The NFL's Chutzpah

The NFL's campaign to enlist Hill folks to pressure Comcast and Time Warner to carry the NFL network on terms other than those reached by voluntary negotiations in the marketplace is an exhibition of sheer chutzpah. (The classic definition of the Yiddish chutzpah is that given by Leo Rosten: "That quality enshrined in a man who, having killed his mother and father, throws himself on the mercy of the court because he is an orphan.") Broadcasting & Cable reports that yesterday another group of legislators urged FCC Chairman Kevin Martin to impose some type of arbitration mechanism on cable program carriage disputes. This follows NFL Commissioner Roger Goodell's proposals to the same effect for mandating "baseball-syle" arbitration to settle the carriage issues.

I wrote here last week in "Peace, Prosperity, and the NFL Network" that I did not understand why politicians "would take time to intervene in a dispute the marketplace is perfectly capable of resolving in a way that maximizes consumer welfare -- at least until the weighty national issues of peace abroad and prosperity at home have all been resolved to everyone’s satisfaction." A week later, I still don't understand why some politicians think they need to inject themselves into a dispute that ought to be settled in the marketplace by private negotiations. Surely there must be more important work for the legislators to do in areas where the government has a legitmate role to play. Surely the FCC has more important work to do.

Back to chutzpah: According to Communications Daily [subscription required], in his latest letter to Time Warner Cable CEO Glenn Britt, the NFL's Goodell states: "The objective is to have a neutral third party determine the price and tier for NFL Network distribution...We view it as a way to make sure that your customers can view our programming on fair terms."

If the NFL thinks it is so important, so much a matter of the national interest, that all Americans be able to watch its games it can opt to have them carried on a broadcast network. Presto! Problem solved.

With an antitrust exemption already in hand, short of a willingness to have itself declared a traditional "essential facility," perhaps on the theory the NFL is "essential to maintain the American way of life," the NFL should quickly back off its full court press to engage politicians in the business of deciding carriage terms. If the NFL keeps it up, at some point the league may convince the politicians that the NFL should be regulated as a public utility "in the public interest."

As I said last week, with competition now the rule among video providers, private negotiations in a marketplace setting are perfectly capable of resolving disputes between the owners of programming, including "high value" programming, and the owners of the facilities used to distribute such programming. Back to chutzpah. For Goodell to say to Time Warner that he views arbitration as a way "to make sure that your customers can view our programming on fair terms," well, that takes chutzpah. Why does Goodell think he knows more about what will best serve Time Warner's customers than does Time Warner? In today's competitive video marketplace, you can be sure that Time Warner, and Comcast too, are attentive to the desires of their customers.

In this instance, one of the customer desires that the cable operators are probably attending to is not overpaying for NFL programming that they perceive may be desired by a certain segment of their customers, but not by all. The politicians ought to let them tend to this business themselves and reject the NFL's pleas for government intervention.

Maryland's Looming Employee Benefits Deficit

In a commentary in the Baltimore Sun on August 30 of this year, I warned that, despite Maryland’s looming budget deficit of $1.5 billion, “almost no attention has been paid to unfunded health benefit liabilities for government employees that will cost the state billions of dollars into the future.”

Now comes the Washington Post story on December 19 reporting on a new study conducted by the Pew Charitable Trust Center for the States which calculates the unfunded liabilities owed by the states for retirement and health care benefits for state employees.

Note this at the outset of the story:

“Maryland, which has about 90,000 state employees, is facing a particularly high liability for its health insurance promise, $14.5 billion, compared with the $2.3 billion that Virginia owes its 100,000 employees, according to the report released yesterday. The difference is that Maryland is more generous to its retirees than Virginia is, researchers said.”

With roughly the same number of employees, the difference in the size of the liability for benefits between Maryland and Virginia is huge, and not in the direction that inspires confidence in Maryland’s fiscal discipline. The General Assembly just completed a special session to deal with the state’s budget deficit without taking any meaningful steps to address the huge projected budget liability attributable to benefits promised to public sector employees.

A state official is quoted in the Post story to the effect that the Pew study failed to account for $100 million the state put away this year to cover public employee benefit expense. This is $100 million is a small fraction of the estimated $14 billion in liability.

The official is also quoted to the effect: “We’re trying to figure out what we should do,” noting that retiree benefit cuts are likely to be seen as part of a solution.

The governor and General Assembly do need to begin to take seriously the task of figuring out what they should do about this huge unfunded liability. The figuring will require a commitment to fiscal discipline, especially on the spending side of the equation, which, more often than not, has been lacking in Annapolis.

Peace, Prosperity, and the NFL Network

In one sense it (almost, but not really) reassures me to know Sen. John Kerry is seeking to intervene in the dispute between the NFL Network, on the one hand, and Comcast and Time Warner, on the other, regarding the carriage of the NFL Network’s games on the cable operators’ systems. The NFL Network already is carried on the cable operators’ sports package tier for which subscribers pay an extra fee, but the league wants to have its package of a few selected football games carried on the lower-priced basic expanded tier.

According to a Broadcasting & Cable report, Sen. Kerry has called for a meeting between high-level Comcast, Time Warner, and NFL Network executives at which he proposes to mediate the carriage dispute. The sense in which Sen. Kerry’s efforts (almost, but not really) reassure me is that I could be lulled into supposing all the issues surrounding the Iraq war, climate change, health care, the subprime lending mess, and even the overall economy have been resolved. After all, these are the weighty issues that usually preoccupy Sen. Kerry. If he has time to worry about whether NFL Football games are carried on one cable tier or another, then perhaps the country is in much better shape than he usually portrays it to be.

The sense in which I am not reassured is wondering why Sen. Kerry thinks the government, in this instance in the person of a senior member of the Senate Commerce Committee, should intervene in this dispute between the football league and the cable operators. Doesn’t Sen. Kerry understand that, ultimately, someone has to pay for the NFL’s high-priced programming (unless the government decides to subsidize it, or, perhaps as a matter of the national interest, simply nationalize the National Football League)? Doesn’t Sen. Kerry understand that the NFL already enjoys a significant government benefit in the form of an exemption from the normal operation of the antitrust laws?

In this case, Comcast has made a business judgment that those football fans who desire to watch the extra NFL games should pay more so that the larger body of cable subscribers who don’t value watching these particular selected games as much won’t be burdened with paying the higher costs. This may or may not be a sound business judgment, or one that stays the same for all time. But Comcast’s decision surely is a business judgment about the use of its property that ought to be left to the marketplace. It is a decision that the private sector parties should be left free to negotiate without Sen. Kerry (or any other government official) intervening. Such government intervention, even if initially under the rubric of simple mediation, almost inevitably leads to coercion of one side or the other.

I understand that Sen. Kerry's interest here is that he may believe it is of paramount national interest that all Americans be able to watch -- as cheaply as possible -- the New England Patriots make their stretch run to a potentially undefeated season. If the NFL wishes, on its own accord it could resolve Sen. Kerry's Patriots' problem by moving the Patriots' game to broadcast TV and replacing it on the NFL Network with another game. But instead of doing this, what the NFL wants to do, if it can, is to enlist the government in putting pressure on Comcast and Time Warner so that the league can enrich itself as much as possible at the cable operators’ expense. In the league’s eyes, why be satisfied with an antitrust exemption?

What I don’t understand is why Sen. Kerry, or any other government official, would take time to intervene in a dispute the marketplace is perfectly capable of resolving in a way that maximizes consumer welfare -- at least until the weighty national issues of peace abroad and prosperity at home have all been resolved to everyone’s satisfaction.

Burying Communications Law Relics

Rep. Marsha Blackburn introduced a bill yesterday that would bury a relic of communications law that may have made sense when adopted but no longer does. The Consumer Freedom of Choice in Cable Act would repeal the FCC's authority to impose new regulations on cable operators under the so-called 70-70 provision of Section 612(g) of the Communications Act. Under this provision, the FCC is given discretion to impose additional regulations if it finds cable is subscribed to by 70% of the households to which it is available. Reps. Edolphus Towns and Joe Barton are co-sponsors.

A good case can be made for comprehensive reform of our communications laws in a way that replaces the current market-distorting techno-functional regulatory regime with one based on post hoc determinations grounded in competitive marketplace realities. But, in the meantime, there is something to be said for reform one step at a time, especially with repsect to a measure that has been as contentious as the 70-70 rule.

The way the brouhaha evolved in the last two weeks over whether the FCC should, or could, find that the 70-70 test was met did not do the agency much credit. And the truth is that it never should have happened. Despite the different and ambiguous ways in which the data may be constructed and interpreted, everyone knows that cable operators face vigorous competition in the video segment of the larger broadband market from two satellite providers, and, increasingly, from the telephone companies. Cable's share of the video segment has been declining, not increasing. Rep. Blackburn's bill, if enacted, would ensure that this or a future FCC doesn't use the 70-70 rule as a basis to impose new regulations on the cable industry at a time when the agency should be adhering to the agency policy pronouncement adopted five years ago: Broadband operators, regardless of the technology platform employed, should be subject to a "minimal regulatory environment."

