Wednesday, April 25, 2007

The "Talking Broadband Down" Crowd

The predictable laments from those who cite the latest OECD broadband penetration statistics are getting tiresome. Quite simply, those here in the U.S. who continue to talk down this country's broadband achievements clearly have a policy agenda in mind. The agenda is to impose net neutrality (read: common carrier regulation) on broadband providers on the perverse theory that somehow consumers will take more broadband if all the providers are required to offer exactly the same service--just as in the good ol' days of Ma Bell.

Today's Communications Daily [subscription required] refers to a letter David Gross, U.S. Coordinator for International Communications and Information Policy, sent to the OCED pointing out the flaws in the OECD's broadband statistics. Gross explained that the OECD reports rely too heavily on counting mere subscriptions as a measure of broadband use (this ignores, for example, the fact that most colleges today have campus-wide WiFi access where thousands of students have high-speed access but no "subscriptions," that millions of others use thousands of WiFi hot spots throughout the country, and that many businesses obtain broadband through high-capacity special access facilities that are not even counted as "subscriptions" in the OECD reports). OECD also ignores important factors such as geographic diversity and population density differences that impact broadband penetration.

The plain fact of the matter is that the U.S. has more broadband subscribers--64 million as of June 2006--than any country in the world. And the most recent FCC report, encouragingly, showed that the largest increase in the number of broadband subscribers occurred in the wireless segment. From June 2005 to June 2006, the number of broadband wireless subscriptions increased exponentially from 380,000 to 11 million.

Rather than celebrating this good news, which is at least partly attributable to the FCC's deregulatory broadband policies under the leadership of FCC Chairmen Michael Powell and Kevin Martin, the "talking broadband down" crowd continues to relish trotting out the flawed OECD statistics to advance a pro-regulatory agenda. FCC Commissioner Michael Copps is a leader of this choir. A prominent member of the chorus is Ben Scott, policy director of the Free Press organization. Again, according to today's Communications Daily, Mr. Scott is quoted as telling a Senate Committee yesterday: "Roughly 10% of the households still do not have a wireless broadband provider. The market is not competitive. It remains a rigid duopoly at the residential level."

Recall that it was only a short while ago that the "talking broadband down" crowd claimed that most Americans had a choice of only one broadband provider. Now we have a "rigid" duopoly because 10% of American households do not have a wireless provider. This is silly. It is plain for all to see that the U.S. broadband marketplace is highly dynamic and increasingly competitive. Compared to most all other countries around the globe, it is hyper-dynamic and competitive.

In somewhat contradictory fashion, Mr. Scott goes on to say: "It's not that broadband isn't available to most Americans--we're just not buying it...We need more competitive, affordable services with attractive features to make it worth the family's hard earned dollars." What Mr. Scott is really saying is that the "attractive feature" he would like to see is for the government to mandate "neutrality" by regulating the Internet in the same way he wants the government to mandate the "fairness" of broadcast content. I think Americans would prefer to see their "hard earned" tax dollars used in other ways.

As I have written many times before (see here and here), apart from the deleterious impact on new investment and innovation caused by implementing the pro-regulation policies advocated by the "talking broadband down" crowd, laws and regulations mandating "neutrality" and "fairness" in content carried raise very serious First Amendment issues in today's digital environment, whether we are talking about broadband Internet providers or other communications providers. More about the First Amendment interests at stake regarding the net neutrality issue and other current communications issues in the coming weeks.

Thursday, April 19, 2007

The Media Cornucopia

My former colleague, Adam Thierer, has a new article in the City Journal entitled, "The Media Cornucopia." Adam is one of the most knowledgeable and articulate voices on issues relating to government regulation of media content and government media ownership rules.

Anyone interested in really understanding the law and public policy issues relating to the government's regulation of the media should not only read Adam's City Journal article, but his excellent book, Media Myths, as well. Adam supplies the facts and figures that separate myth from reality.

