Tuesday, September 25, 2007

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and diversity of information available to the American people, the FCC’s current media ownership restrictions are sadly out of date.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?

Friday, September 21, 2007

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.

Thursday, September 20, 2007

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.”

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.

Wednesday, September 05, 2007

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.

Tuesday, September 04, 2007

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.