVerse, Verizon’s FiOS, and Google Fiber’s television product are pure or hybrid IPTV networks that “look” like cable or satellite TV to consumers but are not. AT&T, Verizon, and Google voluntarily assent to many, but not all, cable regulations even though their service occupies a legally ambiguous area.

Finally, on the horizon, are managed video and gaming services and “virtual MSOs” like Apple’s or Verizon’s video products. These are probably outside of traditional cable rules–like program access rules and broadcast carriage mandates–but there is still regulatory uncertainty.

Broadband and video markets are in a unique state of flux. New business models are slowly emerging and firms are attempting to figure out each other’s leverage. However, as phone and video move out of their traditional regulatory categories and converge with broadband services, companies face substantial regulatory compliance risks. In such an environment, more than ever, the FCC should proceed cautiously and give certainty to firms. In any case, I’m optimistic that experts’ predictions will be borne out: ex ante net neutrality rules are looking increasingly rigid and inappropriate for this ever-changing market environment.

Related Posts

1. Yes, Net Neutrality is a Dead Man Walking. We Already Have a Fast Lane.
2. Who Won the Net Neutrality Case?
3. If You’re Reliant on the Internet, You Loathe Net Neutrality.

Most conservatives and many prominent thinkers on the left agree that the Communications Act should be updated based on the insight provided by the wireless and Internet protocol revolutions. The fundamental problem with the current legislation is its disparate treatment of competitive communications services. A comprehensive legislative update offers an opportunity to adopt a technologically neutral, consumer focused approach to communications regulation that would maximize competition, investment and innovation.

Though the Federal Communications Commission (FCC) must continue implementing the existing Act while Congress deliberates legislative changes, the agency should avoid creating  new regulatory disparities on its own. Yet that is where the agency appears to be heading at its meeting next Monday.

A recent ex parte filing indicates that the FCC is proposing to deem joint retransmission consent negotiations by two of the top four Free-TV stations in a market a per se violation of the FCC’s good-faith negotiation standard and adopt a rebuttable presumption that joint negotiations by non-top four station combinations constitute a failure to negotiate in good faith.” The intent of this proposal is to prohibit broadcasters from using a single negotiator during retransmission consent negotiations with Pay-TV distributors.

This prohibition would apply in  all TV markets, no matter how small, including markets that lack effective competition in the Pay-TV segment. In small markets without effective competition, this rule would result in the absurd requirement that marginal TV stations with no economies of scale negotiate alone with a cable operator who possesses market power.

In contrast, cable operators in these markets would remain free to engage in joint negotiations to purchase their programming. The Department of Justice has issued a press release “clear[ing] the way for cable television joint purchasing” of national cable network programming through a single entity. The Department of Justice (DOJ) concluded that allowing nearly 1,000 cable operators to jointly negotiate programming prices would not facilitate retail price collusion because cable operators typically do not compete with each other in the sale of programming to consumers.

Joint retransmission consent negotiations don’t facilitate retail price collusion either. Free-TV distributors don’t compete with each other for the sale of their programming to consumers — they provide their broadcast signals to consumers for  free over the air. Pay-TV operators complain that joint agreements among TV stations are nevertheless responsible for retail price increases in the Pay-TV segment, but have not presented evidence supporting that assertion. Pay-TV’s retail prices have increased at a steady clip for years irrespective of retransmission consent prices.

To the extent Pay-TV distributors complain that joint agreements increase TV station leverage in retransmission consent negotiations, there is no evidence of harm to competition. The retransmission consent rules  prohibit TV stations from entering into exclusive retransmission consent agreements with any Pay-TV distributor — even though Pay-TV distributors are allowed to enter into such agreements for cable programming — and the FCC has determined that Pay- and Free-TV distributors do not compete directly for viewers. The absence of any potential for competitive harm is especially compelling in markets that lack effective competition in the Pay-TV segment, because the monopoly cable operator in such markets is the de facto single negotiator for Pay-TV distributors.

It is even more surprising that the FCC is proposing to prohibit joint sales agreements among Free-TV distributors. This recent development apparently stems from a DOJ Filing in the FCC’s incomplete media ownership proceeding.

A fundamental flaw exists in the DOJ Filing’s analysis: It failed to consider whether the relevant product market for video advertising includes other forms of video distribution, e.g., cable and online video programming distribution. Instead, the DOJ relied on precedent that considers the sale of advertising in  non-video media only.

Similarly, the Department has repeatedly concluded that the purchase of broadcast television spot advertising constitutes a relevant antitrust product market because advertisers view spot advertising on broadcast television stations as sufficiently distinct from advertising on other media (such as radio and newspaper). (DOJ Filing at p.8)

The DOJ’s conclusions regarding joint sales agreements are clearly based on its incomplete analysis of the relevant product market.

Therefore, vigorous rivalry between multiple independently controlled broadcast stations in each local radio and television market ensures that businesses, charities, and advocacy groups can reach their desired audiences at competitive rates. (Id. at pp. 8-9, emphasis added)

The DOJ’s failure to consider the availability of advertising opportunities provided by cable and online video programming renders its analysis unreliable.

Moreover, the FCC’s proposed rules would result in another video market double standard. Cable, satellite, and telco video programming distributors, including DIRECTV, AT&T U-verse, and Verizon FIOS, have entered into a joint agreement to sell advertising through a  single entity, NCC Media (owned by Comcast, Time Warner Cable, and Cox Media). NCC Media’s Essential Guide to planning and buying video advertising says that cable programming has surpassed 70% of all viewing to ad-supported television homes in Prime and Total Day, and 80% of Weekend daytime viewing. According to NCC, “This viewer migration to cable [programming] is one of the best reasons to shift your brand’s media allocation from local broadcast to Spot Cable,” especially with the advent of NCC’s new consolidated advertising platform. (Essential Guide at p. 8) The Essential Guide also states:

• “It’s harder than ever to buy the GRP’s [gross rating points] you need in local broadcast in prime and local news.” (Id. at p. 16)
• “[There is] declining viewership on broadcast with limited inventory creating a shortage of rating points in prime, local news and other dayparts.” (Id. at p. 17)
• “The erosion of local broadcast news is accelerating.” (Id. at p. 18)
• “Thus, actual local broadcast TV reach is at or below the cume figures for wired cable in most markets.” (Id. at p. 19)

This Essential Guide clearly indicates that cable programming is part of the relevant video advertising product market and that there is intense competition between Pay- and Free-TV distributors for advertising dollars.  So why is the FCC proposing to restrict joint marketing agreements among Free-TV distributors in local markets when virtually the entire Pay-TV industry is jointly marketing all of their advertising spots nationwide?

The FCC should refrain from adopting new restrictions on local broadcasters until it can answer questions like this one. Though it is appropriate for the FCC to prevent anticompetitive practices, adopting disparate regulatory obligations that distort competition in the same product market is not good for competition  or consumers. Consumer interests would be better served if the FCC decided to address video competition issues more broadly — or there might not be any Free-TV competition to worry about.

My response to Free State Foundation’s blog post, “Understanding the Un-Free Market for Retrans Consent Is the First Step for Reforming It”

The Free State Foundation (FSF) questioned my most recent blog post at RedState, which noted that the American Television Alliance’s (ATVA) arguments supporting FCC price regulation of broadcast television content are inconsistent with the arguments its largest members make against government intervention proposed by net neutrality supporters. FSF claimed that my post created a “false equivalency” between efforts to modify an existing regulatory regime and efforts to impose new regulations in a previously free market.

FSF’s “false equivalence” theory is a red herring that is apparently intended to distract from the substantive issues I raised. The validity of the economic arguments related to two-sided markets discussed in my blog doesn’t depend on the regulatory status of the two-sided markets those arguments address. The notion that the existence of regulation in the video marketplace gives ATVA a free pass to say anything it wants without heed for intellectual consistency is absurd.

I suspect FSF knows this. Its blog post does not dispute that ATVA’s arguments at the FCC are inconsistent with the arguments its largest members make against net neutrality; in fact, FSF failed to address the ATVA petition at all. Though the FSF blog was ostensibly prompted by my post at RedState, FSF decided to “leave the merits of ATVA’s various proposals to others” (except me, apparently).

FSF’s decision to avoid the merits of ATVA’s arguments at the FCC (the subject of my blog post), begs the question: What was the FSF blog actually about? It appears FSF wrote the blog to (1) reiterate its previous (and misleading) analyses of the video programing market, and (2) argue that the Next Generation Television Marketplace Act “represents the proper direction” for reforming it.

To be clear, I haven’t previously addressed either issue. But, in the spirit of collegial dialogue initiated by FSF, I discuss them briefly in this blog.

Retransmission Consent

FSF is right that, “In a truly free marketplace, private parties have the liberty to pursue [or not pursue] commercial deals with whomever they choose.” I also agree that the market for video programming is not a “truly free marketplace,” and that the rules governing retransmission consent “restrict private bargaining.” But, FSF’s one-sided characterization of retransmission consent as granting “special rights” to broadcasters only is flatly misleading.

FSF highlights how local broadcasters benefit from (1) “must carry” rules and (2) non-duplication and syndication agreements.

The must carry rules require for-pay video distributors (e.g., cable operators) to carry the programming of broadcasters who elect mandatory program carriage while prohibiting distributors from charging such broadcasters for that carriage. Although I agree with FSF that the must carry rules are particularly intrusive, they are also irrelevant to retransmission consent negotiations. Once a broadcaster elects to engage in retransmission consent negotiations for carriage, it cannot take advantage of must carry for three years. Even if it could, the existence of must carry wouldn’t provide the broadcaster any pricing advantage in negotiations with for-pay video distributors, whose goal is to carry the programming at the lowest possible cost (which must carry sets at zero).

FSF correctly notes that non-duplication and syndication agreements limit the ability of for-pay video distributors (e.g., cable operators) to bargain with non-local broadcasters for new and syndicated broadcast programming, respectively. But FSF sidesteps the fact that these limitations are created in the free market by private contractual arrangements between broadcast stations and the providers of network or syndicated programming, not the government. The FCC’s non-duplication and syndication “rules do not create these rights but rather provide a means for the parties to exclusive contracts to enforce them through the Commission rather than the courts.”

Finally, FSF fails to mention, either in its blog post or its scholarly papers, that the retransmission consent rules limit the ability of broadcasters to choose with whom they bargain by prohibiting broadcasters from entering into exclusive program carriage agreements with for-pay video distributors – a limitation on bargaining that does not apply to programming owned by for-pay video distributors. Unlike non-duplication and syndication, this exclusivity prohibition is not grounded in private contractual arrangements.

FSF does not address whether the potential negotiating advantages conferred on broadcasters by FCC enforcement of network non-duplication and syndication agreements is more valuable in retransmission consent negotiations than the potential disadvantages imposed by the prohibition on exclusive program carriage agreements. To the extent the value of exclusive carriage agreements (the opportunity cost of the retransmission consent regime for broadcasters) outweighs the value of network non-duplication and syndication enforcement (the benefit to broadcasters), for-pay video distributors benefit more from the retransmission consent regime than broadcasters.

Next Generation TV Act

To be sure, even if for-pay video distributors benefit more from retransmission consent than broadcasters, retransmission consent negotiations do not occur in a “truly free market.” I agree with FSF that, “The ultimate goal should be to eliminate regulatory intrusion in this space – and to thereby eliminate occasions for debate over whether this or that particular modification to the old regulations will tip the scales in favor of one class of competitors over another.” Unfortunately, the modifications proposed by the Next Generation TV Act (the Bill) would not eliminate such debates.

FSF describes the Bill as a “comprehensive free market reform.” It would indeed eliminate FCC enforcement of network non-duplication and syndication agreements (and compulsory copyright licenses—an issue that merits additional discussion), but it is far from comprehensive.

First, the Bill doesn’t eliminate must carry for non-profit (e.g., religious and educational) broadcasters – the broadcasters most likely to elect mandatory carriage. Retaining such protections for religious and educational broadcasters is certainly reasonable when viewed from a political perspective; however, it falls short of being a free market approach to video regulation generally.

More importantly, the Bill wouldn’t eliminate any of the underlying reasons for which broadcasters enter into non-duplication and syndication agreements. Broadcasters negotiate exclusive distribution rights in local markets because government regulations require broadcasters to provide their programming for free. As a result of this government mandate, broadcasters rely on local advertising revenue to generate profit. If for-pay video distributors could retransmit duplicative programming (syndicated or otherwise) from non-local broadcasters (e.g., because the local broadcaster had not negotiated exclusive distribution rights), the local broadcaster would lose a substantial portion (if not all) of its advertising revenue. In a “truly free market,” the local broadcaster could respond to the potential loss of advertising revenue by charging subscription fees for its over-the-air video programming delivery or repurposing its spectrum for an alternative use. But broadcasters today don’t operate in a truly free market, and the government generally won’t allow them to pursue other business models.

Although the Bill aims toward a more vibrant free market, my primary concern is that it would leave in place the intrusive business model restrictions on broadcasters while eliminating rules that help make the government-mandated business model work. Perhaps FSF would agree that, if the goal is to “eliminate regulatory intrusions in this space,” the Bill should also eliminate government restrictions on broadcast business models and spectrum use. Anything less is better described as “picking winners and losers,” not “comprehensive free market reform.”

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.

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.

CBS and Time Warner Cable have been embroiled in a heated contractual battle over the past week that has resulted in viewers in some major markets losing access to CBS programming. When disputes like these go nuclear and signal blackouts occur, it is inevitable that some folks will call for policy interventions since nobody likes it when the content they love goes dark.

While some policy responses are warranted in this matter, policymakers should proceed with caution. Heated contractual negotiations are a normal part of any capitalist marketplace. We shouldn’t expect lawmakers to intervene to speed up negotiations or set content prices because that would disrupt the normal allocation of programming by placing a regulatory thumb too heavily on one side of the scale. This is why I am somewhat sympathetic to CBS in this fight. In an age when content creators struggle to protect their copyrighted content and get compensation for it, the last thing we need is government intervention that undermines the few distribution schemes that actually work well.

On the other hand, Time Warner Cable deserves sympathy here, too, since CBS currently enjoys some preexisting regulatory benefits. As I noted in this 2012 Forbes oped, “Toward a True Free Market in Television Programming,” many layers of red tape still encumber America’s video marketplace and prevent a truly free market in video programming from developing. The battle here revolves around the “retransmission consent” rules that were put in place as part of the Cable Act of 1992 and govern how video distributors carry signals from TV broadcasters, which includes CBS.

But those “retrans” rules are not the only part of the regulatory mess here. There are many related federal rules that tip the scales toward broadcasters and content creators, such as the requirement that video distributors carry broadcast signals even if they don’t want to (“must carry”); rules that prohibit distributors from striking deals with broadcasters outside their local communities (“network non-duplication” and “syndicated exclusivity” rules); regs specifying where broadcast channels appear on the cable channel lineup; and prohibitions against carrying sporting events on cable when the local stadium doesn’t sell all its seats on game day (“sports blackout rule”).

As they say on TV.. ” But Wait, There’s More!” Working in the favor of video distributors are the compulsory licensing requirements of the Copyright Act of 1976, which essentially forced a “duty to deal” upon broadcasters. Broadcasters have to let cable operators and other video distributors retransmit local stations, though the system at least ensures they get compensated for it. As I noted in my old Forbes essay, along with must carry rules, “Compulsory licensing is the original sin of video marketplace regulation. We could have avoided most of the regulatory mess of the past quarter century if Congress had simply left these rights and contractual negotiations alone. Once Congress forced broadcasters to share their programming, however, marketplace manipulation was off and rolling.”

Of course, the more primal and problematic intervention came decades before in the 1920s and ’30s when the government decided to nationalize spectrum management. Once mandates instead of markets where chosen as the primary allocation agent, America was off and running with a grand experiment in spectrum central planning. We’re still living with the results today. The very fact that spectrum is licensed and can only be used and sold for very narrow purposes as detailed in meticulous FCC regulations is a sign of just how far-removed we are from a pure free market here.

The question now is, what are we going to do about this fine mess? And is there any chance we can get it done?

The problem in this debate is that there are multiple layers of interventions that have built up over the years and created constituencies that are wedded to their preservation. Broadcasters, networks, independent content creators, big cable companies, small cable companies, satellite companies, sports leagues, and viewing consumers themselves — they all have conflicting interests and a stake in how this debate turns out. In his 2012 Mercatus Center working paper, “Consumer Welfare and TV Program Regulation,” media economist Bruce M. Owen noted that “What distinguishes TV programs from other mass media content, including both traditional print and new online media, is the extreme eagerness of Washington to engage in efforts to prevent markets from working freely, often in response to interest group pressures and opportunities for political advantage and with almost complete indifference to the welfare of consumers.”

As a result, if you talk to almost anyone involved in this debate, they will all insist that only their very specific reforms are the ones that can or should be implemented. Consequently, comprehensive reform will be challenging precisely because of all the conflicting interests and layers of law and regulation that must be eradicated.

But at least there is a blueprint for how to get the job done right. Many times here before I have written about “The Next Generation Television Marketplace Act,” which was floated last session by Rep. Steve Scalise (R-LA) and then-Senator Jim DeMint (R-SC). It proposed wiping off the books all the archaic rules outlined above. Alas, the bill never went anywhere in the last Congress and now that Sen. DeMint has left to lead the Heritage Foundation, there is no supporter in the Senate this session. Instead, we have some lawmakers floating bad ideas like S.912, the “Television Consumer Freedom Act of 2013,” which just proposes more regulatory gaming of an already over-gamed system.

We instead need policy reforms like the old DeMint-Scalise bill that clean up the regulatory mess of the past. But there just isn’t much appetite for such a house-cleaning. Most parties affected by these rules want very specific outcomes and deregulation won’t give them any such guarantees. After all, there will still be blackouts after deregulation. And the cost of some content may continue to go up in response to demand. And there will still be fights over sports programming. And there’s no certainty that all local broadcasters or small video distributors will survive. And so on, and so on.

