Monday, October 30, 2006

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in the public interest as a result of meaningful economic competition" as giving the agency more discretion to leave outdated rules in place than, to his mind, Congress had intended.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.

Saturday, October 21, 2006

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.

Friday, October 20, 2006

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.

Monday, October 16, 2006

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.

Thursday, October 12, 2006

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.

Wednesday, October 11, 2006

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.

Friday, October 06, 2006

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.