Monday, March 31, 2014

Permissionless Innovation - Adam Thierer's Newest Book

Adam Thierer's latest book is titled, "Permissionless Innovation," a subject about which Adam has written knowledgeably for years.

In his book, Adam contrasts public policy shaped by “precautionary principle” reasoning, which he says poses a serious threat to technological progress, economic entrepreneurialism, and long-run prosperity, with “permissionless innovation." According to Adam,  permissionless innovation has been the secret sauce that fueled the success of the Internet and much of the modern tech economy in recent years, and it is set to power the next great industrial revolution—if we let it.

 heartily recommend this book to you, despite two "disclaimers." First, Adam is a former colleague of mine and present friend. Second, I haven't even had a chance to read the book yet.

No matter, really. I know Adam well enough -- and I know he knows the subject matter well enough -- that I am confident it will be a worthwhile read. Even more than worthwhile.

So, again, here is the link to the book.

Section 706, Wild Assumptions, and Regulatory Restraint

I was pleased that Federal Communications Commissioner Michael O'Rielly accepted my invitation to participate as a keynoter at the Free State Foundation's Sixth Annual Telecom Policy Conference on March 18. We engaged in an informative and interesting lunchtime Conversation, and I am grateful to Commissioner O'Rielly for indulging my questions.

I'm also grateful that C-SPAN broadcast the entire FSF conference. You can find the video of my Conversation with Commissioner O'Rielly here.

I commend to you the entire Conversation. But for now I just want to focus on Commissioner O'Rielly's discussion of Congress's intended meaning of now-famous Section 706 of the Telecommunications Act of 1996. In the post-D.C. Circuit Verizon case world, Section 706 is considered to be an independent source of authority for the FCC to regulate broadband Internet providers (and perhaps other market participants as well, the so-called "edge" providers). Tom Wheeler, the FCC's Chairman, has announced that the Commission will look to Section 706 for authority as it considers whether to adopt new non-discrimination and no-blocking rules, along with other regulatory actions.

Before taking his seat at the Commission, Commissioner O'Rielly spent almost twenty years in various congressional staff positions. At the time the Telecom Act of 1996 was being drafted, Commissioner O'Rielly served on the House Energy and Commerce Committee staff. According to his account, he was closely involved in the negotiations leading up to passage of the 1996 Act. In other words, as I said during our exchange, Commissioner O'Rielly had a "bird's eye" view of the drafting process, including that relating to Section 706.

To my mind, this makes what he has to say about his understanding of Section 706 worth contemplating – seriously.

As recounted by Commissioner O'Rielly, in order to accept the court's (and the FCC’s new) interpretation of what Section 706 means, you would have to make "some wild assumptions."

·      You would have to believe that a Republican Congress with a deregulatory mandate inserted very vague language into the statute to give complete authority over the Internet and broadband to the FCC, but then didn’t tell a soul. It didn’t show up in the writings, it didn't show up in the summaries. It didn’t show up in any of the stories at the time.

·      You would have to believe that the conference committee intended to codify Section 706 outside of the Communications Act, thereby separating it from the enforcement provisions of the Act, Title V, but somehow we still expected it to be enforced. [The Communications Act was not amended to include Section 706.]

·      You would have to believe that the congressional committees that went on to do an extensive review of FCC authority afterwards, and even proposed legislation to rein it in, in terms of FCC reauthorization legislation, that they went through that effort, but at the same time they had provided a secret loophole to the Commission to regulate.

·      You would have to believe that when Congress is having extensive debates over the ability to regulate, or the ability to give the Commission authority to regulate net neutrality, at the same time they had already given the Commission this authority.

·      You would have to believe that when Congress did legislate in this space, and more particularly when they legislated on certain edge providers in certain narrow instances mostly related to public safety, you would have to believe that they went through that extensive process, and then it didn’t matter, the fact that they had already given the Commission that complete authority under Section 706.

Commissioner O'Rielly's conclusion: "It's mindboggling to believe that all of those assumptions, and there are many more, are true. You would have to suspend your rational thought to get to that point." [The bullet points above are close to verbatim, but please feel free to listen to Commissioner O'Rielly in his own words directly in the video.]

