Tuesday, December 29, 2009

New Year's 2010

We are all familiar with that snippet from Charles Dickens' A Tale of Two Cities that "it was the best of times, it was the worst of times." But we may forget the entire sentence which so beautifully captures the duality that many of us probably feel as we ring out this year and usher in the new decade:

"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only."

Certainly, there are reasons to be worried about America's future. They range from the ongoing serious threats posed by radical Islamic terrorism, which can't be wished away by politically correct changes in the use of the English language, to a rapidly escalating debt burden piled on future generations by politicians bent on expanding the size and scope of government programs. Of course, the growing measurable deficits are only the tangible manifestation of fiscal irresponsibility. The intangible manifestation is the immeasurable, but nevertheless real, sense of diminished individual responsibility and freedom that inevitably accompanies indiscriminate, overly profligate government handouts or entitlements. This is not to say the government has no role in helping those truly in need who cannot help themselves. But lines must be drawn that are consistent with proper ends the government legitimately ought to pursue as well as proper means of such pursuit.

Yet there are reasons to be hopeful too. Foremost, there is a certain indomitable spirit ingrained in the American people, writ large, that is enterprise-minded and law-respecting. This "can-do-minded" spirit impels an understanding and appreciation, intuited if not always articulated, that there are lines not to be crossed regarding the extent to which government seeks greater control over our lives, even when it does so in the name of sustaining us. These are the lines that have everything to do with proper ends and means.

Another reason to be hopeful is that America is fortunate –- blessed, really -– to have had a Founding generation, with all its manifest human foibles, possessed of sufficient wisdom and practical experience regarding human nature to bequeath a form of constitutional republican government that has endured for more than two hundred years. Our Constitution, which establishes a government of enumerated and limited powers, along with our Bill of Rights, is the foundation upon which our individual liberty ultimately rests.

As we enter 2010, I know that the Free State Foundation's mission to promote free market, limited government, and rule of law principles is as important, if not more important, than ever before. As I do each year at this time as I contemplate the road ahead for FSF, I have reflected again on the wisdom of our Founders -- they who lived, in Dickens' words, through the "winter of despair" and "spring of hope."

With a sense of renewal, I have in mind now what Alexander Hamilton wrote in Federalist No. 31: "In disquisitions of every kind there are certain primary truths, or first principles, upon which all subsequent reasoning must depend." In all of our work during the year ahead, I pledge the Free State Foundation will strive to keep the "primary truths" and the "first principles" uppermost in mind. For if they are not uppermost in mind, then all the "subsequent reasoning" is likely to be for naught in terms of formulating and advocating good policy for the American people.

On behalf of all of us at the Free State Foundation, I am grateful for your friendship and for your past support. I welcome your support going forward, and I wish you the very best for 2010.

Sunday, December 20, 2009

Getting the Message on Text Messaging Prices

Text messaging is a booming wireless service. As the Federal Communications Commission's (FCC) reported earlier this year, "[t]he monthly volume of text messaging traffic grew to 48.1 billion messages during December 2008, up from 18.7 billion messages during December 2006, 9.8 billion messages during December 2005 and 4.7 billion messages during December 2006." CTIA's semi-annual survey from earlier this year indicates that text messaging traffic surged 1,200% from 2005-2008, with an astonishing 1 trillion text messages sent and received just in 2008. But just as text messaging has increasingly gained the interest of consumers, it has increasingly gained the attention of public officials and others eager to intervene in marketplace. In the last year, marketplace interventionists have set their sights on resetting text messaging prices.

