Issue Advocacy: The Real Loophole

Yesterday a federal court ruled that the Federal Election Commission erred in ruling that the Wisconsin Right to Life organization could be barred from running issue ads before an election that advocated stopping filibusters against President Bush's judicial nominees. Because Senator Russ Feingold was running for reelection at the time the ad ran and had opposed some of Bush's judicial nominees, the FEC had held the ads fell within the ban on "electioneering communications" which is part of the McCain-Feingold campaign finance regulation law. The court held that, as applied to these ads, which did not expressly advocate Senator Feingold's defeat, the FEC's ruling was an unconstitutional restriction on Wisconsin Right to Life's free speech.

The court struck a welcome blow for the First Amendment and against the speech regulation regime established by McCain-Feingold. But here is what struck me about the Washington Post report on the case: It says the ruling creates a "loophole" in the McCain-Feingold law. And it quotes a law professor opining that the ruling could "create a major loophole in which all groups have to do is say they are running advocacy-issue ads and they can avoid the statute."

Don't these people understand that the real "loophole" we're talking about here is the one created in the First Amendment by the McCain-Feingold law? The Supreme Court 's First Amendment campaign finance jurisprudence in the face of the free speech restrictions embodied in McCain-Feingold-type regulatory regimes has been disappointing to say the least. Muddle through McConnell v. FEC if you need convincing.

There is a good chance that the Wisconsin Right to Life case or a similar one will eventually make it to the Supreme Court for a ruling on the constitutionality of the FEC's application of the pre-election "electioneering communication" ban to issue ads that don't expressly advocate the election or defeat of a candidate. If the Supreme Court happens to uphold the right of groups to broadcast issue ads before an election that urge a position at odds with a candidate, wouldn't it be nice to see a headline, or even a storyline, to the effect that a "loophole" in the First Amendment opened by McCain-Feingold had been closed.

That would be "loophole" closing story of major import.

Robert McDowell and the Public Interest Standard

FCC Commissioner Robert McDowell has decided, based upon the terms of his Ethics Agreement, the independent view of the Office of Government Ethics, the Virginia State Bar ethics counsel and, most importantly, his "own personal sense of ethics," that he cannot participate in the consideration of the AT&T-BellSouth merger application. In the face of a present 2-2 deadlock among the remaining four commissioners concerning the merger, the FCC's General Counsel last week had authorized, but not required, McDowell's participation to break the current stalemate.

I happen to believe the merger should be approved promptly without resort to conditions, such as imposition of net neutrality mandates that have nothing to do with competitive concerns raised specifically by the merger. As I have written many times before, it is only because the Commission considers mergers under the indeterminate "public interest" standard that commissioners are able to range far afield from concerns related uniquely to the merger and consider matters much more appropriately considered in an industry-wide generic rulemaking. The Commission's handling of this case is Exhibit A (or more correctly probably X, Y, or Z) as to why the merger review process needs to be reformed.

While the public interest standard as a delegation of congressional authority to guide FCC decisionmaking is highly problematical, the public's interest in having public officials guided by the highest ethical standards ought always to be of paramount concern. Even though another individual in good conscience and good faith might well have reached the opposite determination, in its thoughtfulness and eloquence, Commissioner McDowell's statement explaining his decision to remain recused from participating in the AT&T-BellSouth merger decision is a shining example of the proper way for a public servant to approach public service.

Long past when this specific merger, as important as it is, is decided one way or the other, Robert McDowell's example will remain a public interest standard that ought to be embraced by all.

The 10% Telephone Tax

Each quarter the FCC recalculates the amount that consumers are taxed to support the "universal service fund". The FCC's most recent calculation shows the federal tax for the next three months will be 9.7% on every interstate and international call. (Yes, I know that, strictly speaking, this tax is called a "contribution" by the feds, but if it walks like a duck, and quacks like....well, you know. And I know this amount does not even include local telecom taxes imposed by many jurisdictions.)

USF funds are disbursed to subsidize communications service to school and libraries, "high-cost" areas, and low-income persons. Over the years the subsidies, especially those to high-cost areas, have grown exponentially, because there are no incentives built into the system to avoid wasteful expenditures or to use newer, more efficient, less costly technologies. In fact, under the current USF regime, the incentives are just the opposite.

This is not to say that the entire USF concept should be gutted. For example, there is widespread support for subsidies to low-income persons truly in need of discounted communications services. But it is to say the USF is in need of substantial reform. Congress passed up on the opportunity to make any progress on USF reform last year. But because new Internet-based communications services are disrupting the marketplace and do not fit comfortably with the existing USF scheme, the program is going to need to be reformed sooner rahter than later. And that reform, one way or the other, should include a substantial reduction in the total amount of subsidies disbursed each year and then a cap on any further growth from the reduced level.

A 10% telecommunications tax just doesn't make sense in today's communications-dependent environment.

Video Franchise Reform, Net Neutrality, and a Dear Larry Letter

Michigan’s Governor Jennifer Granholm is poised to sign a new video franchise reform law just passed by the legislature. By establishing uniform requirements for local franchises, the new regime presumably will speed up the ability of telephone companies like AT&T and Verizon to obtain the authorization they need to begin offering video services in competition with cable and satellite operators. More competition is good for consumers. And the bill apparently allows incumbent cable providers to opt into the new, less burdensome regime. That makes sense as well. In today’s ever-more competitive broadband environment, as a matter of equity, cable operators should not be subjected to disparate regulatory burdens.

It is encouraging that Michigan is now the 11th state to enact a statewide video franchise reform law designed in one way or another to speed up the franchise process so that local authorities are not roadblocks to competition. Michigan joins Texas, Virginia, Indiana, Kansas, Oklahoma, Connecticut, South Carolina, North Carolina, New Jersey, and California. While I have advocated in congressional testimony adoption of federal legislation to amend the Communications Act to establish a national franchising regime as a means of reforming the franchising process, the prospects for such legislation now seem dim. So it is welcome news that the states have become leaders in this reform effort. As more states pass video reform legislation, the pressure will grow on still others to follow suit, so as not to be left behind. The laggards will be leery of losing out on the telcos’ investment—and the jobs that accompany the investment—in new networks in states where the opportunities for quick, less burdensome marketplace entry are most promising.

Now to the Dear Larry letter. Google and its allies attempted to use Michigan’s video franchise reform bill as a vehicle for adding net neutrality mandates to Michigan’s statue books. In a “Dear Larry” letter dated December 11, Governor Granholm thanks Larry Page, Google’s co-founder and president, for “all the expertise Google has brought to Michigan on the issue of net neutrality.” If only she had stopped with the thanks. Instead, there’s this: “I believe it may be more desirable to pursue stand-alone legislation to further extend consumer protections by enacting net neutrality next year, rather than as an amendment to this year’s legislation.”

So it is almost certain that Michigan will be a net neutrality battleground in 2007. Other states likely will be NN battlegrounds as well if Google comes paging. This is too bad, because even if these efforts to impose Internet regulation are repelled, as they should be, there will be a significant expenditure of time and resources dedicated to fights around the country. The time and resources could be put to more productive use by broadband ISPs—like building out new networks and developing innovative new services and applications.

If states do adopt net neutrality mandates that purport to regulate the rates, terms or conditions on which Internet access is offered by broadband Internet service providers, the FCC should be ready with an order specifically preempting such state actions. Such an order would follow along the lines of the Pulver Declaratory Ruling preempting state regulation of VoIP services, but would more broadly extend to all IP-enabled services. The FCC already has compiled a record to support such action in its long-pending IP-Enabled Services rulemaking proceeding. Without rehearsing here all of the preemption jurisprudence (which, by the way, will be done at a later date), there is a clearly-expressed national policy against regulation of Internet services by the federal government and the states as well. Section 230 of the 1996 Telecom Act states this plainly: “It is the policy of the United States…to preserve the vibrant and competitive free market that presently exists for the Internet and other interactive computer services, unfettered by Federal or state regulation.” This deregulatory national policy for Internet access service now has been embodied in the FCC’s broadband proceedings and affirmed by the Supreme Court in the landmark Brand X case. If exercised properly, the FCC possesses authority to preempt state net neutrality laws or regulations. In essence, imposing non-discrimination obligations, and the rate regulation that inevitably accompanies non-discrimination regulation, contravene clearly expressed national policy.

A final thought: From all of the above, and from my congressional testimony earlier this year, it ought to be clear that I am sympathetic to FCC Chairman Kevin Martin’s decision to explore whether the Communications Act, as it presently stands, authorizes the agency to promulgate federal rules that would ease telco entry into the video marketplace by imposing some form of national franchising standards. In light of the explicit role Title VI of the Communications Act gives the state and local franchising authorities in awarding cable franchises, along with the act’s provision of a judicial remedy for resolving claims that a franchising authority has denied an additional competitive franchise, the Commission’s authority to adopt national franchising rules is not as clear as the agency’s authority to preempt state-imposed Internet regulation. In any event, if the FCC does go forward and adopt national franchising rules, it is likely that the question of the extent of the agency’s authority under Section 621 will end up being resolved by the Supreme Court several years from now.