Tuesday, April 17, 2007

"Digital Distribution of Channels for Media to Explode"

According to Communications Daily [subscription required], Hewlett Packard CTO Shane Robison told the National Association of Broadcasters convention on Monday that the media industry will see an explosion of digital distribution channels this year. With respect to distribution channels, he is reported to have said: "We're at a crucial turning point right now where hype turns into reality...The tire-kicking phase is over...In the next year [the current handful of distribution channels is] going to explode to 10, 20, or more... "

How ironic that Mr. Robison was speaking to NAB convention attendees. While he is there, maybe he should kick! The NAB has been leading the charge trying to convince Congress, the Department of Justice, and the FCC that satellite radio constitutes its own separate product market on the basis that audio services delivered from the sky are uniquely different from audio services delivered over terrestrial or HD radios or iPods or the Internet or wireless devices and so forth. In an essay published yesterday on CNET, I suggested that, in today's digital environment, "there are a number of alternatives in the audio services marketplace that consumers may substitute for satellite radio, especially in the face of any price hike."

In the CNET essay, I urged: "What is most important now for sound communications policy is to move beyond classifying and regulating services based on the technology or slice of spectrum used for distributing the service. Whether evaluating the competitive impact of a particular merger or deciding whether to jettison archaic, unduly burdensome regulations devised during an earlier, generally monopolistic analog era, the important question should be: do consumers have reasonable alternative choices in the marketplace?"

I don't have the engineering and technology credentials of someone like a Shane Robison. But I have observed the changes in technology and communications markets for over thirty years now in various professional capacities, and I have a high degree of confidence in my CNET conclusion that, at this stage of the transformative digital revolution: "Increasing consumer choice depends on robust investment and innovation in new products and services. And robust investment and innovation ultimately depend on government officials appreciating that they should be wary of intervening in today's dynamic, increasingly competitive communications marketplace."

PS--There is a price to be paid, of course, whenever companies and trade associations look to the government to intervene in the marketplace to give them the proverbial "level playing field." And it is this: As quoted in a separate piece in today's Communication's Daily, NAB President David Rehr says the NAB hopes "to make sure that everything we do, everything we say, we say and do with an eye toward the Congress." Perhaps this statement was quoted out of context. But, if not, coming from the head of the association that represents the nation's broadcasters, it is more than a little chilling to think that the association, which ought to be mightily concerned with protecting the First Amendment free speech rights of its members against government interference, is rather more concerned with ensuring that everything that the broadcasters say and do is "with an eye toward Congress."

Thursday, April 12, 2007

Maryland Misses Spending Transparency Opportunity

Here at the Free State Foundation, we were touting the notion of Maryland creating an easily searchable Internet website to track state spending even before Maryland legislators Warren Miller and Alex Mooney introduced a bill to do just that. You can see some of our early writing on the subject and Del. Miller's and Sen. Mooney's "Maryland Funding Accountability and Transparency Act" bill collected here. You would think that in the Internet age this would be pretty much of a no-brainer, unless the majority of our legislators don't want to make it easier to track state spending.

The Examiner newspaper has done a terrific job of covering and editorializing on this issue. In today's Examiner there is a column describing how other states are moving forward to put their spending information on the web. Too bad that Maryland's legislature thinks it is more important to spend time figuring out how to rework the Constitution's electoral college than enacting legislation that would give citizens an effective tool to better understand how their taxpayer dollars.

Well, there's always next year, as they say. And with the looming budget deficit, and talk of tax increases in the air, by all rights there ought to be increased pressure on the legislature, and Governor O'Malley too, to "show us the money"!

Monday, April 09, 2007

Thinking "Siriusly" About Satellite Radio Competition

If you harbor an unshakeable belief that satellite radio service constitutes a separate market for audio entertainment and information, you may also believe—and might try to convince me—that the eggs used in yesterday’s White House egg hunt were left by the Easter Bunny late Saturday night.