But it is also true that a deregulatory environment is more likely to lead to even more experimentation and innovation with new business models, technologies, and methods of content creation and delivery. We already see much innovation in this marketplace despite all the red tape that exists. Just look at what’s been going on recent years with alternative video delivery platforms, including: Netflix, Hulu, XBox Live, Vudu, Roku, Redbox, Boxee, Amazon, Apple TV, Aereo, Google Chromecast, and so on. And don’t forget the strides that the old broadcast and cable giants have made here, too. CBS is actually a pretty good model for how content can be re-purposed online in creative ways on a firm’s own digital platform. Likewise, cable companies like Time Warner Cable are slowly but surely adapting to consumers’ demand for video to be delivered to multiple devices.

Of course, there there will always be hiccups along the road to video nirvana. Some regulatory activists seemingly expect that all content can be delivered effortless and cheaply to consumers without giving a thought in the world to just how complicated it is to get that content financed and distributed in the first place. Great content and great delivery platforms don’t just happen by magic or the good intentions of activists or policymakers. Those platforms happen because new markets and monetization mechanisms develop to facilitate them. If we cut back the regulatory deadwood in our modern information marketplace, we’d likely get even more experimentation and innovation that would likely produce all new ways of financing, creating, and delivering content to consumers. But we’ll never know unless we are willing to embrace change and kill all those old regulatory weeds that continue to grow in our information garden.

Alas, if Congress can’t muster the courage to do that, then lawmakers ought to at least consider asking the broadcasters to return all that juicy spectrum they are sitting on. After all, the current retrans racket gives the broadcasters an increasingly lucrative revenue stream when they deliver content on cable and satellite systems (in addition to the advertising revenues they already receive). No good reason exists to give them preferential treatment relative to any other cable channel out there today. Don’t forget, there are all sorts of garden-variety cable carriage disputes that happen outside the regulated retrans system today. (Remember last year’s big spats between AMC vs. Dish and Viacom vs. DirecTV?) There are no special rules that either side can rely on in those instances. So why should special rules be applied to other content companies simply because some of their properties are broadcast channels? Answer: they shouldn’t.

But if no other reforms occur and if companies like CBS still want to be more like a cable mega-channel — albeit, a very handsomely compensated cable channel — then by all means go for it. In the meantime, however, they can return all that spectrum for re-auction for some better purpose. In fact, back early 2009, CBS Corp. President and CEO Les Moonves told an investor conference that moving all CBS network programming to cable and satellite platforms would be “a very interesting proposition.” I agree! But, absent other reforms, it might be time to make that “interesting proposition” a mandatory one.

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

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

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

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

Download

Related Links

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

I’ve written posts today for both CNET and Forbes on legislation introduced yesterday by Senators Olympia Snowe and John Kerry that would require the FCC and NTIA to complete inventories of existing spectrum allocations.  These inventories were mandated by President Obama last June (after Congress failed to pass legislation), but got lost at the FCC in the net neutrality armageddon.

Everyone believes that without relatively quick action to make more spectrum available, the mobile Internet could seize up.  Given the White House’s showcasing of wireless as a leading source of new jobs, investment, and improved living conditions for all Americans, both Congress and President Obama, along with the FCC and just about everyone else, knows this is a crisis that must be avoided.

Indeed, the National Broadband Plan estimates conservatively that mobile users will need 300-500 mhz of new spectrum over the next 5-10 years.

The last major auction, however, conducted in 2008 for analog spectrum given up by broadcasters in the Digital TV transition, was only 62 mhz.  And that process took years.

So while auctions–perhaps of more of the over-the-air allocations–could help, it can’t be the silver bullet.  We’ll need creative solutions–including technology to make better use of existing allocations, spectrum sharing, release of government-held frequencies.

But why not start by figuring out who has spectrum now, and see if it’s really being put to the use that’s in the best interests of American consumers, who are ultimately the owners of the entire range.

You can guess why some people would prefer not to open that dialogue.

And perhaps why something so obvious as an inventory doesn’t already exist.

For CNET, I posted a long piece describing a full day at CES’s Tech Policy Summit largely devoted to spectrum issues.  Conference attendees in several packed sessions heard from FCC Chairman Julius Genachowski and three of the four other FCC Commissioners (Commissioner Copps was absent due to illness), as well as former Congressman Rick Boucher and industry representatives.

The  message was as clear as it is worrisome.  The tremendous popularity of wireless broadband, on view in a remarkable range of new devices and gizmos on display at the Vegas Convention Center, is rapidly outpacing the radio frequencies available to handle the data.

The mobile Internet needs more spectrum, and there isn’t any to give it.  The app revolution is in danger of hitting a hard stop, perhaps as soon as 2015.

As the exclusive manager of America’s radio waves, only the FCC can reallocate spectrum.  And the good news is that the agency recognizes the crisis as well as its role in solving it.  Chairman Genachowski told the audience that spectrum reform will be the agency’s top priority for 2011.

Reading the Chairman’s prepared comments, however, I was struck by the sense that I’d heard something similar before.  Perhaps in the very same room.  Perhaps by the very same speaker.

Last year, the Chairman didn’t read a prepared statement,but I had taken copious notes.  When I read them over, I realized that both the acute crisis and the basic steps the agency plans to avoid it were nearly identical to what Genachowski described as his priority last year.  That is, his priority for 2010.  Which is now over.

There was no acknowledgment in his comments or in questions from Consumer Electronics Association President Gary Shapiro that none of last year’s promises had been kept, and indeed, that this year’s promises were pretty much a rerun.  None of the journalists who covered last year and this year’s events seemed to notice either.

In the worst possible sense, what happened in Vegas had stayed in Vegas.

It’s not as if the FCC wasn’t especially busy in the last twelve months.  Shortly after CES, the Commission issued its National Broadband Plan which, among other things, called for an additional 500 Mhz of frequency for mobile Internet to be made available as soon as possible.

But the NBP was never the priority for the FCC last year.  And neither was spectrum.

Instead, the agency devoted itself to completing the Open Internet proceeding begun in October of 2009.  But on the very day Genachowski spoke at CES last year, oral arguments were taking place in the D.C. Circuit on the Comcast case, which the FCC lost badly in May.  Then there was Title II reclassification.  Then the “Third Way” proceeding.  Then the call for more information on wireless and specialized services.  Then the private talks with industry and public interest groups on a compromise.  Then the Verizon-Google proposed legislative framework.  Then Rep. Henry Waxman’s draft legislation.  Then the news that the Chairman was calling a vote for the end of December.  Then, finally, the Report and Order approved 3-2 on Dec. 21st.

A busy year indeed.  But in the process of passing rules whose value is doubtful at best, the National Broadband Plan, spectrum reform, clean up of the Universal Service Fund, and pretty much the rest of the Chairman’s agenda received little attention.

One measure of that laser-like focus on net neutrality is that the agency appears not to have even begun preparation of a much-needed inventory of existing licenses and allocations.  When Congress failed to pass legislation requiring the inventory, President Obama in June issued directives to NTIA (government allocations) and the FCC (private allocations) to do it anyway.

According to an FCC representative at CES, so far the agency has only gotten as far as redesigning the user interface of its database, to make it possible just to search for a licensee.  When I asked how work on the inventory was progressing and whether there was a timetable for completing it, the answer I got was that the agency would be reporting its progress on an on-going basis.

It’s hard to see how much progress is going to be made on finding unused or underutilized spectrum, let alone getting it freed up for mobile broadband Internet, when we don’t even know who is holding licenses in the first place.

Spectrum reallocation isn’t the only hope, of course.  Technological improvements in mobile devices and infrastructure can make more efficient use of existing spectrum.  Commissioner McDowell, for one, believes that while not the optimal way to solve the crisis, nonetheless anxiety over running out of capacity could inspire creativity and innovation.

But at the same time there’s general agreement that current allocations are inefficient, and that government (especially the Department of Defense) and local broadcast television are sitting on a great deal of valuable radio real estate that is simply lying fallow.  The spectrum now being used for new 4G services came largely from the successful transition to digital television, but even still, broadcasters have a lot of remaining spectrum that almost none of them are fully using.  In the decline of over-the-air television, few are likely to ever make use of it.

The FCC would like to host what it calls “voluntary incentive auctions,” in essence to create a market for selling off some or all of that underutilized broadcast spectrum.  But the agency doesn’t have the authority to do it, and Congress failed to pass Boucher’s bill that would have given them that authority.

Now Boucher is a private citizen, and the Republican House is steaming at the FCC over last year’s last-minute Open Internet vote.

I hate to sound like a pessimist here, but does anyone have much hope that at next year’s CES, we’ll hear much about progress in avoiding spectrum seizure?  Or even an acknowledgment that the goals set for the last two years haven’t been met, and that perhaps it’s time to develop a contingency plan?

Well, I haven’t been around this block as many times as a lot of policy experts have.  So maybe I’m just missing the part about how a problem gets solved just by repeating the description of the problem once a year.

I’ve grown increasingly tired of the fight over not just retransmission consent, but almost all TV regulation in general.  Seriously, why is our government still spending time fretting over a market that is more competitive, diverse and fragmented than most other economic sectors?  It’s almost impossible to keep track of all the innovation happening on this front, although I’ve tried here before. Every metric — every single one — is not just improving but exploding. Just what’s happening on the kids’ TV front is amazing enough, but the same story is playing out across other programming genres and across multiple distribution platforms.

More proof of just how much more diverse and fragmented content and audiences are today comes in this excellent new guest editorial over at GigaOm, “The Golden Age of Choice and Cannibalization in TV,” by Mike Hudack, CEO of Blip.tv. Hudack notes that, compared to the Scarcity Era, when we had fewer choices and were all forced to watch pretty much the same thing, today’s media cornucopia is overflowing, and audiences are splintering as a result.  “Media naturally trends towards fragmentation,” he notes.  “As capacity increases so does choice. As choice increases audiences fragment. When given a choice people generally prefer media that speaks to them as individuals over media that speaks to the ‘masses.’”

Indeed, he cites Nielsen numbers I’ve used here before illustrating how the top shows of the 50’s (like Texaco Star Theater) netted an astonishing 60-80% of U.S. television households while more recent hits, like American Idol is lucky if it can manage over 15% audience share. He concludes, therefore, that:

While American Idol remains strong, the trend is clear. Americans have been abandoning broadcast television in favor of cable’s niche shows for thirty years.  Historical trends like these do not disappear, they accelerate. Internet video is growing at a significant pace. It has not yet taken a chunk out of the broadcast and cable audiences, but the trend is there. Shows on the web are infinitely more targeted than the shows broadcast and cable companies deliver. […] The broadcast distribution model, which dictates that only one show can air at any given time, makes it impossible for a niche show to thrive. The opportunity cost is too high. And the corporate structures, cost structures, business models and cultures of the network and cable companies make change far too difficult. Thus the Internet will do to broadcast and cable what cable did to broadcast. It’s inevitable. And it’s already beginning to happen.

Too bad nobody bothered telling Washington policymakers that the world has changed so radically.

[ Update 11:00 pm: Ironically, just caught another piece along these lines from TechCrunch entitled, “Internet TV and The Death of Cable TV, really.”  I don’t agree with all it’s conclusions, but includes many good facts and anecdotes pointing to the revolutionary changes underway in the television marketplace.]

As part of its excellent “Room for Debate” series, the New York Times has an interesting new online symposium up now asking, “Will Networks Go Wild, With No Decency Rules?”  It was in response to last week’s Second Circuit decision, which again slapped down an effort by the Federal Communications Commission to defend the agency’s indecency enforcement regime.  I was honored to be asked to contribute a short essay on the subject. Here are the other contributors and their essays.  Take the time to check them out:

• “The F.C.C.’s Policy Was a Mistake” – Michael K. Powell, a former chairman of the Federal Communications Commission
• “Where Is the Line?” – Christopher Rosen, television writer
• “Help Kids and Families” – Liz Perle, editor in chief at Common Sense Media
• “A Bad Idea From the Start” – Robert Thompson, Syracuse University
• “Put Parents in Control” – Adam Thierer, president, The Progress & Freedom Foundation
• “It’s the Violence!” – Kevin W. Saunders, professor of law, Michigan State University

I was particularly interested in former FCC’s Chairman Michael Powell’s admission that “The [FCC’s] fleeting expletive policy was a mistake,” and that “the real problem is the now-flawed constitutional foundation on which the law is built.” Powell goes on to argue that, “We cannot have one First Amendment for broadcasting and another one for every other medium. This vestige of a bygone era provides fertile ground for mischief — culture wars, political agenda and moral mandates. It’s high time for the high court to bring our laws into the 21st century.”

I wholeheartedly agree, and I wrote a lengthy law review article on just that topic back in 2007 entitled,“ Why Regulate Broadcasting: Toward a Consistent First Amendment Standard for the Information Age.” If you find it too boring, just watch this video I made summarizing the key points, which I called “America’s First Amendment Twilight Zone.”

Better late than never, I’ve finally given a close read to the Notice of Inquiry issued by the FCC on June 17^th.  (See my earlier comments, “FCC Votes for Reclassification, Dog Bites Man”.)  In some sense there was no surprise to the contents; the Commission’s legal counsel and Chairman Julius Genachowski had both published comments over a month before the NOI that laid out the regulatory scheme the Commission now has in mind for broadband Internet access.

Chairman Genachowski’s “Third Way” comments proposed an option that he hoped would satisfy both extremes.  The FCC would abandon efforts to find new ways to meet its regulatory goals using “ancillary jurisdiction” under Title I (an avenue the D.C. Circuit had wounded, but hadn’t actually exterminated, in the Comcast decision), but at the same time would not go as far as some advocates urged and put broadband Internet completely under the telephone rules of Title II.

Instead, the Commission would propose a “lite” version of Title II, based on a few guiding principles:

• Recognize the transmission component of broadband access service—and only this component—as a telecommunications service;
• Apply only a handful of provisions of Title II (Sections 201, 202, 208, 222, 254, and 255) that, prior to the Comcast decision, were widely believed to be within the Commission’s purview for broadband;
• Simultaneously renounce—that is, forbear from—application of the many sections of the Communications Act that are unnecessary and inappropriate for broadband access service; and
• Put in place up-front forbearance and meaningful boundaries to guard against regulatory overreach.

The NOI pretends not to take a position on any of three possible options – (1) stick with Title I and find a way to make it work, (2) reclassify broadband and apply the full suite of Title II regulations to Internet access providers, or (3) compromise on the Chairman’s Third Way, applying Title II but forbearing on any but the six sections noted above—at least, for now (see ¶ 98).  It asks for comments on all three options, however, and for a range of extensions and exceptions within each.

I’ve written elsewhere (see “Reality Check on ‘Reclassifying’ Broadband” and  “Net Neutrality and the Inconvenient Constitution”) about the dubious legal foundation on which the FCC rests its authority to change the definition of “information services” to suddenly include broadband Internet, after successfully (and correctly) convincing the U.S. Supreme Court that it did not.  That discussion will, it seems, have to wait until its next airing in federal court following inevitable litigation over whatever course the FCC takes.

This post deals with something altogether different—a number of startling tidbits that found their way into the June 17 ^th NOI.  As if Title II weren’t dangerous enough, there are hints and echoes throughout the NOI of regulatory dreams to come.  Beyond the hubris of reclassification, here are seven surprises buried in the 116 paragraphs of the NOI—its seven deadly sins.  In many cases the Commission is merely asking questions.  But the questions hint at a much broader—indeed overwhelming—regulatory agenda that goes beyond Net Neutrality and the undoing of the Comcast decision.

Pride:  The folly of defining “facilities-based” provisioning – The FCC is struggling to find a way to apply reclassification only to the largest ISPs – Comcast, AT&T, Verizon, Time Warner, etc.  But the statutory definition of “telecommunications” doesn’t give them much help.  So the NOI invents a new distinction, referred to variously as “facilities-based” providers (¶ 1) or providers of an actual “physical connection,” (¶ 106) or limiting the application of Title II just to the “transmission component” of a provider’s consumer offering (¶ 12).

All the FCC has in mind here is “a commonsense definition of broadband Internet service,” (¶ 107) (which they never provide), but in any case the devil is surely in the details.  First, it’s not clear that making that distinction would actually achieve the goal of applying the open Internet rules—network management, good or evil, largely occurs well above the transmission layers in the IP stack.

The sin here, however, is that of unintentional over-inclusion.  If Title II is applied to “facilities-based” providers, it could sweep in application providers who increasingly offer connectivity as a way to promote usage of their products.

Limiting the scope of reclassification just to “facilities-based” providers who sell directly to consumers doesn’t eliminate the risk of over-inclusion.  Some application providers, for example, offer a physical connection in partnership with an ISP (think Yahoo and Covad DSL service) and many large application providers own a good deal of fiber optic cable that could be used to connect directly with consumers.  (Think of Google’s promise to build gigabit test beds for select communities.)  Municipalities are still working to provide WiFi and WiMax connections, again in cooperation with existing ISPs.  (EarthLink planned several of these before running into financial and, in some cities, political trouble.)

There are other services, including Internet backbone provisioning, that could also fall into the Title II trap (see ¶ 64).  Would companies, such as Akamai, which offer caching services, suddenly find themselves subject to some or all of Title II?  (See ¶ 58)  How about Internet peering agreements (unmentioned in the NOI)?  Would these private contracts be subject to Title II as well?  (See ¶ 107)

Lust:  The lure of privacy, terrorism, crime, copyright – Though the express purpose of the NOI is to find a way to apply Title II to broadband, the Commission just can’t help lusting after some additional powers it appears interested in claiming for itself.  Though the Commissioners who voted for the NOI are adamant that the goal of reclassification is not to regulate “the Internet” but merely broadband access, the siren call of other issues on the minds of consumers and lawmakers may prove impossible to resist.

Recognizing, for example, that the Federal Trade Commission has been holding hearings all year on the problems of information privacy, the FCC now asks for comments about how it can use Title II authority to get into the game (¶ 39, 52, 82, 83, 96), promising of course to “complement” whatever actions the FTC is planning to take.

