Happy 2009 -- Upon Reflection, No Twittering

My late mother and I had this riff about think tanks. It began ten years ago the day I told her that I was resigning my law partnership to work in a think tank.

She said: "What in the world is a think tank?"

I said: "It's a place where you think."

She said: "What do you think about?"

I said: "First, I think about what I want to think about."

In a way the riff was silly, of course. But in another way it conveyed something significant – at least to me. A think tank is a place that ought, in the main, to respect and cultivate an environment conducive to a certain amount of studied reflection, not hurried off-the-cuff pontificating. It ought to be a place in which you can think about what you want to think about in a reflective, scholarly way. To my mind, this ability to reflect and consider is an important element in fostering the "deliberative democracy" championed by Madison. Think tanks – doing their best work – can play a constructive, even vital, role in maintaining the health of such deliberative democracy.

This brings me to a New Year's resolution. At least for now, I forswear Twittering. As many of you know, Twitter is a self-described "social messaging utility for staying connected in real-time." The idea is that by "twittering," that is by posting ongoing "tweets," your friends and "followers" can keep up with every thought that pops in your head, at least those that can be expressed in less than the 140 word "tweet" limit.

A lot of think tankers have established Twitter accounts and already are twittering away. Some say we must do this to keep up with the times and the 24/7 "news" cycle. That unless we issue a constant stream of tweet-thoughts we won't remain relevant. I confess I signed up for a Twitter account a couple of months ago, and since then, without issuing the first tweet, I've received a bunch of messages that people have signed up on Twitter to "follow me."

Well, cease and desist. No need to follow me. I've resolved not to twitter. It may be fine for others. But, for me, twittering away all day with instantaneous reactions cuts seriously into time that otherwise might be devoted to more reflective thought and deliberation - cuts even into the habit of more reflective thought.

Hopefully, this New Year's resolution will last longer than the one I make annually about changing certain (bad) dietary habits. It is enough to do a blog now and then when I think I have something worthwhile to say on fairly short notice. No 140 word limit on FSF blogs. Or, of course, on the "Perspectives of FSF Scholars" papers, or on longer scholarly studies or event transcripts.

Finally, at the Free State Foundation, our goal is to bring decades of expertise and experience, along with solid research, to bear on the resolution of public policy problems. To be truly impactful, we strive to combine academic rigor with real-world practicality in a considered and reflective way. Above all, we aspire to adhere to the free market, limited government, and rule of law principles that are our guideposts. Adherence to these principles is the surest way to advance overall consumer welfare and to ensure the social and economic well-being of America's citizens.

Having forsworn Twittering as one New Year's resolution, my other resolution – the principal one - is to work hard, everyday, to lead the Free State Foundation to fulfill the goals and aspirations stated above. If my mother were here to ask what I am thinking about on this New Year's Eve, that is what I would tell her.

Best wishes to all for a happy and healthy 2009, and thank you for your continued friendship and for your support of the Free State Foundation!

Net Neutrality and Googlopoly

Some broadband bits and pieces.

First, I was struck by Rick Whitt's blog post trying to explain what Google means by net neutrality in light of yesterday's Wall Street Journal article suggesting that Google's putative deals with Internet broadband providers concerning creation of a Google priority fast lane may be inconsistent with the company's relentless advocacy of net neutrality mandates. In his post, Whitt says: "[B]roadband providers should have the flexibility to employ network upgrades, such as edge caching. However, they shouldn't be able to leverage their unilateral control over consumers' broadband connections to hamper user choice, competition, and innovation." A bit further along, Whitt calls ups the same macro, the one labeled "unilateral control," and repeats the mantra: "[I]f broadband providers were to leverage their unilateral control over consumers' connections and offer colocation or caching services in an anti-competitive fashion, that would threaten the open Internet and the innovation it enables."

One thing Google's Rick Whitt knows for sure is that there increasingly are few places in the country where providers exercise "unilateral control" over a consumer's broadband connection. We could have a good debate about whether broadband providers exercise such "unilateral control" over consumers if he likes. In most places, consumers can switch if they are dissatisfied with an ISPs' practices. In many areas, there is fierce competition for broadband customers between companies that we use to call "cable" and "telephone" companies. And they are not the only competitors.

Perhaps you didn't take note of the most recent winner of the Alliance for Public Technology's "Broadband Changed My Life" contest. The winner's name is Nancy Reid, and she lives in Southampton County, Virginia, which she describes as a rural farming community. In her winning essay, Ms. Reid recites some of the difficulties she faces in rural Virginia. Then she explains:

"I was so close to achieving my academic goals but had a huge and very frustrating problem, now I would have to drive if I wanted to continue. That is when a close friend told us about his satellite broadband access. I was skeptical but after some creative financing had it installed. To say it has made an impact on my life is so true in many ways. I am now able to download and send pictures to my mom in California in seconds, online banking is a breeze, and school, well, my first 2 reports were given A's! How is that for a morale boost!!" (The extra exclamation point is Ms. Reid's, and I say good for her and for APT for telling her story.)

Satellite broadband access. In the discussions about broadband competition, especially in rural areas, rarely is satellite broadband access mentioned. It should be. It's available almost everywhere across the country. I understand that it is not as fast as cable or telephone-provided access, but not everyone needs or wants the same service. And for marketplace and technological reasons, all network infrastructures won't (and shouldn't) develop at the same pace if consumer demand is to be met efficiently. It will be a big mistake if, in trying to figure out ways to spur the further development of broadband, policymakers now abandon primary reliance on private sector competition in favor of command-and-control planning based on government guesses as to what services consumers want and how much they are willing to pay.