I don't want to suggest that Commissioner O'Rielly's recounting of his personal knowledge of what went on behind the scenes as the 1996 Act was written, itself, should be considered determinative for a court construing Section 706. And I don't think Commissioner O'Rielly means to suggest that his personal recollections constitute official legislative history. Rather, the importance of what he relates is to show the irrationality – the arbitrariness and capriciousness, if you will, in administrative law terms – of adopting a novel interpretation of Section 706 that necessarily is based on so many implausible assumptions.

Commissioner O'Rielly's persuasive recounting shows that the court's – and now, apparently, the FCC Chairman's – interpretation of Section 706 not only is implausible, but far afield from what was widely understood to be the provision's original meaning – that the provision was not intended to constitute an independent grant of affirmative regulatory authority. Recall that this was the Commission's own understanding of Section 706 as well until the agency switched its view after its first foray into net neutrality regulation met with defeat in Comcast Corp. v. FCC.

In providing a convincing account of what Congress intended – and did not intend – Section 706 to mean, Commissioner O'Rielly has performed a valuable service. Even though, for now, the D.C. Circuit panel's opinion remains the controlling interpretation, it is important to remember that, other than holding unlawful the no-blocking and no-discrimination net neutrality rules, the court did not purport to define the boundaries of the Commission's Section 706 authority or adjudicate any particular exercises of such authority. The court did not require the agency to adopt any new regulations. Under all the circumstances – and especially the circumstance that there is no evidence of a present market failure or consumer harm resulting from Internet provider practices – there is no reason for the Commission to move forward at this time to adopt new net neutrality or net neutrality-like rules.

Indeed, under the circumstances, and having in mind the doubt cast on the validity of the D.C. Circuit's Section 706 reasoning by Commissioner O'Rielly's recounting, shouldn't this be an occasion for the FCC to exercise some (rare) regulatory humility?

In my view, it should be. The FCC Chairman should announce that the Commission will stand down and, as far as attempts to revive net neutrality regulations go, engage in watchful waiting. To adopt such a posture of regulatory restraint would not be a sign of weakness, but rather of wisdom.

Thursday, March 27, 2014

U.S. Case Challenging Chinese IP Enforcement Bears Watching

Ineos Group AG, the largest chemicals producer in the U.K., has filed a lawsuit to enforce its IP rights against Beijing’s Sinopec, a large petroleum and chemical corporation. Foreign companies have brought many cases against Chinese companies for copyright, trade secret, or patent infringements to highlight importance and promote the practice of strong IP enforcement worldwide. But this suit is one of the first challenges brought by a foreign firm against a large state-owned enterprise in China.

The case will test the ability and willingness of Chinese courts to enforce IP rights and technology agreements in China. Although China’s courts have reportedly become more sophisticated in handling commercial disputes, IP theft in China is not under control and the legal system for IP enforcement is not nearly as effective as in foreign courts. The Global Intellectual Property Center (GIPC) ranked China 17 out of 25 countries in its International IP Index. China scored nearly 0 in its protection of trade secrets, market access, IP enforcement.

Ineos’ lawsuit may particularly highlight whether the court will enforce IP agreements against state-owned enterprises. Leaders in Beijing have said they are ready to reform China’s large state-owned enterprises, and this case will test the truth of those promises. The scale of China’s state-owned entities gives the country the means to significantly alter the global market. Ineos CEO Jim Ratcliffe stated, “If they build a half-dozen copy plants, they’ll destroy the [our] business.” The willingness of Ineos to bring this case is an encouraging development toward ensuring IP enforcement in China, despite the risk legal action may pose to business and political relationships.

On Ineos’ website, Mr. Ratcliffe articulated the crux of the issues: “We want to take our best technology to China but we need to know that it will be protected … the fundamental value of Ineos depends upon its technology. We have no option but to defend our hard won intellectual property.” As the Wall Street Journal [subscription required] reported, “The thing to watch is not necessarily the outcome … the question will be whether the Beijing court proceeds in a manner that outside observers would conclude is fair, and delivers a ruling that persuades technical experts that it got the case right.” China’s demonstration that it will enforce IP agreements through a fair process has huge implications for international trade, business, and investment, and the case definitely bears watching.

The FCC Should Reject CWA’s Job Protection Pleas, Again

Since the Federal Communications Commission opened its docket seeking comment on Frontier Communications’ application to acquire AT&T’s wireline business and statewide fiber network assets in Connecticut, only one comment objecting to the transaction has been filed. Communications Workers of America (“CWA”) argues that among other negative impacts, the transaction, if approved, could adversely affect employment levels and worker living standards. The Commission may consider the impact of the transaction on service quality, consumer access to service, and other factors when evaluating a merger proposal. But it is improper for the Commission to consider job loss and other employment related impacts during a transaction review, and job protection should not be imposed as a condition on transaction approval.