In Re Text Messaging Antitrust Litigation should serve as a wake-up call for the text messaging marketplace interventionists. Just this month a federal trial judge tossed out this class-action lawsuit concerning text messaging prices, thankfully averting what otherwise could have become a momentous feat of regulation by litigation. The nationwide class-action suit was brought in federal court in Illinois on behalf of all consumers who purchased text messaging services on a fee-per-message basis from all four major U.S. wireless companies from the beginning of 2005 to the present. Plaintiffs' lawyers alleged that Sprint-Nextel, AT&T, Verizon Wireless & T-Mobile conspired to raise and fix text messaging prices for consumers who purchased text messaging services on a per-message basis. (Recent Congressional hearings have addressed the same kinds of claims.) The primary factual allegation of non-competitive behavior is their allegation of parallel pricing" by tacit agreement whereby one carrier would raise per-message prices followed by the other carriers also raising their respective prices several months later. Plaintiffs' lawyers even included in their complaint U.S. Senate Antitrust Subcommittee Chairman Herb Kohl's letter to the carriers in September of last year inquiring into their price increases for per-message purchases. (Sen. Kohl has also sent letters to the FCC and Antitrust Division of the Department of Justice, urging investigation of text messaging pricing.)

The case was dismissed for the failure of plaintiffs' lawyers to allege facts sufficient to state a claim under Section 1 of the Sherman Antitrust Act. Horizontal price-fixing is per se illegal under antitrust law, but here the judge found nothing but empty labels that never rose to the level of plausibility. What's more, the judge's ruling contains some commonsense wisdom that our public officials should keep in mind when it comes to prices for text messaging.

As Judge Matthew F. Kennelly's ruling recognized, consumers may purchase text messaging services either on a per-message basis or through a bundled plain. Bundled plans can include either set allotments of text messages or unlimited amounts. Moreover, since 2005, wireless carriers' "prices for other wireless services, such as voice calling and data transmission, decreased." (The FCC report mentioned earlier states that wireless revenue per minute "declined by one cent from $0.07 in 2006 to $0.06 in 2007, continuing the price trend since 1994.") But the plaintiffs’ lawyers' claims were directed solely at per-message prices for text messaging, not at bundled plan prices or at any of the other available wireless services. The judge's concluding words nicely sum up the situation:

In the wireless communications industry, price competition is fierce for voice calling, data services, and bundled plans. Most consumers purchase test messaging services on a bundled or unlimited basis. [Wireless carriers] charge consumers steep penalties for early termination of service contracts. Given these factors, parallel pricing in this single, relatively narrow part of the field in which they compete does not support a reasonable inference of an agreement not to compete.

In rejecting the price fixing claims, the judge pointed to the more likely explanation of events:

[A]s text messaging became more popular, [wireless carriers] sought to encourage consumers to purchase text messaging services as part of a bundled plan. ... By increasing the per-message price for text messages and encouraging subscribers to increase their usage of text messages through initiatives like the development of CSCs, providers could create an incentive for subscribers to purchase bundled plans to avoid the wildly varied (and sometimes wildly expensive) bills that could result from per-message pricing.

Businesses, non-profit organizations and advertisers use Common Short Codes (CSCs) as a tool for information campaigns and to keep their constituencies and customers up to date on any variety of subjects. But the number of messages sent to and received by wireless subscribers to CSCs becomes financially unfeasible when subscribers partake of per-message pricing. Since wireless carriers generate ad revenue from CSCs, they have every incentive to encourage customers to enroll in bundled text messaging plans.

Unfortunately, some critics of text messaging prices seem to ignore the fact that text messaging operates through advanced wireless networks that are expensive to build, maintain, upgrade, and expand. CTIA’s semi-annual survey, for instances, asserts that wireless capital expenditures totaled $217 billion from 1998-2008. Carriers reported an average combined investment of $22.8 billion per year from 2001-2008 to upgrade their networks. Just because the marginal cost of transmitting a text message through a wireless carriers' network may be a miniscule fraction of a $0.20 cent per-message price doesn't mean the wireless carriers aren't in need of recovering the cost of these extraordinary capital expenditures. Answering these same kinds of short-sighted complaints about text messaging prices, the judge wrote:

Even if the Court assumes, as plaintiffs allege, that [wireless carriers'] pricing for individual text messages resulted in revenues that were "several thousand times what it actually costs" to transmit a text message… plaintiffs have "done nothing more than assert that profits were extraordinary... not… that they were beyond those afforded by a competitive market."… Where, as here, the fixed costs associated with an industry are high… self-interested producers might attempt to charge higher than marginal cost prices for their products in order to recover some of their fixed costs.