Rick Whitt concludes his post by stating that Google remains "strongly committed to net neutrality." What I think he really means is that Google will remain committed to neutrality in accordance with its own understanding of the concept as its business needs and strategic planning evolve. And as I have pointed out many, many times, therein lies a big problem. As the WSJ story, and Whitt's response trying to explain away the story, illustrate, the concept of "net neutrality" is likely always to be so murky and ill-defined that – in light of the extent to which marketplace competition already exists – the costs of enforcing neutrality mandates will outweigh the benefits. With the regulatory uncertainty created, along with possible enforcement sanctions, net neutrality mandates will result in diminished investment and innovation and increased consumer welfare losses.

A final note: One of the FCC's net neutrality principles states: "[C]onsumers are entitled to competition among network providers, application and service providers, and content providers." If this indeed is an enforceable mandate, it is not difficult to imagine that Google itself might one day find itself embroiled in an FCC net neutrality enforcement proceeding defending its dominant market position. After all, Google presently has approximately 65% of the search query market and captures about 75% of the advertising revenues of Internet search companies, and these market shares appear to be growing. It is not fanciful to imagine that some neutrality advocate will file a complaint at the Commission alleging that Google's dominant market position constitutes a googlopoly that deprives consumers of their entitlement to competition among content providers. I assume that, at the least, such a complainant will ask the agency to delve deeply enough into Google's search engine algorithms and search practices to ensure that they operate in a completely neutral and nondiscriminatory manner.

In the event this scenario occurs, I predict that Google's views on net neutrality will evolve -- quickly. Indeed, I predict that, even if such an FCC complaint never materializes (and I hope it doesn't), Google's net neutrality views will evolve as the company recognizes that implementation of rigid notions of neutrality, subject to unpredictable bureaucratic decisionmaking, will hinder the continued evolution of the Internet upon which its business model is entirely dependent.

Maryland Tax Burdens

On discovery of the news that an anti-tax ballot measure is leading -- but apparently not definitively resolved -- in liberal Montgomery County, I recalled a study I saw recently which found Maryland's state and local tax burden the fourth highest in the country. The study determines that Marylanders pay 10.8% of their total income in state and local taxes. Maybe county and state officials should not be as surprised as they seem to be that one of Robin Ficker's tax limitation proposals has garnered so much support.

The Montgomery County anti-tax measure would amend the county charter to require that all nine Council members, rather than the current seven, vote to exceed the established property tax limit. The Washington Post article on the ballot measure is here. If you want to see which states had a higher state and local tax burden than Maryland, the Tax Foundation study is here.

Another Good Morning in America

First things first. To Barack Obama, go congratulations on an historic victory. I grew up in Wilmington, North Carolina at a time when schools were segregated and blacks and whites drank from separate water fountains. The stain of slavery and Jim Crow will always be part of America's history.

But America is nothing if not a work in progress. To my mind, America is, and always hopefully will be, not just a country, but a country with special ideals. A country with aspirations to build that "shining city upon a hill" of which the Pilgrim John Winthrop first spoke, and of which President Reagan so eloquently spoke over three and a half centuries later. To invoke Reagan's spirit is to invoke the idea it is always a new "morning in America."

Apart from everything and anything else, it speaks to America's goodness, and its capacity for change, that we have elected our first black president. That reality should be celebrated, and in no way minimized.

America is not only a country with ideals, but a country in which ideas matter. If you go to the Free State Foundation's website, you will see our mantra: "Because Ideas Matter…" Ideas matter in America because of the success, thus far, of our democratic experiment. We are fortunate to live in a country in which it is possible, without fear of persecution, to contest notions of public policy and the public good in the marketplace of ideas. That is still not true in many parts of the world today.

The FSF home page also makes clear the fundamental principles that guide the "ideas" work of the Foundation. FSF's purpose, broadly speaking, is to promote understanding of free market, limited government, and rule of law principles.

This is not the day or the space to lay out policy prescriptions or to criticize the policy prescriptions of others. Back to that business of debating specific ideas soon enough, I'm sure. But I do want to take the occasion to say, at least broadly speaking, a few words about what FSF's commitment to the core principles stated above means, including in the context of some of the issues on which FSF labors.

As a result of the financial crisis, there is much talk to the effect that America needs to adopt much more pro-regulatory, interventionist policies. Whatever the merits of the need for more regulation in the financial services arena – and overly simplistic or overtly political analyses and sloganeering here will have long-term harmful effects – it would be a serious mistake for policymakers to apply any such pro-regulatory agenda indiscriminately to America's private sector. This certainly would be true in the communications marketplace, where free market-oriented policies, however haltingly applied at times, have already brought consumers many benefits, including competition in most markets, choices of an array of services and products unimaginable a decade ago, and at affordable prices. As I explained in "Deregulation as Scapegoat" in the Washington Times last month, if policymakers now were to take steps to re-regulate today's competitive communications markets in a way that resembles the command-and-control regulation that prevailed in the generally monopolistic analog era, overall consumer welfare and the nation's economy will suffer.