That’s why it is important, in the meantime, for more states to join Michigan and the other ten that have already enacted video franchise reform laws --for them to do so without adopting net neutrality mandates that regulate the Internet.

Video Reform Spurs Fiber to the Home Growth

There is a new study out commissioned by the Fiber to the Home Council indicating that since the passage of the Texas video franchise reform law last year video-enabled fiber to the home (FTTH) has grown faster in Texas than in other parts of the country. This should not be surprising. The report attributes the faster FTTH growth rate to "perceptions that the new law, by ending time-consuming and expensive negotiations with municipalities for franchises, is substantially decreasing the costs of entry and operation, by eliminating unreasonable and unrelated requests during negotiations, and lowering ongoing costs to administer franchise agreements."

The FCC is about to act in its proceeding considering measures it can take to speed up the local franchise process. The new report from the FTTH Council shows why the FCC's efforts in this regard are important, and why the states, in this digital era of broadband competition, should continue their own efforts to reform the franchising process.

Real Property and Real Competition

Two recent items got me thinking about buildings--real property--and telecom competition, and, ultimately, about how respect for private property rights ought to inform telecom policy.

First item: I've just skimmed the recently issued GAO report on so-called "special access" services, those high-capacity dedicated circuits used by large volume corporate business users and "non-incumbent" carriers to transport high volumes of communications traffic. These are not the circuits used by residential users or small "Mom and Pop" businesses, so for some number of years it has baffled me that the FCC has had to spend so much time and energy defending the regulatory flexibility it thus far has granted the LECs for these circuits subject to the most competitive pressures.

But here's what's bugging me: Running through the GAO report, and, frankly, some of the FCC's UNE orders of three or four years ago, seems to be the notion that special access competition should be assessed on a commercial building-by-building basis. The report presents extensive data on the number of buildings that have more than one provider of special access. This is an exceedingly narrow--and inappropriate--measure of the telecom marketplace. If there is demand to warrant, with the various technological platforms available and competitive providers ready to snatch business, it is economically feasible in many, if not most, commercial areas for a new entrant to put in its own dedicated circuit from a nearby collocation office to a building. The competitive provider may have existing facilities down the block or around the corner that could be connected to a building assuming demand for such a connection. Making every building its own market just doesn't make economic sense.

Second item: In FCC Chairman Martin's December 6 speech at the Phoenix Center conference, he made a number of points concerning broadband deployment and video competition, and some of them, especially those concerning reform of the local franchise process made eminent good sense. If the Commission has the authority to do so under the 1992 Cable Act, some of the remedies the Commission is contemplating, such as imposing deadlines for action by local franchise authorities and caps on franchise fees, would speed up the introduction of additional video competition to the benefit consumers. But one of the items Chairman Martin says he is asking the FCC staff to look at is whether new entrants are being "unreasonably foreclosed" from providing service to consumers living in apartments and, if so, what can be done about it.

So both GAO's assessment of special access competitiveness and Chairman Martin's focus on the video marketplace spotlight the actions of particular building owners. That being so, it is useful to remember that there may be many reasons, from avoidance of disruption to the building's physical plant to the desire of the building owner to reap certain benefits in exchange for exclusivity, for the building not to allow multiple providers access to its building. But one reason is surely not to displease the building's tenants, who after all are free to relocate if they prefer a location with more choice in communications providers. If enough tenants value more communications choices above whatever other combination of price and amenities brought them to the building in the first place, they will move--and the building owner will get the message.

I understand that GAO did not suggest in its report that the government should mandate access to buildings in contravention to a building owners wishes. Neither did Chairman Martin in his speech. But with the focus on particular buildings, it is probably useful to remember that both instances represent cases in which respect for the right of a property owner to manage and use its real property as it pleases almost certainly outweigh any countervailing government interest in interfering with the owner's choices. This is especially so in an environment in which, due to technological and marketplace developments, consumers are steadily being treated to more communications choices.

From Cellphones to TV: This Convergence Thing Ain't No Joke

Yesterday's Wall Street Journal had a story about Comedy Central's plans to air on prime time TV a show first produced by start-up wireless carrier Amp'd Mobile Inc. Supposedly this is the first time a show originally produced for cellphone distribution will be aired on broadcast television. If you are a WSJ subscriber, you can read "Comedy Central Thinks Show Produced First for Phones Is Ready for Prime Time" here. Of course, it's common now for shows originally produced for broadcast TV to be "broadcast" soon thereafter on cell networks. The latest I read about is the hit "Ugly Betty". I understand on a cellphone Betty looks more like one of the "Desperate Housewives," another cellphone network TV favorite. But who even knew there were shows originally produced for cellphones?

As Richard Nixon was wont to say: "Let me be abundantly clear": Isn't it time to recognize that we live in an age of video abundance? Isn't it time to stop applying different regulatory regimes to different technological platforms based on the name we give the platform over which the video is delivered or the screen on which we watch the content? More abundantly clearly: Isn't it time to get rid of all the regulations applicable to video content and delivery that were developed in an age when consumers had much less choice?

Here's just one paragraph from the WSJ article: "The Comedy Central deal raises to a new level the nascent business of developing TV shows for cellphones, demonstrating that it has potential to become a breeding ground for TV content. It's the latest case of cross-pollination between technologies, with other examples being videogames morphing into movies, like "Lara Croft: Tomb Raider" and Internet videos winding up on cable networks like Current."

The import of this "cross-pollination between technologies" is that the American people have available an ever-increasing amount of content from an ever-increasing number of diverse sources to view or access whenever and wherever they wish on whatever screen they prefer. (Did you hear the one with the punch line, "You can call me 'TV', you can call me 'cable', you can call me 'the Internet', you can call me 'IPTV, or you can call me 'cellphone-cellvideo-cellweb' or 'VOPL-video over powerline' or whatever....? Just don't call the FCC!")

The reality of what's happening in the marketplace today, largely due to rapid technological advances in digital broadband networks and applications, ought to convince policymakers and regulators that media ownership and other remaining video regulations devised in the analog era are woefully outdated. With competition among broadband platform providers for delivery of differentiated content and applications, policymakers ought to understand that so-called "network neutrality" mandates, intended to prohibit differentiation, are completely unnecessary and very counter-productive. Consumers will vote with their eyeballs, eardrums, and mouse clicks when they are dissatisfied.

If the policymakers and regulators don't understand this marketplace reality at a time when content, such as that produced by Comedy Central, jumps quickly from cellphone to TV to the web to cable to satellite and back, the joke will be on us, and the First Amendment too.

Argumentation by Adjective

A group of self-described consumer groups has submitted a letter to the FCC opposing a delay in the July 2007 scheduled implementation date of the set-top box integration ban. I disagree. I've explained in an essay on CNET and in a longer paper why the implementation date should be deferred, so I won't repeat those arguments here. I will just emphasize, as I did in my papers, that this is a case in which the FCC's authority to grant common sense regulatory relief is very clear. While the self-identified consumer groups refer to the provision in the 1996 Act requiring the FCC to adopt set-top box regulations, they fail to mention that in the very same provision Congress gave the FCC authority to waive or even sunset whatever regulations it adopted. This is rare in the Communications Act and, indeed, in most statutes delegating authority to administrative agencies. I think that even the Congress that included the set-top provision thought that technology and marketplace developments might well outrun any regulatory mandates the FCC might devise. With downloadable security and the DTV transition on the horizon, it would be unwise for this Commission to enforce a regulatory mandate whose near-term costs to consumers outweigh any benefits. This Commission should have a market-oriented majority sympathetic to avoiding unnecessary regulatory mandates,

What really struck me about the group letter, though, is that it is replete with argumentation by adjective. The groups go on about the "the onerous costs of the cable monopoly"; the "excessive monthly rental costs for cable distributor boxes"; "the costly programming packages offered by cable". There's more of this adjectival arguefying, including the usual: "consumers are already suffering from exorbitant cable price hikes."

Yes, it would be nice if multi-hundred channel cable service, with all the new on-demand programming and other digital service features, was less costly. But by what measure do the consumer groups charge that the price of the service is "onerous", "costly", or "excessive". I confess I would be pleased if the price of telephone service, cable service, the Washington Post and Communications Daily, and most certainly Consumer Reports was less rather than more. But, of course, I might not have them at all if they were forced to be priced at some less "onerous", less "costly", or less "excessive" price that I or the authors of the consumer letter prefer. I would prefer that the marketplace rahter than the consumer groups or the government establish the "right" price. In the same vein, I would prefer that policy not be based on overheated rhetoric about "costly" services.

Finally, don't get me wrong: I want to see still more competition in the video marketplace from the "telephone" companies and others. It's coming, and consumers will benefit from that. But the competitive landscape of the broadband marketplace already is such that a forward-looking, market-oriented FCC should be initiating a proceeding to sunset the set-top rules, not just waive them.

The Maryland PSC and Regulatory First Principles

A story in the November 11 edition Saturday's Washington Post begins: "The Maryland Public Service Commission could be on their way out when a new governor and legislature take office...." The import of the story is that new governor-elect Martin O'Malley and the Democrat-controlled legislature will resume the campaign to oust all of the current members of the PSC and replace them with regulators more to their liking.