Skyrocketing volumes of text messaging traffic strongly suggests that the free marketplace is matching supply with demand. The 1 trillion text messages sent last year alone speak to the apparent success of wireless carriers finding price points that consumers find agreeable. Calls for investigations and regulations of text messaging prices are particularly shortsighted when text messaging is taken in isolation. Wireless voice and data services have decreased in recent years and there are benefits to bundled offerings of text messaging with other such services. Marketplace interventionists who dislike current text messaging prices and demand change have a heavy burden to explain why their conjectural price preferences are better than consumers' actual price preferences.

Saturday, December 19, 2009

Fix Maryland's SAP ("Spending Affordability Process")

The Maryland General Assembly's "Spending Affordability Committee" has just issued its annual report that supposedly tells Maryland's legislators what the cap on the state's spending should be for the coming fiscal year. In this case, according to the Gazette's report, the SAC recommended zero growth for the state's operating growth for fiscal 2011. This uncharacteristic spending restraint is projected to cut in half a $2 billion budget deficit.

Of course, the projected budget deficit should impel Maryland's governor and legislators to find further spending reductions. And, before – wrongly -- getting giddy over the SAC's recommendation of seeming fiscal restraint, please have in mind that, as a Free State Foundation study put it last year: "The spending affordability process is broken and should be abandoned. Instead of ensuring fiscal responsibility, it facilitates fiscal irresponsibility."

The Free State Foundation paper, entitled, "Structural Solutions for Maryland's Structural Deficit: Pathways to Reform," explains many reasons why the spending affordability process is broken. Here is a pertinent excerpt:

"Another problematic aspect of spending affordability is that the spending

limit is an aggregate limit on general and some special funds. This combination

prevents legislators or citizens from comparing estimated State general fund

revenues to "affordable" general fund appropriations. If such a comparison could

be made, the imbalance between revenues and expenditures would be clear.

The spending affordability process is vague and malleable and, thus, easily

manipulated. The General Assembly reduces special fund appropriations but

authorizes an increase in the appropriation (and thus spending) during the fiscal

year through the use of budget amendments. The General Assembly also reduces

general funds and authorizes the use of special funds in lieu of the general funds

through budget amendments."

The FSF study not only explains why the "spending affordability process" is broken and facilitates fiscal irresponsibility. It contains nine recommendations for changes in Maryland's budget process that, if implemented, actually would help achieve fiscal responsibility. Read the entire study here.

Thursday, December 17, 2009

Reform Universal Service Now: Two New Data Points

Universal Service Fund (USF) reform has returned to the foreground in recent weeks. Among other things, the National Cable & Telecommunications Association filed a petition for rulemaking that seeks to reduce universal service subsidies in geographic areas experiencing facilities-based competition that is not subsidized. The Federal Communications Commission (FCC) staff's policy framework on the National Broadband Plan suggests USF reform will be a critical component of the Plan. The FCC also issued a Further Notice of Proposed Rulemaking on interim reforms for the High Cost Fund for non-rural telecommunications carriers. And the U.S. Court of Appeals for the District of Columbia Circuit upheld the FCC's "interim, emergency cap" on the High Cost Fund for competitive eligible telecommunications carriers.

All this activity should be understood in the context of two new USF "data points" – perhaps the most important data points for factoring into the FCC's data-driven gristmill. First, the telephone subscribership penetration rate in the U.S. reached 95.7 percent in July 2009. This amounted to a .3 percentage point increase from a year prior, and it’s the highest rate since such data collection begun some 26 years ago. Second, the FCC announced that the proposed universal service contribution factor for first quarter, 2010 will be 14.1 percent. This means that beginning in the first quarter of next year telecommunications providers will add a "universal service fee" line item of 14.1 percent to each interstate and international call made by their customers. This 14.1 percent tax on phone calls is an increase from the 12.3 percent that prevailed for the fourth quarter of 2009.

Taken together, these two data points present a USF paradox: On the one hand, overall telephone subscribership has reached its highest penetration level ever; but on the other hand, at the same time, the universal service tax has reached its highest level ever – and approaching triple the 5 percent USF tax that was in place in 2000. Or, one might instead call it internal incoherency. But however it might be characterized, the juxtaposition between an all-time high level of subscribership and an increasing contribution factor highlights the continuing need for USF reform.