The promotion of free market policies is inextricably linked to the principle of limited government. Limited government provides the breathing space for America's entrepreneurial spirit to take root and flourish. Policies that respect the limited government principle empower individuals, without undue government interference and burdens, to seize opportunities to achieve their dreams. And the principle of limited government is linked to perhaps the foremost American ideal -- individual liberty. The new President and Congress, and state officials as well, ought to be keenly aware, always, of the inherent tension and trade-offs between individual liberty and government intervention. The balance struck between the two is struck differently depending upon time and circumstance. But without a sympathetic understanding that more government intervention almost always means less individual freedom, the balance is likely to be struck in a way that gives liberty short shrift.

And the rule of law. It undergirds all. Without the rule of law, free market policies could not exist, and limited government would be a chimera. The notion of the rule of law can be expressed in many ways. But, in short, as Ronald Cass, former dean of the Boston University School of Law, puts it in his book, The Rule of Law in America, the constitutive elements of the rule of law are: (1) fidelity to rules (2) of principled predictability (3) embodied in valid authority (4) that is external to individual government decision makers.

Another way of expressing the idea of the rule of law is to speak of respect for and adherence to our constitutional principles. For example, a good deal of communications law and policy implicates First Amendment rights. Talk of resurrecting the Fairness Doctrine in today's digital communications marketplace, with its multiplicity of voices, surely implicates the broadcasters' free speech rights. In my view, a resurrected Fairness Doctrine in today's environment would be constitutionally impermissible. And, as I have explained elsewhere in a law review article, proposals to impose Fairness Doctrine-like net neutrality mandates on broadband Internet service providers not only constitute unsound policy, but likely violate the providers' First Amendment rights as well.

Ultimately the rule of law principle which undergirds all is dependent upon a shared understanding and commitment that law and politics are not the same, and that it is the judiciary's role to interpret the law, not make policy. As important as any other charge, our new President and Congress should always fulfill their responsibility to promote and preserve such commitment and understanding.

With all that said, it's just another good morning in America.

Maryland's Governor Ranks Last on Fiscal Policy

In a newly-released report entitled "Fiscal Policy Report Card on America's Governors: 2008" authored by Chris Edwards of the Cato Institute, Maryland Governor Martin O'Malley ranks at the very bottom of the pile of governors in his handling of fiscal policy. Governor O'Malley is not on the ballot tomorrow. But the report's last place ranking of the governor's handling of the state's fiscal affairs nevertheless is instructive as Marylanders head to the polls with economic matters very much on their minds.

The Cato paper explains that: "The report card grades the governors on their fiscal performance from a limited-government perspective. The governors receiving an 'A' are those who cut taxes and spending the most, while the governors receiving an 'F' raised taxes and spending the most. The grading mechanism is based on seven variables, including two spending variables, one revenue variable, and four tax rate variables."

With regard to Governor O'Malley's ranking, the report has this to say: "The lowest-scoring governor, Martin O’Malley of Maryland, spearheaded the passage of a $1.4 billion tax increase in 2007, which was unique in its large size and scope. It increased the corporate tax rate, the top personal income tax rate, the sales tax rate, and the cigarette tax rate. It also expanded the sales tax base and raised taxes on vehicles. This enormous increase will hit Marylanders directly in the pocketbook, and indirectly through slower economic growth over time."

The Cato report describes in details the variables used to grade the fifty governors' fiscal policies. You can judge for yourself whether you think Governor O'Malley's ranking is warranted.

The FCC’s Actions Should Benefit “Joe the Caller”

With the FCC facing its own important November 4 vote on proposals to reform the archaic intercarrier compensation and universal service regimes, here are some thoughts, some of which relate to the discussion at last Friday’s Free State Foundation seminar on the subject.

First, back to 1926. At the time of the creation of the Federal Radio Commission, the FCC’s predecessor agency, Senator Clarence Dill, the chief Senate sponsor of the Radio Act, declared the agency’s commissioners would be “men of big abilities and big visions.” The notion that the new agency could attract such men (and, of course, women too) to serve was tied directly by Senator Clarence Dill to the central idea that the FCC was to be an “independent body” and an “expert authority.”

Much of the work of the FCC affects the American people and the American economy in important ways on a day-in, day-out basis, so the commissioners shouldn’t get too many free passes on anything they do. But some matters, obviously, are more important than others. This is so with regard to the universal service and intercarrier compensation proceedings.

With competition now firmly embedded in the telecommunications marketplace, enabled in large part by new digital technologies, intercarrier compensation and universal service reform is necessary to increase the efficient use of our telecommunications networks, while creating an environment in which competition can flourish without wasteful uneconomic subsidies. The mechanics of how to achieve these efficiency and pro-competitive objectives are no mystery to economists and other public policy scholars who have studied the issues for years, if not decades: Move quickly to a unified intercarrier compensation regime in order to eliminate existing arbitrage opportunities that have everything to do with outdated regulatory constructs and nothing to do with the economic cost of originating or terminating traffic. And move quickly to a universal service regime that targets distribution of subsidies narrowly to those who truly need them, and that collects funds to support the subsidies from a broad base.

The difficulty lies not with the design of a meaningful reform plan, although surely there are differences regarding specific points to be worked out at the margins. Rather what is at issue now is whether the commissioners have the will to adopt such a plan. Surely, none of the commissioners sought or accepted the job with the idea of avoiding making tough, consequential decisions in the interest of all American consumers.