Under Section 214(a) and 310(d) of the Communications Act, the Commission must determine whether a transaction will serve the public interest, convenience, and necessity. FSF scholars have often commented on how the public interest standard, by virtue of its ambiguity, has been interpreted in an abusive way to justify the Commission’s unsavory practice of, in effect, “regulating by condition.” Yet even among the range of factors the Commission has included in its determination of whether a transaction is consistent with the “broad aims of the Communications Act,” whether and how a proposed transaction will affect employment practices is not a proper one.

CWA currently represents 2,900 workers who are employed by AT&T’s affiliate in Connecticut, and 3,800 employees at Frontier nationwide. CWA urges that the Commission should insist that AT&T and Frontier provide “detailed and granular employment data” and “assurances” that the transaction will not lead to any reduction in employment levels and workers’ living standards. CWA argues in its comments that the Commission has considered “whether a proposed transaction will lead to public interest harms with respect to employment practices” in the past and should do so again in reviewing Frontier and AT&T’s application.  

Notably, CWA only cites short statements from FCC Chairman Genachowski and a handful of Commissioners to support this argument; CWA does not point to any of the plentiful public interest standard jurisprudence available. Although Commission officials may have noted the impact of transactions on employment, the FCC’s statutory authority to review transaction proposals should not be construed to allow Commissioners to weigh employment as a factor in its determination, nor have courts interpreted the public interest standard to include such a consideration. And the FCC cannot, and should not, impose job protection conditions on the transaction, as CWA has requested for other transactions.

In its comments objecting to the T-Mobile/MetroPCS merger several years ago, CWA also argued that the Commission should consider the impact of the transaction on employment practices. CWA also requested that the Commission impose job protection conditions on the transaction. FSF President Randolph May responded to CWA’s arguments on the FSF blog: "[T]he FCC has no business abusing its merger review authority by conditioning the merger on adoption of the job protection plan put forward by the CWA. Regardless of whether the Commission has abused its authority this way in the past, such a condition is simply too far afield from any legitimate view of the Commission's exercise of its merger review responsibilities."

The Commission’s public interest authority may be broad, but not so broad as to include the management of the size and composition of company workforces. And the Commission’s authority to impose conditions that promote the public interest does not enable it to extract job protection conditions upon approval of a transaction. Doing so would be an abuse of its regulatory authority and would likely open the Commission to a barrage of requests for job protection plans in other contexts.

While it is unclear whether the Frontier-AT&T transaction will affect employment, and certainly no one wants to see jobs lost for any reason, job protection is just not within public interest purview. 

Tuesday, March 25, 2014

Relinquishing U.S Oversight of the Internet - My PBS NewsHour Appearance

I was interviewed on the PBS NewsHour, on March 24, 2014, along with Vint Cerf, Google's Chief Evangelist, about the Obama Administration’s recently-announced plans to transfer oversight of the Internet to some yet-to-be-determined entity.

I expressed concerns about what will happen at the end of the contemplated transfer process – how the new international entity or organization that will manage the Internet will work, especially with regard to whether such entity will be truly insulated from government control and interference and whether, under the new structure, governments will assume more leeway to prevent the free flow of information on the Net and censor messages with which they disapprove.

Since 1998, the National Telecommunications and Information Administration, an agency within the U.S. Department of Commerce, has exercised light oversight over the current manager of the Internet, the Internet Corporation for Assigned Names and Numbers, or ICANN. ICANN is a non-profit, private sector-led multistakeholder organization. ICANN is required to operate in a collaborative and transparent manner that fosters accountability to the various non-government stakeholders – commercial enterprises, civil society organizations representing Internet users, technical experts, and so forth – that are represented in ICANN's governance structure.

The PBS NewsHour video segment can be viewed here.

Monday, March 24, 2014

Thanks to C-SPAN for Live Coverage of FSF’s Sixth Annual Telecom Policy Conference

We are grateful to C-SPAN for covering the Free State Foundation’s entire Sixth Annual Telecom Policy Conference on March 18, 2014, at the National Press Club. C-SPAN’s live coverage included three keynote sessions and two panels of experts from industry, academia, the FCC, and the Hill. The topics addressed include Net Neutrality, the meaning of Section 706, the Comcast - Time Warner Cable merger, the IP transition, spectrum auctions, TV regulation, FCC reform, and a new Communications Act. You can view the informative and educational sessions in their entirety in the five C-SPAN segments below.