Earlier this fall, at the Free State Foundation's book release event for New Directions in Communications Policy, Professor John W. Mayo of Georgetown University's McDonough School of Business pointed to the consistent mid-90s telephone subscriber rate and suggested we should declare victory on universal service and turn attention to broadband. Among the economic principles outlined Prof. Mayo's book chapter on USF reform in New Directions: "make subsidies explicit and transparent" and "target subsidies to those in need of subsidies." In particular, Prof. Mayo pointed to the low income programs of LifeLine and LinkUp as preferred explicit and targeted approaches toward universal broadband service.

Former FCC Commissioner and FSF Distinguished Adjunct Senior Fellow Deborah Taylor Tate was even more specific in advocating this approach in "FCC Must Make Broadband Access Universal", an FSF Perspectives piece from this summer:

[T]here are tools available to the FCC to increase broadband adoption which the FCC can utilize immediately, specifically the Lifeline and Linkup federal subsidy programs which provide discounts on initial home telephone installation fees as well as for monthly service charges. These discounts are available for qualified low-income subscribers who meet stringent income eligibility criteria. There are already strict audit controls in place.

The Lifeline/Linkup programs, which thus far have been somewhat underutilized, could be expanded to provide discounts for installation and monthly charges for today's broadband services just as they have for old-fashioned telephone services. In addition to helping the urban poor who can't afford broadband, this expansion would help low- income persons in remote areas.
Targeting subsidies in an explicit and focused manner to promote the universal broadband service objective would result in a much more economically efficient and cost-effective regime than the existing wasteful USF regime. And that's the point. Rather than superimpose the unsustainable USF regime designed for telephone onto broadband, the hoped-for universal service transition from telephone to broadband must take a different course. (FSF President Randolph May has detailed additional needed reforms in his prior Perspectives piece, "Put Universal Service Reform Near Top of FCC’s Agenda." And the NCTA petition's detailed analysis showing the extent of USF subsidies paid to carriers in areas where unsubsidized competition already exists represents a way forward.)

The FCC's recent FNPR on universal service support for non-rural carriers admittedly kicks the can down the road on comprehensive USF reform. But the two data points indicating an all-time highs in telephone subscribership and the USF tax speak to the need for meaningful reform, and soon. Perhaps the National Broadband Plan, coupled with the new data points, will be the breakpoint for reforming universal service.

Wednesday, December 16, 2009

Secrecy in Annapolis

The Washington Post has a good editorial this morning urging Maryland legislators to post online how members voted in committee. Because this is not done now, it is often difficult to find out how your representative votes in committee. As the Post points out, while floor votes are available online, it is often in committee where the important, and legislatively determinative, work is done. While the Post reports House Speaker Michael E. Busch as saying he's not convinced a change is necessary, this should be a no-brainer. Putting public committee votes online can be done at very little incremental cost, and there is no reason not to implement this move towards greater transparency and accountability early in the next legislative session.

And for greater transparency and accountability, there is much more that could be done, especially in areas in which more fiscal discipline is likely to result from increased transparency. For example, see the Free State Foundation Perspectives paper, "Structural Solutions for Maryland's Structural Deficits," authored by former Maryland Secretary of the Office of Budget and Management, concerning the state's byzantine "spending affordability process." The paper contains several specific recommendations for making the spending affordability process, which, in theory, is intended to limit the growth in state spending, more transparent. Included among them are measures to put information concerning the annual spending affordably process on the Internet on a timely basis and to give sufficient advance public notice of the meetings of the spending affordability committee.

There is no excuse for not putting legislators' committee votes quickly online. And, in today's digital age, there is no reason not to take many more steps that would increase transparency – and, therefore, accountability – in Annapolis.