Now go back to 1980, even before the AT&T divestiture. At Friday’s FSF seminar, Professor Gerald Brock, Professor of Public Policy and Public Administration at The George Washington University and a member of FSF’s Board of Academic Advisors, began his slide presentation with one entitled “Unified Intercarrier Compensation – An Old Problem.” He points to a 1980 tentative decision that “found the wide variety of existing access compensation methods unreasonably discriminatory and sought to replace them with a unified method.” This early attempt to address the intercarrier compensation problem, according to Professor Brock, was “blocked by opposition from those who would pay higher rates.” The intercarrier compensation problem, and the opposition to reform, is not new. 1980 is almost three decades ago.

Now go back to 2001. In a blog posted last Tuesday entitled, “The Time for Bold Action Is Now,” I predicted there would be cries that the FCC should not “rush to judgment,” that it should seek still more comment before doing anything. In the course of explaining why in this instance those cries are not well-taken, I quoted from Commission pronouncements in 2001 when it opened the intercarrier compensation proceeding. Here’s just one: “The existing intercarrier compensation rules raise several pressing issues. First, and probably most important, are the opportunities for regulatory arbitrage created by the existing patchwork of intercarrier compensation rules.” The Commission stated in the 2001 notice: “We are particularly interested in identifying a unified approach to intercarrier compensation – one that would apply to interconnection arrangements between all types of carriers interconnecting with the local telephone network, and all types of traffic passing over the local telephone network.” Since the FCC sought comment on the 2001 notice, there have been at least five further rounds of comments filed, not to mention the thousands of pages of ex parte comments submitted. Arguments about the FCC “rushing to judgment” seem wildly misplaced in this instance.

Now back to the present – and the future. Two questions from the audience at Friday’s seminar particularly struck me because they highlighted why it has been so difficult up to now to reform intercarrier compensation and universal service. One questioner asked whether the agency, in effect, shouldn’t be especially concerned about acting in a way that might disadvantage some competitors vis-a-vis others. And another asked about the political economy of achieving reform. Won’t more intense, narrow interests likely prevail over the more diffuse public interest in reform? Isn’t this the “public choice” dilemma that has stalled reform efforts long past when it has become clear that substantial change is needed?

Two fair questions. As to the first, I thought John Mayo, Professor of Economics, Business and Public Policy at Georgetown’s McDonough School of Business, and a member of FSF’s Board of Academic Advisors, gave a good answer. It is not the business of the FCC to protect competitors from disadvantage, but rather to adopt policies conducive to creating competition. The focus on creating an environment in which competition thrives without distortive arbitrage opportunities and subsidies, not the protection of a particular class of competitors, will best serve the long-run interests of the American consumer.

As to the second question, the political economy one, the questioner is correct that public choice theory predicts the difficulty of accomplishing meaningful reform that advances te broader public interest in the face of intense, narrowly-focused opposition to change. As a general subscriber to public choice theory, I understand that achieving reform in these circumstances is not easy. But I think the political economy dynamics are changing in a significant way. To fund universal service programs, every “Joe the Caller” in America now pays more than an 11% surtax on every interstate call – and more and more Joes and Josephines (with thanks to Commissioner Deborah Tate at Friday’s FSF seminar for this inclusiveness) are beginning to notice the tax’s size. Why wouldn’t they? An 11% tax is not peanuts, and the fee has grown significantly in the last several years. And it has the detrimental effect of suppressing telecommunications usage, and of discouraging investment that would be directed towards build-out of new, more economically efficient networks.

Again, the way to do something positive for Joe and Josephine, the average American telecommunications consumers, is no mystery to any of the sitting commissioners. No doubt they understand the public policy imperative for bold action to implement, without delay, a unified, cost-based compensation regime and a more narrowly-targeted, efficient universal service regime.

In their consideration of the intercarrier compensation and universal service proposals, the commissioners ought to have in mind Senator Dill’s hope and expectation that the commissioners would be men and women of big abilities and big vision.

The Time for Bold Action Is Now

With the FCC poised in early November to consider proposals to reform the outdated intercarrier compensation and universal service fund regimes, you will hear much talk in the coming days about how the FCC should not rush to judgment to decide issues of such complexity, especially with so many various “interests” affected. You’ll hear about wireless and wireless carriers; ILECs and CLECs in small, mid, and large sizes, and rural and urban varieties; VoIP providers; and so forth and so on. Much of this talk about protecting this or that particular interest, or actions favoring one type of service provider at the expense of another, will have a distinctly familiar “inside the beltway” ring. Pundits will be giving (hedged) odds as they try to figure out who the winning and losing companies will be.

It would be a mistake to buy the “don’t-rush-to-judgment” line. And it would be a mistake for the Commission to forget that the “interest” that really ought to matter in all this is the average American consumer, let’s say “Joe the Caller,” who now pays an 11% tax on every interstate call in order to fund the various unreformed universal service programs.

As for claims that the Commission may be rushing to judgment, in this instance the charge is well-nigh laughable. If the Commission takes any longer to take meaningful actions to reform the IC and USF regimes, it ought to plead guilty to negligence and beg for the court’s mercy.