The statutory provision that Rep. Blackburn's bill would repeal authorizes the FCC to impose additional regulations, even assuming that the 70-70 finding were made, only if "necessary to provide diversity of information sources." In 1984, when the statute was enacted, policymakers may have had a legitmate concern about the availability of a diversity of information sources. In today's environment of media abundance, it is fanciful to suggest there is a lack of information diversity.

Rep. Blackburn has a good understanding of the difference between the media and communications environment now and then. She delivered an excellent Keynote Address at the recent Free State Foundation/Institute for Poilicy Innovation communications policy conference, and I commend the full text to you. But note this line which presages her action on the 70-70 rule: “It should be the free market that decides what works and what does not work, not government intrusion. And, as the process unfolds, it is going to be critical for the United States Congress and for the Commission to hold the line on light touch regulation. And to resist the urge to unbundle what is already working in the free market system.”

Repealing the provision giving the FCC authority to impose additional regulation on cable providers makes sense in today's competitive broadband environment. And taking the free market-oriented philosophy embodied in Rep. Blackburn's keynote address and making it central to an ongoing effort to envision a new competition-centered communications law that puts marketplace realities at its core also makes sense.

Thanksgiving Day 2007

Every year, I anticipate the Wednesday-before-Thanksgiving Wall Street Journal almost as eagerly as Thanksgiving Day itself. Almost, but not quite.

But I do very much appreciate the Journal’s reprinting on the editorial page on this day the same two lead pieces that have appeared each year since 1961. The first, “The Desolate Wilderness,” is a chronicle, based on the account of William Bradford, of the Pilgrims taking leave of the port of Delftshaven in 1620, crossing the Atlantic, and settling in what became Plymouth Colony. Of the Pilgrims, the account ends: “If they looked behind them, there was a mighty ocean they had passed, and was now as a main bar or gulph to separate them from all the civil parts of the world.”

The second piece, “And the Fair Land,” was written by long-time WSJ editor Vermont Royster. The editorial ends this way:

"But we can all remind ourselves that the richness of this country was not born in the resources of the earth, though they be plentiful, but in the men that took its measure. For that reminder is everywhere -- in the cities, towns, farms, roads, factories, homes, hospitals, schools that spread everywhere over that wilderness.

We can remind ourselves that for all our social discord we yet remain the longest enduring society of free men governing themselves without benefit of kings or dictators. Being so, we are the marvel and the mystery of the world, for that enduring liberty is no less a blessing than the abundance of the earth.

And we might remind ourselves also, that if those men setting out from Delftshaven had been daunted by the troubles they saw around them, then we could not this autumn be thankful for a fair land."

Each Wednesday before Thanksgiving when I read the two editorials – and, yes, we reread them again around the Thanksgiving table – I am reminded of the many things for which I have to be thankful, especially family, friends, and community. But I am also reminded, foremost, that the Pilgrims came here to enjoy the freedom they could not enjoy in the Old Country. Amidst the turkey and stuffing, football and basketball games, and day-after sales that now begin Thursday midnight, it is pretty easy to forget that, in a large sense, Thanksgiving is a holiday which celebrates freedom. And a day to be thankful we live in a country in which we are free to celebrate, or not, in any way we wish. This cannot be said to be the case in many parts of the world.

Of course, this Thanksgiving has us entering another political season, as always one with important choices to be made --choices that ultimately impact in significant ways the balance struck in our Republic between more or less individual freedom, or more or less government control. Striking the proper balance, one that protects individual freedom from government constraint, while giving government its due rein under our constitutional system to protect and promote our common interests, is our unending task.

In Federalist No. 10, James Madison warned, quite rightly, that “factions” would divide “society into different interests” representing different political philosophies. Ambitious men in different parties, he said, would seek to “vex and oppress each other.” This understanding of human nature’s dark side informed the Constitution the Founders bequeathed. The chief safeguard against those seeking to vex and oppress is our government of separated and diffused powers. We can be thankful that this constitutional regime has worked well —so far.

But Madison, acknowledging a “degree of depravity” in mankind, also suggested there are other qualities in human nature, which together he called “virtue,” which “justify a certain portion of esteem and confidence.” In Federalist No. 55, he admonished that, “Republican government presupposes the existence of these qualities in a higher degree than any other form.” Thus, he concluded: “Were the pictures which have been drawn by the political jealously of some among us faithful likenesses of the human character, the inference would be that there is not sufficient virtue among men for self-government; and that nothing less than the chains of despotism can restrain them from devouring and destroying one another.”

This Thanksgiving, as on each before, I am thankful that, almost four hundred years after the establishment of Plymouth Colony, that, so far, here in America, there has been sufficient virtue among us for self-government to thrive.

At the Free State Foundation, we proudly promote, through our research and educational activities, free market, limited government, and rule of law principles. While we are always respectful of those with other views, our work is guided by those bedrock principles.

We are most grateful for your interest in the work we do, and for your confidence and support. And, most importantly, in the spirit of freedom, we wish you a most Happy Thanksgiving!

Maryland's Computer Services Malfunction

In its hurry-up special session, the General Assembly has just passed the $1.4 billion tax hike that Governor Martin O’Malley wanted. As I have said previously, more should have done to put in place spending reductions prior to adopting such a large tax increase.

One new tax deserves special mention: The tax bill will make Maryland one of only nine states to tax computer services. The new law applying the sales tax to computer services is expected to raise over $200 million per year in revenue.

In the end, after landscaping, massage therapy, tanning salons, arcades, and all the rest were dropped from the tax bill, computer services are the only new services targeted for the new, higher 6% sales tax. Why? It is as simple as Willie Sutton’s reply when asked why he robbed banks: “Because that is where the money is!” According to a Washington Post article, Sheila Dixon, the Montgomery County Democrat who heads the House Ways and Means Committee, explained, “We feel a little trapped because of the amount of money involved.”

But where the money is now and where it may be in the future if the information economy is stunted and the tax base erodes are two different things. The difference between short term revenue fixes and sustainable, longer term prosperity.

As I said last week here:

“[A]ssuming simply for the sake of argument that the application of the sales tax is going to be expanded, targeting computer services doesn't make sense. Computer services play the --not "a"-- but "the" key role in the information economy. The types of services that would be impacted by the new tax are integral to the installation and maintenance of high-speed broadband networks upon which so much of today's information economy depends. By virtue of their importance in enabling the efficient and less costly delivery of other goods and services, computing services have a positive multiplier effect on the economy at large.

Computer services constitute a segment of its economic base that Maryland should want to promote, not discourage, especially if the state wishes to compete with its neighbors such as Virginia, which have become world-class information economy hubs. The new tax will cause computer services firms, especially small ones that wish to grow, to consider moving to Northern Virginia or Pennsylvania, which don't tax such services.”

The Tax Foundation has just released its latest State Business Tax Climate Index. At No. 24, Maryland certainly doesn’t distinguish itself. Perhaps, more significantly and more relevant in assessing longer term economic impact, Virginia ranks 14th and Delaware 9th. Pennsylvania ranks 27th. The massive new tax hike is not likely to improve Maryland’s ranking.

And the special targeting of computer services in the tax package almost certainly will adversely impact what ought to be a concerted drive by Maryland to promote itself as a friendly venue for the high-tech information economy. Virginia certainly does so with vigor.

Had the General Assembly not been under the gun of the hurry-up special session, there is a good chance, upon more deliberate reflection, that it would have avoided taxing computer services. Indeed, in the legislation, it recognized the need to revisit this decision in five years. It should make a point of reconsidering much sooner than that.

The FCC Shouldn't Compromise Administrative Law Values

I was away last week on a bit of a vacation when the story broke that Kevin Martin, the Republican Chairman of the Federal Communications Commission, wants to impose significant new regulations on cable operators. Chairman Martin seeks to use a 1984 law that gives the agency discretion to impose additional regulations on cable systems if necessary to “provide diversity of information sources” as the basis for the new regulations. Under the statute, the FCC may impose such additional regulations only if cable systems with 36 or more channels are available to 70 percent of American households and are subscribed to by 70 percent of the households to which such systems are available.

Although there has been nothing formal released by the agency, press leaks indicate that one of the new regulations Chairman Martin wants to implement would mandate more extensive unbundling of cable systems’ network capacity for use by unaffiliated third parties at highly discounted rates set by the government. And Martin has long agitated for government-mandated unbundling of tiered cable program services. This so-called “a la carte” regime would allow subscribers to purchase channels on an individual basis, so that unbundling regulation might be on the table as well.

Suffice it to say the thought of this new regulatory initiative almost ruined my vacation. It is yet another piece of what, for Chairman Martin, has become a seemingly single-minded pursuit of new regulation of the cable industry,

As a matter of sound policy, there is no need for additional regulation of cable operators. Indeed, in light of the increasingly competitive environment in which cable operators and other broadband providers of video, Internet, and voice services compete, many of the current regulations —adopted in a monopolistic environment— should be jettisoned.

And, as I have written on several occasions before, further regulation of the kind proposed by Martin raises serious free speech and property rights issues under the First and Fifth Amendments to the Constitution. A sampling of those constitutional objections may be found here and here.