But I’m not going to be easily convinced. Indeed, if the National Association of Broadcasters and its terrestrial broadcaster allies are able to persuade the Department of Justice and the FCC to prevent the Sirius/XM merger on the basis that satellite radio constitutes a discrete product market, well then, maybe I’ll become a believer in the Easter Bunny too.

I’ve been reflecting on the proposed merger since it was announced. And at least at this point, the notion that satellite radio constitutes a discrete market for purposes of assessing the merger’s competitive impact seems problematical—and to defy common sense. As UBS put it in a February 20 investment research report: “The combination of an enhanced programming lineup with improved programming lineup with improved technology, distribution and financials will better position satellite radio to compete for consumers’ attention and entertainment dollars against a host of products and services in the highly competitive and rapidly evolving audio entertainment marketplace: including free “over the air” AM and FM radio, iPods, mobile phone streaming, HD Radio, Internet Radio, and next generation wireless technologies.”

Merrill Lynch had this to say on the same day: “The merged company could ultimately deliver greater content choice (more niche channels given greater bandwidth), offer improved technology (radio receivers and traffic/data products), realize cost synergies and help satellite radio remain competitive in the evolving audio entertainment landscape as it competes with terrestrial radio, Internet audio media, HD radio and portable music players.”

Each year the FCC issues a report examining the status of video competition. As the Commission stated in its 2006 report: “The market for the delivery of video programming services is served by a number of operators using a wide range of distribution technologies.” The agency included in its competitive examination cable operators, direct broadcast satellite operators, broadband service providers and other wireline video providers, wireless cable operators, Internet-based video services, and DVDs and videocassettes. It would be difficult to understand why, in assessing competition in the audio market, the full range of distribution technologies similarly would not be considered. More pointedly, the Commission doesn’t ignore DBS satellite television in assessing competition in the video market, and neither do courts reviewing FCC media ownership decisions. Nor should they.

For my own part, I am not sure that the appropriate product market with respect to assessing the competitive impact of the XM/Sirius merger is not somewhat broader than strictly audio entertainment and information. Consider that both cable and DBS “multichannel video programming distributors” offer many different channels of audio only programming. In today’s fast-changing technological and marketplace environment, perhaps the relevant market is the audio and video information and entertainment market.

With my free market-orientation, I confess to being a bit baffled by some of the comments I have read from those who often share my market-orientation. For example, my friend Scott Cleland has a blog entry in which he opposes the Sirius/XM merger as anti-competitive. Cutting through the heated rhetoric, at bottom his objection seems to be that XM and Sirius are operating on government-licensed spectrum. Scott claims “that spectrum grant alone makes satellite radio a separate and distinct market for antitrust purposes.”

This “spectrum alone” contention simply can’t be right. While there may be certain aspects of the spectrum license grant and accompanying conditions that are relevant for assessing competitive impacts, the use of a certain block of frequencies alone cannot be determinative for purposes of defining a relevant product market. Terrestrial radio and television broadcasters use spectrum too. So do DBS operators and wireless cable operators. Even cable and other multichannel video operators often use spectrum, say, cable relay frequencies and satellite earth stations, as part of their network configurations to deliver their audio and video services. The use of different spectrum blocks does not mean that these various forms of media do not compete with each other.

From my free market perspective, what seems crucially important for communications policy is to move beyond classifying and regulating services based on the technology used, or, to the same effect, based on whether a particular slice of the spectrum is used. You can read my views on this point at greater length in my Federal Communications Law Journal article, “Why Stovepipe Regulation No Longer Works: An Essay on the Need for a New Market-Oriented Communications Policy.” What’s important, whether for purposes of assessing the competitive impact of a particular merger or, more often, for purposes of deciding whether it is time to jettison or relax outdated and unduly burdensome technology-based regulations--say, media ownership regulations--is whether consumers have alternatives in the marketplace for the service or application in question.