Here are just a few excerpts from two different Commission decisions in 2001 expressing a sense of urgency regarding the agency’s need to comprehensively reform the intercarrier compensation regime:

“We believe it essential to re-evaluate these existing intercarrier compensation regimes in light of increasing competition and new technologies, such as the Internet and Internet-based services, and commercial mobile radio services (CMRS). We are particularly interested in identifying a unified approach to intercarrier compensation – one that would apply to interconnection arrangements between all types of carriers interconnecting with the local telephone network, and all types of traffic passing over the local telephone network.”

“The existing intercarrier compensation rules raise several pressing issues. First, and probably most important, are the opportunities for regulatory arbitrage created by the existing patchwork of intercarrier compensation rules.”

“We believe that there are significant advantages to a global evaluation of the intercarrier compensation mechanisms applicable to different types of traffic to ensure a more systematic, symmetrical treatment of these issues.”

And similar long-ago and oft-repeated statements exist concerning the need to reform the universal service regime.

Almost a year ago, I wrote a not so prosaically titled piece, “Put Universal Service Reform Near Top of FCC’s Agenda.” It urged the Commission to cap the high-cost fund, eliminate the identical support rule which provides subsidies to wireless carriers based on wireline carrier costs, and implement reverse auctions as a means of distributing subsidies. Commissioner Deborah Tate deserves credit for leading the Federal-State Joint Board to a point last year where the Board put on the table useful reform recommendations. And Chairman Kevin Martin deserves credit for working hard over the past several months to tee up a set of comprehensive proposals for the Commission to consider. (Of course, the Commission’s staff deserves much credit as well for its hard work.)

No doubt at all that the Commission is confronted with difficult decisions that, if they are to serve the larger public interest, which is to say, the long-run consumer welfare interest, won’t please everyone. Sure, there likely will be compromises and deals cut, and this is often a necessary part of the process of moving forward. But meaningful reform won’t be achieved and sound policy won’t be served by a pedestrian “split-the-difference” or “hold harmless” mentality.

In my view, the Commission should act boldly to adopt a unified and cost-based intercarrier compensation regime that eliminates the arbitrage opportunities that exist under the present rules. The existence of these arbitrage opportunities deters and misdirects investment and innovation to the detriment of all consumers and the general economy. And the Commission should act to implement a universal service system which targets subsidies in a much more narrow fashion than occurs under the current regime. The truth is that the universal service mission is essentially mostly accomplished with respect to provision of voice service. If broadband service is going to be subsidized, any such subsidies should be explicit, narrowly targeted to areas that lack service, and funded broadly, preferably from general revenues. Competitive bidding mechanisms, such as reverse auctions, should be employed to ensure that service is provided as economically and efficiently as possible. And the reforms must be implemented without undue delay and without long transitional periods that render them ineffectual or "obsolete-before-implemented."

The time for kicking the can down the road has past. The can is broken.

Again, I appreciate that the issues are complex and that their resolution involves making difficult choices. Nevertheless, the principles that should guide the Commission are relatively simple and fundamental.

We’ll discuss all of this at the FSF lunch seminar, “Archaic Intercarrier Compensation and Universal Service Regimes: Proposals for Reform,” this Friday at noon. For information and to register, click here.

Burying an FCC Proceeding Seven Years Later

In early 2001, the FCC initiated a proceeding to examine whether it should adopt new regulations to govern the developing technology of what it called “interactive television” or “ITV”. The notice asked hundreds of questions, including many variations of: what is interactive TV; who should be allowed to provide it; and how should it be regulated? The concern prompting the initiation of the Commission’s “interactive television” proceeding, in large part, was the recently consummated AOL/Time Warner merger. The Commission worried that a cable company, like Time Warner, that vertically integrated with an Internet services provider, like AOL, might discriminate against rival ITV providers. It worried about the potential market dominance of a new service launched by the newly-integrated Time Warner and AOL called “AOLTV” that combined video streams with data services including web content.

Put in the best light, the agency’s notice raised questions concerning the regulatory implications, in the then-emerging digital broadband environment, of the marrying of “video” and “data,” of the “television” and the “computer” screen.

With Jeff Eisenach, I filed comments in response to the FCC notice. Remember this was March 2001. In those comments, we said something worth keeping in mind today:

“In today’s rapidly changing technological marketplace environment, however, even the
launching of regulatory inquiries can do more harm than good. Initiating such inquiries may well affect – even if inadvertently – business and technology decisions as current and potential market participants assume full-battle mode in an effort to “shape the process” early on. The likelihood of the harm outweighing the benefit is more acute when the “constant” and continuous” changes to which the Commission refers make it difficult even to specify a “definition” for the potential object of the Commission’s regulatory concern.”

The comments also urged caution by the Commission in light of the First Amendment implications raised by any regime that regulates content or creates mandatory access rights. The Commission’s notice inquired about both.

Of course, we now know the FCC’s concerns that AOL/Time Warner integration might be anti-competitive were, as they say, grossly exaggerated. Anyone following Time Warner and AOL knows the marketplace, in recent years, has dictated more un-integration than integration of those companies. And, of course, in a broader sense, the market for broadband video, data, and voice services and products, sometimes integrated, sometimes not, becomes ever more competitive.

Now comes word that the FCC yesterday issued an order closing the ITV proceeding. The Commission says, wisely: “In the absence of any clear direction or consensus as to how this market may develop, it would be inappropriate to commence further regulatory action.”

Good for the FCC – even though, as I said seven years ago, the Commission should not have initiated this particular proceeding at a time when even a casual reading of the notice indicated the agency really couldn’t define the object of its concern.