Cyberattacks and other forms of terrorism are also on the Commission’s mind.  In his separate statement, for example, Chairman Genachowski argues that the Comcast decision “raises questions about the right framework for the Commission to help protect against cyber-attacks.”

The NOI includes several references to homeland security and national defense—this in the wake of publicity surrounding Sen. Lieberman’s proposed law to give the President extensive emergency powers over the Internet.  (See Declan McCullaugh, “Lieberman Defends Emergency Net Authority Plan.”)  Lieberman’s bill puts the power squarely in the Department of Homeland Security—is the FCC hoping to use Title II to capture some of that power for itself?

And beyond shocking acts of terrorism, does the FCC see Title II as a license to require ISPs to help enforce other, lesser crimes, including copyright infringement, libel, bullying and cyberstalking, e-personation—and the rest?  Would Title II give the agency the ability to impose its content “decency” rules, limited today merely to broadcast television and radio, to Internet content, as Congress has unsuccessfully tried to help the Commission do on three separate occasions?

(Just as I wrote that sentence, the U.S. Court of Appeals for the Second Circuit ruled that the FCC’s recent effort to craft more aggressive indecency rules, applied to Janet Jackson’s nipple, violates the First Amendment.  The Commission is having quite a bad year in the courts!)

Anger:  Sharing the pain of CALEA – That last paragraph is admittedly speculation.  The NOI contains no references to copyright, crime, or indecency.  But here’s a law enforcement sin that isn’t speculative.  The NOI reminds us that separate from Title II, the FCC is required by law to enforce the Communications Assistance for Law Enforcement Act (CALEA). (¶ 89) CALEA is part of the rich tapestry of federal wiretap law, and requires “telecommunications carriers” to implement technical “back doors” that make it easier for federal law enforcement agencies to execute wiretapping orders.  Since 2005, the FCC has held that all facilities-based providers are subject to CALEA.

Here, the Commission assumes that reclassification would do nothing to change the broader application of CALEA already in place, and seeks comment on “this analysis.”  (¶ 89)  The Commission wonders how that analysis impacts its forbearance decisions, but I have a different question.  Assuming the definition of “facilities-based” Internet access providers is as muddled as it appears (see above), is the Commission intentionally or unintentionally extending the coverage of CALEA to anyone selling Internet “connectivity” to consumers, even those for whom that service is simply in the interest of promoting applications?

Again, would residents of communities participating in Google’s fiber optic test bed awake to discover that all of that wonderful data they are now pumping through the fiber is subject to capture and analysis by any law enforcement officer holding a wiretapping order?  Oops?

Gluttony:  The Insatiable Appetite of State and Local Regulators – Just when you think the worst is over, there’s a nasty surprise waiting at the end of the NOI.  Under Title II, the Commission reminds us, many aspects of telephone regulation are not exclusive to the FCC but are shared with state and even local regulatory agencies.

Fortunately, to avoid the catastrophic effects of imposing perhaps hundreds of different and conflicting regulatory schemes to broadband Internet access, the FCC has the authority to preempt state and local regulations that conflict with FCC “decisions,” and to preempt the application of those parts of Title II the FCC may or may not forbear.

But here’s the billion dollar question, which the NOI saves for the very last (¶ 109):  “Under each of the three approaches, what would be the limits on the states’ or localities’ authority to impose requirements on broadband Internet service and broadband Internet connectivity service?”

What indeed?  One of the provisions the FCC would not apply under the Third Way, for example, is § 253, which gives the Commission the authority to “preempt state regulations that prohibit the provision of telecommunications services.” (¶ 87)  So does the Third Way taketh federal authority only to giveth to state and local regulators?  Is the only way to avoid state and local regulations—oh, well, if you insist–to go to full Title II?  And might the FCC decide in any case to exercise their discretion, now or in the future, to allow local regulations of Internet connectivity?

What might those regulations look like?  One need only review the history of local telephone service to recall the rate-setting labyrinths, taxes, micromanagement of facilities investment and deployment decisions—not to mention the scourge of corruption, graft and other government crimes that have long accompanied the franchise process.  Want to upgrade your cable service?  Change your broadband provider?  Please file the appropriate forms with your state or local utility commission, and please be patient.

Fear-mongering?  Well, consider a proposal that will be voted on this summer at the annual meeting of the National Association of Utilities Commissioners.  (TC-1 at page 30)  The Commissioners will decide whether to urge the FCC to adopt what it calls a “fourth way” to fix the Net Neutrality problem.  Their description of the fourth way speaks for itself.  It would consist of:

“bi-jurisdictional regulatory oversight for broadband Internet connectivity service and broadband Internet service which recognizes the particular expertise of States in: managing front-line consumer education, protection and services programs; ensuring public safety; ensuring network service quality and reliability; collecting and mapping broadband service infrastructure and adoption data; designing and promoting broadband service availability and adoption programs; and implementing  competitively neutral pole attachment, rights-of-way and tower siting rules and programs.”

The proposal also asks the FCC, should it stick to the Third Way approach, to add in several other provisions left out of Chairman Genachowski’s list, including one (again, § 253) that would preserve the state’s ability to help out.

Or consider a proposal currently being debated by the California Public Utilities Commission.  California, likewise, would like to use reclassification as the key that unlocks the door to “cooperative federalism,” and has its own list of provisions the FCC ought not to forbear under the Third Way proposal.

Among other things, the CPUC’s general counsel is unhappy with the definition the FCC proposes for just who and what would be covered by Title II reclassification.  The CPUC proposal argues for a revised definition that “should be flexible enough to cover unforeseen technological [sic] in both the short- and long-term.”

The CPUC also proposes the FCC add to the list of those regulated by Title II providers Voice over Internet Protocol telephony, which is often a software application riding well above the “transmission” component of broadband access.

California is just the first (tax-starved) state I looked for.  I’m sure there are and will be others who will respond hungrily to the Commission’s invitation to “comment” on the appropriate role of state and local regulators under either a full or partial Title II regime.  (¶ 109, 110)

Sloth:  The sleeping giant of basic web functions – browsers, DNS lookup, and more – The NOI admits that the FCC is a bit behind the times when it comes to technical expertise, and they would like commenters to help them build a fuller record.  Specifically, ¶ 58 asks for help “to develop a current record on the technical and functional characteristics of broadband Internet service, and whether those characteristics have changed materially in the last decade.”

In particular, the NOI wants to know more about the current state of web browsers, DNS lookup services, web caching, and “other basic consumer Internet activities.”

Sounds innocent enough, but those are very loaded questions.  In the Brand X case, in which the U.S. Supreme Court agreed with the FCC that broadband Internet access over cable fit the definition of a Title I “information service” and not a Title II “telecommunications service,” browsers, DNS lookup and other “basic consumer Internet activities” were crucial to the analysis of the majority.  Because cable (and, later, it was decided, DSL) providers offered not simply a physical connection but also supporting or “enhanced” services to go with it—including DNS lookup, home pages, email support and the like—their offering to consumers was not simple common carriage.

Justice Scalia disagreed, and in dissent made the argument that cable Internet was in fact two separable offerings – the physical connection (the packet-switched network) and a set of information services that ran on top of that connection.  Consumers used some information services from the carrier, and some from other content providers (other web sites, e.g.).  Those information services were rightly left unregulated under Title I, but Congress intended the transmission component, according to Justice Scalia, to be treated as a common carrier “telecommunications service” under Title II.

The Third Way proposal in large part adopts the Scalia view of the Communications Act (see ¶ 20, 106), despite the fact that it was the FCC who argued vigorously against that view all along, and despite the fact that a majority of the Court agreed with them.

By asking these innocent questions about technical architecture, the FCC appears to be hedging its bets for a certain court challenge.   Any effort to reclassify broadband Internet access will generate long, complicated, and expensive litigation.  What, the courts will ask, has driven the FCC to make such an abrupt change in its interpretation of terms like “information service” whose statutory definitions haven’t changed since 1996?

We know it is little more than that the Chairman would like to undo the Comcast decision, of course, and thereafter complete the process of enrolling the open Internet rules proposed in October.  But in the event that proves an unavailing argument, it would be nice to be able to argue that the nature of the Internet and Internet access have fundamentally changed since 2005, when Brand X was decided.  If it’s clear that basic Internet services have become more distinct from the underlying physical connection, at least in the eyes of consumers, so much the better.

Or perhaps something bigger is lumbering lazily through the NOI.  Perhaps the FCC is considering whether “basic Internet activities” (browsing, searching, caching, etc.) have now become part of the definition of basic connectivity.  Perhaps Title II, in whole or in part, will apply not only to facilities-based providers, but to those who offer basic Internet services essential for web access.  (Why extend Title II to providers of “basic” information service?  See below, “Greed.”)   If so, the exception will swallow the rule, and just about everything else that makes the Internet ecosystem work.

Vanity:  The fading beauty of the cellular ingénue – Perhaps the most worrisome feature of the proposed open Internet rules is that they would apply with equal force to wired and wireless Internet access.  As any consumer knows, however, those two types of access couldn’t be more different.

Infrastructure providers have made enormous progress in innovating improvements to existing infrastructure—especially the cable and copper networks.  New forms of access have also emerged, including fiber optic cable, satellite, WiFi/WiMax, and the nascent provisioning of broadband over power lines, which has particular promise in remote areas which may have no other option for access.

Broadband speeds are increasing, and there’s every expectation that given current technology and current investment plans, the National Broadband Plan’s goal of 100 million Americans with access to 100 mbps Internet speeds by 2010 will be reached without any public spending.

The wireless world, however, is a different place.  After years of underutilization of 3G networks by consumers who saw no compelling or “killer” apps worth using, the latest generation of portable computing devices (iPhone, Android, Blackberry, Windows) has reached the tipping point and well beyond.  Existing networks in many locations are overcommitted, and political resistance to additional cell tower and other facilities deployment is exacerbating the problem.

Just last week, a front page story in the San Francisco Chronicle reported on growing tensions between cell phone providers and residents who want new towers located anywhere but near where they live, go to school, shop, or work.  CTIA-The Wireless Association announced that it would no longer hold events in San Francisco, after the city council, led by Mayor Gavin Newsome, passed a “Cell Phone Right to Know” ordinance that requires retail disclosure of a phone’s specific adoption rate of emitted radiation.

Given the likely continued lagging of cellular deployment, it seems prudent to consider less stringent restrictions on network management for wireless than for wireline.  Under the open Internet rules, providers would be unable to limit or ban outright certain high-bandwidth data services, notably video services and peer-to-peer file sharing, that the network may simply be unable to support.  But the proposed open Internet rules will have none of that.

The NOI does note some of the significant differences between wired and wireless (¶ 102), but also reminds us that the limited spectrum for wireless signals affords them special powers to regulate the business practices of providers. (¶ 103)  Under Title III of the Communications Act, which applies to wireless, the FCC has and makes use of the power to ensure spectrum uses are serving a broad “public interest.”

In some ways, then, Title III gives the Commission powers to regulate wireless broadband access beyond what they would get from a reclassification to Title II.  So even if the FCC were to choose the first option and leave the current classification scheme alone, wireless broadband providers might still be subject to open Internet rules under Title III.  It would be ironic if the only broadband providers whose network management practices were to be scrutinized were those who needed the most flexibility.  But irony is nothing new in communications law.

One power, however, might elude the FCC, and therefore might give further weight to a scheme that would regulate wireless broadband under Title III and Title II.  Title III does not include the extension of Universal Service to wireless broadband (¶ 103).  This is a particular concern given the increased reliance of under-served and at-risk communities on cellular technologies for all their communications needs.  (See the recent Pew Internet & Society study for details.)

While the NOI asks for comment on whether and to what extent the FCC ought to treat wireless broadband differently and at a later time from wired services, the thrust of this section makes clear the Commission is thinking of more, not less regulation for the struggling cellular industry.

Greed:  Universal Service taxes – So what about Universal Service?  In an effort to justify the Title II reclassification as something more than just a fix to the Comcast case, the FCC has (with some hedging) suggested that D.C. Circuit’s ruling also calls into question the Commission’s ability to implement the National Broadband Plan, published only a few weeks prior to the decision in Comcast.

At a conference sponsored by the Stanford Institute for Economic Policy Research that I attended, Chairman Genachowski was emphatic that nothing in Comcast constrained the FCC’s ability to execute the plan.

But in the run-up to the NOI, the rhetoric has changed.  Here the Chairman in his separate statement says only that “the recent court decision did not opine on the initiatives and policies that we have laid out transparently in the National Broadband Plan and elsewhere.”

Still, it’s clear that whether out of genuine concern or just for more political and legal cover, the Commission is trying to make the case that Comcast casts serious doubt on the Plan, and in particular the FCC’s recommendations for reform of the Universal Service Fund (USF).  (¶¶ 32-38).

Though the NOI politely recites the legal theories posed by several analysts for how USF reform could be done without any reclassification, the FCC is skeptical.  For the first and only time in the NOI, the FCC asks not for general comments on its existing authority to reform Universal Service but for the kind of evidence that would be “needed to successfully defend against a legal challenge to implementation of the theory.”

There is, of course, a great deal at stake.  The USF is fed by taxes paid by consumers as part of their telephone bills, and is used to subsidize telephone service to those who cannot otherwise afford it.  Some part of the fund is also used for the “E-Rate” program, which subsidizes Internet access for schools and libraries.

Like other parts of the fund, E-Rate has been the subject of considerable corruption.  As I noted in Law Four of “The Laws of Disruption,” a 2005 Congressional oversight committee labeled the then $2 billion E-Rate program, which had already spawned numerous criminal convictions for fraud, a disgrace, “completely [lacking] tangible measures of either effectiveness or impact.”

Today the USF collects $8 billion annually in consumer taxes, and there’s little doubt that the money is not being spent in a particularly efficient or useful way.  (See, for example, Cecilia Kang’s Washington Post article this week, “AT&T, Verizon get most federal aid for phone service.”)  The FCC is right to call for USF reform in the National Broadband Plan, and to propose repurposing the USF to subsidize basic Internet access as well as dial tone.  The needs for universal Internet access—employment, education, health care, government services, etc.—are obvious.

But what has this to do with Title II reclassification?  There’s no mention in the NOI of plans to extend the class of services or service providers obliged to collect the USF tax, which is to say there’s nothing to suggest a new tax on Internet access.  But Recommendation 8.10 of the NBP encourages just that.  The Plan recommends that Congress “broaden the USF contributions base” by finding some method of taxing broadband Internet customers.  (Congress has so far steadfastly resisted and preempted efforts to introduce any taxes on Internet access at the federal and state level.)

If Congress agreed with the FCC, broadband Internet access would someday be subject to taxes to help fund a reformed USF.  The bigger the category of providers included under Title II (the most likely collectors of such a tax), the bigger the USF.  The temptation to broaden the definition of affected companies from “facilities based” to something, as the California Public Utilities Commission put it, more “flexible,” would be tantalizing.

***

Other than these minor quibbles, the NOI offers nothing to worry about!

I had a long interview this morning with the Christian Science Monitor. Like many of the interviews I’ve had this year, the subject was Google. At the increasingly congested intersection of technology and the law, Google seems to be involved in most of the accidents.

Just to name a few of the more recent pileups, consider the Google books deal, net neutrality and the National Broadband Plan, Viacom’s lawsuit against YouTube for copyright infringement, Google’s very public battle with the nation of China, today’s ruling from the European Court of Justice regarding trademarks, adwords, and counterfeit goods, the convictions of Google executives in Italy over a user-posted video, and the reaction of privacy advocates to the less-than-immaculate conception of Buzz.

In some ways, it should come as no surprise to Google’s legal counsel that the company is involved in increasingly serious matters of regulation and litigation. After all, Google’s corporate goal is the collection, analysis, and distribution of as much of the world’s information as possible, or, as the company puts it,” to organize the world’s information and make it universally accessible and useful.” That’s a goal it has been wildly successful at in its brief history, whether you measure success by use (91 million searches a day) or market capitalization ($174 billion).

As the world’s economy moves from one based on physical goods to one driven by information flow, the mismatch between industrial law and information behavior has become acute, and Google finds itself a frequent proxy in the conflicts.

As I argue in “The Laws of Disruption”, the unusual economic properties of information make it a poor fit for a body of law that’s based on industrial-era assumptions about physical property. That’s not to say there couldn’t be an effective law of information, only that the law of physical property isn’t it. Particularly not when industrial law assumes that the subject of any conflict or effort to control (the res as they say in legal lingo) is visible, tangible, and unlikely to cross too many local, state, or national borders—and certainly not every border at the same time, all the time.

To see the mismatch in action, consider two of Google’s on-going conflicts, both in the news this week: Google v. China and Google v. Viacom.

Google v China

In 2006, Google made a Faustian bargain with the Chinese government. In exchange for permission to operate inside the country, Google agreed to substantially self-censor search results for topics (politics, pornography, religion) that the Chinese government considered dangerous. The company had strong financial motivations for gaining a foothold in the astronomically-fast expanding Chinese Internet market, of course, but also had a genuine belief that giving Chinese users access to the vast majority of its indexed information had the potential to encourage fewer restrictions over time.

Apparently the result was the opposite, with the government tightening, rather than loosening the reins. Google’s discomfort was compounded by the revelation in January that widespread hacking and phishing scams had penetrated the Gmail accounts of several Chinese dissidents, leading the company to announce it would soon end its censorship of Chinese searches. (It also added encryption technology to Gmail and, it is widely believed, began working closely with the National Security Agency to help identify the sources of the attacks.) Though Google has not claimed the attacks were the work of the Chinese government or entities under its control, the connection was hard to miss. Google is hacked, Google decides to end cooperation with the government.

This week, the company made good on its promise by closing its search site in China and rerouting searches from there to its site in Hong Kong. As a result of the long occupation of Hong Kong by western governments, which ended in 1997 when the U.K.’s “lease” expired, Hong Kong maintains special legal status within China. Searches originating in Hong Kong are not censored, and Hong Kong appears to be largely outside China’s “great firewall” which blocks undesirable information including YouTube and Twitter.