This is not a good idea for several reasons, which I have testified and written about here, here, and here. Now that the political season is over--and, really, were electricity rates and replacing the PSC big political issues anyway?--calmer heads should prevail. Before taking any rash actions the new governor and the legislature should hold balanced hearings which will provide a basis to carefully consider the following:

• Legislative action to force the resignation of all members of a regulatory body because of disagreement with a particular regulatory action or actions is virtually unprecedented in American regulatory history. There is a reason why this is so. Commissions like the PSC were established with the idea that they would bring specialized technical and economic expertise to the complexities of utility ratemaking. And they were also established in a way that would allow them to do their work largely free from overt day-to-day political interference. If the legislature decides to fire all the PSC commissioners because it doesn't like a decision, the notion that the commission's decisions will be based upon the application of specialized administrative expertise rather than politics will be severely compromised.

• The stability that is a necessary hallmark of any principled rule-of-law regime also will be compromised by precipitous legislative action dismissing the entire group of PSC commissioners. Without a certain degree of confidence in the stability of the legal regime that governs utilities subject to the PSC's jurisdiction, these regulated companies will be reluctant to undertake the investments and pursue the innovations necessary to meet future demand while maintaining high levels of service quality.

• It is important for the governor and legislature to have in mind that before the recent sizeable BG&E&E and Pepco rate increases electricity rates had been frozen since 1993. That is a very long time with stable rates. Under the electricity restructuring plan adopted by the legislature in 1999, BG&E, for example, could not raise retail rates at all until this year, even as wholesale energy prices were rapidly rising. What the new governor and legislature need to consider is not how much rates have gone up in absolute terms under the 1999 restructuring plan which introduced a measure of competition into the electricity marketplace, but rather how much in relative terms rates would have gone up under the displaced regulatory regime. The displaced rate-of-return regime was viewed by most respected regulatory economists as one that created incentives for wasteful investments and expenditures by utilities that were simply passed on automatically to utility consumers.

If done thoughtfully and deliberately, a review of the organization and structure of PSC is appropriate and useful. Indeed, in my pieces referenced above, I have suggested that a greater degree of political control of the agency may be desirable. But the way to do that, if the legislature decides to go in that direction, would be to allow the governor to remove PSC commissioners before the expiration of their terms, a power that he now probably lacks. This is more consistent with our traditional notions of separation of powers than legislative hiring and firing of regulatory agency personnel.

By the same token, it is always appropriate, of course, for the legislature to review and adopt policies to guide the PSC in its ratemaking activities. But in doing so, it won't do anyone any good--especially the consumers in whose interests it purports to be acting--if the legislature ignores the economic fact-of-life that ultimately utilities subject to the PSC's jurisdiction must recover their costs of producing their services. If they aren't allowed to remain financially healthy enterprises, all of Maryland's residential and business consumers who depend on them will suffer.

The Integration Ban and Integrating DTV Transition Policy

NCTA President Kyle McSlarrow has sent a letter dated October 31 to the leadership of the Commerce Department and the FCC Chairman and Commissioners explaining--again--why postponement of the implementation of the FCC's Integration Ban is necessary to facilitate the DTV transition in the least costly and most economically efficient way. McSlarrow's letter is here and it speaks for itself. His main point is that, if implemented, the integration ban will add $2-3 to the monthly price of a converter box that if leased by a cable consumer will avoid the need for payment of the DTV "over the air" subsidy. In other words, unless the integration ban is postponed, different parts of the government will be working at cross-purposes.

Recently I published a CNET commentary and also a longer scholarly paper urging the FCC, at a minimum, to postpone the implementation of the integration ban. As I explain in those two pieces, unlike the case with some issues where the FCC's authority to grant regulatory relief is less clear, in this instance the agency's authority is crystal clear. This is a case in which you would hope that the Commission--or at least a Commission majority--attuned to removing and relieving unnecessary regulatory burdens in a fast-changing communications environment would want to act quickly to show its seriousness of purpose.

Kevin Martin on Regulatory Modesty

FCC Chairman Kevin Martin gave an interesting, thoughtful talk last Thursday as the featured speaker at a program sponsored by the American Bar Association's Administrative Law & Regulatory Practice Section. His prepared remarks are posted on his FCC website.

Before an audience of administrative law afficianados, including me, Chairman Martin explained why we should want to be cautious, in our system of democratic governance, about giving administrative agencies too much unbridled discretion, even as he acknowledged the FCC may use such discretion to achieve sound policy results. An example of employing the FCC's discretion, reinforced with a good dose of Chevron deference, in the interest of sound policymaking is the FCC's deregulatory action in the broadband proceedings that led to the Supreme Court's affirmance in the Brand X decision.

In his address, Chairman Martin cited as worthy of concern the breadth of judicial deference to agency decisions under Chevron and the FCC's broad discretion, as interpreted by the D.C. Circuit, to implement the biennial regulatory review requirement. On the latter, he pointed out that the D.C. Circuit, over his dissent, had interpreted the Communications Act's Section 11 directive to the agency to repeal rules that are "no longer necessary in the public interest as a result of meaningful economic competition" as giving the agency more discretion to leave outdated rules in place than, to his mind, Congress had intended.

Regarding judicial deference to an agency's decisions, I have recently suggested that it would be more consistent with the political accountability and separation of powers rationale upon which the Chevron decision is premised, and, indeed, the separation of powers at the heart of our tripartite constitutional scheme, for independent agencies like the FCC to receive a lesser measure of Chevron deference than Executive Branch agencies. You will find my whole argument set forth in my Spring 2006 Administrative Law Review article entitled, "Defining Deference Down: Independent Agencies and Chevron Deference."

I suspect that Kevin Martin might not go as far as I go in my law review piece, and, in any event, in his speech to the Ad Law group he was articulating prudential concerns, rather than laying out a legal or constitutional argument. But anytime the head of a regulatory agency expresses caution about the exercise of whatever broad discretion he or she may possess, such self-abnegation is to be applauded. Regulatory modesty is often in short supply, and it is becoming.

Microsoft Softens on Net Neutrality

As a company with a touch of market power itself, perhaps Microsoft has a special sensitivity to the potential for abuse of the FCC's merger review process as a means of singling out specific companies for more onerous regulatory treatment than accorded other similarly-situated companies. In any event, for whatever reason, according to the Broadcasting and Cable report, MS has issued the following statement: "Microsoft has withdrawn its name from It's Our Net website for the pendency of the AT&T-BellSouth merger proceeding based on a company decision not to engage in the proceeding." The company added: "[W]e continue to support and will pursue other opportunities to obtain meaningful Network Neutrality policies."

The world would be a better place--or, more modestly, at least communications policy would be in a better place--if MS would grab the whole ball of wax and rethink its support of net neutrality mandates. Nevertheless, it is heartening to see the company apparently recognize the unsoundness of using the merger review process to impose conditions--such as the so-called Fifth NN principle--that would uniquely burden only the merger applicants and not other industry participants. The proposed condition pushed by the remainder of the MS's "It's Our Net" cohorts would essentially reimpose public utility-style common carrier regulation on AT&T's and BellSouth's broadband services. In my view, that would be a terribly backward and counterproductive step to take in today's competitive environment if applied to all broadband providers in the context of a generic rulemaking proceeding. But it would be especially egregious for the FCC to contemplate taking such a radical regulatory action in the context of a merger proceeding that singles out specific companies to bear significant regulatory burdens not shared by competitors. In that case, uniquely inequitable treatment would compound singularly unsound policy. I've written about the abuse of "regulation by condition" many times. Here's a recent one.

We don't know exactly why Microsoft decided not to participate in the merger proceeding. But taking the liberty of presuming that it shares some of my qualms about the use and abuse of the FCC's merger review process, it deserves some credit. Maybe it can use its "withdrawal period" to reconsider it general support for net neutrality regulation.

The Good Doctor's Prescription

When he was at the FCC heading up the agency's policy shop, where he served with distinction for so many years, Dr. Robert Pepper was known as one of the most knowledgeable and astute senior officials. He kept especially close tabs all those years in government service on the development of competition in various telecom markets, and he always seem to have in his briefcase the latest color-coded chart chronicling "on the ground" competitive developments.

In other words, Pepper (as he is wont to call himself) has been around long enough to have witnessed telecom markets that lacked effective competition and, therefore, needed some measure of regulatory intervention to protect consumers. And, conversely, he understands that regulatory intervention when it is unnecessary to protect competition imposes real costs on consumer welfare.

And I've been around long enough too to pay attention when Pepper speaks. So it catches my eye when I see in the October 23rd edition of Communications Daily [subscription required] that Pepper, now now a senior managing director at Cisco, is reported to have said at the recent CITI conference that net neutrality is really not about neutrality, but rather about some people's views of the government's role in business deals. And more specifically, according to Comm Daily, he said that "while network management technology can be used to create very competitive access environments...over-regulation can completely stifle it."