And this caveat as well: The closure of the ITV proceeding is just the termination of one seven-year old docket with a particular docket number. The Commission continues to consider, in one proceeding or another with other docket numbers, imposing various regulatory mandates applicable to broadband providers, including broadband video providers, sometimes under the rubric of “net neutrality,” sometimes “a la carte,” sometimes “open access,” and whatever else have you. Even in terminating the ITV proceeding, the Commission takes pains to remind it is “without prejudice” to further market intervention if conditions warrant. The Commission should cut this sentence from its ITV termination order and post it, in large caps, above the entrance to the Portals through which all FCC regualtors must pass: “In the absence of any clear direction or consensus as to how this market may develop, it would be inappropriate to commence further regulatory action.”

And, finally, this reminder too: This Friday, September 26, FSF is sponsoring a lunch seminar entitled, “Delivering Content in a New Technological Environment: An Exploration of Policy Implications.” The seminar, which will especially focus on the policy implications of the movement to server-based technologies and away from traditional channels, for delivering video content, features Professor Steven Wildman and FCC Commissioner Robert McDowell. Who knows? They may even take a stab at defining interactive television, or explaining the difference in today’s environment between a “television” or “computer” screen. The seminar, including lunch, is free. The details are here.

Don't Confuse Financial and Communications Markets

Absent clear-headedness, the financial crisis facing the U. S. threatens more than the financial institutions that made, packaged, and resold, and re-packaged and re-sold, bad loans. It threatens to give all deregulatory efforts, however justified, a bad name. And it may threaten to give all those who reflexively favor more regulation, regardless of the circumstances, a newfound regulatory cudgel. If so, and if this reflexive approach were to be applied to today’s communications markets, it would be most unfortunate.

It may well be there have been failures of government oversight that could have prevented or ameliorated the current financial crisis, although history is likely to show that government intervention, or at least encouragement, bears some portion of responsibility as well. For example, Congress, with the Administration’s acquiescence, steadfastly encouraged Fannie and Freddie to back more and more, larger and larger home loans to those who, realistically, could not afford them. In all bubbles, the “just sign on the dotted line” mentality takes hold until bursting-time.

Due to ongoing technological innovation and past successful efforts to eliminate or reduce outdated legacy regulations, most communications markets are now workably competitive. This is especially true with respect to broadband communications. Firms formerly known as “cable television” operators and “telephone” companies are engaged in fierce competition in many places to provide integrated “triple play” packages of Internet, video, and voice services. They also provide these services on a stand-alone basis for those who don’t prefer the bundle. In its last broadband report, the FCC found that over a year ago 96% of the nation’s zip codes were served by two or more broadband providers.

Of course, the wireless firms we still often call “cellphone” companies increasingly compete in the broadband marketplace. Now you can watch many of your favorite television shows and other videos on your “cellphone,” not to mention accessing your email, stock quotes, weather reports, and favorite websites. Satellite operators HughesNet and WildBlue offer high-speed broadband service across the U. S.

For a recent announcement of one of the latest technological broadband innovations (and new ones come at you every day), AT&T’s new “HomeManager”™ “phone” caught my eye. AT&T describes the portable device, with a seven-inch color touch screen, this way:

"AT&T HomeManager provides one-touch access from anywhere in the home to a robust lineup of popular features and content, including visual voice mail, weather reports, e-mail access, local news, a portable speakerphone and more. From a broadband-enabled base station, information is sent directly to the cordless touch screen, delivering quick and easy access to relevant information."

Developed in collaboration with equipment manufacturer Samsung, AT&T says HomeManager™ “is a game-changing device that provides true convergence to wireless, wireline and Internet users.” Whether or not the new device is a game-changer, I do not know, although it seems pretty cool. I suspect that, like AT&T, the other broadband providers, like AT&T, have their own “game-changers” in the works -- constantly.

The point is that the broadband marketplace continues to evolve in a generally competitive environment in which the providers are – and, alas, must be – responsive to consumer demand. In this environment, it is such responsiveness to consumer demand that leads to the roll-out of innovative services at reasonable prices.

Government intervention in the form of imposition of legacy command-and-control regulation almost certainly will stifle the innovation and investment that currently characterizes the marketplace. Indeed, the rapid expansion in the availability of broadband service has not come cheap. Cable operators have spent well over $100 billion upgrading their systems to handle digital broadband since passage of the 1996 Telecommunications Act. To remain competitive, AT&T and Verizon reportedly have spent more than $70 billion in the last two years to expand capacity with fiber optic technology and other capacity-enhancing equipment.

This is not to say that even more competition of the facilities-based variety would not be welcome, or that the FCC has no role in facilitating such additional competition. For instance, I have urged the Commission in comments to act promptly to grant the Clearwire-Sprint applications that would allow the New Clearwire venture to construct and operate a new nationwide wireless broadband network using WiMax technology. And it is not to say there are not specific instances of “market failure” where government intervention may be appropriate. For example, in remote rural areas where there is no satisfactory broadband service, it may be appropriate for the government to provide narrowly targeted subsidies to providers through a competitive bidding process.

To continue thriving, the communications marketplace, especially broadband, does not need more regulation. Indeed, there are still many legacy regulations that should be eliminated. While the government should stand ready to intervene, if necessary, in specific instances of demonstrable market failure, it would be very unfortunate if, in the wake of the financial crisis, reflexive generic calls for “more regulation” were imported into markets which bear little or no resemblance to the financial services marketplace.