For residents of the mainland, however, the move is a non-event. China quickly applied the filters that Google had applied on behalf of the government for searches originating inside the country. So Google searches in China are still censored—only now Google isn’t doing the censoring. The damage to the company’s relationship with the Chinese government, meanwhile, has been severe, as has collateral damage to the relationship between China and the U.S. government.  (Google founder Sergey Brin today encouraged the U.S. to put pressure on the Chinese government to stop the censorship.)  The story is by no means over.

Google v Viacom

Also in the last week, a number of key documents were released by the court that is hearing Viacom’s long-running copyright infringement case against Google’s YouTube. The case, which began around the same time that Google made its deal with China, seeks $1 billion in damages from copyright violations against Viacom content perpetrated by YouTube users, who posted everything from short clips to music videos to entire programs, including “South Park” and “The Daily Show.”

Under U.S. law, Internet service providers are not liable for copyright infringement perpetrated by their users, provided the service provider is not aware of the infringement and that they respond “expeditiously” to takedown requests sent to them by the copyright holder. (See Section 512 of the Digital Millennium Copyright Act, http://www.copyright.gov/legislation/dmca.pdf) Viacom claims YouTube is not entitled to immunity in that it had actual knowledge of the infringing activities of its users.

Discovery in the case has revealed some warm if not smoking guns—guns that the parties resisted being made public. (See the New York Times Miguel Helft’s as-always excellent coverage, and also coverage in the Wall Street Journal.) Viacom claims it has found a number of internal YouTube emails that make clear the company knew of widespread copyright infringement by its users, though Google characterizes those messages as having been taken out of context.

Perhaps more interesting has been the embarrassing revelation that many (though still a minority) of the Viacom clips, from MTV and Comedy Central programming for example, were posted by Viacom itself. Indeed, these noninfringing posts were often put on YouTube under the guise of being posted by non-affiliated users in the hopes of giving the clips more credibility!

These “fake grassroots” accounts, as Viacom marketing executives referred to them, made use of as many as 18 outside marketing agencies. Most embarrassing is that Viacom’s own legal team has now admitted that hundreds of the YouTube postings it initially claimed in its list of infringing posts were actually authorized posting by Viacom or its affiliates, disguised to look like unauthorized postings.

(Since 2007, Google has somewhat quieted the concerns of copyright holders over YouTube by introducing filtering technologies that let copyright holders supply reference files that can be digitally compared to weed out infringing copies. This is an example, for better and for worse, of what Larry Lessig has in mind when he talks of implementing legal rules through software “code.” Better because it avoids some litigation, worse because the code may be overprotective—filtering out uses that might in fact be legal under “fair use.”)

Google v Everyone

What do the two examples have in common? Both highlight the difficulty of judging the use of information with traditional legal tools of property and borders.

In the first example, China considers some forms of information to be dangerous. To some extent, in fact, all governments restrict the flow of information in the name of national security, consumer safety, or other government aims. China (along with Burma and Iran) are at one end of the control spectrum, while the U.S. and Europe are at the other end.

Google believes, as do many information economists, that more information is always better than less, even when some of it is of poor quality, outright wrong or which espouses dangerous viewpoints. Google’s view was perhaps best put by Oliver Wendell Holmes, Jr. in his 1919 dissent in Abrams v. United States, 250 U.S. 616 (1919):

[T]he ultimate good desired is better reached by free trade in ideas…[T]he best test of truth is the power of the thought to get itself accepted in the competition of the market, and that truth is the only ground upon which their wishes safely can be carried out. That at any rate is the theory of our Constitution.

But even legal systems that believe in the “the marketplace of ideas” as the preferred forum for determining information value can’t resist the temptation sometimes to put their finger on the scales. Congress and some states have tried and failed repeatedly to censor “indecent” content on the Internet (fortunately, the First Amendment puts a stop to it, but, as John Perry Barlow says, in cyberspace the First Amendment is a local ordinance). Just this week, Australia came under fire for proposals to beef up the requirements it places on Internet service providers to censor material deemed harmful to children. The Google convictions in Italy last month suggest that not even Europe is fully prepared to let the marketplace of ideas operate without the worst kind of ex post facto oversight.

Likewise in the Viacom litigation, it’s clear regardless of the final determination of legal arguments that some information uses that are illegal are nonetheless valuable to those whose interests are supposedly being protected by the law. Viacom can make all the noise it wants to about “pirates” “stealing” their “intellectual property,” as if this were the 1800’s and the Barbary Coast. . Those who posted copyrighted material to YouTube were not doing it with the intent of harming Viacom—their intent was just the opposite. What’s really going on is that users—fans!—who value their programming were using YouTube to share and spread their enthusiasm with others.

Yet intent plays no part in copyright infringement. The law assumes that, as with physical property, any use that is not authorized by the “owner” of the information is with few exceptions likely to be financial detrimental. That is certainly what Viacom claims in the litigation. But the company’s own behavior tells a different story. Why else would they post their own material, and pretend to be regular users? Put another way, why is information posted by an anonymous fan more valuable to Viacom than information posted by the company itself? What is it about an unsanctioned sharing that communicates valuable information to the recipient?

By posting the clips, YouTube users added their own implicit and explicit endorsement to the content. The fact that Viacom marketing executives pretended to be fans themselves demonstrates the principle that the more information is used, the more valuable it can become. That’s not always the case, of course, but here the sharing clearly adds value—in fact, it adds new information to the content (the endorsement) that benefits Viacom.

Whether that added value is outweighed by lost revenue to Viacom from users who, having seen the content on YouTube, didn’t watch it (or the commercials that fund it) on an authorized channel ought to be a key consideration in the court’s determination, but in fact it has almost no place in the law of copyright. Yet Viacom obviously saw that value itself, or it wouldn’t have posted its own clips pretending to be fans of the programming.

Productive v Destructive Uses

Both these cases highlight why traditional property ideas don’t fit well with information uses. What would work better? I present what I think is a more useful framework in the book, a view that is so far absent from the law of information. That framework would analyze information uses not under archaic laws of property but would rather weigh the use as being “productive” or “destructive” or both and determine if, on the whole, the net social value created by the use is positive. If so, it should not be treated as illegal, regardless of the law.

What do I mean? Since information can be used simultaneously by everyone and, after use, is still intact if not enhanced by the use, it’s really unhelpful to think about information being “stolen” or, in the censorship context, of being “dangerous.” Rather, the law should evaluate whether a use adds more value to information than it takes away. Information use that adds value (reviewing a movie) is productive and should be legal. A use that only takes value away (for example, identity theft and other forms of Internet fraud) is destructive and should be illegal. Uses that do both (copyright infringement in the service of promoting the underlying content) should be allowed if the net effect is positive.

Under the productive/destructive model, Google’s actions in entering and now exiting from China make more sense as both policy and business decisions. Censoring information is destructive in that it gives users the appearance of complete access where in fact the access has been limited. That harm should be weighed against the benefit of providing information that otherwise wouldn’t have been available at all to Chinese users.

That the government became more rather than less concerned about Google over time might imply that Google had gotten the balance right—that is, that the Chinese government was increasingly aware that even what it originally thought of as benign information could have the kind of transformative effects it wanted to avoid.

Is China wrong to censor “dangerous” information? Economically, the answer is yes. There is a strong correlation between countries who are on the “freer” end of the censorship spectrum and those that have gained most financially from the spread of information technology. The more information there is, the more value gets added by its use, value that is allocated (roughly, sometimes poorly) among those who added the value.

Likewise, the posting of Viacom clips on YouTube should weigh the productive value of information sharing (promotion and endorsement) against the destructive aspects–lost revenue of paid viewers on an authorized channel supported by cable fees, advertising sponsorship, and purchased copies in whatever media.

Under that kind of analysis, it might turn out that Viacom lost little and gained a great deal from the unpaid services of its fans, and that in fact any true accounting would have credited the fans for $1 billion in generated value rather than the other way around. Or maybe it was a wash. But just to consider the lost revenue, particularly using the crazy method of modern copyright law (each viewed clip is considered as a lost sale), is certain to misjudge the true extent of the harm, if any.

A lingering problem in both these examples is the difficulty of determining both the quality and quantity of the productive and destructive uses of the information in question. How much harm did Google censoring cause? How much value did YouTube users generate?

We don’t know, not because the answers aren’t knowable but because the tools for making such determinations are so far very primitive. Traditional rules of accounting follow the industrial assumptions of physical property—that is, if I have it then you don’t, and once I’ve used it, it’s gone or at least greatly depleted—that information doesn’t follow. It makes little or no allowance for the fact that information use can be non-diminishing, or even productive.

So how would we measure the harm to Chinese Internet users from the censored information, or the value of the information they could get before Google left town? How would we measure the value of “viral” marketing of Viacom programming posted by real (as opposed to “fake grassroots”) fans? How would we measure the actual losses Viacom suffered—not the statutory damages they claim under copyright law, which are surely far too generous?

Well, one problem at a time. First let’s change the rhetoric about information use, positive and negative, from the language of property to a language that’s better-suited to a global, network economy. If we do, the metrics will invent themselves.

Today I am testifying at an FCC hearing on “Serving the Public Interest in the Digital Era.” [Speaker lineup here.] The purpose of the workshop is to explore:

• A brief history and overview of policies involving “public interest” requirements for commercial media and telecommunications companies;
• The state of local commercial broadcast TV and radio news and information; and
• The impact of media convergence and the emergence of the Internet, mobile technologies, and digital media on FCC media policy.

In my remarks, I focused on “Why Expansion of the FCC’s Public Interest Regulatory Regime is Unwise, Unneeded, Unconstitutional, and Unenforceable.” Down below I have attached my written remarks.

Why Expansion of the FCC’s Public Interest Regulatory Regime is Unwise, Unneeded, Unconstitutional, and Unenforceable

by Adam Thierer

I.       Introduction

Thank you for inviting me here today for this FCC workshop on “Serving the Public Interest in the Digital Era.” I have been asked to discuss “the impact of media convergence and the emergence of the Internet, mobile technologies, and digital media on FCC media policy”^[1] on the FCC’s “public interest” regulatory regime.

In my remarks, I will outline both the normative and practical cases against the expansion of “public interest” notions and corresponding regulatory requirements. I will argue that such considerations counsel that the Commission exercise extreme caution as it looks to revise regulations that govern America’s media marketplace.

II.     The Normative Case against Expansion of Public Interest Regulation

A.     The Inherent Ambiguity of “the Public Interest” Notion

The normative case against expansion of public interest regulation begins with the fact that this notion has always been haunted by an inherent ambiguity that is fundamentally at odds with America’s First Amendment tradition. Indeed, while public interest regulation has been considered the cornerstone of communications and media policy since the 1930s, at no time during these seven decades has the term been adequately defined.

Former FCC Commissioner Glen Robinson has argued that the public interest standard “is vague to the point of vacuousness, providing neither guidance nor constraint on the agency’s action.”^[2] And Nobel Prize-winning economist Ronald Coase argued 50 years ago that “The phrase… lacks any definite meaning. Furthermore, the many inconsistencies in commission decisions have made it impossible for the phrase to acquire a definite meaning in the process of regulation.”^[3]

And that is still true today. Simply put, the public interest standard is not really a “standard” at all since it has no fixed meaning; the definition of the phrase has shifted with the political winds to suit the whims of those in power at any given time.

B.      None Dare Call it Elitism

Still, many policymakers continue to prop up public interest notions and regulations in the belief that they are directing the content or character of media toward a nobler end. At times, their rhetoric takes on a fairy-tale quality as lawmakers and regulators speak of the public interest in reverential and fantastic terms, again, all the while deftly evading any attempt to define the term.

But the fundamental problem here is that public interest proponents assume that their values or objectives—which, in their opinion, are consistent with the needs and desires of the public—should ultimately triumph within the public policy arena. Simply stated, what motivates much public interest regulation is a simple desire by some here in Washington to tell the American people what’s best for them.

Worse yet, how the term has been interpreted and applied by the FCC has often depended on the ideological disposition of whatever party is in charge at the time.  As Ford Rowan, author of Broadcast Fairness, once noted: “Many liberals want regulation to make broadcasting do wonderful things; many conservatives want regulation to restrain broadcasting from doing terrible things.”^[4] Consequently, during periods of liberal rule, the “public interest” has been seen as a method of politically engineering more “educational” and “community-based” programming. By contrast, in the hands of conservative appointees, the public interest has been seen as an instrument to curb “indecent” speech.

Few have dared to call this elitism—but I will.^[5] What else should we call it when a five unelected officials here at the FCC sit in judgment of acceptable media content and dictate media marketplace outcomes? The viewing and listening public, however, has a broad array of interests and desires that cannot be easily gauged by this agency. As media scholar Benjamin Compaine has rightly noted, “[i]n democracies, there is no universal ‘public interest.’ Rather there are numerous and changing ‘interested publics.’”^[6]

Perhaps what some are afraid to ask is this: Does the public really want to watch what some policymakers and regulatory advocates consider to be more “culturally enriching” or “civic-minded” content, or would they rather tune into something else? Given the choice, many viewers will opt for what many public interest regulatory supporters would consider to be “low-brow” offerings over the programming that policymakers feel the masses should be consuming. Public interest supporters may bemoan the lack of civic spirit, or claim that this represents the end of our culture as we know it, but these are voluntary choices made by the citizenry that must be respected by government officials. In particular, government should not censor Americans’ choice of content through open-ended public interest regulatory rationales.^[7]

C.      There’s More “Public Internet” Content Than Ever Before, But You Can’t Force Citizens to Consume It

Generally speaking, however, the media marketplace traditionally has reflected what the public on average really wants to see and hear. And that’s even truer today. Viewers and listeners are being offered a stunning array of diverse media inputs and options. Just because the American people sometimes make choices that policymakers find distasteful, it does not mean that citizens don’t have good choices at their disposal.

For example, we are blessed to be living in the golden age of children’s video programming.^[8] As I have documented in my ongoing PFF special report on Parental Controls & Online Child Protection [9] and in other filings to the Commission,[10] there’s never been more educational and enriching kids programming available to families than there is today. Similarly, consider the stunning diversity of programming available thanks to the 500-plus channel universe of multichannel video options now at our disposal.[11] Almost every conceivable interest or hobby is now covered by a video network.^[12]

And is there really any shortage political programming or “civic-minded” content from which to choose?  C-SPAN alone covers more activity in the course of a week than most of us probably came into contact with in our entire lives just 30 years ago. Consider these data points.[13] In the 2009 calendar year, C-SPAN provided the following amount of first run programming across their three channels:

• 8,438 overall hours of programming;
• 2,709 hours of House & Senate floor activity; and,
• 1,222 hours of House & Senate committee hearings.

Moreover, C-SPAN recently created the C-SPAN Video Library,[14] which archives 23 years worth (1987-on) of fully searchable (and free) video content, including:

• 161,000 overall hours of programming;
• 56,600 hours of House & Senate floor activity; and,
• 20,152 of House & Senate committee hearings.

Importantly, many people fail to realize that C-SPAN is a private, non-profit company that is provided as a public service by cable industry contributions. It receives no government or taxpayer contributions. From 1979-2009, total license fees paid by cable & satellite companies to support C-SPAN totaled $922 million.

And let’s not forget about what the Internet has made available to us. It has given us unprecedented access to public affairs information—local, state, national, and international.

But, again, you can’t make people watch, listen, or read if they don’t want to. “Today, the scarce resource is attention, not programming,” notes Ellen P. Goodman of the Rutgers-Camden School of Law. “Given the proliferation of consumer filtering and choice, these kinds of interventions are of questionable efficacy. Consumers equipped with digital selection and filtering tools are likely to avoid content they do not demand no matter what the regulatory efforts to force exposure.”^[15]

Absent truly repressive measures to limit choice or alter consumer media consumption patterns, it will be impossible for policymakers to force the masses to pay attention to what they want them to see or hear in an age of abundant media content and unrestricted choice. “[R]egulation cannot, in a liberal democracy, force viewers to consumer media products they do not think they want in the name of the public interest,” argues Goodman.[16] (This dilemma creates additional practical problems for proposals to expand public interest regulation, which will be discussed in Sec. II below.)

D.     Returning to First Principles

Yet now we face the prospect of this arbitrary regulatory regime being expanding to cover more platforms and speech.^[17] But, instead of first looking to expand regulation, we should use this as an opportunity to return to first principles—especially in light of the dubious constitutionality of the FCC’s existing public interest regulatory regime.^[18]

We should begin by recalling that, from the time of the republic’s founding, public interest regulation has never been applied to newspapers, magazines, pamphlets, or books. Instead, the First Amendment has reigned supreme.[19] And when policymakers attempted to apply such public interest obligations to print media, those edicts were ruled flatly unconstitutional.^[20]

The characteristics of broadcast radio and television, however, were considered sufficiently unique to justify a different regulatory approach and second-class citizenship status in terms of First Amendment rights.  Scarcity, of course, was the lynchpin of the regulatory regime imposed on the broadcast industry, and it yielded calls for public interest regulation of the medium. But whatever one thinks of the scarcity rationale for differential treatment of broadcasting—and, personally, I don’t believe it was ever a legitimate excuse for diminished First Amendment treatment—that era of scarcity is clearly over.^[21] We now live in an age of information abundance—even information overload.^[22] We have more media options and diversity at our disposal today than ever before, and generally at falling prices.^[23] And yet, at the Commission, it continues to be business as usual.

The courts, however, have acknowledged that the situation on the ground has changed, and changed radically. When policymakers have sought to expand broadcast-like regulatory requirements to newer media platforms in recent years, the Courts have pushed back. That has particularly been the case for the Internet^[24] and video game content.^[25] The jurisprudential Twilight Zone will live in today—in which we classify services and determine free speech rights based on technical characteristics or functional features—makes no sense and can’t last for much longer for reasons discussed next.[26]

III.  The Practical Case against Expansion of Public Interest Regulation

Let’s look beyond these normative concerns and instead focus on the practical considerations associated with any effort to expand the horizons of public interest regulation.

