Wednesday, October 24, 2007

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 or 972-874-5139.

Friday, October 19, 2007

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.

Monday, October 08, 2007

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.

Tuesday, October 02, 2007

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.