Thursday, March 13, 2014

A New FCC And A New Communications Act

Anyone who has followed communications law and policy for a number of years – and I've been doing so for over thirty-five years – knows that the marketplace environment has changed dramatically in the last "number" of years. And undeniably – although at times some do try to deny it – the change has been in the direction of more competition and more choice for consumers. 

Another way of saying this is that there is more competition and more consumer choice for data, video, voice, and any other service or application that is offered over various digital networks, whether the technological platform employed is called "cable" or "telephone" or "wireless" or "satellite" or "fiber" or whatever. 

Of course, there may be legitimate debates concerning the extent to which competitive market forces are present in particular market segments at particular times. It has never been my view that in instances of demonstrated market failure there is not a role for proper government regulation. I have often stated, however, here and elsewhere, that in today's communications marketplace, in which the digital revolution is driving more competition, absent convincing evidence of market failure, the default presumption should be that the costs of regulation outweigh the benefits. 

You may have thought it strange that I put "number" in quotes in the first paragraph. But I did it for a reason. I want you to think about the passage of time – maybe about how quickly time flies, as they say – while many of the laws and regulations that govern participants in the communications marketplace remain in place, as if frozen in time. 

So, for example, in thinking about marketplace change and the passage of time, recall that the regulations governing multichannel video distributors, like cable operators, largely were put in place by the Cable Act of 1992 – almost a quarter century ago. 

And the "silos" that establish the regulatory framework for most market participants were left in place in the last major revision to the Communications Act – the Telecom Act of 1996. Yet the "Internet," which so dominates our policy debates now, was mentioned only twice in the 1996 Act.

And in 2000, in connection with their "petition to deny" filed with the FCC, a coalition of consumer groups issued a dire warning that the then-proposed merger between AOL and Time Warner "would fuse the country's largest online company with the world's biggest media and entertainment conglomerate." This, they argued, "would allow two enormous firms to dominate the markets for broadband and narrowband Internet services, cable television, and other entertainment services, which could leave consumers with higher prices, fewer choices, and the stifling of free expression on the Internet." Well, we know how that prediction turned out.
And in 2004, the FCC initiated what it called the "IP-Enabled Services" proceeding to consider a proper regulatory model for the rapidly growing Internet services. The agency pointed out that the greater bandwidth of broadband networks encourages the introduction of services “which may integrate voice, video, and data capabilities while maintaining high quality of service.” Then, in a prediction that came to pass shortly thereafter, the FCC added: “It may become increasingly difficult, if not impossible, to distinguish ‘voice’ service from ‘data’ service, and users may increasingly rely on integrated services using broadband facilities delivered using IP rather than the traditional PSTN (Public Switched Telephone Network).” In the decade since 2004, the Commission never took any further meaningful action in the IP-Enabled Services proceeding. Finally, earlier this year, in response to a petition filed by AT&T in 2012, the agency authorized trials as part of its IP-Transition project.
I could go on with the timeline but you get the point. The communications marketplace environment has been and continues to change rapidly – and the laws and regulations governing the marketplace have not kept pace.
Which brings me to the Free State Foundation's Sixth Annual Telecom Policy Conference next Tuesday, March 18, at the National Press Club. The conference theme is: "A New FCC and a New Communications Act: Aligning Communications Policy with Marketplace Realities."
A "New FCC" refers to the fact that the agency has a new Chairman and a new Commissioner. Whenever the agency is reconstituted, especially with a new Chairman, there is an opportunity for a fresh start, for changing course. A "New Communications Act" refers to the House Commerce Committee's recently-initiated effort to review and update the Communications Act. And "Aligning Communications Policy with Marketplace Realities" refers to…well, just go back to the timeline sketched out above.
So, at Tuesday's conference, we will be discussing what a new FCC and a new Communications Act may mean for communications law and policy – and not just what they may mean, but also what they ought to mean. After all, for a think tank that proclaims "Because Ideas Matter" in its logo – and which has confidence this is true – the "ought" is most important of all.
Take a quick look at the agenda. I'm sure you will be convinced that the conference promises to be interesting, informative, and lively. In addition to the keynote sessions with FCC Commissioners Mignon Clyburn and Michael O'Rielly and FTC Commissioner Maureen Ohlhausen, the two panels are packed with nationally-prominent law and policy experts of all stripes. Both panels will be conducted in a lively Q&A format; A conversational format, with no initial presentations…and no filibustering!
In order to attend the conference, please register here. You must register to attend. Because there is no charge to register, I cannot offer a money-back guarantee. But I pledge that if you do attend, when you leave you will know a lot more about what a new FCC and a new Communications Act may mean – and what they ought to mean – than when you arrived.
I hope to see you on Tuesday. And, as always, we appreciate your support for the Free State Foundation's programs.