My interest in the Sirius/XM merger has little or nothing to do with concern about whether either one of the two money-losing companies, or the merged company if the merger is approved, will be around in five or ten years. The same goes for terrestrial broadcasters, Apple’s iPod, mobile streamers, a particular cable or telephone company, and so on. Frankly, the way technologies and consumer tastes evolve so rapidly in today's dynamic environment, I wouldn’t feel comfortable betting $10 on any one or the other of them surviving that long.

My main interest is that consumers continue to benefit from the array of information and entertainment choices that the digital revolution enables. Consumer welfare ultimately depends on continued long-run investment and innovation in the marketplace, with providers seeking competitive advantage by responding to consumer demands. And continued investment and innovation depend on regulators at DOJ and the FCC not taking such a constrained, static view of marketplace competition that they end up maintaining in place or adopting new regulations, or preventing market-driven mergers, which have such investment and innovation-stifling effects.

Maryland Lags on Spending Transparency

As a bastion of "liberal" thinking, Maryland's legislature--presumably with the support of the majority of Maryland's voter's--is certainly a liberal spender of the public's tax money. So much so that Maryland faces a structural budget deficit of over 6 billion dollars in the next five years. Too bad the Democrat-controlled legislature doesn't display such liberality in wanting to allow the taxpayers to easily determine how state funds are being spent.

The Internet, of course, provides a means which would allow such spending information to be made available to the public in an easily retrievable manner and at relatively little cost to the state. That's why it is so disappointing that the "Maryland Funding Accountability and Transparency Act" introduced by Delegate Warren Miller and Senator Alex Mooney and several Republican colleagues went nowhere this legislative session. The Accountability and Transparency bill would require Maryland to establish a "single, searchable website, accessible to the public at no cost," that allows Maryland citizens to easily track state funding of grants, loans, awards, and other forms of limited assistance.

There is an editorial in today's Examiner newspaper that explains why the new database established by OMB is a "giant step forward" in enabling the public to track the federal earmarks that did so much under Republican rule of the Congress to lead to bloated spending. As the Examiner editorial explains, "the OMB Earmarks Database offers details on 13,496 earmarks totaling more than $19 billion that were contained in fiscal year 2005 appropriations."

The Examiner deserves much credit for urging Maryland to adopt legislation along the lines of the Miller-Mooney bill and for spotlighting the legislators' position on this openess issue. See here and here.

If the Bush Administration can get the searchable OMB database up and running fairly quickly to provide some much-needed transparency regarding federal spending, you would think that Maryland's government could do the same. Unless the legislature and the governor really don't want to make it easy to "show me the money." Liberal spending should be accompanied by liberal disclosure.

Thursday, April 05, 2007

Riding the Back of the Net Neutrality Tiger

There was a time when I knew JFK's 1960 Inaugural Address by heart. Well, most of it anyway. In reading the interview in the April 9 edition of Business Week with Goggle's CEO Eric Schmidt, I was reminded of one of JFK's many memorable lines: "In the past, those who foolishly sought power by riding the back of the tiger ended up inside."

President Kennedy was referring to countries, not Google. But Google's market cap of approximately $146 billion (give or take a few billion) now exceeds the annual Gross National Product of more than 70% of the world's countries. Small wonder that the BW article was entitled, "Is Google Too Powerful?"

The tiger I have in mind that Google is riding is net neutrality, of course. In the Eric Schmidt interview, curiously net neutrality didn't come up. But it was on my mind at a couple of points in the Q&A. Schmidt was asked: "As Google passes 50% and rising of search market share, will that dominance change the way Google operates?" Answer: "I'm not sure I agree with the word dominance. Dominance is defined not by majority market share but what you do with it." Now I know that Google preaches, as Schmidt said during the interview, that "we would never try to violate people's trust." But I am wondering why Google is so sure--sure enough, apparently, to seek new laws and regulations--that broadband providers will adopt practices that harm consumers, at the same time that it asks lawmakers, policymakers, and the rest of us to accept that it would never try to violate our trust. And if the important question in Google's mind in assessing market power is "what you do with it," surely broadband Internet consumers to date have not experienced demonstrable harms sounding in net neutrality justifying new, broad anticipatory laws and regulations.