Friday, December 11, 2009

What 'Free Enterprise Fund' Means for the FCC

Whenever the U.S. Supreme Court takes up a case involving constitutional limits on the powers of an independent federal agency, the implications should logically extend to every independent federal agency. A number of independent federal agencies are built on the Federal Trade Commission model, whereby the agency is run by commissioners who are nominated by the President and confirmed by the Senate but who are not removable from office except “for-cause.” Both the Federal Communications Commission (FCC) and the Securities & Exchange Commission (SEC) fit this model.

A case about constitutional limits on independent federal agency power involving the SEC was argued before the Supreme Court this week. Throughout arguments in Free Enterprise Fund v. Public Company Accounting Oversight Board, the FCC was mentioned by name a few times by the Justices and lawyers. Could this case hold any near-term significance for the FCC? Although the ultimate answer depends on how the Supreme Court rules in the case next year, the case won’t likely have any direct impact on current FCC operations. However, to the extent the Supreme Court’s decision elaborates any constitutional rule about independent federal agencies and Presidential power, such a rule would constrain any future Congressional reorganization or reform of any and all independent federal agencies—including the FCC.

Free Enterprise Fund presents the Supreme Court with questions about the constitutionality of the Public Company Accounting Oversight Board (“PCAOB” or “the Board”). Created as part of the Sarbanes-Oxley Act of 2002, the Board’s powers include the collection of information of certain public financial accounting entities, the undertaking of investigations, and the assessments of fees. The Board’s members are appointed by the SEC but not removable by the SEC except for-cause. Since the SEC Commissioners themselves are independent of Presidential control and can be removed from office only for-cause, SarbOx creates a situation that Chief Justice John Roberts referred to this week as “for-cause squared”. That is, independent commissioners not removable from office except for-cause are empowered to appoint Board members who assume regulatory powers but who, in turn, cannot be removed office except for-cause. Free Enterprise Fund poses separation-of-powers questions about whether the makeup of the Board—including the “for-cause squared” barrier—unconstitutionally restricts Presidential authority over control and removal of executive officers.

A reading of the transcript of the arguments conducted at the Supreme Court this week leave the constitutional fate of the Board an open question. The back-and-forth between the lawyers and Justices on independent federal agencies, accountability, and Presidential power provide for a lengthy but intriguing discussion. Last spring’s ruling by the Supreme Court in FCC v. Fox Stations, Inc. (2009) included a spar between Justices Antonin Scalia and John Paul Stevens over the nature of the FCC in relation to the political branches, with Justice Scalia insisting that “[t]here is no reason to magnify the separation-of-powers dilemma posed by the Headless Fourth Branch.” If this week’s argument in Free Enterprise Fund is any indication, next spring’s ruling in the case could provide some kind of sequel installment to the Justices’ ongoing disputes concerning federal independent agencies and the separation-of-powers.

Indeed, “[t]his latest chapter involving the Public Company Accounting Oversight Board is the most important separation-of-powers case regarding the President’s appointment and removal powers to reach the courts in the last 20 years.” So wrote Judge Brett Kavanaugh of the U.S. Court of Appeals for the District of Columbia last year. A divided panel of the D.C. Circuit previously ruled in favor of the Board’s constitutionality, 2-1. But Judge Brett Kavanaugh’s thorough dissenting opinion explains why even a ruling by the Supreme Court that the Board’s structure is unconstitutional in Free Enterprise Fund would likely be limited in its direct impact:

[F]inding the PCAOB unconstitutional would not itself call into question the many other independent agencies that dot Washington, D.C. The heads of those agencies are appointed by and removable for cause by the President, the precise structure that Humphrey’s Executor upheld and that is conspicuously missing form the PCAOB statute. In other words, the PCAOB is uniquely structured, and a judicial holding invaliding it would be uniquely limited to the PCAOB.

The FCC doesn’t have anything like the Board at issue in Free Enterprise Fund. That is, the FCC has no equivalent Board of members who are appointed by FCC Commissioners to carry out regulatory functions but who are otherwise not removable by the Commissioners except for-cause. A ruling of unconstitutionality in Free Enterprise Fund would not have any direct application for the FCC, and therefore cause no institutional disruption at the FCC.