Monday, March 10, 2014

U.S. Wireless Market is Competitive, Despite What Son May Say

Wireless market observers have been buzzing about the rumored acquisition of T-Mobile by Sprint for months now. Sprint has not made an official merger offer to T-Mobile, and Softbank and Sprint have repeatedly declined to comment on the possible transaction with T-Mobile. But recent actions by Masayoshi Son, head of SoftBank Corp. and Chairman of Sprint Corp. have certainly shown that Mr. Son means business. After U.S. antitrust officials voiced opposition to the acquisition, Mr. Son announced plans to make a presentation to the Chamber of Commerce in Washington, D.C. on March 11 to argue the merits of a merger between the wireless providers.

It is all well and good for Mr. Son to state his case wherever he wishes. But he has been vocally critical of the U.S. wireless market in making his arguments for approval of the rumored transaction. In particular, he has charged that Verizon Wireless and AT&T dominate the U.S. market and keep the costs of data communications high. The Wall Street Journal [subscription required] recently quoted Son saying, “The U.S. has one of the world’s highest mobile fees,” and the principles of competition aren’t working. Presumably he is tossing out these allegations to support his claims that Sprint needs more scale to compete with the top-two providers.

Unfortunately for Mr. Son, his claims are not supported by marketplace realities. There is plenty of evidence that the U.S. wireless market in fact offers its consumers some of the best prices and value for service in the world. For example, the Organisation for Economic Cooperation and Development (OECD) found in its most recent publication of Communications Outlook 2013 that U.S. pricing was more favorable than Japanese pricing for handsets/smartphones for 10 out of the 11 baskets or service bundles it studied. Further, the most popular mobile service bundle in the U.S. was 290% more expensive in Japan. The only market segment in which Japan led the U.S. in price was for USB sticks, which accounts for less than 3% of U.S. mobile connections. Overall, Japanese prices averaged 55% higher than U.S. prices.

The results of the mobile baskets price comparison compiled from the relevant tables in OECD’s publication are presented the chart below.

* Source: OECD Communications Outlook 2013, available at This chart is compiled from the various numbered charts in the left-hand column.

In addition to offering better price options for mobile baskets than Japan, the U.S. wireless market also offers consumers more advanced networks to support their wireless service. For instance, competition for speed and data-hungry consumers has driven service providers to invest $34 billion in network upgrades and development to build out 4G LTE networks in 2013 alone. This historic level of investment ranked 4th in the world according to OECD, and amounted to more than any other U.S. industrial sector invested in 2013. In contrast, Japan ranked 12th in investment according to OECD.

U.S. investments led to over half of the world’s 4G LTE subscribers being here in the U.S., despite the fact that only 5% of the world’s wireless subscribers in the U.S – nearly double that of Japan. And over 97% of the world’s smartphones sold in 2013 run on operating systems developed by U.S. companies.

Finally, despite whatever Mr. Son may say, competition is alive and well in the U.S. wireless market. The remarkable investment in U.S. wireless 4G LTE and broadband networks have enabled providers to offer consumers a wide range of choice in networks, devices, applications, and subscription plans. The FCC reported that at by the end of 2012, the U.S. had more facilities-based wireless service providers that own and manage network equipment than any other country in the world, and nearly all U.S. consumers have a choice of three or more mobile voice carriers; 97.2% of the U.S. population is covered by three or more mobile voice carriers and 92.8% is covered by four or more mobile voice providers. 

Regarding mobile broadband, 91.6% of the U.S. population is served by three or more mobile wireless broadband providers and 82% are served by four or more providers. Additionally, U.S. consumers have a choice of nearly 300 different handsets, and more than 3.5 million apps for 14 different mobile device operating systems. And recent trends indicate that investment, consumer demands, and disruptive technologies will continue to drive fierce competition in the wireless marketplace in the future.