But now I want to write primarily from an administrative law perspective. As a former Chairman of the American Bar Association’s Section of Administrative Law and Regulatory Practice, this perspective is important to me in a professional sense and one about which I have some expertise. This latest in a series of Martin-proposed regulatory assaults on cable operators risks compromising fundamental administrative law values, both as a matter of process and substance. There is a broader public interest, one that transcends the interest of any one company or any one industry segment, in maintaining the integrity of the agency’s decisionmaking process.

First, the core administrative law values of transparency and public participation in agency policymaking have been put at risk. According to leaks to the press, Chairman Martin proposes to have the agency regulate based on a determination that the second prong of the “70-70” test is met, that is, cable service is subscribed to by 70 percent of the households to which it is available. According to press reports, Chairman Martin is relying on data from one industry source, Warren Communications News, Inc., to support his conclusion that the second prong, cable subscribership as a percentage of homes passed by cable, has been met. Virtually all other sources reporting cable subscribership data point to a contrary conclusion that puts cable’s penetration of homes passed in the 60% range. This is consistent with the generally acknowledged and consistent findings, by the FCC itself among others, that cable operators’ share of the multichannel video market has been declining for several years in the face of stiff competition from other alternatives, including satellite television and the phone companies’ video service offerings.

It has now becoming evident —based on clarifying and qualifying statements made by Warren’s Managing Editor— that it is doubtful Warren’s subscriber data provide support for the conclusion Chairman Martin wants to reach. When they read the qualifying statements by Warren’s Managing Editor in the press concerning the limitations of the data, Commissioners Deborah Tate and Robert McDowell wrote to Warren asking that all information concerning Warren’s data be filed in the public record.

The question whether the FCC should impose significant new regulations on cable operators is far too important to be left to conclusory back-of-the-envelope calculations that contradict the calculations based on nearly every other data source. In light of the questions that already have been raised about the use to which the Warren data is being put, it is imperative, as Commissioners Tate and McDowell have requested, that all clarifications and qualifications regarding the data’s limitations be put on the public record and subjected to scrutiny by all interested parties.

Transparency and public participation are core requirements of administrative due process. Absent the ability of the public to receive notice of, and to examine, all the underlying data and accompanying caveats upon which key regulatory factual findings are supposedly premised, the ability of the public to participate meaningfully in the agency’s process is negated. The integrity of agency’s decisionmaking process is compromised. This is especially so when the proposed draft factual findings which are the subject of leaked press reports run counter to the findings based on data from most other sources.

Another core administrative law value, this one substantive, relates to the rationality of the agency’s decisions as it exercises its discretion under delegated statutory authority. It is important to understand that even if the second prong of the 70-70 test were met, at most the Communications Act only allows the FCC to impose new regulations; it does not mandate them. And, significantly, the FCC is authorized to do so only if additional regulation is “necessary to provide diversity of information sources.”

In today’s era of media abundance, now including the Internet among all the others, it is simply not rational to suggest more regulation is needed to provide a diversity of information sources. There —apparently— always will be some who will suggest, despite the reality of the media marketplace, that Americans don’t have access to a diversity of viewpoints on important public issues. This position is no longer tenable, if it ever was. It would be untenable if only the average cable system, with its hundreds of program channels, were to be considered. But when terrestrial broadcast radio and television stations, satellite radio and television, wireless information providers, the Internet, newspapers, magazines, and the rest are thrown in, it is distinctly irrational to suggest a lack of diversity of information sources.

In the last of its Video Competition Reports, released in March 2006, the FCC concluded: “The market for the delivery of video programming services is served by a number of operators using a wide range of distribution technologies.” Based on its collection of a comprehensive set of data, the Commission summarized its findings this way:
We find that almost all consumers have the choice between over-the-air broadcast television, a cable service, and at least two DBS providers. In some areas, consumers also may have access to video programming delivered by emerging technologies, such as digital broadcast spectrum, fiber to the home, or video over the Internet. In addition, through the use of advanced set-top boxes and digital video recorders, and the introduction of new mobile video services, consumers are now able to maintain more control over what, when, and how they receive information. Further, MVPDs of all stripes are offering nonvideo services in tandem with their traditional video services.

Marketplace developments since the agency published that finding have only led to the availability of more consumer choices, especially as the telephone companies such as Verizon and AT&T, are now rolling out their video offerings with increasing robustness. An abrupt reversal of course by the agency to make a contrary determination would simply not be supported by the evidence. In traditional administrative law terms, it would be arbitrary and capricious and an abuse of discretion for the FCC to conclude that it is necessary to impose additional regulation to provide a diversity of information sources.

There are many familiar policy and legal objections to Chairman Martin’s latest stratagem to impose new regulations on cable operators. But in an important way that ought not to be ignored there are also not-so-familiar objections that sound in administrative law. And the sound is one in which core administrative law values of transparency in decisionmaking, the ability of the public to participate meaningfully in the rulemaking process, and the rationality of the policymaking process are jeopardized in a way that threatens to harm not only cable operators, but, more importantly, the institutional integrity of the FCC.

This Maryland Tax Doesn't Compute

Maryland faces a looming budget deficit in the $1.5 billion range, and Governor Martin O'Malley called the legislature, heavily controlled by the Democrats, into a special sesion to try to deal with deficit. A day or so ago, completely out of the blue, the Maryland Senate Budget and Taxation Committee proposed for the first time to apply the state sales tax to computer services.

This is surely a stupid idea that doesn't compute.Under the Senate Committee proposal, computer services would be lumped with landscaping services and arcades to take the new 6% sales tax hit. Computer services include computer facilities mangaement, computer programming, systems integration, computer disaster recovery, and hardware and software installation and maintenance.

Several points need to be made here about what is going on in the Maryland special session:

First, there has not been enough serious hard-nosed discussion by the Governor and General Assembly concerning meaningful spending cuts to reduce the budget deficit. Before considering widespread and significant tax increases of the kind now being considered, the Governor and legislators should show a heretofore lacking seriousness about controlling spending. In their minds, the burden of closing the deficit predominantly falls on the tax side.

Second, the way in which the proposed new tax on computing services popped up out of the blue illustrates the pitfalls of trying to develop rational tax and budget policy on the fly during a hasty special session. There have been no hearings on the impact of taxing computer servcies for the first time. Or for lumping them with landscaping and arcade services, while dropping tanning salons, massage therapy, and health clubs from the proposed expanded tax net.

Third, assuming simply for the sake of argument that the application of the sales tax is going to be expanded, targeting computer services doesn't make sense. Computer services play the --not "a"-- but "the" key role in the information economy. The types of services that would be impacted by the new tax are integral to the installation and maintenance of high-speed broadband networks upon which so much of today's information economy depends. By virtue of their importance in enabling the efficent and less costly delivery of other goods and services, computing services have a positive multiplier effect on the economy at large.

Computer services constitute a segment of its economic base that Maryland should want to promote, not discourage, especially if the state wishes to compete with its neighbors such as Virginia, which have become world-class information economy hubs. The new tax will cause computer services firms, especially small ones that wish to grow, to consider moving to Northern Virginia or Pennsylvania, which don't tax such services.

Perhaps it might make sense, assuming taxes must be raised at all, to tax arcades or tanning salons. But taxing computer services doesn't make sense.If Maryland's legislators take the time necessary to develop sound budget policy, they will realize that this is one tax that doesn't compute!

A Bundle of Unbundling

For many many months now, I have been saying that, in one fashion or another, many of the hot-topic communications policy issues involve this question: Will the government require broadband operators such as AT&T, Comcast, or T-Mobile (by way of example) to unbundle transmission services, applications and content?

As I have pointed out many times, unlike the case of the accurately named “Unbundled Network Elements” regime, some of today’s regimes that have already or would impose unbundling mandates don’t advertise that fact as explicitly. Rather they have more felicitous-sounding monikers, such as Open Access or Net Neutrality. No matter. Even when the unbundling mandate is not spelled out in so many words, it is there. By virtue of requiring a non-discrimination obligation, unbundling necessarily must be implemented in openness and neutrality regimes. Why? Because, in the end —that is, at the end of all of the rulemaking and the regulatory and judicial litigation— there is no way to enforce a non-discrimination mandate that requires all to be treated equally without unbundling elements that otherwise might be integrated. Absent unbundling, there is no basis for gauging equal treatment.

Here are some current issues before the FCC that involve unbundling of transmission, applications, and/or content:

· 700 MHz Proceeding: In July, the Commission adopted an order mandating that the winner of the 700 MHz C Block spectrum auction operate on an open platform basis. This means that the wireless provider must not discriminate in allowing third party devices and applications access to its network. When all gets said and done, the only way to enforce the non-discrimination obligation is to require unbundling of the elements of the network operator’s own services, equipment, and applications.

· Net Neutrality Obligations: The FCC is exploring whether to impose net neutrality obligations more generally on wireless providers, and it already has adopted generic net neutrality principles and employed them to impose net neutrality obligations on providers in the context of merger proceedings. At the heart of the net neutrality obligation is the non-discrimination obligation with respect to the applications, content, and devices of entities unaffiliated with the broadband operator. Once again, an unbundling requirement is a predicate for enforcing the neutrality mandate.