However, should the Supreme Court rule in Free Enterprise Fund that “for-cause squared” at the “Headless Fourth Branch” of the SEC is unconstitutional, it would mean that any future Congressional reorganization or reform of independent federal agencies such as the FCC would be constrained by the Court’s new precedent. For instance, should the Supreme Court issue such a ruling, it would prohibit future (and purely hypothetical) Congressional legislation creating an FCC-appointed Media Diversity Board or Network Neutrality Board of members who are given regulatory powers and removable only for-cause. Rather, under such a ruling the constitutionally permissible alternatives would most likely include: appointment of Board members by the President with advice and consent of the Senate or placement of such any such Board entirely within an existing federal independent agency and subjecting Board members to at-will removal by the agency.

In sum, regardless of which way the Supreme Court’s rules in Free Enterprise Fund, the ruling will be limited to the PCAOB and the FCC won’t be directly impacted by the Court’s decision. The Justices’ written opinions in the case might include some insightful exchanges on the constitutional relationship between independent federal agencies and the political branches. But any constitutional limit on independent federal agency power set by the Supreme Court in its ruling would constrain future attempts by Congress to establish or reform independent federal agencies such as the FCC.

Thursday, December 10, 2009

Fairly Disclosing ETFs vs. Price Regulating ETFs

The competitive free market is the best price-setting mechanism for wireless device and service contracts that include early termination fees (ETFs). So I maintained in my recent FSF Perspectives piece, “Let Competition and Choice Check Wireless ETFs.” In the dynamic wireless marketplace, the case for pricing freedom for wireless carriers and competitive choice for consumers is especially strong. Currently, all major wireless carriers make subsidized wireless device and service contract ETFs optional for consumers, with fee amounts pro-rated to some degree or other over the life of the contract. ETFs therefore present consumers with an added price option that makes wireless devices and services more affordable.

Arguments for marketplace regulation are often made in one or more of three circumstances. These include: (1) where transactions between producers and consumers impose external costs on third parties; (2) where monopolization or lack of existing or potential competition unduly limit consumer choices; and/or (3) where informational asymmetry exists between producers and consumers concerning technical or complex knowledge about a product or service.

To the best of my knowledge, no ETF-critics suggest that such fees impose any sort of spillover costs on non-parties to wireless device and service contracts that feature ETFs. And as I point to in my FSF Perspectives piece, several studies and analyses—including one by the FCC from earlier this year—reveal a dynamic wireless marketplace. Contrary to claims that wireless ETFs are anticompetitive (also addressed in my FSF Perspectives piece), existing marketplace competition tips overwhelmingly against regulation and in favor of pricing freedom and competitive choice.

It’s also a long shot to peg ETFs as presenting any kind of information asymmetries. By nature, ETFs are usually simple terms of service and not especially difficult to understand, they don’t (or shouldn’t) typically necessitate consumers to undertake any extraneous efforts to gather information about them in order to accurately appraise them. Nor must consumers necessarily possess prior or subsequent experience with ETFs in order to be able to make an informed choice about a wireless carrier’s ETF terms.

To date ETFs have primarily presented issues of fair disclosure and informed consent. Those issues have been raised in a string of class-action lawsuits against wireless carriers, many of which have resulted in large settlements. Contract law typically requires a meeting of the minds on terms of agreement for terms to be legally enforceable. And consumer protection laws prohibit unfair and deceptive trade practices. Accordingly, wireless carriers must make ETF options and terms clear and understandable to consumers, or face additional class-action suits and lose customers to marketplace rivals.

In late August, the FCC posed a number of questions about point-of-sale disclosures about ETFs in its Notice of Inquiry for Consumer Information and Disclosure and Truth-in-Billing and Billing Format & IP-Enabled Services. The key paragraph (#31) in the FCC’s NOI asks questions relating to the adequacy of point-of-sale disclosure, such as:

Do consumers receive sufficient information to understand, prior to subscribing to a service, the full range of potential costs and fees associated with that service? Are disclosures that are currently being provided useful and easy to understand? For example, are early termination fees being clearly disclosed including whether and how such fees are prorated? Do consumers understand how such fees will be prorated if they terminate service before the end of the contract? What point-of-sale disclosures are most important for wireless data plans, now growing in popularity with the use of smart phones and netbooks? Should wireless providers be required to disclose the cost of any “free” or “discounted” handset or other end-user device, such as a netbook that is recovered through monthly service payments made by the subscriber?