All this is to say, when Mr. Son comes to town on March 11, skepticism is warranted regarding his claims that U.S. wireless consumers somehow are less well off than those in Japan, or anywhere else in the world for that matter. If Mr. Son wants to argue in favor of a merger between Sprint and T-Mobile, he can surely do so. But despite whatever Mr. Son may say, the U.S. wireless market is dynamic, competitive, and offers consumers some of the best prices and value for service in the world. 

Thursday, March 06, 2014

STELA Offers An Opportunity for Congress to Clean Out Old Cable Regulations

When Congress has an opportunity to eliminate outdated, unnecessary, and constitutionally problematic regulations, it should consider doing so. Congressional legislation reauthorizing the Satellite Television Extension and Localism Act (STELA) offers just such an opportunity. 
Section 623 of the Communications Act contains basic tier regulations that are relics of a long bygone cable "bottleneck" era. Basic tier rate and must-buy regulations should be eliminated so that federal communications policy can better match today's competitive market conditions. STELA reauthorization legislation constitutes one plausible vehicle to clean out outdated basic tier cable regulations. Congress should keep an open mind about using STELA as a route to regulatory reform.
STELA is considered "must-pass" legislation because it contains the framework for retransmission of broadcast TV content by direct broadcast satellite (DBS) providers. Absent reauthorization, certain provisions regarding broadcast TV, DBS, and cable video will sunset at the end of this year.
Some suggest that Congress should keep the STELA bill "clean." Here "clean" means extending provisions scheduled to sunset at the end of 2014 while avoiding any reforms of legacy video regulation. However, prior STELA reauthorization legislation included a variety of provisions touching on video services. For example, the 2010 bill reauthorizing STELA included directives to the Copyright Office regarding filing fees, audits, and reports. It likewise permitted carriage of low-power broadcast TV stations throughout local markets and modified cable statutory licenses to address carriage of multicast broadcast TV streams.
Congress shouldn't be rigidly wedded to any artificial principle in order to obstruct genuine regulatory reform. Rather, it's a sound principle that burdensome government regulations premised on market failure should be reduced or eliminated where competitive market conditions actually emerge. Whether necessary reforms are to take shape through legislation that is broad-based or narrowly targeted, immediate or incremental, typically involve context-specific judgments of expediency. Leaving expediency judgments aside, STELA reauthorization presents a fitting instrument for clearing away government restrictions on cable services that market changes have rendered unjustifiable.
For example, Congress could insert into STELA reauthorization legislation a provision to eliminate basic tier cable rate regulation. Under Section 623, the FCC is authorized to oversee local rate regulation for "basic tier" service on cable systems. And under Section 76.906 of the FCC's rules, "cable systems are presumed not to be subject to effective competition." Cable operators must overcome that pro-regulatory presumption by demonstrating the existence of effective competition. With two nationwide DBS providers, not to mention telco entrants into the video market that are rapidly gaining market share, cable operators have obtained relief from basic tier rate regulation in numerous local markets.
But the entire rate regulation system has outlived its reason for being. Rate regulations are an onerous form of government restrictions that can be justified only in instances of market failure. Much of existing law concerning cable video services was adopted back in the early 1990s. At that time, most people could obtain video subscriptions only through their local cable operators.