Another Q: " Some people think that Google has not been as transparent as it should be in areas such as click fraud, use of data, and its intentions in various markets....[D]o you think that Google needs to be more open?" A: "There's a real tradeoff between the sort of secret sauce, the special knowledge that Google has, and our business policies. An example would be that a lot of people are very interested in how our data centers work. But we've decided not to talk about that, because we don't see any end-user benefit for knowing how the data centers work and it would simply change the competitive landscape if we did."

Well, it's nice to know that, at least when it comes to its own business policies, Google understands that there are real trade-offs between sharing the "secret sauce" and changing the competitive landscape. In other words, I think Schmidt is saying that if new laws or regulations mandated that Google must be "transparent" and "open," like it is lobbying to have the government mandate openness for broadband providers, its own competitive position might suffer. So Schmidt would prefer not have the government mandate such transparency for Google's data centers or otherwise.

Now, I happen to believe that even with Google's position as the dominant search engine, there is no present need for new government mandates to regulate its business practices at its data centers or otherwise. Trust me. This is not because Google says that ""we would never try to violate people's trust." It is because I think, especially in light of the technological dynamism in Google's market, and in light of the existing competition, and the potential competition, consumers will be protected adequately without the tangible and intangible costs imposed by new regulations that likely would chill innovation and investment. And I think the same is true in the broadband Internet market.

I just wish, in pursuing its net neutrality lobbying strategy, Google would remember JFK's admonition: "In the past, those who foolishly sought power by riding the back of the tiger ended up inside."

Tuesday, April 03, 2007

Markey's Timely Universal Service Reminder

The FCC recently announced that the surcharge on interstate communications services to support universal service programs has reached an all-time high of 11.7%. This additional tax on communications ain't peanuts, and, regardless of your views on smoking, taxing communications has very different economic and societal impacts than taxing cigarettes.

On April 2, Ed Markey, Chairman of the House Telecom Subcommittee sent a letter to FCC Chairman Kevin Martin asking a series of questions concerning universal service policy. To my mind, on the whole, Markey's questions are pertinent and important ones. You can read Chairman Markey's entire letter here.

But apart from the individual questions, some of Chairman Markey's prefatory comments are particularly worth noting, and encouraging, if they can be fairly taken as an indication of an inclination for trying to achieve meaningful reform of the bloated--and still "bloating" as I write--univeral service regime. Referring to the 1996 Telecommunications Act, Markey said: "Congress anticipated that competition would promote consumer welfare, even in many high cost areas where universal service support was needed to keep rates affordable, by lowering the cost of universal service as providers competed for the universal service subsidy. Further, advances in technology were expected to make networks deliver supported services more efficiently, not in a more costly manner."

What is also especially noteworthy about Markey's letter is his citation to the 1996 Act's congressional reports as support for the above propositions. From House Report No. 104-204 (I): "Over time, [the Congressional Budget Office] expects the operating costs of telephone companies would tend to fall as a result of competitive pressures and the total amount of subsidies necessary would decline." From Senate Report No. 104-23: "[C]ompetition and new technologies will greatly reduce the actual cost of providing universal service over time, thus reducing or eliminating the need for universal service support mechanisms as actual costs drop to a level that is at or below the affordable rate for such service in an area." [The emphasis is all mine.]

Universal service subsidies have done nothing but balloon since the program's inception, leading to today's 11.7% USF tax. I am sure that Chairman Markey and I probably differ concerning how, how much, and how fast we would reform the program. But his USF letter indicates that he may be inclined to push for meaningful reform to reduce the size of the USF subsidies. If so, he should be commended. And by recalling the legislative history acompanying the 1996 Act, Markey has reminded us that Congress understood then that new competition and new technologies--which certainly rapidly proliferated since 1996--should have let to a decline in subsidies, not ever increasing ones.