A.     The Scale & Volume Problem

As the title of this particular panel quite rightly noted, we now live in an age of media and technological convergence.^[27] All bits are coming together.^[28] Because convergence is now upon us, media can be distributed instantaneously across numerous platforms. Thus, a regulatory attack on one type of media outlet or technology might necessitate an attack on many other media outlets if it has any hope of being effective.

But how will this work? If we are to achieve regulatory parity in an age of convergence, we must come to grips with the sheer scale of the task at hand. The modern mediasphere is massive—and growing rapidly. Consider some statistics about online media activity:

• 1.73 billion Internet users worldwide as of Sept 2009; an 18% increase from the previous year.^[29]
• 81.8 million .COM domain names at the end of 2009; 12.3 million .NET names & 7.8 million .ORG names.^[30]
• 234 million websites as of Dec 2009; 47 million were added in 2009.^[31] In 2006, Internet users in the United States viewed an average of 120.5 Web pages each day.^[32]
• There are roughly 26 million blogs on the Internet^[33] and even back in 2007, there were over 1.5 million new blog posts every day (17 posts per second).^[34]
• In December 2009, 86% of the total U.S. online population viewed video content.^[35] The average online viewer watched 187 videos (up 95 percent from the previous year), while the average video length viewed grew from 3.2 to 4.1 minutes.^[36] The majority of online video viewing (52%) occurred at video sites ranked outside of the top 25, suggesting the increased fragmentation of online video and the emergence of sites in the “long tail.”^[37]
• YouTube reports that 20 hours of video are uploaded to the site every minute,^[38] and 1 billion videos are served up daily by YouTube, or 12.2 billion videos viewed per month.^[39]
• For video hosting site Hulu, as of Nov 2009, 924 million videos were viewed per month in the U.S.^[40]
• Developers have created over 140,000 apps for the Apple iPhone and iPod and iPad and made them available in the Apple App Store.^[41] Customers in 77 countries can choose apps in 20 categories, and users have downloaded over three billion apps since its inception in July 2008.^[42] Apple’s iTunes Store has a catalog of 12 million songs, over 55,000 TV episodes, and 8,500 movies. It has sold more than 10 billion songs.^[43]
• Social networking giant Facebook reports that each month, its 400+ million users upload more than 3 billion photos, and create over 3.5 million events. More than 3 billion pieces of content (web links, news stories, blog posts, notes, photos, etc.) are shared each week. There are also more than 3 million active Pages on the site.^[44]
• There are 10 million edits made to Wikipedia every seven weeks.^[45]

• Twitter users send out 50 million tweets per day, an average of 600 tweets per second.^[46]
• 4 billion photos hosted by Flickr as of Oct 2009.^[47]

Even in “traditional” media sectors, the scale and volume problem is formidable: [48]

• 565 cable TV channels^[49]
• over 2,200 broadcast TV stations ^[50]
• over 13,000 broadcast radio stations ^[51]
• over 20,000 magazines ^[52]
• over 276,000 books ^[53]

In sum, the mediasphere is bigger than ever and it begs the question how the FCC plans to wrap its public interest regulatory tentacles around all of it if analog era regulations are to cover digital era content, platforms, and technologies.

B.      The Definitional Problem: Who’s Covered (or Subsidized?)

Another intractable problem associated with expansion of public interest regulation will arise once policymakers are forced to define who or what counts as a “media entity” or a “journalist” in today’s wide-open media world. And this will be a problem whether public officials are regulating media entities or subsidizing them.

For example, will bloggers be regulated or, conversely, eligible for public media subsidies? Will foreign-owned news entities be regulated or be eligible for support?  What’s the public interest standard that applies to MySpace or Facebook? Are YouTube, Hulu, and Vimeo, and Joost “just like TV stations” and, therefore, regulated like one? There may well be rational ways to make cuts along these lines, but they could raise constitutional questions. Government preferences among speakers or classes of speakers are prior restraints, constitutional sins of the highest order.

Further, it would be just these sorts of choices that would open the door to the most abusive government intrusion into the production of journalism.  It is not hard to imagine that government regulators, even with the best of intentions and acting in the utmost good faith, would, perhaps unconsciously, favor speakers and classes of speakers to whom they felt the closest affinity.  And, because Administrations come and go, as do members of Congress, no particular class of speakers would ever be truly safe — no story would be reported without at least a glance by the author over her shoulder to make sure that she had not offended the “wrong” person.  This is not an approach consistent with a free press reporting to a free people.

C.      Expanded Regulation Will Kneecap Media Providers As They Are Struggling to Reinvent Themselves

Meanwhile, this inquiry comes at a time when many traditional media providers are fighting for their very existence. Audiences are fragmenting. Advertisers are fleeing. Revenues are shrinking.  And yet, again, here we are toying with the idea of expanding regulatory burdens while the media marketplace is experiencing unprecedented upheaval and gut-wrenching creative destruction.

And if the FCC’s intends to simply continue to impose public interest regulations on the narrow set of media operations they currently control—broadcast television and radio—that’s tantamount to the FCC signing a death warrant for those media operators. But, as noted below, any proposal to “spread the pain around” by burdening everyone equally is a recipe for even greater economic catastrophe, and it wouldn’t likely pass constitutional muster in the courts anyway.

This all begs the question: Do traditional media providers really have too much power, or do they actually have too little.  Indeed, the viability of traditional media operators is increasingly in doubt since they lack pricing power and the ability to control when, where, and how their content is delivered and consumed. They no longer have protected geographic markets or “protectable scarcity.” Meanwhile, advertising—the traditional lifeblood of the media sector^[54]—is increasingly being subjected to new scrutiny and regulation here in Washington.^[55] And copyright infringement has also made monetization more challenging and placed strains on many operators.  Regardless, with traditional media operators in such serious trouble, now certainly isn’t the time to impose new rules and red tape that could hamstring their ability to respond to new competitive pressures.

Perhaps the most destructive set of ideas floating around today are those that would essentially burn the village in order to save it. For example, some regulatory advocates have toyed with ideas like “public interest vouchers,”[56] broadcast spectrum taxes,[57] expanded ownership restrictions or forced media divestiture plans,[58] or even taxes on commercial advertising,^[59] consumer electronics, cell phone providers, and ISPs.[60] In each case, the cure would be worse than the disease that ails the body. We’re not going to get a more diverse media marketplace in this country by forcing private media providers to fund their non-commercial or public-subsidized competitors.  While some of these proposals are well-intentioned and aimed at addressing perceived deficiencies in the market for “public interest” content, there are better ways for policymakers to achieve that goal.

IV.  Using Existing Public Platforms to Promote Preferred Content Through a “Public Interest Portal”

Most obviously, support for the Corporation for Public Broadcasting (CPB) could be expanded. However, that should be achieved without skimming funds off of commercial advertising budgets or through “fees” on private media operators. Enhanced support for CPB and non-commercial media in general should be derived from general treasury funds, not special levies on commercial media operators.

If the FCC believes something more must be done to create—or drive citizens to—“public interest” or civic-minded content, the best approach would be for the agency to work with other federal and state entities and leverage existing government platforms and resources to accomplish this task.

Consider how federal agencies are already doing so in an effort to promote Internet safety and security. A dozen federal agencies and several private child safety organizations have collaborated^[61] to create the OnGuardOnline.gov website, which “provides practical tips from the federal government and the technology industry to help you be on guard against Internet fraud, secure your computer, and protect your personal information.”^[62] Among other things, the effort includes a “Stop-Think-Click” promotion that recommends “Seven Practices for Safer Computing.” In October 2009, OnGuardOnline also released a new online safety resource called Net Cetera: Chatting with Kids about Being Online . [63] This 54-page document, which is being widely distributed by the government (both online and offline), is an outstanding resource for parents and kids.

In a similar vein, the FCC could work with several other agencies to create a massive “Public Interest Portal” that aggregates and promotes the sort of the public interest programming and content that policymakers hope will gain more widespread distribution—whether produced by traditional programmers, niche professionals, or amateurs. The collaborating agencies might even be able to create a downloadable widget or toolbar for use on any web browser that could enable citizens to instantaneously access a wide variety of public interest content. Many organizations already offer similar portals for children’s content. (Examples include: KidZui,[64] Glubble,[65] Browser Buddy,^[66] KidRocket,^[67] KIDO’Z,^[68] Noodle Net,^[69] Hoopah Kidview Computer Explorer^[70] and Peanut Butter PC.^[71]) There’s no reason that model couldn’t be significantly expanded by the FCC and other government agencies if they put their resources behind it.

The success of this approach, of course, is by no means guaranteed since, as noted above, it is impossible to force a free people to consume content they do not demand.  Nonetheless, it would allow the government to at least accomplish the objective it has long sought to achieve through affirmative regulation of commercial media providers: increasing the availability and practical accessibility of public interest programming. Moreover, this approach would have the advantage of not raising serious constitutional objections or burdening commercial media operators with onerous new regulatory requirements or fees. If, however, policymakers reject this approach on the grounds that citizens would still “tune in” to other types of programming first, it would confirm the fundamental elitism that some of us have long suspected truly animates most “public interest” regulatory efforts.

V.    Conclusion: Regulate Up or Deregulate Down?

In light of the considerations addressed above, we must ask: To achieve regulatory parity, should we regulate up or deregulate down? To the extent that technological convergence leads to policy convergence, it should be done in the latter direction. In a world in which scarcity has been overthrown by abundance, we should strike the balance in favor of greater media freedom and stronger First Amendment protections for all speech however it is delivered. [72]

It is vital that the outmoded public interest rationales undergirding the broadcast regulatory regime be discarded, not only to spare broadcasters from more unfair, asymmetrical regulatory restrictions, but also to ensure that this contorted vision of the First Amendment is not extended to other media platforms.[73] While some policymakers and media critics propose extending the broadcast regulatory regime to cover new media outlets and digital technologies,^[74] if America is to have a consistent First Amendment in the Information Age, such efforts should be halted and the public interest regulatory regime should be relegated to the ash heap of history.

There are better ways for the Commission and Congress to accomplish “public interest” goals other than by regulating as if it’s still 1934.

[2] Glen O. Robinson, The Federal Communications Act: An Essay on Origins and Regulatory Purpose, A Legislative History of the Communications Act of 1934 3, 14 (Max D. Paglin ed., 1989). Likewise, Lawrence J. White has noted that, “The ‘public interest’ is a vague, ill-defined concept. Under the ‘public interest’ banner the Congress and the FCC have established far too many protectionist, anticompetitive, anti-innovative, inflexible, output-limiting regulatory regimes and have unnecessarily infringed on the First Amendment rights of broadcasters.” See Lawrence J. White, Spectrum for Sale, The Milken Inst. Rev. (June 2001) at 38. See also William T. Mayton, The Illegitimacy of the Public Interest Standard at the FCC, 38 Emory L. J. 715, 716 (1989).

[3] Ronald H. Coase, The Federal Communications Commission, 2 J. L. & Econ. 1, 8–9 (1959). Even supporters of broadcast regulation such as Paul Taylor and Norman Ornstein admit that, “neither in the 1927 [Radio] Act nor in the 1934 [Communications] Act, nor subsequently, did Congress define clearly what actions by broadcasters would represent managing their stations in the public interest.” Paul Taylor & Norman Ornstein, New America Foundation, A Broadcast Spectrum Fee for Campaign Finance Reform, Spectrum Series Working Paper No. 4, (2002) at 6.

[4] Ford Rowan, Broadcast Fairness (Longham, 1984), p. 39.

[5] See Adam Thierer & Berin Szoka, The Progress & Freedom Foundation, What Unites Advocates of Speech Controls & Privacy Regulation?, Progress on Point 16.19, Aug. 11, 2009, www.pff.org/issues-pubs/pops/2009/pop16.19-unites-speech-and-privacy-reg-advocates.pdf. On occasion, even public interest regulatory advocates have admitted this. “One of the dangers in evaluating the media in a public interest framework is that it can easily take on an elitist tone.” David Croteau and William Hoynes, The Business of Media: Corporate Media and the Public Interest (2001) at 151.

[6] Benjamin M. Compaine, The Myths of Encroaching Global Media Ownership, Open Democracy.net, Nov. 6, 2001, at 5, www.opendemocracy.net/content/articles/PDF/87.pdf

[7] See Harry Kalven, Jr., Broadcasting, Public Policy and the First Amendment, J. L. & Econ. 15, 19 (1967) (“The mandate to grant licenses that serve the public [interest]… does not constitute the FCC the moral proctor of the public or the den mother of the audience.”)

[8] Adam Thierer, The Progress & Freedom Foundation, We Are Living in the Golden Age of Children’s Programming, Progress Snapshot 5.6, July 2009, www.pff.org/issues-pubs/ps/2009/pdf/ps5.6-childrens-television-golden-age.pdf.

[9] Adam Thierer, The Progress & Freedom Foundation, Parental Controls and Online Child Protection: A Survey of Tools and Methods, Version 4.0 (2008) (“PFF Parental Controls Report”), www.pff.org/parentalcontrols.

[10] Comments of The Progress & Freedom Foundation and the Electronic Frontier Foundation In the Matter of Empowering Parents and Protecting Children in an Evolving Media Landscape, Federal Communications Commission, MB Docket No. 09-194, Feb 24, 2010, www.pff.org/issues-pubs/filings/2010/2010-02-24-PFF-EFF_Response_to_FCC_Empowering_Parents_Protecting_Children_NOI_MB_09-194.pdf; Adam Thierer, The Progress & Freedom Foundation, Comments in the Matter of Implementation of the Child Safe Viewing Act; Examination of Parental Control Technologies for Video or Audio Programming, Federal Communications Commission, MB Docket No. 09-26, April 15, 2009, www.pff.org/issues-pubs/filings/2009/041509-%5BFCC-FILING%5D-Adam-Thierer-PFF-re-FCC-Child-Safe-Viewing-Act-NOI-%28MB-09-26%29.pdf.

[11] The number of channels available on multichannel video distribution platforms skyrocketed from just 70 in 1990 to 565 in 2006, the last year for which the FCC has released data. Federal Communications Commission, Thirteenth Annual Video Competition Report, MB Docket No. 06-189, Nov. 27, 2007, http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-07-206A1.pdf.

[12] For an up-to-date list, see National Cable & Telecommunications Association, Cable Networks, www.ncta.com/Organizations.aspx?type=orgtyp2&contentId=2907, or Wikipedia, List of United States Cable and Satellite Television Networks,  http://en.wikipedia.org/wiki/List_of_United_States_cable_and_satellite_television_networks.

[13] All C-SPAN data confirmed by Peter Kiley, Vice President, C-SPAN Networks. Also see: Marking 30 Years. Covering Washington Like No Other, www.c-span.org/30Years/default.aspx.

[14] www.c-spanvideo.org/videoLibrary

[15] Ellen P. Goodman, “Proactive Media Policy in an Age of Content Abundance,” in Philip M. Napoli, ed., Media Diversity and Localism: Meaning and Metrics (2007) at 370, 374.  And there is no reason to believe this situation has ever been different or will ever change. Writing in 1922, famed journalist Walter Lippmann noted that, “it is possible to make a rough estimate only of the amount of attention people give each day to informing themselves about public affairs,” but “the time each day is small when any of us is directly exposed to information from our unseen environment.” Walter Lippmann, Public Opinion (1922), p. 53, 57.

[16] Id., at 374.

[17] Among the expanded public interest responsibilities regulatory advocates promote: Controls on speech (indecent or “excessively violent” content); expanding coverage of political campaigns, debates and developments; free (or lower-cost) campaign ad time; expanded “educational” or cultural programming (especially aimed at children); and expanded coverage of community affairs and public service announcements.

[18] See Randolph J. May, The Public Interest Standard: Is It Too Indeterminate to Be Constitutional? 53 Fed. Comm. L. Jour. (May 2001) at 427-68, www.law.indiana.edu/fclj/pubs/v53/no3/may.pdf.

[19] Jonathan Emord, Freedom, Technology and the First Amendment (1991).

[20] Miami Herald v. Tornillo, 418 U.S. 241(1974).

[21] Even FCC officials have acknowledged this. See John W. Berresford, Federal Communications Commission, The Scarcity Rationale for Regulating Traditional Broadcasting: An Idea Whose Time Has Passed, FCC Media Bureau Staff Research Paper No. 2005-2, (March 2005) www.fcc.gov/ownership/materials/already-released/scarcity030005.pdf. Berresford refers to the scarcity rationale as “outmoded,” “based on fundamental misunderstandings of physics and economics,” and “no longer valid.”

[22] See Adam Thierer and Grant Eskelsen, The Progress & Freedom Foundation, Media Metrics: The True State of the Modern Media Marketplace (Summer 2008), www.pff.org/mediametrics; Adam Thierer, The Media Cornucopia, 17 City Journal 2 (Spring 2007) at 84-89, www.city-journal.org/html/17_2_media.html.

[23] See Benjamin M. Compaine, The Media Monopoly Myth: How New Competition is Expanding Our Sources of Information and Entertainment, New Millennium Research Council (2005) www.newmillenniumresearch.org/archive/Final_Compaine_Paper_050205.pdf.

[24] Reno v. American Civil Liberties Union, 521 US 844, 874 (1997); American Civil Liberties Union v. Gonzales, 478 F.Supp.2d 775, 795 (E.D.Pa. 2007).