Now these NOI questions raise some threshold jurisdictional questions about whether the FCC rather than the Federal Trade Commission (FTC) should be inquiring about consumer protection and point-of-sale disclosures about smartphones and (especially) netbooks. Regardless, in its survey of the ETF landscape the FCC should take into account the role of existing consumer protection laws that have been on display in recent ETF class-action lawsuits. Existing statutes and case precedents arising under such statutes already provide a mechanism for creating customary common law of ETFs. Another factor to keep in mind is the disciplining effects of marketplace competition in keeping wireless carriers open and honest in their dealings with consumers.

Significantly, however, the FCC Wireless Bureau’s recent letter to Verizon Wireless about its recent ETF increase for one of its new smartphone offerings poses questions going beyond disclosure to consumers. The Wireless Bureau’s letter extends its inquiry to ETF rates and smartphone prices. In particular, the Wireless Bureau’s letter ask about the “rationale” for ETF increases, “cost differentials” for what advanced wireless devices cost the carrier “over what it charges its consumers,” and the dynamics or role of advanced wireless device wholesale prices charged by manufacturers.

As I relate in my FSF Perspectives piece, “[t]o the extent that an ETF might exceed the supposed value of the wireless device or service, at that point the ETF is simply a more expensive price option. ETFs are essentially a price component of cell phones and wireless devices.” Because consumer preferences differ and market supply and demand is in continuous flux, no absolute value for a product or service exists. In such circumstances—and especially in a dynamic marketplace devoid of monopoly—the marketplace itself should set the value and price. The wireless marketplace is characterized by such dynamism, giving consumers a lot of device and service choices. This makes the imposition of price controls through ETF regulations an unnecessary restriction. It would be disturbing – and ill-advised -- if the FCC’s price questioning is intended to foreshadow price regulating.

Wednesday, December 09, 2009

Google's Discriminating Goggles

Did you see the December 8 Wall Street Journal article about Google's new search engine products? One of the Web giant's new products, called Google Goggles, caught my eye because it appears to be another example of a discriminatory (read: non-neutral) Google Internet offering.

Recall the minor Googlegate that erupted in October when it was revealed that Google's Internet telephone service, Google Voice, discriminated against certain high-cost rural locations by refusing to deliver traffic to those locations. The FCC ultimately sent Google a series of questions inquiring about the nature of its phone service and the justification for the discrimination. You can read about this controversy in my earlier post, Google: Phone Giant or Internet Giant?

Now, according to the December 8 WSJ article, one of the new services the dominant search engine is banking on is Google Goggles, which allows Google users to pull up information about a landmark or a product by taking a picture from a cellphone instead of typing in a query. The WSJ reports that the "service is only available currently for cellphones running versions of Google's Android software." In other words, if you want to use this cool new Internet service, you can't do so with your iPhone or other phones with non-Google operating systems. Or, in still other words sounding in FCC-speak, Google Goggles is offered on a discriminatory basis that favors devices using Google's operating system in a way that violate net neutrality principles.

Now I understand that Google's position will be that this has little to do with net neutrality because the Goggles offering is an "information" rather than a "telecommunications" service, or an "edge" service rather than one at the "core" of the network. But as I explained in Google: Phone Giant or Internet Giant?, this twenty-year old regulatory distinction is increasingly difficult, if not impossible, to maintain in today's digital age, at least not without imposing substantial consumer welfare costs that outweigh any consumer benefits. Under a net neutrality rule that prohibits discrimination, there will be constant, never-ending litigation concerning the not-so-bright line to be drawn between services at the core and at the edge of the Internet. Apart from the direct litigation costs, the intangible costs imposed by the uncertainty of not knowing what the regulators ultimately will do are likely to be great. Investment and innovation do not thrive in the face of such regulatory uncertainty and instability.