· Open Cable: The FCC is considering whether it should adopt regulations that dictate the extent of “openness” required in digital cable ready equipment. The cable industry has developed a platform that it calls OpenCable that employs a “middleware’ solution to enable third parties such as television manufacturers and applications and content providers to develop and deliver a host of new two-way interactive services using the Open Cable standards. But the consumer electronics industry is asking the FCC to require still more mandatory unbundling of the digital cable ready platform.

· A La Carte Mandates: The FCC Chairman has suggested that cable operators ought to be required to offer their program channels on an a la carte basis so that the subscriber pays only for those individual channels to which he or she wishes to subscribe. The unbundling in this instance is explicit and obvious.

· Must Carry and Leased Access Mandates: These are mandates that require cable operators (and surely other broadband providers to follow) to set aside capacity on their own networks for use by third parties. In essence, the service provider is required to unbundle capacity on its network so that the separated capacity can be used by an unaffiliated party.

Note that I haven’t addressed the question whether the unbundling mandates in each of these instances are justified. Regular readers of this space know that, in general, I do not believe they are. This is because, considering today’s increasingly competitive and technologically dynamic communications marketplace, I believe it is counter-productive and costly —in terms of chilling investment, innovation, and more facilities-based competition— for the FCC to attempt to micromanage broadband operators’ business models, while modeling what it considers to be ideal competitive outcomes.

Absent instances of demonstrable market failure, which I don’t see, broadband providers ought not to be locked into “unbundling” straight-jackets that prevent them from responding to changing consumer demand in the most efficient and innovative ways, including ways that integrate services, applications, content, and equipment. The FCC ought not risk becoming known, however informally, as “The Federal Unbundling Commission.”

But don’t get me started.

For all I really want to do here is to provoke your thinking on this subject and, of course, entice you, if you haven’t already signed up, to attend the “Federal Unbundling Commission?” conference sponsored by the Free State Foundation and the Institute for Policy Innovation on Tuesday, October 30. Senator Jim DeMint and Representative Marsha Blackburn, two of the most market-oriented and influential telecom policy leaders, will deliver keynote addresses discussing these issues. FCC Commissioner Deborah Taylor Tate will be there. And the issues will be addressed by two panels, one comprised of industry representatives and the other of expert scholars.

Since the conference, including lunch, is free, I can’t guarantee your money back if you are not satisfied. But I do guarantee you will know a lot more about the impact of various net neutrality, open access, and unbundling mandates when you leave than you did when you walked in the door.

Information about the conference is here. To register, rsvp to Erin Fitch at erinfitch@ipi.org or 972-874-5139.

Bearing in Mind the Broadband Forbearance Order

I have only had a chance to do a quick read-through of the FCC’s October 12 order granting AT&T some regulatory relief regarding certain packet-switched and optical transmission broadband offerings. I would have preferred to have seen a more robust exercise of the Commission’s authority to forbear from regulation to include an elimination of Title II common carrier requirements. Nevertheless, the Commission’s Republican majority (over the dissent of the two Democrats) deserves credit for forbearing from dominant carrier regulatory requirements for these high-capacity business broadband services.

The Commission’s action offers some hope that a Commission majority will move forward promptly, and with more constancy, to grant fuller regulatory relief for the broadband services of other providers—and to refrain from imposing new regulations on broadband providers. There is certainly a rationale for adopting such a deregulatory posture based upon certain statements in the Commission’s order.

Here are some statements and determinations that the agency offered in support of regulatory relief that struck me as significant. The logical import of these statements should not be lost on the Commission going forward.

· The Commission points out that, even in 2004, it determined “that a diverse range of broadband technologies and facilities-based platforms that promote both price and quality-of-service competition will be available to consumers….” [Para. 48] The competitive environment is more robust now than in 2004. The Commission should recognize, with a consistency that has not always been present, the significance of this competitive finding whenever it considers any issue relating to broadband regulation.

· The Commission considers the broadband market to be national, rather than one more limited in geographic scope. [Paras. 20-21] This is appropriate and consistent with past FCC actions regarding broadband.

· Significantly, the Commission views “a broadband marketplace that is emerging and changing.” [Para. 20] Shortly thereafter, the Commission again refers to “the emerging and evolving nature of this market….” [Para. 23] This is a key insight that should lead the Commission to be wary of imposing regulatory straight-jackets of various kinds on broadband providers as they experiment with new business models that respond to evolving and changing consumer demand.

· In assessing the status of competition, the Commission states that “we find that competitors either are providing, or readily could enter the market, to provide these services.” [Para. 23] Recognizing the role that potential competitors play in disciplining the market is significant and welcome because there have been many times when the agency appears not to have considered the relevance of potential competition.

· In light of the evolving and changing nature of the market, the agency says it “would not give significant weight to static market share information in any event.” In a marketplace as technologically dynamic as communications, and especially broadband, it is necessary for the Commission to take a dynamic rather than a static view. This appreciation of the dynamic nature of the marketplace should carry forward to many other issues before the agency, not least of which is special access, but also to issues such as the consideration of the Sirius-XM merger, where focus on static market definitions and static market shares seems to dominate the thinking of regulatory proponents.

· At several places in the order there is an appreciation that, even where competing services do not presently exist, competitors can deploy facilities “to the extent there is a demand for such services….” [Para. 25] In other words, the ability to deploy new facilities is ever present if there is a demand, and this potential competition constrains the prices of the incumbents.

· Finally, there is this: “As the Commission has stated before in reducing regulatory requirements where competition is present, there comes a point at which constraints become counter-productive, especially in terms of carriers’ ability to respond to customer needs.” [Para. 35] This is the timing issue about which I have written before, especially in the special access context. For a discussion of the timing of deregulation and other regulatory principles in the context of special access, click here. As competition develops, it is better for the enhancement of consumer welfare to deregulate too early rather than too late. And it is important not to go backwards ---that is, to re-regulate—absent demonstrable proof of market failure. The Commission’s statement above seems to be acknowledging that, while there will always be disputes about the particular market situation, consumers ultimately suffer when regulatory relief actions are too halting.

So, while I would have preferred bolder action, the majority should be commended for going as far as it did.

As importantly, going forward, the Commission should be considerably more constant than it has been in charting a deregulatory course for all broadband providers, regardless of the technological platform the providers employ. This deregulatory course is warranted by the current marketplace environment. As indicated above, much of the Commission’s reasoning in the AT&T forbearance order --with its emphasis on market dynamism, the impact of potential competition, the evolving nature of the marketplace, and the like --provides a basis for a principled deregulatory policy, if only the agency would take its own words to heart.

Competition, Innovation, and Regulatory Paradigms

The net neutrality, open access, mandatory unbundling proponents argue that regulation of broadband providers is needed to promote innovation, especially at what they call the networks’ “edge,” the realm of application and devices. Having in mind today’s competitive environment, I say just the opposite. A Carterfone regime may have been fine for 1968. AT&T had a monopoly, or a near one, then. It is not fine for 40 years later when competition is now the norm, not the exception.

In their zeal to enforce absolute non-discrimination rules, the net neutrality proponents ignore —and are willing on behalf of consumers in whose name they purport to speak— to sacrifice any cost-saving efficiencies and innovation that might result from unfettered integration of networks, applications, and devices. They close their eyes to how competition in an unregulated marketplace leads to innovation.

I am struck by an October 4, 2007 article, “Apple Raises Bar on Smart Phone,” in the New York Post. The lead: “Pushed by the successful launch of the iPhone, mobile device makers are scrambling to come up with innovative gadgets that geeks will want in the Christmas stocking.”

The article says that the iPhone’s introduction “has triggered a lot of innovation and experimentation and new design approaches on the part of competitors.” According to the piece, Verizon Wireless will begin selling more “up-market” phones, including one made by LG Electronics that incorporates touch screen technology. Microsoft is upgrading its Zune digital music player. And Noika is undertaking a marketing blitz touting the fact that iPhone users must use AT&T’s wireless network. Not surprisingly, all manner of different competitive marketplace responses.

Please understand that the innovative iPhone was introduced in an environment yet to be governed by net neutrality, although the FCC, wrongly, took an unwise step in that direction in its 700 MHz decision this summer. Indeed, had the government had in place neutrality rules that would have prohibited the non-neutral (read: discriminatory) relationship between AT&T and Apple, we quite likely would not have the iPhone, at least not now. Why? Because almost certainly it was the ability of the two companies to structure a negotiated business arrangement that they thought made economic sense that led to the decision to go forward. (Note: This is not the same thing as saying that the deal they struck, in fact, makes good economic sense for either or both. The vagaries of the marketplace will make that determination.)

I was quoted last week in the press as saying the current FCC and its cohort of commissioners had “bounced around a bit” and needed to establish a firm free market policy orientation. True to my nature, I was being a bit kind. The current FCC cohort has bounced around too much, not just a bit. The three Republicans, the commissioners who by all rights, and by their own professions, ought to be most sympathetic to eliminating and relaxing existing regulations and not imposing new ones, have been inconsistent and unsteady in their adherence to market-oriented principles.