[25] See, e.g., Video Software Dealers Association v. Schwarzenegger, 556 F.3d 950, 965-967 (9th Cir. 2009); Entertainment Software Ass’n v. Blagojevich, 469 F.3d 641, 652 (7th Cir. 2006); Interactive Digital Software Association, et. al. v. St. Louis County, et. al., 329 F.3d 954 (8 Cir. 2003); American Amusement Machine Association, et al. v. Kendrick, et al., 244 F.3d 572 (7th Cir. 2001); Entertainment Software Ass’n v. Granholm, 426 F Supp 2d 646 (E.D. Mich. 2006); Video Software Dealers Association, et. al. v. Maleng, et. al., 325 F. Supp.2d 1180 (W.D. Wa. 2004).  See generally Adam Thierer, The Progress & Freedom Foundation, Fact and Fiction in the Debate Over Video Game Regulation, Progress on Point 13.7, March 2006, at 13-18 www.pff.org/issues-pubs/pops/pop13.7videogames.pdf (discussing cases striking down state video game laws); Henry Cohen, Constitutionality of Proposals to Prohibit the Sale or Rental to Minors of Video Games with Violent or Sexual Content or Strong Language, Congressional Research Service, U.S. Library of Congress (Jan. 12, 2006), http://digital.library.unt.edu/ark:/67531/metacrs9144/m1/1/high_res_d/.

[26] Adam Thierer, Why Regulate Broadcasting : Toward a Consistent First Amendment Standard for the Information Age, Catholic University Law School, 15 CommLaw Conspectus (Summer 2007) at 431-482; http://commlaw.cua.edu/articles/v15/15_2/Thierer.pdf. Randy May as referred to these artificial distinctions as “techno-functional constructs.” Randolph J. May, Charting a New Constitutional Jurisprudence for the Digital Age, Engage (Oct. 2008) at 109.

[27] Henry Jenkins, founder and director of the MIT Comparative Media Studies Program and author of Convergence Culture: Where Old and New Media Collide, defines convergence as “the flow of content across multiple media platforms, the cooperation between multiple media industries, and the migratory behavior of media audiences who will go almost anywhere in search of the kinds of entertainment experiences they want.” Henry Jenkins, Convergence Culture: Where Old and New Media Collide (2006) at 2.

[28] Nicholas Negroponte, Being Digital (1995).

[29] Royal Pingdom, Internet 2009 in Numbers, Jan. 22, 2010, http://royal.pingdom.com/2010/01/22/internet-2009-in-numbers.

[30] Id.

[31] Id.

[32] Gavin O’Malley, Comcast Taps Hispanic Web Portal, MediaPost News, Online Media Daily, March 8, 2006, www.mediapost.com/publications/?fa=Articles.showArticle&art_aid=40714

[33] Royal Pingdom, supra 29.

[34] David Sifry, The State of the Live Web, April 2007, www.sifry.com/alerts/archives/000493.html

[35] comScore, The 2009 U.S. Digital Year in Review – A Recap of the Year in Digital Marketing 10, Feb. 2010, http://www.comscore.com/Press_Events/Press_Releases/2010/2/comScore_Releases_2009_U.S._Digital_Year_in_Review.

[36] Id.

[37] Id. at 12.

[38] Ryan Junee, Zoinks! 20 Hours of Video Uploaded Every Minute!, Broadcasting Ourselves: The Official YouTube Blog, May 20, 2009, http://youtube-global.blogspot.com/2009/05/zoinks-20-hours-of-video-uploaded-every_20.html

[39] Royal Pingdom, supra 29.

[40] Royal Pingdom, supra 29.

[41] Apple, 140,000 apps at your fingertips. From day one., www.apple.com/ipad/app-store.

[42] Press Release, Apple, Apple’s App Store Downloads Top Three Billion (Jan. 5, 2010), www.apple.com/pr/library/2010/01/05appstore.html.

[43] Press Release, Apple, iTunes Store Tops 10 Billion Songs Sold (Feb. 25, 2010), www.apple.com/pr/library/2010/02/25itunes.html.

[44] Facebook, Statistics, www.facebook.com/press/info.php?statistics (last accessed Mar. 2, 2010).

[45] Katalaveno, Edit growth measured in time between every 10,000,000^th edit, en.wikipedia.org/wiki/User:Katalaveno/TBE (last accessed Mar. 2, 2010).

[46] Twitter Blog, Measuring Tweets, Feb. 22, 2010, http://blog.twitter.com/2010/02/measuring-tweets.html.

[47] Royal Pingdom, supra 29.

[48] Statistics derived from various sources, but all can be found in Adam Thierer and Grant Eskelsen, The Progress & Freedom Foundation, Media Metrics: The True State of the Modern Media Marketplace (Summer 2008), www.pff.org/mediametrics.

[49] Federal Communications Commission, Thirteenth Annual Video Competition Report, MB Docket No. 06-189, Nov. 27, 2007, http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-07-206A1.pdf.

[50] Central Intelligence Agency, The World Fact Book, United States, www.cia.gov/library/publications/the-world-factbook/geos/us.html (data is from 2006).

[51] Id.

[52] Magazine Publishers of America, Magazines: The Medium of Action, A Comprehensive Guide and Handbook 2009/10, at 8, www.magazine.org/ASSETS/088C8564EB9E4E978A69B183881AEF58/MPA-Handbook-2009.pdf.

[53] Bowker, Bowker Reports U.S. Book Production Flat in 2007, May 28, 2008, www.bowker.com/index.php/press-releases/526.

[54] “Advertising is the mother’s milk of all the mass media,” Wall Street Journal technology columnist Walt Mossberg has noted. Walter Mossberg, Now You See ‘Em…, SmartMoney.com, June 15, 2000, available at http://web.archive.org/web/20061124235126/http://www.smartmoney.com/mossberg/index.cfm?story=20000615; And Harold L. Vogel, author of Entertainment Industry Economics, the definitive textbook for media market analysts, has noted, “Advertising is the key common ingredient in the tactics and strategies of all entertainment and media company business models. Indeed, it might further be said that advertising has substantively subsidized the production and delivery of news and entertainment throughout the last century.” Harold L. Vogel, Entertainment Industry Economics (Cambridge University Press, 7^th Edition, 2007) at 46.

[55] Adam Thierer & Berin Szoka, The Hidden Benefactor: How Advertising Informs, Educates & Benefits Consumers, Feb. 22, 2010, www.pff.org/issues-pubs/ps/2010/ps6.5-the-hidden-benefactor.html; Berin Szoka & Adam Thierer, Targeted Online Advertising: What’s the Harm & Where Are We Heading?, Progress on Point 16.2, April 2009, www.pff.org/issues-pubs/pops/2009/pop16.2targetonlinead.pdf; Berin Szoka & Adam Thierer, Behavioral Advertising Industry Practices Hearing: Some Issues that Need to be Discussed, PFF Blog, June 18, 2009, http://blog.pff.org/archives/2009/06/behavioral_advertising_industry_practices_hearing.html

[56] For example, Robert McChesney and John Nichols advocate a “Citizenship News Voucher” that would give every American adult a $200 voucher to donate money to the non-profit news medium of their choice. Of course, a number of restrictions would apply to eligible entities, including a ban on accepting advertising as a condition of receiving support from the program. Robert W. McChesney & John Nichols, The Death and Life of American Journalism (2010) at 201-6.

[57] For a recent debate on the question of broadcast spectrum taxes, see: Resolved, Broadcasters Should be Charged a Spectrum Fee to Finance Programming in the Public Interest, Pro: Norm Ornstein, Con: Adam Thierer, in Richard J. Ellis and Michael Nelson, Debating Reform: Conflicting Perspectives on How to Fix the American Political System (2010) at 53-69. Also see McChesney & Nichols, supra 56 at 209-10.

[58] For example, Free Press calls for “government incentives to encourage local ownership and media divestiture.” They want to prevent private media operators from attaining greater scale at the exact time they probably need to do so. Instead, they would subsidize those media entities who went non-commercial and disaggregated to become more atomistic. Comments of Free Press In the Matter of News Media Workshops: From Town Crier to Bloggers: How Will Journalism Survive the Internet Age? Federal Trade Commission, Project No. P091200, Nov. 6, 2009, at 21, www.ftc.gov/os/comments/newsmediaworkshop/544505-00027.pdf.

[59] Free Press advocates channeling more money to public media by affixing “a small tax” on private commercial advertising. Comments of Free Press In the Matter of News Media Workshops: From Town Crier to Bloggers: How Will Journalism Survive the Internet Age? Federal Trade Commission, Project No. P091200, Nov. 6, 2009, at 18, www.ftc.gov/os/comments/newsmediaworkshop/544505-00027.pdf.

[60] McChesney & Nichols, supra 56 at 210-11. They advocate a 5% tax on consumer electronics and a 3% tax on monthly cell phone bills to channel money into a massive new “public works” program for the press.

[61] www.onguardonline.gov/about-us/overview.aspx

[62] www.onguardonline.gov/default.aspx

[63] www.onguardonline.gov/pdf/tec04.pdf

[64] www.kidzui.com

[65] www.glubble.com

[66] www.buddybrowser.com

[67] http://kidrocket.org

[68] www.kidoz.net

[69] www.noodlenet.com

[70] www.hoopah.com

[71] www.peanutbuttersoftware.com

[72] Brian C. Anderson & Adam D. Thierer, A Manifesto for Media Freedom (2008).

[73] See Adam Thierer, Why Regulate Broadcasting : Toward a Consistent First Amendment Standard for the Information Age, Catholic University Law School, 15 CommLaw Conspectus (Summer 2007) at 431-482; http://commlaw.cua.edu/articles/v15/15_2/Thierer.pdf; Adam Thierer, FCC v. Fox and the Future of the First Amendment in the Information Age, Engage (Feb. 2009) www.fed-soc.org/doclib/20090216_ThiererEngage101.pdf.

[74] See Adam Thierer, The Progress & Freedom Foundation, Thinking Seriously about Cable and Satellite Censorship: An Informal Analysis of S. 616, The Rockefeller-Hutchison Bill (2005) www.pff.org/issues-pubs/pops/pop12.6CableCensorship.pdf; Robert Corn-Revere, The Progress & Freedom Foundation, Can Broadcast Indecency Regulations Be Extended to Cable Television and Satellite Radio? (2005) www.pff.org/issues-pubs/pops/pop12.8indecency.pdf.

Adam Thierer (PFF) Remarks at FCC Hearing on Public Interest in Digital Era (3-4-10) http://d1.scribdassets.com/ScribdViewer.swf

by Adam Thierer & Berin Szoka, Progress Snaphot 6.1

Stephanie Clifford of the  New York Times posted a very interesting article this week summarizing a recent “on-the-record chat” the Times staff had with Federal Trade Commission (FTC) chairman Jon Leibowitz and FTC Bureau of Consumer Protection chief David Vladeck.  The interview [discussed by Braden here] is profoundly important in that it reveals an alarming disconnect regarding the relationship between “privacy” regulation and the future of media, which were the subjects of their discussion with Times staff.  Namely, Leibowitz and Vladeck apparently fail to appreciate how the delicate balance between commercial advertising and journalism is at risk precisely because of the sort of regulations they apparently are ready to adopt.  Because the value of online advertising depends on data about its effectiveness and consumers’ likely interests, and because advertising is indispensable to funding media, what’s ultimately at stake here is nothing short of the future of press freedom.

The “Day of Reckoning” Is Upon Us

Leibowitz and Vladeck spend the first half of The Times interview wringing their hands about “privacy policies,” the declarations made by websites and advertising networks about their data collection and use practices (for which the FTC can and must hold them accountable).  But the two feel that privacy policies don’t adequately inform consumers.  Chairman Leibowitz claims that online companies “haven’t given consumers effective notice, so they can make effective choices.”  And Mr. Vladeck states that advise-and-consent models “depended on the fiction that people were meaningfully giving consent.” But he and the FTC seem ready to abandon the notice and choice model because the “literature is clear” that few people read privacy policies, Vladeck told the Times.  He and Leibowitz continue:

“Philosophically, we wonder if we’re moving to a post-disclosure era and what that would look like,” Mr. Vladeck said. “What’s the substitute for it?” He said the commission was still looking into the issue, but it hoped to have an answer by June or July, when it plans to publish a report on the subject. Mr. Leibowitz gave a hint as to what might be included: “I have a sense, and it’s still amorphous, that we might head toward opt-in,” Mr. Leibowitz said.

This clearly foreshadows the regulatory endgame we have long suspected was coming.  When the FTC released its “Self-Regulatory Principles for Online Behavioral Advertising” eleven months ago, we asked: “What’s the Harm & Where Are We Heading?”  Their answers to both questions have become clearer with each new calculated comment—all apparently intended to slowly “turn up the heat” on the advertising industry so that the proverbial frog will stay in the pot until the water finally boils.  Leibowitz’s FTC has simply dodged the “harm” question with a four-part strategy:

1. Cobble together a “record” full of sympathy-evoking anecdotes submitted by advocates of regulation in comments and the FTC’s ongoing “Exploring Privacy” Roundtables;
2. Let the most extreme Chicken Littles fulminate about the grand conspiracy of “neuromarketing manipulation” and the like (and sometimes even shout down FTC staff in panel discussions) in order to redefine the “reasonable center” of the debate;
3. Define-down “harm” as purely a matter of “consumer expectations” or consumers’ “dignity interests” (whatever that vague and infinitely elastic term means); and
4. Attack the effectiveness of “consent” itself by suggesting that consumers cannot be trusted to understand privacy policies or be expected to make any effort to protect their own privacy.

Conveniently, this strategy leads right back to the “day of reckoning” Chairman Leibowitz threatened was coming last February: We are heading precisely where he told us we would be—to full-on, opt-in regulation.  The writing on the wall becomes more apparent every day: Leibowitz set out to bring online advertising to heel even before becoming Chairman, and his Commission is reprising almost precisely the same approach that led to the passage of the Children’s Online Privacy Protection Act (COPPA) of 1998: building a case for new authority, dismissing industry self-regulation as ineffective, and finally presenting a report to Congress intended to produce a rapid legislative response.  After the FTC presented its report on the need for regulation in congressional testimony in June 1998, it took Congress just four months to pass COPPA—and much of that time was consumed by the summer recess.  In short, Leibowitz is mounting a carefully choreographed campaign for increased regulation.

The only real question is whether Leibowitz will somehow try to use the FTC’s existing authority over “unfair or deceptive” trade practices or wait for expanded authority from Congress.  While most observers typically assume that such expanded authority would come in the form of a privacy-specific bill—be it a broad “baseline” privacy bill or one specifically focused on online data collection for advertising purposes—the authority Leibowitz yearns for could just as easily come in the form of increased rulemaking authority as part of a broader bill that allows the FTC to preemptively regulate practices that are not deceptive but merely deemed “unfair.”

This would take the agency “ Back to the Future”—to the late 1970s, when the agency reached the height of its efforts to regulate purely on “unfairness” grounds by trying to ban advertising to children.  The agency’s behavior earned it the moniker “National Nanny” from the Washington Post, hardly a bastion of regulatory skepticism.[1] That outpouring of popular resentment caused a heavily Democratic Congress to cut-off the Democratic-led agency’s regular funding and prohibit it from regulating advertising merely on the grounds of “unfairness.”  In essence, they told the agency to “go back to its knitting” and focus on protecting consumers from demonstrated harms.^[2] Duly chastened (and actually shut down for several days), the FTC formulated a meaningful legal standard for “unfairness,” which Congress codified in 1994: for a practice to be unfair, the injury it causes must be (1) substantial, (2) without offsetting benefits, and (3) one that consumers cannot reasonably avoid.

Under this statutory standard, as FTC Commissioner Thomas Rosch has argued, the commission must carefully consider:

[the] legitimate pro-consumer and pro-competitive benefits that result from [targeted advertising]. Absent hard data weighing these benefits against the limited “invasion of privacy interests” involved, it would seem difficult to conclude that treating that practice as an actionable violation of the “unfairness” prong of Section 5 will pass muster.[3]

So Leibowitz and Vladeck either need to get serious about weighing the costs and benefits of targeted advertising—or, in the absence of such actually measuring these trade-offs, get Congress to give them the authority to regulate.  But one thing is clear from their past statements: they are in a hurry to do  something. As Vladeck told The Times last August, “There is a sense of urgency around here… Consumers, I don’t think are sufficiently protected under the current regime.”  Apparently, the case is closed in their minds.

“Left Hand, Meet Right Hand”

The second half of the  Times interview concerns the future of news. Chairman Leibowitz is not optimistic:

“There are some areas where you clearly see positive creative destruction,” Mr. Leibowitz said, giving the example of travel agents who were replaced by Orbitz and other online-booking systems. The news, he said, was not one of those. “When you’re dealing with something as critical as news is to a democracy, you need to ensure, certainly, that it’s independent, but also that it’s vibrant going forward,” he said. Areas like investigative reporting, foreign and domestic bureaus, and state-house reporting, he said, would likely falter under blog operations because of “economies of scale.”

He said he wasn’t sure what the solution was, but threw out a few ideas discussed at the conference: maybe special tax treatment for newspapers, a Corporation for Public Broadcasting-like fund, or for the newspaper industry to charge fees for the re-use of its content, similar to the model that the American Society of Composers, Authors and Publishers uses. [emphasis added]

Mr. Chairman, with all due respect, haven’t you forgotten about the solution that has powered private media for a few centuries in this country?  You know— advertising!  Indeed, what’s stunning about these comments is the complete disconnect with what Leibowitz and Vladeck said earlier in the interview.  It certainly may be the case that they said more on the subject than what The Times has reported, but given their escalating rhetoric, it seems likely that significantly increased FTC regulation is on the horizon.  And, yet, as Chairman Leibowitz marches us into this brave new world of regulating Internet media through their key funding source, he and Mr. Vladeck seem to have little appreciation of the vital role played by advertising in sustaining a truly free and vibrant press.

An Attack on Advertising Is an Attack on Media Itself

Let’s step back and revisit Media Economics 101.  Almost every serious scholar in the field acknowledges this truism: Advertising cross-subsidizes media platforms and the creation of valuable information—especially news.  “Advertising is the mother’s milk of all the mass media,”  Wall Street Journal technology columnist Walt Mossberg has noted.  Similarly, Harold L. Vogel, author of Entertainment Industry Economics, the leading text in the field, has noted, “Advertising is the key common ingredient in the tactics and strategies of all entertainment and media company business models.  Indeed, it might further be said that advertising has substantively subsidized the production and delivery of news and entertainment throughout the last century.”[4] Mossberg agrees and notes, “Without ads, most editorial products and other programming would be either unavailable or prohibitively expensive.”