In other words, we will all be the worse off if policymakers should ever blithely assume that the causes and cures for the current financial distress provide a justification for applying heavy-handed regulation in the communications marketplace.

Don't Roam Backwards

The Federal Communications Commission is considering whether to revise the policy it adopted – unanimously – to exclude from its automatic roaming mandate requests from mobile service providers to roam in their home markets. “Roaming” occurs when a subscriber of one mobile service provider utilizes the facilities of another mobile service provider with which the subscriber has no pre-existing relationship to place or receive a call. The Commission requires that a service provider accede to roaming requests by unaffiliated carriers except where the requesting carrier has a wireless license or spectrum usage rights in the same geographic area as the would-be host provider.

In other words, there is an automatic roaming right unless both providers have spectrum rights in the same overlapping area, the requesting carrier’s home market. Of course, in that instance, the two providers are free to negotiate a mutually satisfactory roaming agreement on a voluntary basis.

Several mobile service providers and rural carrier interests have asked the FCC to revoke the home market exclusion from the automatic roaming mandate, or at least to revise it substantially to preserve the automatic roaming entitlement. This the Commission should not do. Were it to do so, it would be another instance of the agency looking backwards through the regulatory rearview mirror, rather than forwards.

Recall the reasons why the Commission adopted the home market exclusion only a year ago. According to the Commission, an automatic roaming right in the home market of the requesting carrier “does not serve our public interest goals of encouraging facilities-based service….” The agency says this is because:

"[I]f a carrier is allowed to ‘piggy-back’ on the network coverage of a competing carrier in the same market, then both carriers lose the incentive to build out into high cost areas in order to achieve superior network coverage. If there is no competitive advantage associated with building out its network and expanding coverage into certain high cost areas, a carrier will not likely do so."

The Commission’s rationale – to encourage facilities build-out by preventing mandated piggy-backing on another carrier’s facilities – is sound. It was this very reason, the deterrence of incentives to invest in facilities, which caused me to oppose for so long the agency’s “Unbundled Network Elements” network sharing regime. The Commission’s UNE network sharing rules were tilted too far in the direction of mandatory piggy-backing on the in-place facilities of incumbents.

There are certainly echoes of the long-running UNE saga in the roaming controversy. In the 1999 AT&T v. Iowa Utilities Board case, the Supreme Court held that the FCC’s UNE rules were unlawful because they required unlimited network sharing. What Justice Stephen Breyer said in his concurring opinion has particular relevance here:

"Nor can one guarantee that firms will undertake the investment necessary to produce complex technological innovations knowing that any competitive advantage derived from those innovations will be dissipated by the sharing requirement...Increased sharing by itself does not automatically mean increased competition. It is in the unshared, not in the shared, portions of the enterprise that meaningful competition would likely emerge."

Eventually, the wisdom embodied in Judge Breyer’s opinion held sway when the courts forced the FCC as a matter of law to abandon the agency’s overly expansive UNE network sharing regime. The conclusion that the regime discouraged facilities-based investment was central to the courts’ decisions.

To be sure, the facts relating to the UNE regime and the mobile roaming issue are not precisely parallel. But the same underlying principle is at issue in both instances. Mandated network sharing discourages both carriers – the one with the facilities and the one without – from further innovation and investment that lead to more robust competition. The UNE network sharing requirement, in effect, established a regulated resale mandate, and the same would be true with respect to elimination of the home market exclusion, even though the FCC sunset the mobile carrier resale obligation over five years ago.

This does not mean that the Commission might not tweak its roaming rules to allow some in-market roaming entitlement for some limited time or on some circumscribed basis if it determines that some form of narrow relief is warranted on a transitional basis. For example, if the requesting carrier’s spectrum rights are encumbered for some period of time so that, in effect, use of the spectrum by the requesting carrier is not feasible, then some form of transitional relief from the home market exclusion may be warranted.

But in reconsidering the roaming regime, the Commission should not roam backwards by adopting a UNE-style mandatory network sharing regime. When it based the home market exclusion on the principle that network piggy-backing discourages facilities build-out, the Commission too must have heard the echoes of its unfortunate UNE experience.

Going forward, the FCC should stick to principle.

"The Most Significant and Controversial Assertion of Agency Authority"

Last Friday, I moderated a panel entitled, "Net Neutrality Regulation: Perspectives on What It Means and Whether It Is Necessary," at the American Bar Association's annual meeting in New York. The program was sponsored by the ABA's Section of Administrative Law and Regulatory Practice. The presentations, and the back-and-forth exchanges among the panelists, were some of the most interesting and informative I have heard in a long while. The panelists were Marvin Ammori, General Counsel, Free Press; Link Hoewing, Vice President of Internet and Technology, Verizon; James Speta, Professor of Law, Northwestern University; and Joe Waz, Senior Vice President, External Affairs and Public Policy Counsel, Comcast.

Not surprisingly, much of the discussion centered on the FCC's August 1 action sanctioning Comcast for what the FCC claims to be discriminatory interference with Comcast's subscribers access to BitTorrent's peer-to-peer applications. When the audio of this ABA Continuing Legal Education program becomes available later, I will provide a link for those that might be interested. But, for now, I want to highlight two statements by members of the panel that struck me as very significant, and worthy of further attention and reflection.