By contrast, today's video services market is marked by choice in video content and competition between different platforms. As indicated in the FCC’s 15th Video Competition Report, by mid-2012 there were approximately 101 million multichannel video programming distributors (MVPD) service subscriptions. Of those, 98.6% – that is, 130.7 million households – had access to at least three MVPDs, and 35.3% – 46.8 million households – had access to at least four MVPDs. As of mid-2012, DBS operators had a market share estimated at 33.6% and "telco" MVPD entrants had a market share of 8.4%.
Also, Congress could insert into STELA reauthorization legislation a provision to eliminate basic tier "must-buy" regulation. Under Section 623, cable operators are required to carry all local broadcast TV signals on their basic tier channel lineup. Must-buy is a central component of the government-prescribed basic tier that cable operators must make available to consumers as a pre-condition to offering additional tiers of cable channels.
But must-buy has likewise outlived its reason for being. Cable operators should be free to offer consumers video content according to their own editorial judgment, not government dictates. To the extent cable operators would rather carry broadcast TV content on a separate premium tier or not carry it at all, consumers could still seek such content from DBS providers, online video distributors such as Hulu or broadcast TV websites, or by using rabbit-ears that receive over-the-air high-definition TV signals.
Further, must-buy regulation poses serious First Amendment problems. Supreme Court case law clearly holds that MVPDs engage in and transmit speech, thereby receiving First Amendment protection from government restriction. The so-called cable bottlenecks that justified much of the cable regulation adopted in the early 1990s do not exist in today's video services market. This point was amply made in the context of the D.C. Circuit's decision in Comcast v. FCC (2013). The D.C. Circuit reversed the FCC's attempt to determine cable channel lineup placement by government decree. In his concurring opinion, Judge Kavanaugh explained that because "the video programming market has changed dramatically, especially with the rapid growth of satellite and Internet providers," MVPDs do not possess market power in the nationwide video services market. Concluded Judge Kavanaugh: "In restricting the editorial discretion of video programming distributors, the FCC cannot continue to implement a regulatory model premised on a 1990s snapshot of the cable market." (For more on this see  The Free State Foundation's "The Case for Program Carriage Reform.")
The must-buy requirement implements a regulatory model premised on a 1990s snapshot of the cable market. Congress should not wait for a new Supreme Court ruling to address must-buy’s misalignment with today's market conditions and First Amendment protections. By some legislative proposal or the other, Congress should eliminate must-buy regulation.
In fact, additional legislative proposals have been offered that would eliminate onerous and outdated regulations of video services. H.R. 3720, introduced by Rep. Steve Scalise, would eliminate both rate and must-buy basic tier cable regulation. Rep. Scalise's "Next Generation Television Marketplace Act" is much broader in scope than basic tier regulation, and its approach is something FSF scholars have previously expressed support for.
Likewise, H.R. 3196, introduced by Rep. Bob Latta, would eliminate the FCC's integration ban that prohibits MVPD-provided video devices from performing both navigation and security functions. The bill offers an approach that could be embodied in STELA reauthorization legislation. FSF scholars have previously commended the policy approach of Rep. Latta's "Consumer Choice in Video Devices Act."    
Congress should keep an open mind about using STELA reauthorization legislation as a route to regulatory reform for video services. Through STELA, Congress could tidy up its policy toward cable services by eliminating rate and must-buy basic tier regulations. Whether STELA is ultimately the right instrument for eliminating outdated cable regulations may be a question of expediency and tactics within the legislative domain. But there’s nothing unclean about the imperative to remove old regulations that are no longer justifiable in today’s competitive video services market.