The reason for the indispensability of advertising is simple: Information (including news and other forms of “content”) has “public good” characteristics that make it is very difficult (and occasionally impossible) for information-publishers to recoup their investments.  Simply put, they quite literally lack pricing power: Whatever they charge, someone else will charge less for a close substitute, inevitably leading to “free” distribution of the content, even though the content is anything but free to produce.  Advertising is the one business model that has traditionally saved the day by rewarding publishers for attracting the attention of an audience.

Which raises another under-appreciated point: Private advertising promotes press independence.  “Newspapers, magazines, radio, television, and many websites all receive their primary income from advertising,” notes William F. Arens, author of  Contemporary Advertising, another leading textbook in the field. “This facilitates freedom of the press and promotes more complete information” he concludes.[5] Why?  Because, contrary to what some critics claim, advertising and marketing help keep private media providers independent of the need for taxpayer subsidies or private patrons.  This begs an even more profound question: If not advertising, then what else?

A “Public Option” for the Press?

What’s most troubling about Chairman Leibowitz’s comments to the Times is that he has apparently found his alternative to advertising: a “public option” for the press! He mentions special tax treatment for newspapers or a new CPB-like fund (don’t we already have one?) as two possibilities.  That certainly will be music to the ears of radical, pro-regulatory activist groups like the ironically-named “Free Press,” which wants to see a massive “public works” program for the media sector.

Free Press recently filed comments with the FTC in the agency’s recent workshop, “Can Journalism Survive the Internet Age?” and proposed a far-reaching industrial policy for “saving the news.”  They call for over $50 billion in subsidies for the Corporation for Public Broadcasting and other bureaucracies, a “journalism jobs program” for that would be part of AmeriCorps, a variety of new tax incentives for struggling media operations or individuals who support favored institutions, and an assortment of government incentives to encourage local ownership and media divestiture (by handing over control to smaller operators or minority-owned groups).  Ironically, “Free Press” has also floated the concept of “a small tax on advertising” as one way to pay for a press bailout.

The organization’s founder Robert W. McChesney, the prolific neo-Marxist media scholar, penned an essay with John Nichols of The Nation last year, claiming that saving journalism essentially requires that media become an appendage of the State.  Although advertising has supported journalism as a “public good” for centuries, the only way they can conceive to provide a public good is to socialize its means of production.  Thus, journalism, like education and national defense, requires constant government oversight and support: “A moment has arrived at which we must recognize the need to invest tax dollars to create and maintain news gathering, reporting and writing with the purpose of informing all our citizens.”  They ask us to consider the $60 billion in government spending they propose as a “free press ‘infrastructure project,’” which would “keep the press system alive.”

Some in Congress seem willing to listen.  The Senate has already held hearings about the future of journalism.  And Senator Benjamin L. Cardin (D-MD) recently introduced what he has called the “Newspaper Revitalization Act,” which would allow newspapers to become nonprofit organizations in an effort to help them stay afloat.  Importantly, however, the bill would also disallow political endorsements on newspaper editorial pages—which, like campaign finance restrictions, would be a boon for incumbent politicians.  That bill should serve as fair warning to journalists about the sort of strings lawmakers will attach to press-welfare efforts going forward.  What other “golden shackles” might come with media subsidies?

To be clear, Chairman Leibowitz hasn’t called for a complete press takeover along the lines of the Free Press plan.  Yet, he hasn’t answered a key question in this debate: Who pays for news?  He appears ready to endorse a bold new regulatory scheme for the Internet and online media that, in the name of “protecting privacy” would put at risk the one traditionally successful method of supporting private media operations—advertising.  As the Pew Research Center’s Project for Excellence in Journalism noted in its latest State of the News Media report, “The problem facing American journalism is not fundamentally an audience problem or a credibility problem.  It is a revenue problem—the decoupling… of advertising from news.”  There’s probably no way policymakers can stop this process, nor should they try.  But they shouldn’t be creating new obstacles to the survival of traditional media creators, either.

Unfortunately, that’s exactly what Chairman Leibowitz’s new regulatory scheme would do.  The revenue “delta” between “smart” advertising (tailored to consumers’ likely interests and measured for effectiveness in producing clicks, purchases, etc.) and “dumb advertising” (based purely on surrounding keywords or demographics of users presumed to visit the site) is difficult to measure but potentially enormous—even 10 times as great for some sites.[6] The difference between opt-in and opt-out could be nearly as dramatic, because it’s difficult to get consumers to opt-in for anything, especially for small players—which means that opt-in regulation could, perversely, force consolidation in the online advertising and content markets.  If the FTC cares about its statutory responsibility to safeguard competition, they should take this dynamic seriously and be hyper-cautious about heavy-handed mandates that could derail smarter advertising.

Finally, to be fair, in his interview, the Chairman also suggests the newspaper industry might want to find new way “to charge fees for the re-use of its content.”  We’re certainly not opposed to the notion and think that, if it could somehow be made to work (especially by removing antitrust obstacles), it could part of a diverse revenue mix for digital journalism.  But, there’s the rub.  Micropayments inevitably face the problem of “mental transaction costs”  that likely swamp the perceived value of most content and, like pay-walls, have generally worked only in media environments characterized by a scarcity of providers and a uniqueness of a sufficiently valuable product.  These cold, hard economic realities are why advertising remains indispensable.

The Principled Alternative to Regulation

Convinced that privacy policies simply don’t work, Leibowitz and Vladeck are asking what a “post-disclosure era” would look like.  We appreciate the continued sensitivities expressed by certain groups and individuals about online privacy and data use more generally.  But there is another way forward.  We have proposed the following “5-E” layered approach to concerns about online privacy, focusing on restraining government access to data as a clear harm, rather than crippling the private sector uses of data that directly benefit consumers:

1. Erect a higher “Wall of Separation between Web and State” by increasing Americans’ protection from government access to their personal data—thus bringing the Fourth Amendment into the Digital Age.
2. Educate users about privacy risks and data management in general as well as specific practices and policies for safer computing.
3. Empower users to implement their privacy preferences in specific contexts as easily as possible.
4. Enhance self-regulation by industry sectors and companies to integrate with user education and empowerment.
5. Enforce existing laws against unfair and deceptive trade practices as well as state privacy tort laws.

Such a layered approach would not only be a “less restrictive” alternative to top-down, one-size-fits-all government regulation, but also potentially more effective in key respects than government data use/collection mandates.  In an ideal world, adults would be fully empowered to tailor privacy decisions, like speech decisions, to their own values and preferences (“household standards”).  Consumers would have (1) the information necessary to make informed decisions and (2) the tools and methods necessary to act upon that information. Importantly, those tools and methods would give them the ability to block the things they don’t like—annoying ads or the collection of data about them, as well as objectionable content—while also helping them find the information and content they desire.

But of course, the devil’s in the details.  Leibowitz and Vladeck would set the bar so high as to what constitutes “effective” consumer choice that current privacy policies necessarily fail their test—if only because most users don’t care enough to make the “right” privacy choices.  Privacy policies, even if read by relatively few consumers, nonetheless allow privacy advocates, journalists and watchdog-bloggers to scrutinize what companies say they’re doing—promises to which the FTC should hold companies stringently.  That’s clearly not good enough for Leibowitz and Vladeck, who want to give up on “notice and choice” and move on to “opt-in” mandates.  But why not first try to make “notice” more effective?  The advertising industry is currently developing standardized interfaces that could communicate key information about privacy practices in a single icon, label or other easily-digested “consumer touch point.”

More radically, why focus on tinkering with consumer interfaces, when standardized data disclosure formats like the Protocol for Privacy Preferences (P3P) could distill legalistic privacy policies into “machine-readable” code?  Such disclosures could provide a powerful form of “notice” that the ordinary consumer could “use”: simply setting their own privacy preferences in a browser tool that automatically implements those preferences by blocking tracking that users object to.  Such a privacy disclosure format could also allow the FTC to automate enforcement of its existing authority to punish unfair or deceptive trade practices.

Conclusion

And so we return to the question the FTC asked in its recent workshop, “Can Journalism Survive the Internet Age?”  Answer: Not if the FTC kills the golden goose that lays the golden eggs through onerous advertising regulations and data controls in the name of “privacy.”  Chairman Leibowitz and Bureau Chief Vladeck shouldn’t foreclose the possibility that advertising can play a central role in the future of a free press in the Digital Age—just as it has done historically in the United States.  Indeed, they would be wise to remember that advertising has always been with us.  As the Supreme Court noted in its 1996 decision, 44 Liquormart, Inc. v. Rhode Island.

Advertising has been a part of our culture throughout our history. Even in colonial days, the public relied on “commercial speech” for vital information about the market. Early newspapers displayed advertisements for goods and services on their front pages, and town criers called out prices in public squares. Indeed, commercial messages played such a central role in public life prior to the founding that Benjamin Franklin authored his early defense of a free press in support of his decision to print, of all things, an advertisement for voyages to Barbados.[7]

Of course, for advertising to continue to play the role as sustainer of the press, it must be allowed to evolve.  Media operators—large and small alike—must be allowed to craft new strategies, some of which may require data collection and marketing practices that will make some privacy-sensitive users uncomfortable, but will also ensure that the goose keeps on laying golden eggs for them and everyone else.

While Chairman Leibowitz may decry the creative destruction at work in the news sector and information industries today, that shakeup will continue and, no doubt, be painful for incumbent players.  Advertising alone may not “save the day” for media as it has in the past, but it will likely remain essential to sustaining private media platforms and providers going forward— if federal policymakers allow it.  The alternative—massive government intervention into the news and media sectors—is too horrifying to think about.

[1] Washington Post, March 1, 1978.

[2] Congress terminated the FTC’s efforts to prohibit advertising to children, and barred the agency from issuing any advertising regulation predicated solely on unfairness for three years.  FTC Improvements Act, Pub. L. No. 96-252, § 11 (May 1980).  See generally J. Howard Beales, Director of the Bureau of Consumer Protection, Federal Trade Commission, The FTC’s Use of Unfairness Authority: Its Rise, Fall, and Resurrection, www.ftc.gov/speeches/beales/unfair0603.shtm.

[3] Thomas Rosch, Some Reflections on the Future of the Internet: Net Neutrality, Online Behavioral Advertising, and Health Information Technology, Remarks at U.S. Chamber of Commerce Telecommunications & E-Commerce Committee Fall Meeting, October 26, 2009, 13, www.ftc.gov/speeches/rosch/091026chamber.pdf.

[4] Harold L. Vogel, Entertainment Industry Economics (Cambridge, MA: Cambridge University Press, 7th Edition, 2007), at 46.

[5] William F. Arens, Contemporary Advertising (McGraw-Hill Irwin, 10^th Ed., 2006) at 50.

[6] See Berin Szoka & Mark Adams, The Benefits of Online Advertising & Costs of Privacy Regulation, PFF Working Paper, Nov. 8, 2009, www.scribd.com/doc/22445754/Benefits-of-Online-Advertising-Paper.

[7] 517 U.S. 484, 495 (1996), http://www.law.cornell.edu/supct/html/94-1140.ZO.html

______________________________

Related PFF Publications

• Privacy Trade-Offs: How Further Regulation Could Diminish Consumer Choice, Raise Prices, Quash Digital Innovation & Curtail Free Speech, Berin Szoka, Comments to the Federal Trade Commission “Exploring Privacy” Roundtable, November 10, 2009.
• Online Advertising & User Privacy: Principles to Guide the Debate, Berin Szoka & Adam Thierer, Progress Snapshot 4.19, Sept. 2008.
• Targeted Online Advertising: What’s the Harm & Where Are We Heading?, Berin Szoka & Adam Thierer, Progress on Point 16.2, April 2009.
• Privacy Polls v. Real-World Trade-Offs, Berin Szoka, Progress Snapshot 5.10, Oct. 2009.
• The Benefits of Online Advertising & Costs of Privacy Regulation, Berin Szoka & Mark Adams, PFF Working Paper, Nov. 8, 2009.
• Benefits of Online Advertising, Berin Szoka, Mark Adams, Howard Beales, Thomas Lenard & Jules Polonetsky, PFF Capitol Briefing, July 2009.
• Public Option for Press Should Get the Red Pen, Adam Thierer, The Daily Caller, Jan. 12, 2010.

PFF has just released the transcript of an excellent panel discussion I moderated last week entitled, “Let’s Make a Deal: Broadcasters, Mobile Broadband, and a Market in Spectrum.”  As I’ve mentioned here before, one of the hottest issues in DC right now is the question of broadcast TV spectrum reallocation.  Blair Levin, who serves as the Executive Director of the Omnibus Broadband Initiative at the Federal Communications Commission, recently raised the possibility of reallocating a portion of broadcast television spectrum for alternative purposes, namely, mobile broadband. Such a “cash-for-spectrum” swap would give mobile broadband providers to spectrum they need to roll out next generation wireless broadband networks while making sure broadcaster receive compensation for any spectrum they hand over.  The FCC just recently released a public notice on “Data Sought on Users of Spectrum,” (NBP Public Notice # 26) that looks into the matter. “This inquiry,” the agency says,” takes into account the value that the United States puts on free, over-the-air television, while also exploring market-based mechanisms for television broadcasters to contribute to the broadband effort any spectrum in excess of that which they need to meet their public interest obligations and remain financially viable.” Meanwhile, the House Energy and Commerce Communications Subcommittee is set to hold a hearing on the issue next Tuesday.

PFF’s panel discussion on this issue featured an all-star cast of characters, including opening remarks by Blair Levin, and a terrific discussion ensued. [You can hear the full audio from the event here.]  Down below I have highlighted some of the major points each speaker made during the discussion and also embedded the complete transcript in a Scribd reader.  Also, just a reminder that my PFF colleague Barbara Esbin and I authored a short paper on this issue recently: “An Offer They Can’t Refuse: Spectrum Reallocation That Can Benefit Consumers, Broadcasters & the Mobile Broadband Sector.”

• Blair Levin, Executive Director of the FCC’s Omnibus Broadband Initiative, began the discussion by describing how additional spectrum will be needed to expand wireless broadband and why spectrum currently held by broadcasters would be a good option.  In addition to identifying spectrum that has the technical qualities to support broadband, he explained, “You also would look at things like where there’s an economic gap between the current use and potential wireless use.  You would want to look at bands where maybe there are regulations which constrain the market mechanism.  You also might want to look at bands where you can have a meaningful reallocation of spectrum while, nonetheless, preserving current uses.”
• Coleman Bazelon, Principal at The Brattle Group, presented findings from his recent paper on the value of spectrum currently held by broadcasters if it was reallocated to commercial mobile or wireless broadband uses. “This analysis shows that there are significant gains from reallocating the broadcast band, and I think the takeaway should be that there are significant gains, not that its $42 billion or $51 billion, but that its tens and tens of billions of dollars,” Bazelon stated.
• David Donovan, President of the Association for Maximum Service Television, Inc., questioned the estimates of the additional value of broadcast spectrum that could be gained if it was auctioned for other uses.  “If you are valuing over the air television broadcasting and its importance to the American public, using a snapshot based on an auction valuation at a particular point in time is really highly inappropriate,” he stated. “The business model of broadcasting is heavily regulated. … and that defines, of course, the value, just like heavy zoning defines the price of land.”
• Kostas Liopiros, Principal of The Sun Fire Group, discussed the technical feasibility of using various blocks of spectrum for wireless broadband use.  “Only additional spectrum can produce the required gains of capacity in the future, but if the gains capacities are oriented towards wireless broadband, for national wireless broadband capability, you need to focus on the right type of spectrum,” he explained.
• John Hane, Counsel in the Communications Practice Group of Pillsbury Winthrop Shaw Pittman LLP, warned of the legal difficulties of modifying broadcast licenses.  “Extinguishing licenses requires a hearing, potentially hundreds of them, each one affecting one or more Congressional districts.”  Although the FCC is able to modify a license without the licensee’s consent, he continued, “that is a very long and complicated process with an uncertain time frame.  If there really is a spectrum crisis, the stick approach …is not going to solve it very fast.”
• Paul Gallant, Senior Vice President of Concept Capital, discussed the possible effects of Congress involvement in auction of broadcast spectrum.  If broadcasters are reluctant to modifying their business model, Gallant explained, it might be beneficial for them to have Congress involved in such a deal.  However, he warned that Congressional involvement could also result in uncertainty for the broadcasters.  “It is not clear, if Congress does pass a bill, whether broadcasters come out better or worse than they would if they had worked something out with the FCC.  The main reason is there is tremendous budget pressure in Congress today.  They are looking for new sources of revenue,” Gallant explained.
• Andrew Jay Schwartzman, President and CEO of Media Access Project, expressed that he was resistant to the idea of auctioning spectrum.  “It isn’t property,” He stated.  “They favor incumbents.  They’re rigged.  They don’t generate the revenues that OMB and Congress seem to think they will.” He also warned of the possible impact of auctions on innovation. “Auctions lock in existing technology and near-term foreseeable technology. The people who are able and willing to bid are basing it on technology that they know they can generate and that does not allow the spectrum to be used in better ways coming down the road.”

Transcript of Dec 1 PFF Event on Broadcaster TV Spectrum Reallocation [PFF – Thierer] http://d1.scribdassets.com/ScribdViewer.swf?document_id=23980532&access_key=key-wdpoolnrm5gxq1xu7c6&page=1&version=1&viewMode=list

In a recent PFF paper I argued that “We Are Living in the Golden Age of Children’s Programming,” and showed how, despite incessant complaints by many policymakers:

the overall market for family and children’s programming options continues to expand quite rapidly. Thirty years ago, families had a limited number of children’s television programming options at their disposal on broadcast TV. Today, by contrast, there exists a broad and growing diversity of children’s television options from which families can choose.