I don't think Dr. Pepper has any particular axe to grind as a senior Cisco official other than promoting a healthy a vigorously competitive broadband market that will be good for the country and, coincidentally, consume more and more Cisco equipment. When he speaks out in the net neutrality debate, it's worth paying attention to his diagnosis and prescription.

NBCU Version 2.0 and the FCC's Media Ownership Rules

The FCC is once again taking comments in its various media ownership dockets. (Note right at the outset that the open dockets reach back to include the multiple ownership of radio stations proceeding opened in 2000 and the cross-ownership of broadcast stations and newspapers opened in 2001). Just contemplating on a Friday afternoon the tortured history of efforts to relax or eliminate these outdated rules in the face of the new media realities is enough to dampen an upcoming weekend.

Take the lead in today's story in the Washington Post on the NBC Universal restructuring and job cuts: "NBC Universal announced sweeping cuts to its television operations yesterday demonstrating just how far a once-unrivaled network must now go to stay competitive with YouTube, social networks, video games, and other upstart media." NBC refers to the restructuring as the NBCU 2.0 plan. The Post's story is headlined: "NBC Takes a Big Step Back from Television." This in and of itself should be enough to get the pro-media ownership control crowd to acknowledge how much the world has already changed and continues to change as the various ownership dockets drone on at the Commission and bounce up and down between the agency and the courts. Every new day brings more fresh news about the woes of the old media as the new media garner more and more eyeballs and eardrums.

The past few weeks have brought a spate of stories about the financial pressures on most of the country's newspapers as they continue to lose readership --and ad dollars--to new media outlets. The newspaper/broadcast cross-ownership prohibition, one of the media ownership rules under review, was adopted in 1975 when most people still relied on their local newspaper or broadcast station for news and information. Regardless of whether it made sense then, and there is a lot of evidence that shows that commonly-owned media properties often publish and broadcast diverse views, the rule was adopted before the advent of hundreds of cable channels, before satellite TV and radio, before the Internet, before DVDs, before I-Pods and podcasts, and so on and so forth. Today, about 90% of Americans subscribe to multichannel cable and satellite television and the vast majority are online.

With print newspapers fighting for survival and local broadcast stations in a tough fight to retain viewers and listeners, who really thinks that the newspaper/broadcast ownership prohibition is necessary to promote "diversity" of opinion? To the contrary, in many communities, such a combination may be the only way to allow both types of outlets to remain financially viable through the realization of operating efficiencies.

I think NBC was trying to send a clear signal by calling its restructuring plan "NBCU 2.0". The signal has a lot to do with what the Internet is doing to disrupt the old media marketplace and the way people get news and information. The FCC needs to repeal or substantially relax its media ownership rules, and fast.

Unfair Allegations Against DOJ

In their October 13 letter to FCC Chairman Kevin Martin asking that the vote on the AT&T/BellSouth merger be postponed, Democratic commissioners Michael Copps and Jonathan Adelstein assert that further review is important "because the Department of Justice approved this combination with little substantive analysis...." In the next sentence, they characterize DOJ's effort as a "limited analysis."

This characterization of DOJ's work is unfair. In its official statement regarding the closing of its investigation, DOJ refers to its "extensive investigation" before it determined that the proposed merger is not likely to impair competition. It says it reviewed "extensive information" obtained from the merging parties and competitors and customers of the merging parties. It says it "thoroughly examined" all areas in which the two companies compete--residential local and long distance, telcom services provided to business customers, and Internet services, along with the impact on wireless broadband services. DOJ says it also evaluated the cost savings and efficiencies claimed on behalf of the merger, and found the documentation submitted in support of the claimed efficiencies likely to be realized. The closing statement contains a summary of DOJ's conclusions regarding each of these areas.

I happen to agree with DOJ's assessment that the merger does not appear likely to lessen competition, especially in light of the existence of competitors using alternative technological platforms and the technological dynamism that characterizes today's communications marketplace. Not to mention further potential competition lurking on the sidelines from entrants using still other technological platforms. I recognize that others, including Commissioners Copps and Adelstein, may have a different lens through which they view potential competitive impacts and the state of competition in the communications marketplace. But that is an entirely different matter from denigrating DOJ's investigation that lasted over half a year.

Commissioners Copps and Adelstein appear to wish that DOJ would have written an FCC-style 200-pager in concluding its investigation without imposing any conditions. But that misconstrues DOJ's role as chief law enforcer of the nation's antitrust laws. As DOJ says, in accordance with long-standing policy, the closing statement "is limited by the Division's obligation to protect the confidentiality of certain information obtained in its investigations." In the AT&T/BellSouth investigation, as in most, Justice says that its evaluation has been "high fact-specific," with much of the relevant information, understandably in today's competitive environment, not public.

I understand that the FCC may have broader authority under the indeterminate public interest standard than does DOJ in reviewing mergers. For reasons I have stated many times, reviewing mergers under the vague public interest stand is problematical, because it gives the FCC almost unbridled authority to extract so-called "voluntary" concessions from the merger applicants. See these Legal Times and this National Law Journal pieces for why this is so and for previous examples of abuse. In any event, whatever the FCC's approach, there is no justification for mischaracterizing or misunderstanding the effort of DOJ or the work the antitrust agency has done. Instead, the FCC should rely heavily on that work in getting on with the job of voting on the AT&T/BellSouth transaction.

Of You Tube, Media Ownership Mandates, and the First Amendment

The news about Google's proposed acquisition of You Tube for $1.6 billion (no, you can't write about this without also including a reference to the price tag!) made me recall the FCC media ownership hearings a week ago in LA. Remember, the five FCC commissioners trucked out to the Left Coast to hear the assembled crowd decry the concentration of control in the media that, in their view, has stifled the free flow of information.

So, I pulled out my press accounts of the hearing. Communications Daily reported in its October 5 edition that the vice-president of the Directors Guild of America told the FCC: "The robust independent production community that existed a decade ago has been destroyed. The pool of entities producing content today, a diversity of source, is almost non-existent." Much of the testimony was of this tenor.

Of course, with self-publishing, video-producing and sharing, and social networking Internet sites such as You Tube and My Space wildly popular, and receiving millions of hits a day, it is hard to know what to make of an assertion that "the pool of entities producing content today... is almost non-existent." To state the obvious: The pool of entities producing content has never been greater. We all know that, more and more, programming content put up on You Tube or Google Video or My Space or --yikes!--the FSF Blog may be viewed in a short time by millions of viewers around the world.

Maybe Mr. Hackford meant to say there is much less content being produced by members of the Directors Guild of America. Or much less content being produced by "directors" that live in California. Or much less content of the type that he prefers. Or that the proportion of programming now viewed on what he calls "television" screens is diminishing everyday compared to that viewed on what I call computer "monitors". Or whatever.

Mr. Hackford proposed--quite predictably--that the government should mandate that at least 25% of primetime programs be produced by firms not owned by networks or Hollywood studios. Ummm...I assume, in order to satisfy his union constituency, for purposes of calculating the 25% mandate, the Directors Guild wants to ignore video programming on sites like You Tube and Google and hundreds of others that appears screens that we don't call TVs and is available 24/7, not just in primetime. This is silly in today's world.

But in today's diverse media environment the argument that the media ownership control crowd is making is more than silly. It is constitutionally offensive. Government mandates on the amounts and the types of programming that media outlets can carry are inconsistent with core First Amendment values. This isn't the pre-cable, pre-satellite, pre-Internet 1960s or 1970s anymore when three broadcast networks dominated primetime. It ought to be primetime for the free speech values embodied in the First Amendment.

Maryland's Business Tax Climate Ranking

Each year the Tax Foundation releases a report detailing how states stack up under its State Business Tax Climate Index (SBTCI). The bottom line: This year Maryland slipped to 29th place in the SBTCI ranking from 25th place last year. In other words, Maryland's lawmakers, media, and citizens should take note: There is a lot of room for improvement.

The Tax Foundation's new release is here and the study's Executive Summary is here.

The overall business tax climate index ranking is composed of scores in five sub-indices: Corporate Tax (7); Individual Income Tax (35); Sales Tax(8); Unemployment Tax(30); and Property Tax(41). So it is really in the individual, property, and unemployment tax areas that Maryland falls way short.

As the Executive Summary says: "Good state tax systems levy low, flat rates on the broadest bases possible, and they treat all taxpayers the same. Variation in the tax treatment of different industries favors one economic activity or decision over another. The more riddled a tax system is with these politically motivated preferences the less likely it is that business decisions will be made in response to market forces."

It ought to go without saying that business decisions which respond to market forces--rather than decisions responding to political preferences--will lead to a sounder, more robust economy that enhances overall consumer welfare for all of Maryland's citizens.

The Skunk in the Fiber

In an October 5 piece in Communications Daily [subscription required], entitled "FiOS Big on User Content, Wary of Offending Subscribers," Verizon's Joseph Ambeault, director of interactive services, worries that user-created content that offends some subscribers might prevent Verizon's FiOS service from becoming a mass-market product. He see two potential solutions to address this concern about offensive content: "Make new content providers take editorial responsibility by contract, as programming providers do, or reserve earlier hours of the day for 'family entertainment' and loosening up later at night."