We live in an era of increasing competition among service providers that, like Myamar, were formerly known by different names (“telephone companies,” “cable companies,” “cellphone companies,” and “satellite companies”) tied to their twentieth century identities). Despite marketplace convergence, services often still go by names tied to particular technologies and functionalities (“cable television,” “telephone,” “special access,” “Frame Relay,” “Ethernet,” “FiOS,” “DSL,” “U-Verse,” “BPL,” “wireless” and so on and so forth). In reality, most of the companies known by their former names and many of the services still known by their particular technological handles, either do now, or will soon, compete in the marketplace against each other in one way or another to some extent. In the current dynamic environment characterized by technological innovation and marketplace competition, an FCC majority has yet to emerge that demonstrates, consistently, that it is anchored in a principled way by a free market policy orientation.

If such a market-oriented majority existed, there would not be talk of the FCC mandating the unbundling of cable and satellite channels in a competitive audio and video marketplace. There would not be an existing FCC decision to impose net neutrality mandates on the wireless broadband sector, a competitive market segment.

There would not talk of re-regulating the “special access” services of the companies formerly known as “telephone companies” in markets the FCC already has determined to be served by competitors offering high-capacity services, albeit under different names and with different technologies. There would be an understanding that it is not appropriate to judge the competitiveness of the special access marketplace on such a narrow frame of reference as a building-by-building basis, or even a wire center-by-wire center basis, because the nature of communications facilities and networks is that they can be extended to meet customer demand where such demand exists based on payment of a market price. There would be an understanding that once new entrants have demonstrated that it is possible for them to enter a market by actually entering the market and promoting their services, re-imposing government price controls on the companies still known as the incumbents almost certainly will make it more difficult for the new facilities-based entrants to expand their businesses or for still other new competitors to enter.

In short, there would be an understanding by an FCC majority that in order to promote innovation, encourage investment, and advance consumer welfare, that it must choose, and consistently so, a principled free market-oriented, deregulatory approach over the legacy managed competition paradigm that has so dominated communications policymaking in the past.

Video News Releases and Constitution Day at the FCC

On September 17, in honor of the day that marks our Constitution's adoption, I published an essay entitled, "Constitution Day at the FCC." The basic point of the piece is that the FCC's communications policies would be more sound if the agency would pay more heed to certain constitutional values particularly relevant to communications policymaking.

My piece was called to mind this morning when I read an item in Broadcasting & Cable's online edition about the fines that the FCC proposes to impose on Comcast for what the agency considers to be a violation of its sponsorship identification rules. Comcast's fining offense: One of its afffilated cable networks, CN8, aired "video news releases" that, in the Commission's judgment, contained too much focus on a product or brand name in the programming material without identifying a sponsor.

You can read the B&C article, "Free, Noncontroversial VNRs Can Still Trigger Fines" or one of the actual FCC notices proposing the fines to get the gist of the matter.

The FCC's action regarding these video news releases ("VNRs") appears overzealous. First, normally the sponsorship identification rules are invoked when someone pays a broadcaster to air programming. Indeed, the relevant statutory provision from which the FCC's authority derives seems to require sponsor ID only when programming is aired by a broadcaster in exchange for "money, service, or other valuable consideration." In the case of Comcast's airing of the subject video news releases, there doesn't seem to be any dispute that Comcast was not compensated in any way beyond the provision of the news releases.

The second point, which is fundamental, also relates to the statute from which in this instance the agency derives its authority. On its face, Section 317 of the Communications Act applies only to "matter broadcast by any radio station," not matter aired by cable television operators. Throughout Section 317, the provision speaks only of broadcasting and station licensees. There is no intimation that Congress intended the provision to be applicable to cable operators. It is true that the FCC long ago adopted a rule applying its broadcast licensee sponsor identification rules to cable television operators. And it even may be true (although I do not know) that the cable operators that existed at the time did not object to adoption of the rule. Nevertheless, this does seem, on its face, an instance of agency-stretching of statutory authority. There are many instances, of course, where the Communications Act was amended specifically to address regulations applicable to cable operators.

The last point, in my view, is the most fundamental, and brings me back to "Constitution Day at the FCC." Even as applied to broadcasters, the FCC's newly-instituted foray into regulation of video news releases raises serious First Amendment issues. In a letter dated October 5, 2006, the Radio-Television News Directors Association (“RTNDA”) called the FCC's recent inquiries to broadcast stations concerning their own airing of VNRs "an unprecedented regulatory intrusion into newsroom operations." On behalf of the broadcast news directors, RTNDA concluded, "[t]he government would not dream of inserting itself into a print newsroom to dictate or otherwise oversee how newspaper editors utilize press releases."

While not minimizing the legitimate First Amendment concerns of broadcasters, free speech concerns are even more serious when the Commission intrudes into the programming operations of cable operators. Even under the Supreme Court's oft-muddled First Amendment jurisprudence, there is no doubt that free speech claims of cable operators are considerably stronger than those of broadcasters. Although for First Amendment purposes it ought to make little difference, in the Comcast case for which the FCC now proposes fines, the cable operator did not just take the proffered VNRs and air them as presented. Before airing, they were edited in an exercise of the operator's programming judgment. In other words, the cable operator exercised editorial discretion.

Before proceeding further down the road of intruding into the editorial judgments of cable operators regarding video news releases (or other programming decisions for that matter), each Commissioner ought to consider carefully how his or her actions comport with the oath each took to protect and defend the Constitution. I submit that giving some thought to this question will lead to the conclusion that the agency's proposal to levy a fine against Comcast for airing the video news releases in question raises serious First Amendment questions.

That being so, this is yet another example of an instance where having in mind fundamental constitutional values, such as the protection of free speech, will serve the Commission well.

Media Ownership Questions

The FCC just held another in a series of public hearings on media ownership, this time in Chicago. I am struck by the opening statements of Commissioner Michael Copps and Chairman Kevin Martin.

I expect Commissioner Copps to carry on his campaign declaiming the lack of diversity in our media. No surprise here in his statement. He says there are many critically important issues troubling America right now –“Iraq, finding and keeping good jobs, making sure families have health insurance, educating our kids, creating equal opportunity.” He says all of these issues “are increasingly being funneled through the filter of big media” and “might just benefit from a little more diversity and competition.”

Questions for Mr. Copps: Which of the issues you identified do you believe are not being addressed in the media today? Which specific issues do you believe are not being addressed in a way in which a diversity of views is being presented? Which ones do you believe are being presented in a way that suppresses what you call diversity of viewpoint? Iraq? Job? Health Insurance? What specific viewpoints on the issues you identified do you believe are not available because of what you claim is a lack of diversity? On the issues you identified, do you believe “liberal” viewpoints are not available? Or, are you troubled that “conservative” viewpoints are not available to the American people? Is it possible that in your zeal to regulate in ways that, in your view, ensure “fairness” in the media that you are “filtering” out the incredible diversity of views available to the American people through their national and local newspapers, magazines, radio and television broadcast stations, 300+ channel cable and satellite television services, satellite radio, the Internet, and so on?

I was disappointed to see the statement that Chairman Martin issued. He failed to use the hearing as an opportunity to educate concerning the way in which today’s media environment is incredibly –in the truest sense of the word– more diverse than it was 30, 20, even 10 years ago. He could have used the forum --should have used the forum-- to articulate why, in light of the technological and marketplace changes that have occurred creating the abundance and diversity of information available to the American people, the FCC’s current media ownership restrictions are sadly out of date. Instead, Chairman Martin used the occasion to argue for more media regulation.

Mr. Martin once again argued for cable a la carte regulation, this time in these terms:

"Eliminating tying and giving consumers more choice would be an important step toward leveling the playing field between independent programming voices – those not affiliated with the large broadcast, cable and satellite distributors – and competing channels that are owned by cable and satellite. Under the current system, many cable and satellite-owned networks are bundled into the offerings not necessarily because viewers are demanding them, but because the distributor has a financial interest in maximizing their distribution. Under a system in which viewers do the choosing, those channels that do not benefit from a corporate parent will be able to attract viewers on a more equal footing." (Emphasis added.)

Then Mr. Martin added:

"But you don’t have to take my word on it. In a joint letter to the U.S. Congress Consumers Union, Consumer Federation of America, Free Press and Communications Workers of America said it the best: 'Cable companies act as gatekeepers over the programming allowed into the expanded basic package, preventing independent content producers from reaching viewers. By allowing consumers to vote with their wallets rather than forcing them to buy channels they never watch, the marketplace will responding by providing more diverse and higher quality programming that consumers demand.'”

Take my word for it. There is a problem, one that runs deeper than just an irony, with a supposedly free market-oriented FCC Chairman relying on CU, CFA, and Free Press as authority on communications policy matters. Like Commissioner Copps, these groups have an entrenched pro-regulatory mindset and an unshakeable view that the current communications marketplace is dominated by old-fashioned monopoly “gatekeepers,” rather than characterized by an increasingly vigorous competitive dynamism.