I then documented there and in my book, Parental Controls & Online Child Protection:

• the many excellent family- or child-oriented networks available on cable, telco, and satellite television today;
• the growing universe of religious / spiritual television networks;
• the many family or educational programs that traditional TV broadcasters offer; or
• the massive market for interactive computer software or Internet websites for children.

And every time I turn around I find another great show, service, or site for families to choose from.  Earlier today I highlighted the excellent new online video search service, Clicker.com, which is essentially a “TV Guide for the Internet.”  It is absolutely awesome and I highly recommend you play with it. You’ll be instantly hooked if you are TV junkie.

Better yet, Clicker.com offers a wonderful compendium of kid- and family-oriented video programming options. Although the site is still fairly new, you can already find 660 shows and almost 5,000 unique episodes of kids programming there.  A lot of it is just good ‘ol fashion couch potato fare ranging from the old (The Jetsons, Fat Albert, The Flintstones, etc) to the new stuff that you’d find on various cable channels today.  But there’s also plenty of wonderful educational programming to be found on Clicker including shows like Arthur, Sesame Street (over 1,000 episodes), Martha Speaks, The Electric Company, Animal Exploration with Jarod Miller, Jonathan Bird’s Blue World, Postcards From Buster, Science on Brain Pop, Technology on Brain Pop, and more.

Although my kids aren’t really into TV, as they grow older, I bet they’ll be watching a lot more programming via services like Clicker.  Currently, my kids enjoy watching snippets of video via kid-oriented online search portals like KidZui and Glubble.  Such online walled gardens offer a safe place for parents to find terrific online content for their kids.   Bottom line: compared to the miserable state of affairs some of us faced growing up in the 1970s, kids and parents have never had it better in terms of the video programming options at their disposal.

Anyway, some of “kid-vid” issues — including potential expansion of the Children’s Television Act of 1990 — could be up for discussion in the FCC’s new proceeding, “Empowering Parents and Protecting Children in an Evolving Media Landscape” (MB Docket 09-194).  The FCC just tweeted about it here and I posted my thoughts on where the agency might be heading in this proceeding in this post last month.

The Parents Television Council (PTC) released a new report today entitled Women in Peril: A Look at TV’s Disturbing New Storyline Trend. The report argues that “by depicting violence against women with increasing frequency, or as a trivial, even humorous matter, the broadcast networks may ultimately be contributing to a desensitized atmosphere in which people view aggression and violence directed at women as normative, even acceptable,” said PTC President Tim Winter.  As evidence the report cites… Nicole Kidman.  OK, it cites more than Nicole Kidman, but the 7-page report and accompanying press release does seem to place a lot of stock in the fact that, while being questioning by a House Foreign Affairs subcommittee hearing about violence against women overseas, “Ms. Kidman conceded that Hollywood has probably contributed to violence against women by portraying them as weak sex objects, according to the Associated Press.”  I’m not sure what Ms. Kidman was doing testifying before Congress on the matter of violence against women overseas — dare I suggest some congressmen were out for another photo-op with a Hollywood celeb? — but the better question is whether Ms. Kidman’s opinion has any bearing on the question of what relationship, if any, there is between televised violence and real-world violence against women. (Incidentally, if she really feels passionately about all this, is she prepared to go back and recut some of her old scenes in “Dead Calm,” “To Die For,” and “Eyes Wide Shut“?)

But let’s not nitpick about the credentials Ms. Kidman brings to the table or whether it makes any sense for PTC to elevate her opinions to proof of theory when it comes to a supposed connection between depictions of violence against women in film or television and real world acts of violence against women. PTC, however, suggests that’s exactly what is going on today. They allude to a few lab studies which are of the “monkey see, monkey do” variety — where the results of artificial lab experiments are used to claim that watching depictions of violence will turn us all into killing machines, rapists, robbers, or just plain ol’ desensitized thugs.

There’s just one problem with such studies, and the PTC report:  Reality.  Whatever lab experiments might suggest, the evidence of a link between televised media violence and the real-world equivalent just does not show up in the data. The FBI produces ongoing Crime in the United States reports that document violent crimes trends. Here’s what the data tells us about overall violent crime, forcible rape, and juvenile violent crime rates over the past two decades: They have all fallen.  Perhaps most impressively, the juvenile crime rate has fallen an astonishing 36% since 1995.

Now, let me be perfectly clear about something.  When analyzing such things it is vitally important to recall one of the first rules of statistical analysis: correlation does not necessarily equal causation. This works in both directions. Even if an increase in real-world violence was closely tracking depictions of violence on television or in video games, it wouldn’t necessarily mean there is a connection. But it would also be wrong to state that, on its own, an inverse correlation (with the trends moving in opposite directions) meant that there was absolutely no connection between these things.

At the margin, I believe that some media can have negative impacts on some people. Certainly, in heavy enough doses, watching non-stop depictions of sex or violence probably would have some sort of negative effect on some people — loss of sleep, if nothing else. Perhaps more.

Then again, I just cannot entirely dismiss the real-world evidence being so starkly at odds with the “monkey see, monkey do” theories bandied about by PTC and some researchers or regulatory proponents. At a minimum, the real-world evidence should at least call into question the “world-is-going-to-hell” sort of generalizations made by proponents of increased media regulation, who all too often make casual inferences about the relationship between media exposure and various social indicators. Such a causal relationship is even more dubious today since all Americans, especially youngsters, are surrounded by a much wider variety of media than ever before. Even though television viewing has gone down slightly in recent years, it has been due to the rise of other media substitutes that command the attention of children, including the Internet, cell phones and video games. Overall, therefore, it appears that children are “consuming” as much, if not more, media than ever before. One would think that if depictions of violence in media really were leading to increased aggression among youth it would start showing up in some of these indicators at some point. But that’s just not occurring. [If you’re interested, I’ve discussed all these issues at much greater detail here, here, here, and here.]

Another argument I often here is: ‘Well, the numbers would be even better if not for media violence!’  But there’s just no way to prove that one way or the other. Would the juvenile crime rate be down 46% instead of the 36% decrease we’ve actually since 1995?  I don’t know. Nobody can know. But I certainly hope that media critics and regulatory proponents aren’t so foolish as to suggest that the crime rate would drop to zero if we just forced everybody to watch “Mary Poppins” all day long.

Finally, let’s assume that the PTC is right and that depictions of violence against women are on the rise on TV. I can actually accept that statement. With all the forensic science shows and crime dramas on TV today, it’s clear that some of the plot lines are going to involve people dying in some fashion and many of those people will be women. And yes, some of the depictions will get pretty gritty. “Fringe” and the various “CSI” shows are clearly showing things we didn’t see on “Quincy” back in the day. (Bring back Jack Klugman! He was awesome.)

But, hey, culture has changed.  Envelopes have been pushed a bit.  A little less is left to the imagination.  But most of us can live with that fact.  Indeed, many of us actually enjoy that fact!  And for those who do not share that worldview or who have heightened sensitivities about depictions of violence in TV shows, movies, or games, I would like to tell them that I really do understand and appreciate where they are coming from.

Yet, there are many other ways you can deal with that without forcing us all to forgo content we might enjoy consuming. And, you guessed it, this is where I remind the world for the umpteenth time that I have written a whole book about parental control tools and methods! [The shameless self-promotion never ends here, folks!]  In fact, part of the reason I have invested so much time in that project — and my ongoing efforts to get companies and other third parties to expand the range of tools, ratings, and other information that we have access to — is because I genuinely want to make sure that those individuals and families who have different needs and values than I have the ability to craft their own “household media standard.”   I want each family to be empowered to make media content decisions for themselves such that they can find the media content they want and discard all the rest. Luckily, that is the world we increasingly live in today. Parents have more tools and methods at their disposal to help them decide what constitutes acceptable media content in their homes and in the lives of their children.

I know that some critics including the PTC feel that the tools aren’t good enough, but I just don’t buy it. Sure, there’s always some room for improvement regarding parental control tools and rating systems, but the existing panoply of tools and methods offer families unprecedented control over their media consumption habits. And that includes tools and methods which enable them to find enriching and educational content, which we have more of than ever before.

I understand PTC doesn’t share my worldview on these matters.  But the difference between us is that they want to take something away from me (the right to watch certain types of content) while I want to give something to them (the ability to block that which they find distasteful).  To be fair, however, their report did not rush to the regulatory solution, even though they did call for more hearings and they warn that:

if the television industry is unwilling or unable to take serious steps to reduce or tone down such graphic images, then we will urge the Congress and the FCC, by virtue of their regulatory authority over the public airwaves, to step in and take action.

The problem is, I don’t think PTC will ever rest until all this content is removed from the airwaves altogether, even if millions of Americans actually enjoy that programming.  Again, the better solution is for PTC to work with others to improve the tools and methods available to families to more effectively make this decision for themselves.  I certainly don’t want others making these determinations for my wife and me and our two kids.  We’ve got the job handled, thank you very much.

When the government tells someone to shut up, we call it censorship and the First Amendment requires the government to defend its regulation. But what if the government just says, “Shhhh… could you please turn that down?” Rep. Anna Eshoo’s Commercial Advertisement Loudness Mitigation Act (“CALM Act” – HR 1084) would do just that: require the FCC to issue rules that broadcast and cable TV ads:

(1) … shall not be excessively noisy or strident; (2) … shall not be presented at modulation levels substantially higher than the program material that such advertisements accompany; and (3) [their] average maximum loudness…  shall not be substantially higher than the average maximum loudness of the program material that such advertisements accompany.

Now,  I understand where Ms. Eshoo is coming from: I have a very low tolerance for noise in general and for television in particular—and it’s not just about commercials. (I find TV news at least as “noisy” and “strident” as commercials. That’s why I opted-out from the whole TV thing in about 2000. Yup, that’s right: I found better things to do with my time and the supposedly all-powerful “gatekeepers” of Hollywood couldn’t do a damn thing about it. You should try it if you don’t like what’s on TV! To paraphrase Voltaire, “I disapprove of what you say watch,  but I will defend to the death your right to say watch it! You can get most of what’s worth watching on DVD or online anyway.) But do we really need bureaucrats in Washington micromanaging volume levels? Maybe Congressmen would have a little more time to read the bills they vote for if they they weren’t so busy fiddling with everyone else’s remote!

Eshoo’s bill has passed the House Energy & Commerce Committee’s Communications Subcommittee just as the TV industry is completing work on voluntary standards of their own. That’s one “less restrictive” alternative to regulation. What about technological empowerment? If Americans really hate loud commercials so much, why don’t they demand TVs with built-in volume normalization features? But this bill isn’t merely unnecessary, it would also set a disturbing precedent in at least six ways.

First, while it might seem that a regulation could draw clear lines with simple rules here about volume, Cliff Stearns (R-Fl) points out that “it is difficult to regulate volumes, since commercials are produced by a number of studios and companies that use different technologies and volume standards.” But this ambiguity merely increased the potential for selective enforcement, which would exist even where it were possible to craft precise rules.  Because the law makes no distinction about “non-commercial” (i.e., not-for-profit) advertisements, this means a politicized FCC could use volume controls as a weapon against opposing political advertising or other non-profit speech it did not like. Anyone who’s ever lived under a Home Owner’s Association should understand how easily an HOA president with a personal grudge could use hyper-technical rules about what shade of blue you have to paint your own mailbox to harass you. And isn’t “strident” the very adjective most commonly used to write off the arguments of those with whom we disagree?

Second, even though it does not exempt non-commercial ads, the bill does embody a recurrent presumption that it’s ok to regulate advertising in ways we wouldn’t accept for the “show” itself (i.e., non-advertising content). Of course, the show could be “commercial” (which, in First Amendment terms, means it would generally get only “intermediate” scrutiny) while the advertisement could be “non-commercial”—such as a political ad. But even if most ads are commercial, so what? If the government is going to protect us from “noisy or strident” commercials, why not all “noisy or strident” programming? Even the most annoying TV ad is probably less annoying than, say, the James Carvilles of the world debating the Glenn Becks of the world. (Of course, users really bothered by noise, but unwilling to give up TV, would probably much rather have a dynamic market for TVs with volume moderating features than rules that dull the din of commercials alone.)

Third, I’m sure that the government would defend Eshoo’s bill, if signed into law, as a restriction on the “time, place and manner” of speech. Although such restrictions are much easier for the government to defend than most restrictions on speech, the government must still show that the regulation is “narrowly drawn” and “serves a significant government interest.” So… what’s the interest here? I’m a little disturbed by the idea that the government has a “significant interest” in what goes on in the space between Americans, their couches, and the electronic display of their choosing. (If we were talking about non-consensual “second-hand television” like TVs blaring in airports, I might be slightly more sympathetic: It’s awfully hard to escape the sound of TV when you’re stuck at the gate waiting for a flight. But commercials are only marginally more annoying to me than most TV, and airport TVs generally show news anyway—the height of annoyingness. I’d much rather see airports, bars, etc. adopt directional sound technologies so that users can move out of the “blast radius” and into peace and quiet simply by moving over a few seats.)

Fourth, I understand that most users probably do wish that commercials probably weren’t so loud. But, this very fact, combined with the ease with which users can now skip all commercials (36% of U.S. homes have a DVR), creates a pretty powerful incentive for the TV industry to self-regulate the volume level of advertising. “Noisy or strident” advertising is just another example of the “tragedy of the commons” at work: Absent any rules, every individual advertiser has an incentive to jack up the volume in order to attract attention, and doing so will probably work up to a certain point of increased annoyance by the user. But collectively, such ads hurt all advertisers because they increase ad blindness, ad deafness, and/or outright commercial skipping. The same dynamic plays out on the Internet, where flashing, blinking, bouncing, strobing dancing ads really drive users nuts and make them turn to tools like AdBlock Plus and Flashblock—which is why ad networks like Google have policies that implement their own “time, place and manner” rules out of pure self-interest. Such rules are useful and valuable. They benefit advertisers, consumers and the ad network alike, because there exists a basic harmony of interests between them: annoying ads don’t really benefit anyone in the long-term.  Do we really want government bureaucrats making these decisions instead?

Fifth, if the FCC has a “significant” interest in “protecting” us from annoying TV ads, why shouldn’t the F TC protect us from annoying ads online? Here, the problems of government making rules become even more obvious as the medium is far more dynamic. But users already have radical user empowerment tools.

Finally, what about the unintended consequences of such regulation? For example, will intermediaries be responsible for compliance?

Rep. Zack Space (D-Ohio), raised the issue of the impact of the bill on small cable operators. He said that while he was not disputing the need for uniform commercial volume, he said the bill, “perhaps unintentionally” was prejudiced [against] small operators. He pointed out that many of those operators did not insert ads themselves or have “the right to alter national feeds unilaterally, like some of the bigger cable companies.” He said that those operators “simply pass through broadcast signals and have no means of adjusting the volume of commercials on the stream.”

If the FCC were to hold ad-distributor intermediaries liable for the volume-compliance of ad-producers, that could certainly disadvantage small distributors and perhaps even promote consolidation—both horizontal and vertical. But isn’t media consolidation the great evil that “media reformistas” are constantly warning us about?

The Tennis Channel and ESPN have teamed up to offer live coverage of the US Open online. Not only is this a wonderful thing for consumers, but it also demonstrates just how easily content creators (including traditional television programming networks) can completely bypass cable companies, who once supposedly used their “bottleneck” power to act as “gatekeepers” over the content Americans could receive. If this was ever true, it certainly isn’t true in the era of Internet video!

The venture will, of course, be ad-supported. But just how much content such a  model can support will depend  heavily on whether Internet video programming distributors like this venture (or Hulu.com) will be able to personalize the ads shown on their videos based on the likely interests of users.  Ad industry observer David Hallerman has predicted that spending on behavioral advertising:

is projected to reach $1.1 billion in 2009 and $4.4 billion in 2012 [a quarter of U.S. display advertising].The prime mover behind this rapid increase will be the mainstream adoption of online video advertising, which will increasingly require targeting to make it cost-effective.

The problem isn’t just the expense involved in streaming online video, it’s that contextually targeting advertising (based on keywords) is easy when the content is text but far more difficult when the content is video.

So if you’re hoping to cut the cord to cable and save the expense of a monthly cable subscription, you’d better hope the privacy zealots don’t wipe out advertising model necessary to make Internet video a true substitute for traditional subscription video sources!

The D.C. Circuit has struck down as arbitrary and capricious the FCC’s “cable cap.”  The cap prevented a single cable operator from serving more than 30% of U.S. homes—precisely the same percentage limit struck down by the court in 2001.  The court ruled that the FCC had failed to demonstrate that “allowing a cable operator to serve more than 30% of all cable subscribers would threaten to reduce either competition or diversity in programming.”

The court’s decision rested on the two critical charts (both generated by my PFF colleague Adam Thierer in his excellent Media Metrics special report) at the heart of the PFF amicus brief I wrote with our president, Ken Ferree:

First, the record is replete with evidence of ever increasing competition among video providers: Satellite and fiber optic video providers have entered the market and grown in market share since the Congress passed the 1992 Act, and particularly in recent years. Cable operators, therefore, no longer have the bottleneck power over programming that concerned the Congress in 1992.

Second, over the same period there has been a dramatic increase both in the number of cable networks and in the programming available to subscribers.

Our chart shows the explosion in the number of programmers (though not the total amount of programming), as well as the falling rate of affiliation between cable operators and programmers, which was among the prime factors motivating Congress when it authorized a cable cap in the 1992 Cable Act:

These two charts show how much less defensible the FCC’s 30% cap is now than it was back in 2001. If the Court had needed still more evidence, it could have cited the broader trend towards “Cutting the Video Cord.” As we explained in our amicus brief, viewers are shifting away from cable, satellite and fiber (“Multichannel Video Programming Distributors,” in FCC-speak) towards sites like Hulu and Netflix (which we dubbed “Internet Video Programming Distributors” in the hopes that a familiar-sounding acronym might resonate inside a regulatory agency that can’t even figure out how to stream its own meetings properly). Nothing better demonstrates how the Internet is revolutionizing video distribution than the fact that Hulu.com has actually overtaken TimeWarner cable in viewership: