Friday, December 24, 2010

Costco Connection - Net Neutrality Debate


For those of you who still get Time magazine, or whatever, instead of the Costco Connection, which I am told reaches 6 million Costco members, here is a link to a debate between Public Knowledge’s Art Brodsky and myself, on the topic, “Should Internet openness be ensured by regulation.

Costco Connection - January 2011 - Page 22-23

Guess which side at took.

You can even vote yea or nea to Internet regulation.

Anyway, when you are through with this month’s Costco Connection, you can send me this page for my scrapbook.

Monday, December 20, 2010

Internet Regulation - "When Hell Freezes Over"

The FCC is poised to take a significant step tomorrow to regulate Internet providers. When it does, its action will say a lot about what's wrong with an agency that was created in 1934 to regulate telephone and telegraph monopolies.

I always held out hope that, "until hell freezes over," the FCC really wouldn't take this unnecessary step to regulate the Internet. I guess the fact that the temperature here in Washington has not been much above freezing for about two weeks now is not a good sign.

The nub of the problem with the FCC's action can be neatly summed up this way: The Commission is acting on dubious legal authority, in the face of widespread, bipartisan opposition, to adopt a new Internet regulatory regime to "fix" a problem that doesn't exist. There you have it.

Indeed, at least up to now, the FCC itself hasn't argued that there is any market failure or consumer harm resulting from the absence of net neutrality mandates. Rather, it has, from the beginning, casts its regulatory initiative as an effort to "preserve" and "maintain" the openness that exists on the Internet.

In my view, the most harmful aspect of the new rules is likely to be the prohibition on "unreasonable discrimination." This is the same prohibition at the core of the Title II common carrier provisions in the Communications Act of 1934 directed to regulating telephone and telegraph monopolies. Remember Western Union and the "Bell System"?

The harmfulness of the anti-discrimination provision may be mitigated to the extent it is qualified and somehow limited in the Commission's order, say, by the agency explicitly affirming that paid prioritization is not generally to be considered unreasonably discriminatory. This should be done.

By the same token, the new rules will be more or less harmful to the extent that they make clear that the anti-discrimination and other neutrality mandates do not apply to wireless Internet providers.

And the most significant way in which the likely harm resulting from the FCC's order could be mitigated would be if the Commission's rules are written to require a showing of market power by the Internet provider and consumer harm resulting from the provider's practices as prerequisites to any finding of discrimination. In other words, absent a showing of market power and consumer harm, the actions of Internet providers would be deemed presumptively reasonable. In this way, the Commission would at least, in some fashion, acknowledge that it appreciates the difference between the competitive, dynamic marketplace that exists in today's digital environment and the monopolistic marketplace that prevailed at the time the '34 Act was adopted.

In a macro sense, the Commission's action tomorrow – if the agency does go through with it – will simply confirm its central failing as we now move into the second decade of the twenty-first century. It is this: Rather than devoting its resources to reducing or eliminating analog-age legacy regulations, or reforming analog-age regimes such as universal service, or command-and-control spectrum management policies, or delay-prone, unseemly "regulation-by-condition" merger review policies , the Commission's mindset is still grounded in extending regulation into new areas where there is no market failure.

I don't want to give up hope or my willingness to be surprised. But, frankly, it is unlikely the Commission's prevailing mindset will change meaningfully and materially until Congress adopts a new regulatory framework for communications along the lines of the Senator DeMint's Freedom for Consumer Choice Act, introduced this session, which is based on the Digital Age Communications Act he presciently introduced in 2005.

Wednesday, December 15, 2010

FCC Needs Fast-Track Fix to Stop Traffic Pumping

As 2010 draws to a close, among the important pieces of unfinished business at the FCC is the ongoing problem of "access stimulation" or "traffic pumping." The current intercarrier compensation system creates some unfortunate efficiency-killing arbitrage opportunities, and traffic pumping is one of them. Traffic pumping costs voice carriers millions of dollars each year. As long as rural voice services continue to be subsidized under the existing unreformed intercarrier compensation system, it is only sensible that the FCC immediately take narrow and targeted steps to prevent bad actors from taking advantage of the subsidy system it oversees.

Traffic pumping is a form of regulatory arbitrage arising out of the intercarrier compensation system's formula for assessing interstate access charges. To simplify, long-distance or interexchange carriers (IXCs) that originate interstate calls are required to make access charge payments to an end-user's local exchange carrier (LEC) that terminates such calls. Under the legacy intercarrier system, interstate access charges are particularly favorable to rural LECs. Rural competitive LECs, in particular, enjoy special exemptions that result in significant access charge revenues for those LECs. In other words, the current system subsidizes the cost of services provided by rural LECs through interstate access charges paid by IXCs that originate calls to LECs that terminate calls. The intercarrier compensation system is set up to transfer significant costs for voice services in rural areas onto voice services in urban areas--and thereby reduce the price of rural services for rural customers.

To simplify further, the current formula for assessing interstate access charges is premised on certain assumptions about the voice traffic history for rural LECs. Such rural LEC networks, it is assumed, have small customer bases and small associated amounts of per-minute interstate traffic that are terminated on their networks. But traffic pumping is a clever tactic for LECs to take advantage of interstate access charge regime, confounding the underlying assumptions of the system.

In recent years, some small LECs have entered into traffic pumping business arrangements with other entities to provide customers across the country a variety of "free" interstate and international conference call services or similar services that terminate on numbers in the LECs' networks. This results in surging amounts of interstate traffic being terminated on an LEC's network, despite the fact that no local customers are in any way associated with the terminating calls. LECs then bill IXCs for terminating the interstate calls they receive, reaping even larger above-cost interstate access charge revenues. And that means large interstate access costs incurred by IXCs. One recent study concluded that IXC losses due to traffic pumping amounted to some $2.3 billion.

The prevalence of traffic pumping practices eventually prompted the FCC to issue a Notice of Proposed Rulemaking to address the subject. As the FCC indicated in the NPRM,

We tentatively conclude that a rate-of-return carrier that shares revenue, or provides other compensation to an end user customer, or directly provides the stimulating activity, and bundles those costs with access is engaging in an unreasonable practice that violates section 201(b) and the prudent expenditure standard. On its face, the compensation paid by the exchange carrier to the entity stimulating the traffic is unrelated to the provision of exchange access.

That NPRM was issued in October 2008. Since then, however, the Commission has not acted on it. Instead, the Traffic Pumping NPRM docket has become a battlefield of ex parte filings. Meanwhile, traffic pumping practices continue, with numerous complaints filed by IXCs piling up at the FCC, at state public commissions, and at federal and state courts.

The National Broadband Plan sensibly acknowledges that "[m]ost ICC rates are above incremental cost, which creates opportunities for access stimulation, in which carriers artificially inflate the amount of minutes subject to ICC payments." As a prelude to long-term, comprehensive reforms of the intercarrier compensation system and universal service, the Plan recognizes the need for a quick fix to address regulatory arbitrage problems such as traffic pumping. Recommendation 8.7 in the Plan calls on the FCC to "adopt interim rules to reduce ICC arbitrage," which includes "rules to reduce access stimulation and to curtail business models that make a profit by artificially inflating the number of terminating minutes." In short, the Plan calls on the FCC, while it tackles intercarrier compensation reform more broadly, to make a band-aid fix for the problem it previously recognized in the Traffic Pumping NPRM.

The FCC should act fast to put an end to traffic pumping arbitrage activities. A clear problem exists. The Commission has already recognized the problem, and both the FCC and the National Broadband Plan have highlighted the need to address it. So what is the FCC waiting for? For starters, the FCC could set out some basic parameters defining the practice of traffic pumping and declare it impermissible for an LEC to apply its tariffed switched access rates to such conduct.

When it comes to traffic pumping, interim action by the FCC should be undeterred by any of the supposed complexities arising from the conceded necessary long-term, comprehensive reform of the intercarrier compensation system and universal service regime.

There is nothing that should be holding the FCC back from taking swift action against traffic pumping. Unfortunately, the FCC has been holding itself back and allowing arbitrage activity to continue. By 2011 it will be well past time for the FCC to have dealt with this problem. FCC efforts to tackle traffic pumping problems need not wait a day longer.

Monday, December 13, 2010

Preserving an Open FCC

I am much more concerned about preserving an open and transparent FCC than I am about preserving an Open Internet. It is not that I don't believe the Internet should be "open." It already is, and there is no need for the FCC, at least not now, to supplant the marketplace's discipline to try to fix what is not broken.

But here's something that may be broken, at least with respect to the net neutrality proceeding: The FCC's own processes. FCC Chairman Julius Genachowski, rightly, has made a commitment to running the FCC in an open and transparent way, and in a way that facilitates informed public participation in rulemaking proceedings. And in certain respects he deserves credit for his efforts, thus far, in this regard.

But I am very puzzled to discover this curt document which was placed in the public file of the Open Internet proceeding on December 10 by the Deputy Chief of the FCC's Wireline Competition Bureau, the staff office primarily responsible for drafting the FCC's proposed Internet regulations:

The FCC document reads in its entirety: "Please enter the attached documents into the official record for the [Preserving the Open Internet proceeding]. The reproduction of copyrighted material is prohibited. Thank you."

What makes this December 10 filing by the FCC's Deputy Wireline Chief extraordinary is that the "attached documents" comprise more than 1900 pages of materials, ranging from white papers, excerpts from books and journal articles, and who knows what else. The attached 1900 pages of documents, without any index and seemingly pasted together in no particular order, may be found in the following links:











As someone who has written widely on adminitrative law topics, served as Chair of the ABA's Administrative Law and Regulatory Practice Section, and who presently serves as a Fellow of the National Academy of Public Administration, I can't recall previously encountering a "data dump" like this – of this extraordinary magnitude – at least immediately before the Sunshine Act cut-off date for further communications with FCC commissioners and staff.

At least to my way of thinking, a last minute data dump of this size is very curious. But, more importantly, it seems to call into question the FCC's commitment to operate in an open and transparent way – in other words, in a way consistent with sound principles of administrative law and fundamental due process. This is because it is very difficult to see how interested parties – even the most well-heeled ones – could review the 1900+ pages of documents and, if they thought warranted, respond in an intelligent fashion. The hallmark of sound administrative law and due process in rulemaking proceedings is to give interested parties sufficient notice as to the facts and law upon which the agency may rely in fashioning a new regulation and to give interested parties an opportunity to respond.

Now, I may be missing something, and, if so, I am willing to stand corrected. Perhaps all of these documents are already in the record. That would mitigate my concern. Even so, because they essentially are pasted together in random fashion, and because the net neutrality rulemaking record is so huge, it would take considerable time to verify this. Also, it may be that the FCC's putative pro-net neutrality regulation majority, and the agency's staff, already have determined with certainty – although this would be curious – that they will not rely in the putative decision on any of the documents. But this raises an intriguing question: Why the last minute data dump? Again, there may be a good answer, but at this point I am not aware of it.

I am convinced there really is no need for the FCC to proceed with Chairman Genachowski's Internet regulation proposal, and certainly no need, absent any current market failure or consumer harm, for the agency to proceed as presently scheduled on December 21. The "Open Internet" surely will be preserved, as is, in the meantime without any FCC action.

But preserving the Open FCC is much more fundamentally important to the public, over the short, medium, and long term. I have my doubts concerning how the FCC's dumping of 1900 pages of documents into the public record on the eve of the date it cuts off public participation is consistent with preserving an Open FCC.

Wednesday, December 08, 2010

Online Video and the Comcast – NBCU Transaction

If you want to know more about what's wrong with the FCC's merger review process, and there is plenty as I first documented in 1999, look no further than the agency's lengthy review of the proposed Comcast-NBCU transaction, and especially the entanglement of "online video" issues in the review. The Commission's regulatory venturing into this emerging market segment has contributed to the unduly prolonged merger review – which, by all rights, should be completed promptly.

It has been long-reported from "sources inside the FCC" and now assumed by almost all that the FCC will extract from Comcast some form of condition offered up "voluntarily" supposedly designed to prevent Comcast from inhibiting the development of online (or Internet or web) video. (Even as I write I am reading that Comcast is now offering up a proposed condition.) The purported rationale for such condition is to protect a rapidly-growing, alternative means of consuming video for those who do not wish to subscribe to the existing multichannel service of Comcast, or of its competitors, such as DirectTV, Dish Network, Verizon's FiOS, or the like.

Initially, it should be emphasized that such concerns more properly ought to be addressed in a generic, industry-wide rulemaking proceeding, rather than in the context of a specific merger review. But put aside for now that point of process. The FCC's venture into regulating online video says a lot about the bureaucratic imperative that continues to grip the agency in a time-warp vise, even as the communications environment becomes ever more dynamic. For rather than viewing the rapid development of online video as a reason – finally – to get serious about eliminating decades-old legacy regulations applicable to broadcasters, cable operators, and satellite providers, the FCC instead can't resist using the new means of accessing video as a rationale for extending regulation.

Now, I understand that, in theory, if Comcast possesses dominant market power as a distributor of video it might have the incentive, along with the ability, to somehow restrict the development of online video as an alternative distribution means. If Comcast possesses such market power, presumably it could try to require video content programmers to withhold content from Internet video sites if the programmers wish to have Comcast distribute their programming.

Although highly unlikely, perhaps at some point in the future the video distribution marketplace may revert to the monopolistic structure that prevailed through, say, the mid-90s. If so, I am not arguing there may not be a proper role for the FCC (or the antitrust authorities) to play in fostering competition. But such is simply not the case now.

This piece is not the place to reproduce the essence of the FCC's own series of thirteen video competition reports, which have chronicled the increasing competitiveness of the video distribution marketplace, or to repeat the contents of the almost-daily newspaper and online stories concerning the fierce competition among video providers. It should suffice to point out that when FCC Chairman Julius Genachowki testified before the Senate Commerce Committee in July 2009, he told the committee that since 1990, "an array of new choices – direct broadcast satellites, Internet-based video, mobile services, video offerings from telephone companies, and video games – have joined broadcast and cable television as a daily reality for millions of American families." In its most recently-released (and long-delayed) video competition report, the FCC stated in January 2009, based on data largely from 2006 sources, that "[t]he marketplace for the delivery of video programming services is served by a number of operators using a wide range of distribution technologies." And with respect to Internet video, the Commission concluded: "The amount of web-based video provided over the Internet continues to increase significantly each year."

Of course, since 2006, or 2009, or last week, the amount of Internet video available to consumers, much available for "free" and the remainder available at various subscription rates, has continued to expand exponentially. YouTube, is yesterday's news, of course, with the emergence of so many Internet-based video sites, such as AppleTV, Google TV, Hulu, and so forth and so on.

So, why has the FCC unduly delayed action on the Comcast – NBCU transaction while it considers online video merger conditions? Because the agency clings to the notion that, regardless of marketplace circumstances, a central part of its mission is to "level the playing field" -- to make sure that competition is "fair." Thus, it invites complaints for regulatory intervention from competitors who want the playing field "leveled" in their direction. Take, a new online video distributor being sued by many video networks, including NBCU, for alleged copyright infringement with respect to online programming distribution. According to an article in Broadcasting & Cable magazine, ivitv now comes to the FCC insisting that "Comcast's content contracts be free of exclusivity and other contractual barriers to innovation, competition, and fair value for consumers."

In light of the competitive video marketplace, it is bodacious, but not at all surprising, that ivitv would appeal to the FCC for advantages in the context of the Comcast-NBCU merger proceeding. But, frankly, it takes a certain amount of hubris on the FCC's part to indulge in the exercise.

Does the FCC think that it is in a better position than the marketplace to determine whether Comcast's (and other video distributors) contracts for content should be exclusive, and, if so, for how long? Does the agency appreciate that exclusivity – and the property rights which protect exclusivity – encourage innovation and investment in new programming? Does the FCC think it is equipped to determine a "fair" price at which video distributors who have acquired programming rights in contract negotiations ought to be required to make that programming available to online distributors?

Does the FCC believe it is better equipped to make these judgments than the marketplace it has repeatedly characterized as competitive? If so, the agency is wrong, and it should refrain from trying to do so.

And the Commission certainly should refrain from delaying any longer action on the Comcast-NBCU merger while considering issues such as online video – and net neutrality, for example - which should be considered, if at all, in generic proceedings. There is much that the FCC presently is considering in the way of expanding regulation that it should not be considering. It is time for the Commission to exhibit a seriousness of purpose by focusing more of its resources on completing with dispatch matters properly within its domain. Completing its review of the Comcast-NBCU transaction falls into this category.


Friday, December 03, 2010

FCC's Flexible TV Spectrum Proposal Promising for Wireless Broadband

On November 30, the FCC launched its first wave of proposals to increase the availability and efficiency of spectrum in order to meet surging consumer demand for advanced new services such as wireless broadband. Of the three notices issued by the FCC, one is a proposed rulemaking that would help prepare the way for wireless broadband service on spectrum that is now primarily dedicated to TV broadcasting. The FCC's open TV spectrum proposal could play a positive role in making more spectrum available to fulfill the future promise of wireless broadband.

There is a pressing need to set aside more commercial spectrum to meet consumer demand for wireless broadband services. As NTIA's recent "Plan and Timetable" on making new spectrum available put it:

In recent years, owing in large part to the rise of smartphones, the amount of information flowing over some wireless networks has grown at over 250 percent per year, creating what is often referred to as a “spectrum crunch… For America to continue to lead the wireless revolution, we must put spectrum to its most effective uses and free up additional spectrum to meet the increasing demand for new technologies.

Whereas NTIA's report focuses on efforts to free up unused or underused government-owned spectrum for commercial wireless broadband services, the FCC's TV spectrum notice focuses on ways to make existing commercial spectrum in the UHF and VHF (or U/V bands) available for wireless broadband services. NTIA and the FCC are both committed to the goal of making 500 megahertz of spectrum available for commercial use in the next ten years.