It makes a difference, or ought to, as to which view of the marketplace you hold as to whether you even would consider, apart from First Amendment considerations, imposing a la carte mandates on cable and satellite operators. If cable or satellite operators could exercise monopoly power, there might be a legitimate concern about whether they were leveraging their market power as video distributors to deny consumers access to programming content produced by unaffiliated firms. But note that Chairman Martin does not rest his anti-bundling campaign on an assertion that the market for video programming distribution is not competitive. Even CU, CFA, and the Free Press, at least in the statement relied upon by Mr. Martin for authority, do not make that assertion. They simply say that “cable companies act as gatekeepers over the programming allowed into the expanded basic package.” No kidding. Just as the Washington Post and the New York Times act as gatekeepers over the material allowed into their newspapers and Time and Newsweek act as gatekeepers over the content allowed in their magazines and the Free Press and Consumers Union act as gatekeepers over the material allowed on their websites. The fact that cable operators act as “gatekeepers” over the product they offer for sale to the American public is true enough, but unremarkable and irrelevant.

When considering consumer choice, ignoring the competitive realities of the marketplace is a big mistake. True enough, in some theoretical sense, and at least for some transient period of time, if the government were to mandate that all cable channels must be offered on an a la carte basis, consumers might have more choice. (This assumes, of course, that the government controlled the price of individual channels to ensure that the choice is “meaningful” based on the government’s inevitable assessment of what consumers are willing and able to pay for whatever channels they would wish to choose individually. And I say “transient” because, unless the government is going to require cable operators to continue to carry channels that, because of low subscribership, are uneconomic to carry on a stand-alone basis, the number of individual channels now available to subscribers actually may diminish, substantially curtailing consumer choice.)

If the video programming marketplace is competitive, cable and satellite operative will have every incentive to satisfy consumer demands. They will do this with programming regardless whether it is independently-produced or produced by an affiliated entity. They will bundle programming in packages —or unbundle programming and make it available on some a la carte basis— in a way that gives them a competitive edge by satisfying consumer demand.

In 2006, in the FCC’s most recent in its series of annual Video Competition reports, the FCC stated: “The market for the delivery of video programming services is served by a number of operators using a wide range of distribution technologies.” Non-cable providers—the two satellite television providers, the telephone companies, and alternative broadband providers—now have approximately a third of the multichannel video market, considerably more than only a few years ago. And the share of the non-cable providers has been growing steadily. Moreover, the most recent Video Competition report indicates by 2005 only 22% of cable networks were owned by cable operators, whereas in 1992 48% of the national programming services were vertically integrated.

So, some questions for Mr. Martin: Even assuming for present purposes that the video services segment is separate from the broader broadband services marketplace, and despite the findings in the Commission’s own recent Video Competition reports, do you believe that the video marketplace is better characterized as competitive or monopolistic? If you believe the marketplace is better characterized as competitive, do you still believe the government can do a better job determining which business models satisfy consumer demand than the service providers? Like Mr. Copps, do you believe the American people suffer from a lack of diversity in the viewpoints available to them through the media?

Classless Class Action Against Cable

Broadcasting & Cable reports today that, in a wanna-be class action lawsuit, 14 cable subscribers have sued major cable operators and programmers seeking millions of dollars. The alleged offense: "unlawful unbundling" that has injured consumers. According to the lawsuit, subscribers have been "deprived of choice, have been required to purchase product they do not want and have paid inflated prices for cable television programming."

This almost certainly frivolous class-action would do Class Action King Bill Lerach proud but for the fact that he has just pleaded guilty to federal conspiracy charges in connection with his extortionist class action antics. And just yesterday, Melvyn Weiss, Lerach’s former partner, was indicted on federal charges of conspiracy, racketeering, obstruction of justice and making false statements to a grand jury for activities relating to his years of filing class actions suits.

The lawsuit against the cable industry makes no sense because there is no law—of any sort—that requires cable operators to offer programming on an a la carte basis and the broadband marketplace is sufficiently competitive that consumers will be able to get programming in the form they want it from one of the video providers or another, not to mention the Internet.. And apart from the reasons why such a law would constitute poor policy in today’s competitive broadband environment, as I have argued on CNET and elsewhere, government-mandated a la carte would violate the First Amendment rights of cable operators.

The lawsuit claims subscribers are deprived of “choice” to purchase product they don’t want. Funny thing. When I signed up for cable, not only did I understand what programming I was getting for what price, I don’t remember a gun being held to my head. I understood the First Amendment, but I didn’t imagine anyone would assert on my behalf that I had a fundamental right to dictate how the cable operators conduct their business.

The aim of class actions of this sort, which have no basis in law, is to extort quick settlements which mostly enrich the lawyers. Reading about this one, Bill Lerach must be lamenting that his own game could not have continued on a bit longer.

As the Broadcasting & Cable article notes, cable operators have been under pressure from FCC Chairman Kevin Martin and some members of Congress such as Senator John McCain to “voluntarily” offer a la carte programming—under the veil of threats for a government-imposed mandate if they don’t. This unwarranted pressure from public policymakers, unfortunately, provides a backdrop which makes it easier to file a frivolous lawsuit like this one. The pressure should cease.

Another Communications Policy Inflection Point

In a marketplace changing as rapidly as the communications market, with the changes driven in large part by technological dynamism, it is not surprising that on a fairly frequent basis the FCC confronts important milestone regulatory decisions. This is especially so as the transition from an analog to digital world, and from a monopolistic to a competitive one, appropriately has led to changes away from the dominant “common carrier” regulatory paradigm that prevailed during most of the twentieth century.

I have been thinking of regulatory paradigms —and deregulatory milestones— in connection with two of the FCC’s current hot topics: Whether to continue on the course of broadband deregulation and resist those urging re-regulation of so-called telephone company-provided “special access” services that already have been granted pricing flexibility based on Commission findings that competitive alternatives exist. The decisions confronting the Commission in these two areas—broadband forbearance and special access—represent yet another important inflection point for communications policy, one that will say much about whether the FCC continues to move forward on a market-oriented course commensurate with the increasingly competitive marketplace environment. Or whether, instead, the agency falls backwards into a regime best characterized as managed competition.

In 1999, then FCC Chairman William Kennard, a Democrat, issued a strategic plan for the agency which he called, “A New Direction for the 21st Century.” The first two sentences of the plan read as follows: “In five years, we expect U.S. communications markets to be characterized predominately by vigorous competition that will greatly reduce the need for direct regulation. The advent of Internet-based and other new technology-driven communications services will continue to erode the traditional regulatory distinctions between different sectors of the communications industry.”

By no means did I agree with everything Chairman Kennard did on his watch. But he certainly was correct in 1999 in recognizing how quickly competition and convergence were taking hold to “greatly reduce the need for direct regulation.” He deserves credit for stating the proposition so clearly. And he deserves credit for, at least in some respects, leading the Commission to take important market-oriented actions.

After all, it was during Bill Kennard’s tenure that the Commission adopted the regime that led to the grant of special access pricing flexibility based upon findings of marketplace competition. This was a significant deregulatory step taken by a Democratic-led FCC. In a paper released this past June entitled, “Special Access and Sound Regulatory Principles: The Market-Oriented Case Against Going Backwards,” I rehearsed the history of the special access, from its creation as a regulatory classification for high-capacity business services right after the 1984 AT&T Divestiture to the present. The paper not only recites in considerable detail the regulatory trajectory that got us to where we are today, but it examines the fundamental regulatory principles that should lead the Commission to conclude that it would be a mistake to re-regulate. (More about the reasons for not re-regulating later.)

Another example worth recalling during Kennard’s tenure was his mostly consistent position that cable operators should not be saddled with traditional common carrier regulation under the guise of an open access regulation. He recognized that in a world of converging services and technologies cable operators were transforming themselves into multi-service broadband service providers. Hence, he stated memorably that he wanted to avoid picking up the “whole morass of regulation” from the telephone world and “dump[ing] it wholesale on the cable pipe.” A pretty good beginning for a deregulatory broadband policy.

In 2001, control of the FCC shifted to the Republicans. And in a generally commendable if not always absolutely consistent way, the Commission under the leadership of Chairmen Michael Powell and Kevin Martin since has adhered to the policy adopted in 2002 that broadband services should be subject to a “minimally regulated environment.” As multi-platform competition among broadband providers, such as the former “telephone” companies, former “cable” operators, “satellite” companies, and “wireless” companies has continued to grow, the wisdom of this deregulatory broadband policy has been borne out. That is why it was puzzling, and, frankly, so potentially harmful, when the Commission deviated from this deregulatory course for wireless broadband services in its recent 700 MHz decision by including an open access/net neutrality condition for a wireless spectrum block.

The year 2004 marked the date that Bill Kennard predicted “U.S. communications markets to be characterized predominately by vigorous competition.” That prediction proved correct. No, not in the sense that vigorous competition exists to the very same degree in every nook and cranny of the U.S., but certainly in the sense that the direction towards effective competition is clear. And the three years since 2004 have only brought more of the same.

So now the Commission confronts broadband deregulation and special access.

I’ve written in detail about both of these topics, often highlighting information about the latest competitive developments, such as the most recent FiberTower or FiberTower marketing announcements to compete with incumbent “special access” services in new markets. Or Sprint’s announcements that it plans to rapidly deploy its own wireless broadband network that will not only obviate its need for special access facilities, but serve the consumer market as well. Sprint has entered into a cooperative arrangement with Clearwire to provision its WiMax services, and Google is on board as a business partner. And, even as I write this, I read in a September 20 report in Information Week that Sprint says it expects to have WiMax service available in “30ish” markets covering more than 100 million people by next year. For more, see the special access paper and my FCC comments on special access updating some recent competitive developments. I am not going to repeat all that here.