Monday, March 03, 2014

Another One Bites the Dust: Burlington Telecom’s Failure Shows, Again, That Government-Operated Broadband Networks Are Not The Solution

In a public statement on February 19, Chairman Tom Wheeler laid out his plans for the Federal Communications Commission’s approach to broadband in reaction to the D.C. Circuit’s Verizon v. FCC decision. Many of the proposed Internet regulations and policies Chairman Wheeler announced amount to “solutions in search of a problem,” as House Subcommittee Chairman Greg Walden stated.
Among those problematic “solutions” is Chairman Wheeler’s idea to potentially preempt state restrictions on the ability of cities and towns to offer broadband services to their communities. The idea to encourage localities to build their own networks was introduced as a way to “enhance competition.” Chairman Wheeler elaborated after the FCC’s open meeting on February 20 that “the operating hypothesis” regarding municipal networks “is that if local communities say they want more competition and want to work through their locally elected officials” to accomplish that, they should be allowed to do so.
The goal of increasing consumer choice in Internet access is a worthy one. However, the Commission’s “hypothesis” that local entities can achieve that goal has been proven wrong repeatedly. Government-owned systems have experienced widespread failure nationwide, and the localities have passed the cost of those shortcomings onto taxpayers. In contrast, the private sector has been the central source of impressive investment and efficient broadband deployment for years, and the Commission should not interfere with the healthy growth and evolution of technology and business models by favoring localities over private investors.
The most recent government-owned network that is in the news for falling short of expectations is Burlington, Vermont’s network, Burlington Telecom (BT). On February 3, Burlington Mayer Miro Weinberger said the city had reached a settlement with Citibank in its lawsuit over its loans on the financially ailing BT cable system. The BT system has been deteriorating for years. In 2011, the New Rules Project released a report, which found that “in little more than a year, Burlington Telecom went from being a hopeful star of the community fiber network movement to an albatross around its neck.” The report found that BT’s debt to the city’s cash pool reached $17 million by 2009, and BT’s management “grossly overspent even their own estimates,” with over half of all expenditures allocated to a nebulous “other charges” line item. These findings imply a lack of transparency, irresponsible spending, and potentially fraudulent use of funds.
For the past two years, BT has been fighting the claims of Citibank, its primary creditor, that BT owes it $33.5 million; the proposed settlement is for $10.5 million, which will be funded “largely” through non-taxpayer resources. Not surprisingly, the city has had to look to the private sector to help in funding the settlement. 
Many local governments have encountered the same fate after investing heavily on money-losing municipal broadband projects. For example, the towns of Mooresville and Davidson, North Carolina, faced multi-million dollar debts after acquiring the MI-Connection Communications System from the bankrupt Adelphia Communications cable systems. Starting in 2011, the towns owed over $7 million in annual debt payments for five years, which constituted one-fourth of the town’s operating budget each year. Utah’s UTOPIA network was built with the goal of achieving a positive cash flow in five years. Instead, the network operated at a loss from 2003–2012, which caused “serious damage to the agency’s financial position” and resulted in total net assets of negative $120 million by 2011. Chattanooga, Tennessee’s Electric Power Board (EPB) network was built almost entirely at taxpayer expense. According to a 2012 National Taxpayers’ Union report, EPB’s electric customers were responsible for financing a $160 million loan, its new Internet and cable television customers financing $29 million, and federal taxpayers financing another $111 million via the 2009 “stimulus” bill to build the network. By 2010, the network had incurred a combined $176.5 million in cumulative debt and experienced a downgrade in credit rating due to the “high degree of business risk and operating margins that are less predictable than the EPB’s traditional electric operations.” And last February, the Iowa state government sought to sell off its Iowa Communications Network. The Iowa network is one of the oldest government telecom systems in existence, but the debt it accrued over its history rendered the system unsustainable. Other municipal “broadband busts” include Provo, Utah, Lafayette, Louisiana, and the N.C. Eastern Municipal Power Agency.
FSF President Randolph May concluded in a blog last year that the “common denominator” among these and other government-owned systems is this: “Because of almost universal cost overruns and less than projected demand for the services offered, taxpayers typically are left to bear the burden of the ensuing financial distress, either by providing direct subsidies from government coffers or by providing indirect subsidies through premium guarantees for bond offerings used to finance the projects.” Running a telecom network is a complicated, capital-intensive, and risk-laden venture that should be left to the private sector, unless private operators have not shown a willingness to provide service.
FSF scholar Seth Cooper also highlighted the problems with empowering local governments to directly compete with private broadband Internet providers in a February 26 Perspectives. He found that in addition to exposing local taxpayers to financial risk and wasting community resources, allowing governments to assume “a dual role as public authority and as competing business proprietor poses inherent conflicts-of-interest for local governments. Such conflicts lend themselves to abuses of government power.” He also found that FCC preemption of state safeguards on government-owned broadband projects to prevent such abuses may exceed FCC authority and violate constitutional federalism principles. As such, both legal and policy-driven analyses support leaving broadband network ownership and management to the private sector.
Luckily for Burlington, Mayor Weinberger seems to have chosen to divest the city from the telecom business. He stated that private investors have a better chance of competing successfully in the “highly competitive, quickly evolving and capital intensive” telecommunications business, and he is right.
Chairman Wheeler recognized in his recent statement that since 2009, nearly $250 billion in private capital has been invested in U.S. wired and wireless broadband networks. Telecommunications companies are leaders in domestic capital investments. AT&T and Verizon ranked in the top five “U.S. Investment Heroes of 2013,” together investing $34.5 billion last year. The telecommunications and cable sector was responsible for $50.5 billion of investment in 2013, comprising more than one-third of total capital investments in the U.S. economy. And since 1996, cable operators have invested over $200 billion into broadband infrastructure. Additionally, private sector investors — and not local taxpaying residents — bear the financial risks should private systems falter.
As Free State Foundation scholars have frequently discussed, broadband investment will continue to come from the private sector if the proper policies are promoted. The FCC should focus on policies to incentivize private investment and remove barriers to broadband build-out. However, government-operated networks are not the solution to promoting broadband deployment, as the widespread failure of these systems continues to prove.