The article never mentions net neutrality. But, speaking of giving offense, NN seems to me to be the proverbial skunk in the fiber. I fail to see its irrelevance to dealing with the concerns expressed by Mr. Ambeault. Indeed, net neutrality mandates, such as those contained in the current version of the Senate bill, could make it difficult (that is, legally dicey) to implement solutions such as the perfectly logical ones suggested by Mr. Ambeault. Remember that the Senate bill (and similar proposals) provides that each Internet service provider must allow each subscriber to "access and post any lawful content of that subscriber's choosing" and "access any web page of that subscriber's choosing." It doesn't say anything, at least very clearly, about allowing "family entertainment" hours before loosening up later at night or allowing ISPs to negate the access rights by requiring content providers through contract to assume editorial responsibility.

Much of the discussion about net neutrality has focused on whether NN prohibitions are needed to ban the potential "discrimination" of two-tiered (what about three or four-tiered?) pricing. For reasons I've explained many times elsewhere, in today's competitive marketplace, they are not.

But apart from sound economic principles, I've also been arguing in recent months in different venues that net neutrality mandates are inconsistent with the First Amendment rights of the broadband ISPs. In other words, there is more at stake than just maintaining the freedom of the ISPs to differentiate and price their services in ways that respond to marketplace needs. Also at stake is the freedom of speech of the ISPs to decide how to "program" their networks. See here (National Law Journal), here (Perspective of FSF Scholars), and here (Broadcasting & Cable) for my recent pieces explaining why net neutrality mandates infringe on First Amendment rights.

The concerns of Verizon's Mr. Ambeault about dealing with "offensiveness" while trying to develop a mass market service are instructive. They show that NN is about more than the freedom to price to market. According to Comm Daily, Mr. Ambeault says Verizon has to get ahead of the problems and can't rely on taking down content as complaints arise. Assuming the offensive content is lawful, and most of what may offend is, with access and posting rights enshrined in federal law, NN might well prevent such takedowns by Verizon and other ISPs. At that point, like the newspapers, magazines, broadcasters, cablecasters before them, broadband ISPs may be left with no choice but to fight for their free speech rights.

Deregulation Works

Deregulation works! That is not a headline you are likely to see in any major newspaper. Well, maybe the WSJ would be an exception. But it would be an apt headline for a story recounting the FCC's release of its 11th annual report on the state of competition in the wireless industry.

Since 1993, when Congress largely eliminated federal and state economic regulation of the wireless industry, the American consumer has been served very well by the competition that has been unleashed. The FCC's news release recites the mind-boggling statistics concerning subscriber growth, time spent talking on our cell phones and the number of text messages, and decline (yes, decline) in the per-minute price, and the like. At the end of 2005, there were 213 million subscribers, 50 or so million more than the number of landline subscribers. You can read the statistics in the news release. Or you can just walk outside of your home or office anywhere in America and see people using their mobile devices everywhere--even where you wish they weren't!

FCC Chairman Kevin Martin points out in his statement that 98% of the total U.S. population lives in counties with 3 or more mobile service operators. There is no doubt the competition is robust, and mobile services will increasingly compete with other broadband platforms in the video and Internet market segments.

The mobile services market is a good case study concerning how a technologically-dynamic marketplace can flourish when lawmakers and regulators allow competition to substitute for regulation. All the more reason why it is important not to allow states, as some have been wont to do, to establish a patchwork of different regulations that, in effect, chip away at the 1993 deregulation mandate. In this light, the provision of Senate Commerce Committee bill establishing a national framework that preempts state wireless regulation represents sound communications policy.

Maryland's Economic Freedom Ranking

Today the National Center for Policy Analysis and Canada's Fraser Institute, two well-respected non-partisan public policy research organizations, released their annual report that attempts to quantify each state's economic freedom and examines what this means for economic growth. As the news release accompanying the report aptly states: "States that have lower taxes, smaller government and flexible labor markets tend to have comparatively more economic growth." The full study may be found here.

The rankings are based on data only for the period from 2000-2003, so they should not necessarily be taken as an accurate reflection of the current reality. Nevertheless, the study provides useful information and benchmarks. Among the states, Maryland's economic freedom score ranks it in 36th place, an improvement from 39th in 2000. The study's summary for Maryland states:

[O]verall numbers both show modest improvement from three years ago, the all-government ranking moving from 39th in 2000 to 36th in 2003 and the subnational from 24th to 15th. The same three-year improvement holds for government size (42nd to 32nd all-government, 27th to 20th subnational). Changes in the other two major areas were less dramatic. All-government takings and taxation actually dropped two places to 39th while the state and local stayed at 23rd. Labor market freedom all-government also went down slightly from 31st to 33rd, while the subnational ranking, the state’s best-performing measurement over the last decade, went from 14th to 12th. Maryland once hovered around the national average for combined state and local tax burden but has now exceeded it at 10.2%, placing Maryland at 11th highest. The state is even higher—No. 4—on the overall tax list after the federal burden is folded in. Its various alcohol taxes are at or below average, especially beer at 9¢. [Page 57].

Despite Maryland's modest improvement, there is obviously a lot of room for further progress, especially regarding taxes, regulation, and labor flexibility. Legislative actions, for example, such as singling out Wal-Mart for the imposition of government-dictated levels of health care spending and local ordinances purporting to dictate a "living wage" are the antithesis of the freedom we should expect in a market-oriented economy. And these measures have the unfortunate effect, as shown in the NCPA-Fraser Institute report, of repressing economic growth.

New Hampshirites take special pride in their state's motto: "Live Free or Die." Marylanders should take special pride in their state's nickname: "The Free State." And they should do all they can to help Maryland live up to its name!

The Real Lesson From Maryland's Voting Problems

The Washington Post had an editorial yesterday skewering election officials in Montgomery and Prince George's counties and Baltimore for the serious voting problems experienced on primary day. Given the problems--from failure to deliver computer cards in many precincts to failure to have a system in place for election boards to communicate with the polling places--some real skewering is in order. As the Post points out, the responsibility for the problems looks to fall most heavily on the local election boards rather than state officials.

But here's perhaps the most important takeaway from the primary day voting difficulties: Even apart from the serious legal issues that led to the judicial rebuke of the legislature's measure allowing early voting outside of home precincts, it doesn't make sense to consider new measures like multiple-day "early" voting when the election boards haven't shown they can run "scheduled" elections in a smooth fashion. Can you imagine the potential chaos--and potential for fraud and chicanery--if the local election boards were required to run elections spanning five days with voters having "multiple choice" precincts?

In today's lingo: "Let's don't go there!" If we place a high premium on election integrity--and what's more important?--let's just ask our election officials to ensure a smooth and clean election on one long-designated day in precincts with known voters. Apparently that task will be challenging enough.

The Foolishness of Wal-Mart Bashing

If you want to understand why it is foolish for (mostly) Democrats to bash Wal-Mart, read George Will's column, "Democrats versus Wal-Mart," in today's Washington Post. It is filled with facts and figures concerning how much Wal-Mart's low prices save consumers and I won't repeat them. Here's just one: "Wal-Mart and its effects save shoppers more than $200 billion a year, dwarfing such government programs as food stamps ($28.6 billion) and the earned-income tax credit ($34.6 billion)." Oh well, here's one more: "A Mckinsey company study concluded that Wal-Mart accounted for 13percent of the nation's productivity gains in the second half of the 1990s...."

Will's column is mostly about the war being waged against Wal-Mart by the Democrats at the national level. But the Democrat-controlled Maryland General Assembly can lay claim to some of the earliest and most irrational Wal-Mart bashing, passing a bill, since held unlawful by a federal court, singling Wal-Mart out for a mandatory increase in health benefits.

Regardless of party, let's hope the politicians begin to understand that wages and benefit levels are better left to marketplace regulation than government dictates. And they should understand that the consumers they purport to represent benefit from--and value--Wal-Mart's low prices.

California Opts For More Competition

The California legislature has sent the Terminator (aka "the Guv") a bill that would provide a big spur to video competition in the Golden State. The bill, which last night passed the State Senate overwhelmingly, provides for statewide franchises for multichannel video providers. This allows telephone companies, like AT&T and Verizon in California, to get into the video business in competition with the cable and satellite television providers much more quickly than if they are required to obtain franchises on a locality-by-locality basis. Importantly, according to the LA Times story, the bill will allow the cable companies to opt into the statewide franchise system so they are treated the same for regulatory purposes as the telephone company competitors.

The LA Times story contains this statement: "AT&T Inc., California's dominant phone company, would be the biggest beneficiary of the legislation." It is true that AT&T is a "beneficiary" of this legislation in the sense that it will be able to enter a market that it wants to serve much more quickly than it otherwise could, and it won't be subjected to locality-by-locality rent-seeking hold-ups. It may even be a big beneficiary in that it will make money at the business, although there are no guarantees in the fast-changing communications marketplace. But the "biggest" beneficiaries are California's consumers. They will benefit from the lower prices and better service quality that additional competition brings.

There are a lot of ideas that originate in California that I pray never make it eastward over the Rockies, or even the Sierra Nevada. But, especially the way that Montgomery County, Maryland thus far has held up Verizon's bid to provide video service, the Maryland General Assembly might want to look westward for a model for jump-starting video competition. My earlier post, "Montgomery County Impedes Video Competition," is here.

More Education Policy

Yesterday in a post in this space I said that if Maryland gubernatorial candidate Martin O'Malley's plan to pay big signing bonuses to school principals to take assignments in the most troubled schools was tied to past achievement than it warranted serious consideration as a worthwhile proposal. I added: "It will be interesting to see whether O'Malley pushes this or other new ideas in the face of union opposition."

Now, according to a story in today's Washington Post, Governor Robert Ehrlich is putting forward a plan to tie teachers' compensation, at least to some extent, to merit. He's including a request for modest funding in the state's fiscal 2008 budget proposal for planning what he calls a "Quality Compensation Initiative." According to the Post report on Ehrlich's merit pay proposal, O'Malley said "he believes that the state should focus on ensuring that teacher salaries and benefits, including pensions, are competitive."

It's not entirely clear, but that sounds like it may be a cop-out. Sure, the teachers' pay should be "competitive" in order to attract good people to the profession. But, in my view, some form of merit pay system, which ties compensation to performance, should be initiated for both teachers and principals, even if on a limited and experimental basis in order to get a program in place quickly. As I said yesterday, the teachers' and principals' unions, and maybe even the city administrators' unions, will oppose the notion of merit pay. All the more reason to have a good debate about the issue to see where our political leaders--and wanna-be leaders--stand on an important issue of education policy.

Education and the Public Sector Unions

There is a story in today's Washington Post about Baltimore Mayor Martin O'Malley's plan to pay signing bonuses of $200,000 to principals hired to lead dozens of Maryland's lowest performing schools. There are enough serious problems with Maryland's K-12 schools, and especially those in Baltimore, that it is good that the "education issue" is moving front and center in the gubernatorial race. And the notion of paying big signing bonuses to have seasoned principals go in and try to turn around the most troubled schools has a certain appeal, especially if the bonus award is tied to a demonstration of prior achievement as a principal. (It is not clear the extent to which O'Malley's proposal would actually tie the bonus to past demonstrated achievement.) Anything that acknowledges the value of tying the compensation of educators to past meritorious achievements and willingness to undertake difficult future challenges is an idea worth serious consideration.

But read the story closely and you might be struck by something that perhaps is now so embedded in our government that it often goes unremarked: The extent to which most all of our public servants are unionized. Putting aside the teachers' union, the story refers to the "National Association of Secondary School Principals," "the principals union in Prince George's," and the "city administrators union." While no definitive rejection-at-all-costs reactions were reported, the implication of the reporting is that all of these groups would find O'Malley's plan problematical.

I know you know the teachers are unionized. But did you know the principals had their own union? And the city administrators too? I understand that as union membership in the private sector has continued to shrink, the principal target of organized labor for several decades has been the growing public sector. The notion of public sector employees organizing unions to negotiate with the government of which, as citizens, they are part and parcel--in other words, to negotiate with themselves--continues to strike me as an ill-conceived oddity.

In any event, it is not surprising that these public sector unions are wary of any idea that shakes up the status quo, even one that might improve the educational prospects of public school children. It will be interesting to see if O'Malley pushes this or other new ideas in the face of union opposition.

The FCC's Adelphia Order, Mergers, and Free Speech

I confess that only in the heat of late summer's dog days was I able to muddle through the nearly 200 pages of the FCC's order approving the transfer of control of Adelphia's cable systems to Comcast and Time Warner.

Over the years, I have written much concerning how the FCC's merger review process could be improved by having the agency defer to the Department of Justice or the Federal Trade Commission's review of the competitive impact of the proposed transaction. That would eliminate a lot of the unnecessary duplication of government resources (yes, the FCC and the DOJ and FTC are all part of the same government) that takes place now. And, of course, at the same time it would minimize the tangible and intangible costs incurred by the parties to the transaction resulting from the duplicative effort. In essence, the merger review process should be reformed so that the authority of the FCC is confined to ensuring that the proposed merger does not create any violation of the Communications Act or of an FCC rule. A couple of my essays on the subject are here and here, the first from 2000 and the second from last year. So I have been at this merger review reform effort for a long time. The Digital Age Communications Act (DACA) project's Regulatory Framework Working Group recommends embodies this approach. And Senator DeMint's DACA bill, S. 2113, adopts the merger reform recommendation.

One of the major problems with the FCC's current review process is that the indeterminate "public interest" standard allows the agency practically unbridled discretion to impose conditions on the merger that are not be required to bring the merged entity into compliance with existing Communications Act provisions or rules. In the Adelphia case, the agency used that public interest authority to impose conditions mandating the "nondiscriminatory" availability of Comcast and Time Warner-affiliated "regional sports network" (RSN) programming to unaffiliated video distributors. The primary reason the FCC imposed the RSN conditions, even though they are beyond the scope of existing regulations, is that the agency deems RSNs to be "must have" programming without which competitors will be unable effectively to compete. According to the FCC, RSNs are "must have" programming because "sports fans believe there is no good substitute for watching their local and/or favorite team play an important game."

Now there is much to question about the economic analysis concerning the Commission's judgment that, in today's competitive broadband marketplace, RSN programming is "must have" programming (see paragraphs 217-218 on the competitiveness of the broadband marketplace). And you can question the wisdom, as a policy matter, of the remedies imposed by way of condition. But here I want to highlight why, apart from whether the agency's economic analysis may be questionable, the FCC's decision is problematical. Anytime the Commission imposes consequential regulatory judgments based on the content of programming, it is on shaky First Amendment ground. And in this instance it made some pretty fine-tuned cuts denominating "must have" RSN programming. For example, it defines RSNs to include Major League Baseball, the NBA, NFL, and NHL, NASCAR, and NCAA (but only Division 1) programming. (In his separate statement, FCC Chairman states that in North Carolina, "there is no substitute for Tarheel basketball." Surely, a slip of the tongue. In my heart, I know he meant to refer to the "Duke Blue Devils"!)

The problematical nature of the agency making such content-based regulatory decisions is illustrated by Commissioner Michael Copps' dissenting statement. He agrees RSN programming is "must have" but asks if it is the only such programming. "What if you only speak Spanish? Wouldn't a Spanish language channel be 'must have'? How about local news? Children's programming?" Copps says "[w]e ought to be careful before starting down the slippery slope of determining what is and isn't 'must have' cable content." He's right about that, of course. But, unfortunately Commissioner Copps' preferred remedy apparently would be to impose common carrier-like "non-discrimination" requirements on cable operators and other broadband service providers as well. Right about the slippery slope. Terribly wrong remedy.

My former colleague, PFF's Adam Thierer, recently posted a good essay on how people have come to view themselves as having entitlement to an expanding array of "rights" to cable television programming, and how the government, in one way or another, has catered to what Adam called this "rights inflation". Towards the end of his essay, Adam turns to the real "rights" at stake--the cable operators' First and Fifth Amendment rights. With respect to the First Amendment, he says: "When the FCC starts intervening in private contractual disputes over channel carriage, it is interfering with the editorial function played by cable programmers."

Bottom line: There has been far too little attention paid to the way in which the FCC's conditioning of the Adelphia transaction to mandate special access to regional sports programming raises serious free speech issues. And, as I wrote recently in a National Law Journal article, there has been too little attention paid as well to the way in which net neutrality mandates would impinge on the free speech rights of all broadband Internet access providers.

Don't get me wrong. I like to watch Blue Devil basketball games as much as Chairman Martin likes to watch the Tarheels. But especially in today's competitive communications environment, with all the various video choices available, I "must not have" this "must have" programming at the expense of an infringement of anyone's First Amendment rights.

State Legislators Against Net Neutrality

At its just concluded meeting in Music City, aka Nashville, the National Conference of State Legislatures sang the right tune on net neutrality. By a wide margin, NCSL's Executive Council adopted an anti-net neutrality mandate resolution formulated by NCSL's Communications, Technology & Interstate Commerce Committee.

The state legislators' resolution displayed a keen understanding of how the Internet is already changing society in many positive ways and contributing to the nation's economic growth, and how proposed net neutrality regulations put all this at risk. You should read the entire resolution, but the following excerpts capture much of the reasoning why net neutrality mandates should not be adopted:

"The exponential growth of the Internet has flourished as a result of both the government’s ‘hand’s off’ approach, ever increasing competition, as well as fierce consumer interest."

"Regulation of the Internet may interfere with future investment and innovations benefiting the health and well-being of its end user customers."

"Companies that invest in broadband and broadband-related applications should be afforded the flexibility to explore fair and competitive business models and pricing plans for their products and services."

"Mandated net neutrality regulations that go beyond the FCC’s broadband policy statement would impede future capital investments in the U.S.’ broadband infrastructure."

"The National Conference of State Legislatures calls upon the Congress of the United States of America to maintain today’s approach that allows the competitive marketplace to drive broadband and broadband-related applications development and deployment."