It may be that Google, exercising its increasing and highly visible political muscle, will itself be able to wriggle out from under the neutrality strictures. Indeed, the FCC's net neutrality rulemaking proposal appears going in to exempt "application" providers from the neutrality mandates, while focusing solely on Internet service providers.

I almost wrote next: "Well, more power to Google" for, thus far, avoiding FCC regulation. But in light of Google's dominant position in the web search and adjacent markets, and the way it is exercising its political muscle pushing for neutrality mandates that would entrench its own business models, I don't really want to wish "more power to Google." What I wish is that Google would realize that the "government-as-enforcer-of-Internet-neutrality-game" is a dangerous one, even for itself. Because once the government starts regulating any part of the Internet ecosystem, the necessarily blurry regulatory lines among Internet participants can be used as a sword turned any which way.

Having said all this, please do not mistake my bottom line, which I have stated in this space many times: I do not advocate subjecting Google to the FCC's outstretched regulatory arms, even though Google is doing everything it can to ensure that Internet service providers' freedom to innovate and develop new business models is constrained – or neutered, if you will. And my position would be the same even if the FCC were to decide – wrongly – to impose net neutrality regulations on ISPs.

I prefer to stand, consistently, on the fundamental principle that in today's competitive and technologically dynamic broadband Internet environment, neither Google, no matter its increasing Web dominance, nor the ISPs, should be regulated by the FCC in a fashion akin to last century's telephone common carriers, which was the same as the 19th Century's railroads.

Tuesday, December 01, 2009

An A+ for Careful Targeting

The announcement by the National Cable & Telecommunications Association that is initiating what it calls its "Adoption Plus (A+)" program to increase digital literacy and broadband adoption for millions of low-income middle school students is welcome news. The two-year A+ pilot program combines digital literacy training with discounted home computers and discounted broadband service for qualifying low-income households. The details of the program are here in the NCTA press release.

The pilot program is called a public-private partnership because the federal government may choose to provide additional subsidies (presumably with already appropriated federal stimulus funds) for further discounts off of the price of the computers and school districts will be involved in implementing the digital literacy training. The federal government is also going to assess the effectiveness of the pilot program. NCTA says the value of the discounted broadband services provided by its participating member cable operators could reach $572 million over two years, depending on the extent of the low-income household participation.

It is always possible that the execution won't match the announcement's promise, at least in full. Nevertheless, NCTA should be commended for devising a carefully targeted program likely to have a positive impact. The focus on low-income households without computers targets assistance to a demographic group that lags in broadband adoption.

(The NCTA press release states the proposal is the product of discussions with FCC Chairman Julius Genachowski and Omnibus Broadband Initiative Executive Director Blair Levin, and that it was developed with their "encouragement." Assuming, as I do without any indications to the contrary, that the "encouragement" to which NCTA refers did not cross the line and become coercive – always a legitimate concern when a regulator encourages a regulated party to undertake a voluntary action – then these FCC officials deserve credit too.)

There is a lesson in design here too for the FCC. As my colleague Deborah Tate, FSF's Distinguished Adjunct Senior Fellow, proposed in August in a commentary piece, "the Lifeline/Linkup programs, which thus far have been somewhat underutilized, could be expanded to provide discounts for installation and monthly charges for today's broadband services just as they have for old-fashioned telephone services." In other words, the way to address universal service is by careful targeting of subsidies, not by making available broad subsidies in an unfocused manner that necessarily is wasteful of scarce resources.

The fact of the matter, as I have written many, many times in this space over the last several years, is that the FCC has been derelict in its responsibilities by not having done more to reform the broken universal service regime. With the universal service tax on every interstate and international telephone call reportedly set to jump from 12% to 14% in the first quarter of next year, it is imperative that the FCC – and Congress for that matter – face up to the responsibility to reform a system designed for a bygone era. The already bloated existing regime should not be expanded in an unfocused manner generally to include broadband services. Rather, as former Commissioner Tate has suggested, the FCC should alter the Lifeline/Linkup programs to allow subsidies for qualified low income households.

Cable's A+ pilot program, with its careful targeting of private resources, provides a good template for the way any complementary federal subsidy programs should be designed.