The FCC's open TV spectrum notice proposes to give TV broadcast licensees in U/V bands greater flexibility, so as to allow such spectrum to be used for wireless broadband services on a co-primary basis with broadcasting. By adopting flexible use rules for the U/V band, the FCC would pave the road for future incentive auctioning for the use of such spectrum by wireless broadband service providers. The idea is that new rules would give TV broadcasting licensees incentive to voluntarily turn over a portion of their licensed spectrum to the FCC in exchange for a portion of the auction proceeds. The open TV spectrum notice also envisions the scenario in which some TV broadcast licensees might voluntarily turn over their spectrum in exchange for auction proceeds and the ability to co-locate their broadcasting on certain six-megahertz channels alongside other TV broadcasters.

The upshot of the FCC's proposed rulemaking is that TV broadcast licensees could continue to deliver over-the-air programming, while wireless broadband service providers would have more spectrum to meet future consumer demands, with the federal government generating auction proceeds for deposit in the U.S. Treasury.

The most immediate obstacle to spectrum auctions is the FCC's current lack of authority to turn over a portion of any auction proceeds to spectrum-vacating TV broadcasters. As the FCC's open TV spectrum notice stipulates, the agency requires authorization by Congress before it could successfully conduct and conclude such auctions. But circumstances should now favor the agency receiving congressional authorization. There is a growing recognition of the economic benefits -- indeed the economic necessity -- of freeing up additional spectrum for commercial use to meet future needs. And, while spectrum policy should not be dictated primarily by the nation's fiscal situation, Congress should find inviting the prospect of generating new revenue for a budget deficit-plagued federal government.

At this point it remains unclear just how eager TV broadcasting licensees would be to take such a deal. Reports about prior rounds of discussion between the FCC and broadcasters suggested broadcasters were wary if not outright resistant to even voluntary efforts to get TV broadcast licensees to relinquish a portion of their spectrum. But any continuing resistance by broadcasters to new flexible use rules and auction authority should be discounted to the extent that the FCC's proposal won't force any TV broadcaster to do anything.

In all, the FCC's open TV spectrum proposal is a shot worth taking. Giving spectrum licensees greater flexibility in how to maximize commercial use and value of spectrum makes good sense. Spectrum licensees in the business of serving consumers are in a better position to gauge consumer demands and meet them by deciding what uses spectrum should be put to than government bureaucracies.

The FCC should move quickly and decisively in advancing its open TV spectrum proposal. This means putting new flexible use rules in as soon as the process permits to tee up the work Congress must do to give the agency new auction authority.

This also means the FCC (as well as Congress) should remain focused on the small steps it now proposes to take, and not let itself get pulled into and distracted by other issues. To be sure, the property rights-driven spectrum reform movement and the spectrum "commons" counter-movement have raised a number of larger issues about spectrum policy that are worth debating in their own place. And in light of today's competitive media marketplace, there are a number of fundamental issues surrounding the efficacy of legacy public interest and other programming regulations, such as must-carry and retransmission consent. (The FCC's open TV spectrum notice's insistence that it is not trying either to enlarge or reduce must-carry and retransmission consent rules appears to be a sensible approach under the circumstances.) However interesting and important those surrounding issues ultimately may be, the FCC's open TV spectrum proposal should not be the occasion for deciding them.

But even for those who hope to eventually see more principled, sweeping changes in spectrum policy, there can be consolation in the FCC's open TV spectrum proposal. Professor Gerald W. Brock (a former FCC Common Carrier Bureau Chief and a member of FSF's Board of Academic Advisers) pointed out in his re-telling of FCC policy history in Telecommunications Policy for the Information Age that major policy changes have often begun with limited decisions narrowly focused on a specific issue brought before the agency. So it was, for instance, with the FCC's Carterfone ruling, which later led to the Computer Inquiry proceedings. Similarly, the FCC's initially limited grants of approval to MCI to operate long-distance private lines between major cities later led to competition in long-distance services. So perhaps there is room for optimism that the FCC's open TV spectrum proposal will eventually lead to a broader set of spectrum reforms. But again, just what that broader set of reforms might look like ought not to delay action on the open TV spectrum proposal.

Starting with the open TV spectrum proposed rulemaking, the FCC and Congress can take some modest but practical steps to bring about more flexible and efficient use of spectrum to sustain and spur economic growth. Hopefully, the agency and our elected officials will pursue this opportunity with focused determination and without delay.