This is good free market-oriented advice from the state legislators. Congress should take it. Or the Nashville musicmakers will have cause for a sad but true new "somebody done somebody wrong song"....

Net Neutrality Unreality

There is an article in today's Wall Street Journal [subscription required] concerning a Cable Labs report that asserts cable operators may have to sharply boost capital spending in the future to keep up with their broadband rivals and to meet the increasing demand for high-speed Internet connections. Since the passage of the 1996 Telecom Act, cable operators already have spent upwards of $100 to upgrade their facilities to deliver digital broadband. In the WSJ article, officials from Time Warner and Comcast dispute the notion that they will need to sharply increase spending on their networks in order to compete effectively, even as Verizon is expected to spend $20 billion over the next 10 to 15 years laying fiber to homes across the U.S.

I don't know whether Verizon's major investment in fiber to the home or AT&T's sizeable capital investment on its own advanced broadband platform will pay off or not, or whether the cable operators will, in turn, have to spend additional billions on top of what they have already spent to keep up. I only know that, going forward, these are decisions that the marketplace can sort out far better than me. But what I do know is this: The WSJ article doesn't mention the skunk in the closet--net neutrality. Does anyone really believe that either the telephone companies or the cable operators are going to continue to invest the huge sums required to build and operate ever faster, higher capacity broadband networks if they are mandated to essentially operate as common carriers subject to anti-discrimination and "reasonable" rate regulation?

Google, Yahoo, Amazon and the other net neutrality proponents like to talk breezily about the "monopolistic" power of the telcos and cable to support their pro-regulation argument. But here are a couple of excerpts from the WSJ article: "Cable and telephone companies are battling fiercely to consumers they're the best provider of these and other services." And "Cable and phone companies have been in a technological arms race since the late 1990s when both began rolling out high-speed Internet connections. More recently, they have been getting into each other's primary businesses, with cable operators launching phone service, and phone companies offering TV."

The article points out that popular bandwidth-hogging sites such as Google and You-Tube are driving the need for ever more investment in broadband networks. I can understand why Google and its allies want to do whatever they can, through the imposition of regulatory shackles, to avoid paying for the increased costs they cause the broadband operators to incur. If the industry web giants like Google can enlist the government in putting in place a regime that requires others to subsidize the costs they cause to be incurred, it is a good gravy train. But, in the rivalrous environment described in today's WSJ article, I can't understand why Congress and other policymakers would seriously entertain the notion. I'd call doing so net neutrality unreality.

Early Voting Goes Down (For Now)

As the Washington Post reported on August 12, Ronald Silkworth, a Democrat-appointed Anne Arundel County Circuit Court judge, has ruled that the Democrat-controlled General Assembly measure that would open the polls a week before election day violates Maryland's Constitution. And Judge Silkworth decided that it is unlawful as well to allow voters to cast ballots outside of their home precincts. Curiously, the judge stayed his decision pending appeal. It seems to me that having found the Assembly's radical election law changes unconstitutional, it would have been wiser to put an immediate halt to the notion that such far-reaching changes in polling procedures should continue to be implemented. But at least Judge Silkworth has made a decision that appears to uphold the rule of law in the face of often overheated populist rhetoric that demeans the sacredness and sanctity of the right to vote.

In an editorial today, the Post does point out that "Democrats used their upper hand in the General Assembly to write legislation that unfairly favored their party...." But the Post, while not disputing the constitutional infirmities of the current measure, nevertheless holds out hope that they can be remedied. Of course, voting should not be made difficult for those who are eligible to exercise the franchise, and participation by all those eligible should be encouraged, not discouraged. Period.

But Maryland has a virtual "no excuses" absentee ballot policy for those who cannot--or simply do not want--to make it to the polls in person. With radical new changes in polling such as early voting and voting outside of home precincts, there is necessarily an increased risk of fraud. In light of Maryland's very liberal absentee ballot policy, even apart from the constitutional infirmities, Maryland lawmakers should have acted with much more prudence before enacting radical changes to the election law.

Putting aside any partisan motivations, behind all so-called "liberal" election law changes such as those rammed through by the Maryland Assembly is the notion that every single person should vote, no matter what. No matter if we have to bring the ballot to them on a silver platter wrapped in white linen with a fresh red rose astride. The Post captures some of this vote-at-all-costs sentiment in today's editorial when it says that giving Maryland voters four extra days to vote "would dilute the effectiveness of perennial excuses for voter laziness--such as the classic 'I forgot today was Election Day.'"

Excuse me. But "I forgot today was Election Day" --or voter laziness-- is not a reason to make elections an ongoing running affair, or to allow voters to show up to vote wherever it may suit their fancy. Once we make sure that those who want to vote, but can't make it to their local precinct on election day, find it easy to do so through absentee ballots, why can't we acknowledge that those who "forget" it is election day, or who just won't go to one extra bit of trouble or sacrifice to exercise the sacred privilege, probably shouldn't be voting at all? After all, elections don't come along every day--unless the Maryland General Assembly has its way. It is not too much to ask citizens to be sufficiently motivated to do a little extra to get to the polls on election day.

The old Soviet Union always boasted, and today's Iran, North Korea, and Cuba all boast, about election turnouts approaching 100%. No one would assert--I hope--that such ubiquitous turnouts are a sign of a healthy democracy.

The Examiner Eyes Earmarks

The Examiner newspaper is engaging in a useful exercise of "citizen journalism." In an article titled, "Is Congress Spending Your Money in Secret?," the newspaper points out that Congress is considering a Labor, Health and Human Services appropriations measure that presently contains 1,867 special earmarks that represent more than a half billion tax dollars.

The Examiner has created a database listing the earmarks for each state. Here are the earmarks for Maryland. While there don't appear to be any "bridges to nowhere," they are certainly worth eyeing closely. And here's where the "citizen journalism" exercise comes in: The Examiner is asking readers to check out the earmarks by calling their own congressperson and also the recipient institutions and asking pointed questions about sponsorship of the mark and its purpose.

Sounds like a worthwhile endeavor in citizen oversight of Congress. Since it is the taxpayers who foot the bill, there are a lot worse ways to spend the dog days of August than dogging Congress on its undisciplined spending habits.

The Stevens Bill Moves Towards Internet Regulation

In the first version of what is now called the "Advanced Telecommunications and Opportunities Reform Act," Senator Stevens sensibly proposed that the FCC study the net neutrality issue and report back to the Committee after a year. Unfortunately, the latest draft version recently circulated contains very problematical Net Neutrality mandates in Title IX, beguilingly titled, "Consumer Internet Bill of Rights." A study is a much better idea.

A couple of obvious problems. Although not yet much appreciated, Senator Stevens' draft bill, along with all of the other similar bills, tramples on the real Bill of the Rights, the one containing the First Amendment. That's the First Amendment that says rather plainly: "Congress shall make no law...abridging the freedom of speech, or of the press...." Yet the bill mandates that each service provider shall allow each subscriber to "post any lawful content of that subscriber's choosing...." Of course, it goes on to mandate that each service provider must allow each subscriber to access any content of the subscriber's choosing. Simply put, unless all of these ISPs are common carriers, which they have not been declared to be and should not be, it is a violation of the ISPs' free speech rights to be required to post any message of any subscriber's choosing or to be prohibited from selecting content which subscribers will not be allowed to access. I prefer that we put a higher priority on preserving freedoms in the Bill of Rights than creating new feel-good "consumer rights" that contravene these precious freedoms. I'll have more to say about this First Amendment argument fairly shortly.

Of course, it is unlikely that in the current increasingly competitive Internet access environment that any subscriber will be denied access to any content. If one ISP decides to restrict access to certain content, it is most likely that a competitor will see a market opportunity to stake out another position.

That brings me to a final point (for now): The draft has a new provision, Section 905, that mandates that ISPs must provide "any Internet service" without requiring a potential subscriber to purchase or use "any telecommunications service, information service, IP-enabled voice service, video service, or other service offered by such Internet service provider." There almost certainly will be enormous difficulties encountered trying to distinquish between the bare-bones "any Internet service" and these other usually integrated service offerings. This provision is an handsome and no doubt welcome invitation to the lawyers to enter litigation metaphysicsland. Remember the "Metaphysics of VoIP" from way back in January 2004!

What's more, putting aside the likelihood of ISPs being tied up in litigation knots for years to come, there is no consumer welfare reason, in the current competitive marketplace environment, for any anti-bundling prohibition. The draft bill, Section 902 (3), actually refers to "the vibrant and competitive free market that presently exists for the Internet and other interactive computer services." That being so, to paraphrase John Lennon, the Senator Stevens and his colleagues ought "to give markets a chance."

Wal-Mart, Health Benefits, and the Minimum Wage

In today's WSJ [subscription required], there is a good piece, "If Only Most Americans Understood," by David Henderson that recounts the arguments and evidence as to why raising the minimum wage law mostly hurts those it purports to help. Henderson explains most economists understand that raising the minimum wage "will help only a subset of the people it is thought to help, and will help them only a little--while hurting some of them a lot."