What I want to do now is offer some observations that seem to me to be key as the agency confronts these issues.

· Once regulatory authorities have recognized that competition is emerging and, therefore, that traditional common carrier-type regulatory restrictions applicable to the incumbent providers should be removed completely or relaxed, absent demonstrable evidence of more than transient market failure, regulators should not backslide from a deregulatory course. The notion of “managing competition” always has an allure for certain regulators (after all, they are regulators). But it is virtually impossible to manage competition without suppressing the development of the additional competition that all sides proclaim as the shared goal. This is because, even assuming purely for the sake of argument that the incumbent’s prices for special access are “too high” as claimed by Congressman Chip Pickering and others, reducing prices by regulatory fiat makes it more difficult for existing competitors to expand or for new ones to emerge. Do you think that FiberTower, FiberTech, Clearwire, and other facilities-based service providers that compete against the telephone companies “special access” services want to see the FCC force down the incumbents’ prices?

· The Commission tried to create “competitors” by controlling incumbent prices in the ill-fated Unbundled Network Element (UNE) regime. All this managed competition regime managed to do was create a financial bubble based on an unsustainable regulatory constructs that ultimately resulted in hundreds of bankruptcies and millions of dollars lost by those who invested in a regulatory regime rather than in new facilities. We want policies that lead to investment in new facilities, not in regulatory constructs. The Commission should have learned from this experience that the way to foster sustainable, facilities-based competition is not through regulation. It is especially disturbing that policymakers who profess to be free market-oriented learned so little from the UNE experience. In his September 13 letter to the FCC, Representative Pickering, a strong supporter of the UNE platform to the end, still misguidedly talks about the FCC “creating” competition by ratcheting down the “incumbents’ unreasonably high prices.” Not surprisingly, he provides no basis for suggesting the prices are too high.

· Congressman Pickering asserts there is there is “no effective competition [for special access] in the vast majority of markets” What does he make of the FCC’s findings of competitive entry by the FCC in the markets in which the agency has granted regulatory flexibility? Does he think the FCC’s tedious information-gathering process was a sham? The FCC has used collocation arrangements purchased by competitors as triggers for granting pricing flexibility. Does Representative Pickering know that the competitors almost always refuse to provide any meaningful information concerning their customers, the prices they charge their customers, the types of services their customers purchase, and the like, claiming the information is commercially-sensitive proprietary information? This secretive conduct, in and of itself, is what you would anticipate in a market characterized by competition.

· As for the forbearance petitions, the Commission, of course, has a responsibility to look at the actual and potential competitive alternatives available for these packet-based business broadband services that include Frame Relay, ATM, Ethernet, and other technologies employed to deliver of high-speed, high-capacity services to major business users. But, if competitive alternatives exist, or if the Commission determines it is practically feasible for such alternatives to develop, the agency should forbear from applying the existing regulatory requirements. To do anything less would be a deviation from its declared policy that broadband services should exist in a “minimally regulated environment.”

· Importantly, the Commission should have in mind that, to date, it has consistently viewed the broadband market as national, not local, in scope. In the landmark 2002 decision establishing the policy of minimal regulation for broadband services, the Commission at the same time declared that it was creating an “appropriate national framework.” Quite properly, this commitment to a national framework has remained the agency’s position since then. It comports with Congress’ intent at the time of the adoption of the 1996 Telecommunications Act, when it said it was providing, at least with respect to advanced telecommunications and information technologies such as those at issue in the broadband petitions, “a pro-competitive, de-regulatory, national policy framework.”

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I don’t want to minimize the significance of many other decisions the Commission makes on a day-to-day basis. But it does seem to me that its forthcoming decisions in the broadband and special access matters are new inflection points, decisions that rightly will be viewed as important markers in determining whether or not the agency, as currently constituted, is free market-oriented.

At this stage, well-along in the transition from a communications marketplace characterized as generally monopolistic to one that is generally competitive, the FCC commissioners ought to come down firmly on the side of market-oriented rather than managed competition policies. I (hopefully) could be wrong, but I suspect the two Democratic commissioners are most likely to favor not granting meaningful broadband forbearance and re-regulating special access. They have a good-faith, but, in my view, mistaken belief, that the way to get more competition is through more regulation.

In the interest of not backtracking on established deregulatory policies that have been working for America’s consumers, it will be very important, this time around, for the three Republican commissioners, all of whom profess to adhere to free market principles, together to make that profession a marketplace reality.

The Metaphysics of Broadband

In what now seems eons ago, I published a piece on CNET called “The Metaphysics of VoIP.” Actually, the piece was published in January 2004 -- eons ago in telecom time, but short of four years by the Gregorian calendar.

The main point of the essay was to suggest that regulation of the then-emerging VoIP services likely would turn on regulatory classifications at once arcane and, yes, metaphysical, such as the difference between “telecommunications” and “information” services. Without going on and on here, metaphysics comes into play when the regulatory question turns, for example, on whether there has been, in the parlance of the telecommunications services definition, “a change in the form or content of the information sent or received.” Shortly thereafter, in October 2004, I advocated adoption of a new regulatory paradigm, one in which regulation is not tied to the “stovepipe” regime that is based on what I called “techno-functional” constructs. In “Calling for a Regulatory Overhaul, Bit by Bit,” I proposed a new market-oriented regulatory paradigm based on competitive analysis. A more extended treatment of communications metaphysics and techno-functional constructs was published in the Federal Communications Law Journal under the title, “Why Stovepipe Regulation No Longer Works: An Essay on the Need for a New Market-Oriented Communications Policy.”

Acting within the confines of the current Communications Act and under the leadership of Chairmen Michael Powell and Kevin Martin, the FCC deserves credit for adhering, for the most part, if not consistently, to what the agency calls a “minimal regulatory environment” for broadband. This generally deregulatory policy has worked well in stimulating new investment in broadband facilities. And new investment has fueled more facilities-based competition.

The musings above about metaphysical techno-functional constructs come to mind as I read reports of impending FCC actions relating to “broadband” services, possibly as early as September 11. The FCC is considering telephone company requests that various business-oriented packet-based broadband services be allowed to be offered free from common carrier regulation. According to the knowledgeable telecom analysts at Stifel Nicholaus, among the broadband services targeted for regulatory relief are “Frame Relay, Asynchronous Mode Transfer (AMT), Ethernet-based, and very-high- capacity optical networking, hubbing, and transmission level (“Ocn” level),…but not TDM (Time Division Multiplexing) services, including DS1-level (24 voice-grade equivalents) and DS3-level (672 voice grade equivalents) special access services.” According to the Stifel Nicholaus analysts, Sprint opposes the requested broadband relief on the basis that the TDM/non-TDM distinction would create a loophole that the telcos would exploit by reconfiguring their networks and rebranding their services as non-TDM. Sprint says that by seeking relief “from all but their TDM-based special access services, the [telcos] are effectively cutting off carriers from the IP-based network of the future.”

The main point I want to make is this: The distinctions among the above services—as indicated by their “Frame Relay”, “AMT”, “Ethernet”, and “TDM” monikers— really are based on techno-functional constructs having little to do with marketplace realities. The decision as to whether regulatory relief is granted should be based on whether customers have choices in the marketplace for comparable services, not on whether a service provider might possibly be able to technically reconfigure a network or rebrand a service, or might be discouraged from doing so for fear of regulatory consequences.

In my view, the “business broadband” services at issue in the telcos’ request for relief are generally subject to marketplace competition, with more competition on the way, and, for that reason, should be granted regulatory relief. Because the FCC now is considering “forbearance” petitions under Section 10 of the Communications Act, the agency does not have to overly concern itself with regulatory classifications based on techno-functional constructs, or marketing brands. Marketplace competition, not metaphysics, should be the focus.

Based on its experience thus far with a “minimal regulatory environment” for broadband Internet services, most notably the success in stimulating new network investment leading to more competition, the Commission should be receptive to requests to extend regulatory relief to the broadband services used principally by large businesses and carriers. The FCC should keep broadband policy moving in a deregulatory direction.

The FCC Takes A Positive Step for Consumers

On August 31, the FCC announced it was replacing what it termed “outmoded” rules governing the provision of long distance services with a new regime that allows AT&T and Verizon to more efficiently integrate their service offerings. As the Commission put it: “The old framework included requirements that the BOCs separate their local telephone and long distance operations, which is at odds with a market environment where local and long distance services increasingly are marketed and provided on a bundled basis.” No kidding.

While a long time in coming, the FCC deserves credit for its deregulatory action. Most of the rules requiring separate local and long distance operations were put in place immediately after the AT&T divestiture in 1984, and have remained in effect since. This despite the fact that the distinction between “long distance” and “local” calls has largely eroded as consumers choose any distance, anytime buckets of minutes.

In partially dissenting, Commissioners Copps and Adelstein strike an odd note. They worry that what they claim as “the significant consolidation” that has taken place in the marketplace will leave consumers with “a choice between two providers—a cable and a telephone company.” It is worth noting the vicious competition between the telcos and cable companies in areas where they are now battling head-to-head for customers. (I just wish I had the amount of money they spend each week mail promotional print materials on my block!)

But, more fundamentally, nowhere in their statement do Commissioners Copps and Adelstein account for the wireless providers and the gazillion “all distance” minutes they sell each week. No do they account for the independent VoIP providers, such as Skpe or Vonage, and their offerings of bundles of “all distance” minutes. This omission is curious, and significant, amidst all the talk of “duopoly.”

In any event, Chairman Martin and his colleagues deserve credit for getting rid of "separation" rules that only added to the costs and inefficiency of providing services that consumers increasing prefer to take on a bundled basis.

No Need to Commit Hara-Kiri

I am old enough to remember the so-called “Japanese miracle” of the 1980s, and the subsequent bust, with a decade of recession and then little or no economic growth. The articles concerning Japan’s boom and bust are legion, but the following quote by Asian expert David Asher from a 1996 article, “What Became of the Japanese ‘Miracle,’” captures the essence:

“What became of the Japanese economy that appeared so threatening that some Americans spoke of the need for cold war-style containment? Where today is the developmental state capable of turning depression to growth on the basis of smart industrial policies that deserved to be emulated throughout the world? Japan seems mired in a bog, weighed down by a series of financial crises unprecedented in the postwar era, a major wave of industrial hollowing-out, rising unemployment and corporate bankruptcy, and a growing divide between insider haves and outsider have-nots throughout the system.”

During the 80s—before the crash--it was all the rage to marvel at “keiretsu,” the interlinked networks of Japan’s big businesses. And to suggest that perhaps America was falling behind because that we lacked Japan’s “smart industrial policies,” featuring a lifetime guaranteed employment system and close collaboration between government and private enterprises.

The article in yesterday’s Washington Post, “Japan’s Warp Speed Ride to the Internet Future,” is all about how the U.S. trails Japan in broadband service. According to the article, “Japan has the world’s fastest Internet connections, delivering more data at lower cost than anywhere else.” This may well be true, and the United States should never be complacent about its technological prowess and economic progress, related as they are, of course.

But some words of caution are in order in the face of yet another “we are behind” broadband broadside. It was Japan that changed its economic system in the 90s to become more free market-oriented like ours. While I am not an expert on Japan’s telecom laws and policies, I am not convinced the U.S. should shift gears to emulate Japan’s communications policies.

There is much that already has been written comparing the U.S. broadband experience with other countries, and I don’t want to rehearse all that here. But here are the cautionary notes that occurred to me as I read the Washington Post piece:

· The article notes that Japan’s success in expanding broadband penetration and increasing bit rates “is partly a matter of geography and demographics: Japan is relatively small, highly urbanized and densely populated.” Even though the U.S. is not small, highly urbanized, and densely populated —all characteristics that make the dispersion of broadband a much less costly proposition— it is doing very well in getting broadband to consumers. Now, about 50% of U.S. homes have a broadband connection, and the penetration figure continues to grow. Among the homes that have an Internet connection at all—some people just don’t want one, even if they can afford one—fully 70% have high-speed service. (70% of Americans access broadband at home or at work.) This and a lot more data may be found in the most recent broadband report from the Pew Internet and American Life Project. In light of the fact that the United States is large and not densely populated in the same way as Japan and many European countries are, the U.S. is doing well by any reasonable standard that does not simply ignore such geographical and demographic differences. And that we are doing well is in no small measure attributable to the adoption several years ago of a policy by the FCC of a “minimally regulated environment” for broadband. Alas, since then, and even now, that deregulatory policy has been subject to never-ending, vigorous counterattack by those net neutrality, open access, and unbundling advocates who are convinced that the nation’s communications infrastructure should always be operated under a public utility-like common carrier regime—which brings me to next cautionary note.


· The Post article acknowledges that an important reason for Japan’s super-fast broadband speeds is that, on average, the country has shorter and newer copper loops than those used for telco-provided DSL service in the U.S. But it also credits “Japanese-style competition through regulation.” The essence of this “competition by regulation” approach seems akin to the UNE forced unbundling approach this country abandoned four years ago. It became increasingly evident that a policy directed towards supporting newly-created “competitors,” wholly dependent as they were on government-mandated and price-controlled access to the incumbents’ copper loops, was inhibiting investment in new broadband facilities by incumbents and new entrants alike. I don’t think keiretsu is the way to organize the American economy, and I don’t think “Japanese-style competition through regulation” constitutes sound regulatory policy in any sustainable sense, which brings me to the final cautionary note.


· At the end, the article says the growing speed addiction is having the ironic effect of “returning near-monopoly power in fiber to NTT, which owns and controls most new fiber lines to homes.” NTT is the incumbent former state-owned telephone company. A Japanese professor of telecommunications economics is quoted to the effect that, “NTT is becoming dominant again in the fiber broadband kingdom.” Aha! So it appears that at the end of the “competition through regulation” regime that “opened up” DSL lines to entrants, Japan may be left with a near-monopoly provider of the next-generation broadband facilities. I think America’s (thus far) deregulatory broadband regime which has served to stimulate investment by facilities-based broadband competitors will serve America’s consumers better in the long run than will “competition by regulation” policies that discourage investment. I don’t think Verizon would be investing $23 billion in building a new fiber-to-the-home network, or the cable companies already would have invested over $100 billion in upgrading their networks to handle digital broadband, if the U.S. had maintained a Japanese-style regulatory regime.

Even though our deregulatory posture is working to stimulate investment and promote competition by facilities-based competitors, America should not become complacent about our broadband standing. With our country’s continental expanse that includes large, little-populated area, there may be a justification, for example, for using narrowly targeted, time-limited tax incentives to exapnd broadband infrastructure in rural areas.

But that is far different than committing hara-kiri, or even keiretsu, or swooning over a Japanese-style “competition through regulation” regime that is pointing towards a monopolistic environment down the road.

The 700 MHz Decision: “Into the Morass of Regulation”

In the wake of the FCC’s 700 MHz decision mandating open access for the C block spectrum, I thought this comment from the analysts at Stifel Nicolaus was most telling: “We think it likely that much of the meaning of the open access rules will be determined by the 2009 election (which will determine the leadership of the FCC) and the courts.”

I assume the Stifel analysts mean the 2008 election. But in referring to 2009, they undoubtedly have in mind the time it takes for a new Administration to put in place its own FCC Chairman and its own team. For the same reason that much of the meaning of the FCC’s open access rules won’t be determined until 2009 or (more likely) thereafter, it follows that the revenues realized from the auction will be less than they would be in an unencumbered auction. This is because that veritable economic theorem that “people don’t want to buy a pig in a poke” holds true, even for the FCC.

Think about it: In how many auctions have you bid when the rules concerning what you can do with your winning bid won’t be known until several years later? As they say, it doesn’t take an Einstein to figure out that the looming uncertainty about the ultimate interpretation and enforcement of the new open access rules necessarily will drive down the bid price.

Regardless how it chooses to style its action, and regardless whether it calls it net neutrality, open access, or “no-lock, no-block,” the import is the same: The FCC is taking a step backwards to imposing common carrier regulation, a backwards step that imports public utility regulation into the broadband world. I still think former FCC Chairman William Kennard had it right in 1999 when he explained why he rejected arguments that the FCC should impose an “open access” requirement on cable:

But I also know that it is more than a notion to say that you are going to write regulations to open the cable pipe. It is easy to say that government should write a regulation, to say that as a broad statement of principle that a cable operator shall not discriminate against unaffiliated Internet service providers on the cable platform. It is quite another thing to write that rule, to make it real and then to enforce it. You have to define what discrimination means. You have to define the terms and conditions of access. You have issues of pricing that inevitably get drawn into these issues of nondiscrimination. You have to coalesce around a pricing model that makes sense so that you can ensure nondiscrimination. And then once you write all these rules, you have to have a means to enforce them in a meaningful way. I have been there. I have been there on the telephone side and it is more than a notion. So, if we have the hope of facilitating a market-based solution here, we should do it, because the alternative is to go to the telephone world, a world that we are trying to deregulate and just pick up this whole morass of regulation and dump it wholesale on the cable pipe. That is not good for America.

Curiously, the FCC, with the commendable exception of Commissioner Robert McDowell, seems to take pride in consigning broadband back to “the telephone world.” How else to explain the ritual incantation of Carterfone, a decision rendered in 1969 when the telephone world was indeed monopolistic? But this isn’t 1969, as Commissioner McDowell explained in his eloquent dissent. It is not even 1999, when Chairman Kennard rightly resisted picking up the “morass of regulation” and dumping it on the cable pipe.

No, this is 2007, when a Bush Administration FCC decided, despite the fact it recently concluded the wireless market is competitive, to reverse course and impose net neutrality/open access mandates on wireless broadband providers.

It is true that, as the Stifel Nicolaus analysts suggest, that the details of the “morass of regulation” won’t be entirely clear until 2009, if then. But what’s clear now, in 2007, is that the FCC has created a morass for no good reason.