If the weight of evidence shows that mandating an increase in the minimum wage costs jobs and hurts those workers it purports to help, what is the impetus for the current federal increase proposal and the slew of state proposals? Henderson explains that quite nicely: "The focused support for the minimum wage comes mainly from the labor unions, all of whose members earn more than the minimum. This isn't benevolence at work, but greed. Their leaders understand that the minimum wage prices out their low-wage competition: it acts like an internal tariff. If only most Americans understood."

Of course, the adverse overall impact on the number of available jobs is the very same when the Maryland General Assembly mandates a minimum wage increase or mandates payment of a higher level of employee health insurance costs by Wal-Mart. (See the essay by FSF's Trevor Bothwell.) And the source the impetus for such new mandates is the same: from those who want to eliminate low-wage competition. Apart from hurting those whose jobs disappear, it is hard to see how this benefits consumers.

Computer Inquiry I, II, III, And On and On

At the book forum on Tuesday announcing the release of the new book, Net Neutrality or Net Neutering: Should Broadband Internet Be Regulated, which I co-edited with my former colleague Tom Lenard, I made the point that the current campaign to impose "net neutrality" regulation on broadband service providers, in effect, is nothing more than an effort to re-impose the same type of strict non-discrimination common carrier obligations on the broadband ISPs that were at the heart of each the three Computer Inquiry proceedings that played out at the FCC during the 60s, 70s, and 80s. I said that the current attempt to impose neutrality mandates on broadband providers could just as well be called Computer V, Computer IV being the failed campaign of a few years ago to impose "open access" requirements on cable operators.

For those fortunate enough to be too young too know these things, I pointed out Computer I was begun in 1966, when, yes, Virginia, AT&T did possess dominant market power. As computers began to be connected via communications, and new applications integrating data processing and communications emerged, the central idea of the Computer Inquiries was to prevent AT&T (and then post-divestiture, its Bell Company progeny) from using dominant market power to discriminate against newly emerging "enhanced" service providers. At that time, in the then-narrowband world still largely characterized by the market power of the Bell companies, the Computer Inquiry rules requiring strict separation of transmission and content and carrier non-discrimination made some sense.

But, as I pointed out at the book forum, as far back as its 1981 Computer II decision, even as the the FCC was imposing non-discrimination obligations, the agency predicted that "technological trends suggested that hard-wired access provided by the telephone company will not be the only alternative." It recognized even then that, as a result of technological developments, the communications marketplace was beginning to become more competitive.

Now flash forward a quarter of a century later. The FCC's prediction was correct, of course. With cable operators, satellite providers, and wireless companies all competing with the telephone companies, the broadband marketplace is radically different than the narrowband world that gave us the Computer I, II, and III proceedings. Over four years ago, based on an extensive record, the FCC determined that the broadband marketplace is competitive and that broadband ISPs such as Comcast, Verizon, and the like are not common carriers subject to the Communications Act's rate regulation and non-discrimination obligations. Of course, the broadband marketplace is even more competitive now then when the Commission made that finding, and is becoming more so every day.

So, it's discouraging that, in this changed marketplace environment, net neutrality advocates are trying to re-impose quarter-century old Computer Inquiry mandates that no longer make sense in today's world. You might as well call this new regulatory effort by what it is: Computer V. At least that way, you can easily trace its origins back to 1966, a far-away time with a marketplace terrain that now is almost a distant memory.

Power Politics

With air conditioners working overtime during the heat wave of the past few days, it is a good time to remember that it is unwise for politicians--whatever may be the short-term political gains--to make scapegoats of utilities. A story in today's Washington Post recounts the strains on the local power grid that have caused some scattered problems, along with deliberate cut-backs of power. And the Wall Street Journal has a story, "Heat Wave Spurs Calls for Stronger Power Grid," to the same effect from a national perspective. [Subscription required.] The Journal reports that, while the amount of backup power is now adequate, it "has been in decline as a result of a growing economy and disruptions in energy markets that caused many firms to cancel new power-plant projects." According to the Journal's report, "one major problem is making sure that there's enough power available to accommodate sudden spikes in usage caused by extremely hot weather."

No one likes rate increases, and certainly not every rate increase, or the full extent of such increase, sought by a power company is justified. But the fact of the matter is that the costs of producing electricity has spiked in the past few years, and, at the same time, demand for electricity has grown, putting pressure on the capacity of the existing transmission infrastructure. Ultimately the higher costs of producing electricity and the investment in new transmission facilities and power generating plants must be recovered if utilities are to remain financially healthy enough to meet the demand for electricity.

There is, of course, room for legitimate differences of opinion as to the proper pace and method of cost recovery. But make no mistake: It is the consumers who will suffer in anything but the short run if the utilities are not ultimately allowed to recover the costs incurred in generating and transmitting electricity. Absent the ability to earn a fair return, the utilities will simply not invest in the facility and plant upgrades necessary to ensure that consumers, over the long term, have available reliable, secure sources of power at reasonable rates.

That is why, in the face of this year's proposed BG&E rate increases following an extended six year rate freeze, the Maryland General Assembly's bill scapegoating the Maryland Public Service Commission is so disappointing. The wholesale firing by the legislature in mid-term of all the PSC commissioners appointed by the governor creates an unstable legal and regulatory environment that will harm the long-term interests of ratepayers. And it also harms the interest all citizens have in maintaining a system of governance that respects the separation of powers that is central to preventing abuse of government power. For more on this subject, see here and here.

Montgomery County Impedes Video Competition

At the end of June, Verizon filed a lawsuit in federal court against Montgomery County asking the court to declare that the county's cable franchise process violates the federal communications and antitrust laws, as well as its First Amendment free speech rights. Verizon is asking the court to issue a preliminary injunction invalidating the county's franchising law and directing the county to negotiate a franchise with Verizon within sixty days.

Verizon alleges that the county is acting unlawfully by seeking to assess franchise fees on its non-video services such as Internet access and Internet telephone services, in demanding that it set aside an exceessive number of channels for public access and government programming, and in demanding cash and free services as a condition of granting Verizon the franchise authority the county says it needs before Verizon can offer television services over its newly-installed (and very expensive) fiber optic lines. What's more, Verizon claims the county is even demanding, in violation of federal law, that it pay hundreds of thousands of dollars to cover the fees of the county's lawyers and consultants. (Would you believe there is a whole cottage industry of consultants advising counties around the country concerning how to extract the most "free" goodies from franchise applicants!)

I do not know whether all of Verizon's allegations against the county are true or not, although based on past practices around the country and Montogomery County's own excessively pro-regulatory history, the allegations have the ring of truth. In the past the county has tried to regulate Comcast's provision of high-speed Internet service, which it lacks the legal authority to do, and which it shouldn't do anyway as a matter of policy. In any event, whether or not all of the specific allegations are proven in court, in a larger and more fundamental sense they are beside the point. The truth is that the requirement that a local franchise be required before "cable" service be offered has outlived whatever usefulness it possibly may have had in the past. The requirement that cable television operators, such as Comcast in Montgomery County, obtain a local franchise has been used primarily as a means of economic regulation on the theory cable television service is a monopoly service. Of course, that is not true in today's technologically-dynamic environment. Although cable operators still may be the dominant multichannel video providers, consumers already have available the alternative of satellite television providers. And now Verizon wants to enter the video market in a big way in Montgomery County and, using its newly-installed high-capacity fiber network, offer consumers a TV package of several hundred digital video and music channels, with access to an on-demand video library.

Apart from the strict legalities of the County's position (more about that later in this space), it is clear that the county's foot-dragging harms the very consumers the county may try to claim it seeks to protect. Although you might think it would not take a brain surgeon to figure this out, several studies by respected scholars, and studies by the GAO and the FCC, have confirmed that when telephone companies enter a local market the prices for "cable television" service drop quickly. (I put "cable television" in quotes, because cable operators, telephone companies, and satellite operators all are scambling to offer various packages of services that include video, voice, and Internet access in competively priced bundles. And because in today's technologically dynamic environment, video, voice, and Internet services are all just bits offered over the same digital network facilities. And, of course, your kids--and maybe you too!--are already watching some of your favorite TV shows on your cellphone screens.)

Put simply, Verizon's lawsuit illustrates why, as I testified before the U.S. House of Representatives Commerce Committee in March, it is time to change the law to establish a national video franchise regime, one that treats telephone companies and incumbent cable television operators alike in all respects. In a competitive environment, there is no sound reason why either cable operators or other video providers such as Verizon should remain subject to local franchise reqirements. This regime would still protect the localities' interest in establishing reasonable regulations and cost recovery mechanisms to govern the providers' use of local rights-of-ways. But a national franchise regime would prevent localities from holding up new entry into the video marketplace while they try to extract maximum concessions from franchise applicants. A bill establishing such a national franchise regime passed the House of Representatives in June and awaits Senate action.

It is unclear whether federal legislation will pass this year removing the county's local franchising roadblock to the speedier introduction of competition. It really shouldn't have to matter. Montgomery County citizens should not have to wait any longer for additional video and communications competition. The county should quickly get on with the process of granting Verizon permission to enter the market. More competition means consumers benefit from lower prices and better quality of serivice. This simple proposition should not be that hard for the Montgomery County government to grasp.