Professor Speta, one of the nation's leading telecom scholars, teaches courses in telecommunications and Internet policy and administrative law. He is also a member of FSF's Board of Academic Advisors. Near the outset of his remarks, Professor Speta declared: "The FCC's Comcast action is the most significant and controversial assertion of authority by an agency since the FDA's effort to extend its jurisdiction over tobacco." In the course of his remarks, Professor Speta indicated that he believes, on occasion and depending on the circumstances, there may be instances of Internet service provider conduct that call for net neutrality-like remedies in the context of post hoc adjudicatory proceedings that sound in antitrust jurisprudence. But he professed considerable skepticism that the Comcast matter presented such an instance.

In any event, Professor Speta's characterization of the FCC's action as the most significant and controversial assertion of agency authority since the FDA's attempt to extend its jurisdiction over tobacco ought to give pause. In that case, even though Congress had regulated tobacco in many different ways for many years -- and had considered and rejected legislative proposals to give the FDA authority to regulate tobacco -- the FDA proceeded to assert authority by classifying tobacco as a "drug." Suffice it to say for present purposes that the FDA's regulatory grab did not turn out well. In 2000, the Supreme Court rejected the agency's jurisdictional assertion in FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120 (2000). Before the FCC acted in the Comcast case, I argued in pieces here and here that, in light of the changed circumstances since the complaint against Comcast was filed by Free Press, and the uncertainty surrounding the FCC's "ancillary" authority to regulate the practices of Internet providers, the Commission should have dismissed the complaint without prejudice.

Speaking of Free Press, Mr. Ammori made the second statement I wish to highlight. Near the beginning of his remarks, he said that one of Free Press's goals is to make communications policy "more political." Now we all know that, in practice, the FCC, a so-called independent regulatory agency, does not operate consistently in accordance with the theoretical premises of such an agency. The theory of the Progressive-era reformers who envisioned the independent agencies like the FCC was that these agencies, by institutional design, would be insulated from ordinary politics, that their largely apolitcal regulatory decisions would be guided by the institutional expertise of the commissioners and staff.

I am one who has questioned the validity of the theoretical premises of the independent agencies on separation of powers grounds. Be that as it may, query whether it really makes sense to want to make decisions such as "net neutrality" more political. This is especially so when such decisions involve, as they inevitably will, and as they do in the Comcast case, highly technical questions concerning whether certain Internet practices constitute acceptable "reasonable network management" or prohibited "discrimination." It is certainly worth pondering whether making the decisional process "more political" in cases like Comcast's enhances the quality of agency decisionmaking. I doubt that Senator Clarence Dill and the other "founders" of the FCC would think so.

The FCC's Misleading Disclosure Statement

The FCC's website contains the following statement: "The FCC does not regulate the Internet or Internet Service Providers (ISP)." Check it out for yourself here.

While the import of this statement has been "degraded" and "impaired" in various ways over the last couple of years, the FCC's action last week sanctioning Comcast in the BitTorrent affair certainly now renders the statement, to put it nicely, inoperative. Or you could say inaccurate or false. You could find other similar declarations, but this one in the Commission's news release indicates the extent to which the agency's website statement is inaccurate: "The Commission announced its intention to exercise its authority to oversee federal Internet policy in adjudicating this and other disputes regarding discriminatory network management practices with dispatch..."

In the interest of accurate disclosure, I assume the FCC fairly promptly will correct the website statement. Perhaps in the interest of the fullest possible disclosure it will even provide a link to the Comcast order.

Hard Cases Make Bad Law: On Regulatory Bits and Torrents--Part II

Back on July 17, when I first became aware that FCC Chairman Kevin Martin wanted to get a Commission majority to issue an order holding unlawful Comcast’s actions in last November’s BitTorrent affair, I wrote this piece, “Hard Cases Make Bad Law: On Regulatory Bits and Torrents.” My view hasn’t changed since then, and now we’re a day away, to steal a phrase, from Day One -- as in the first day the FCC, with a Bush-appointed chairman leading the way, may take a major step towards regulating the Internet.

The arguments that I made in the July 17 piece have been echoed in pieces in recent days by FCC Commissioner Robert McDowell, “Who Should Solve This Internet Crisis,” and the Wall Street Journal editorial board, “FCC.politics.gov.” And I just saw this July 31 letter to Chairman Martin from Republican Leader John Boehner.

Upon reflection, I think what is most disturbing about what Chairman Martin apparently is about to do is the way it is the anti-thesis of conservative, not “conservative” in a partisan political sense, but in the Burkean sense of little “c” conservatism. It is true that President Bush and many of his appointees could never fairly be accused of being Burkean conservatives, but that is too bad. And it is especially too bad when it comes to taking a step that likely will be used as a precedent for much greater regulation of the broadband Internet than even Chairman Martin likely envisions, or with which he would claim to be comfortable.

Now Chairman Martin’s allies in this matter, Move.on, Free Press, Public Knowledge, and Google, are anything but Burkean conservatives. They will freely and proudly admit that they want to radically alter the FCC’s existing general posture of creating a minimal regulatory environment for the Internet. (It must be pointed out that, under Chairman Martin’s rein, this general deregulatory posture, announced in 2002 under his predecessor, increasingly has been honored in the breach.) More and more Chairman Martin has allied himself with Move.on, Free Press, and others who want much more broadband regulation.

Now, to be clear: Unlike some, I have not taken the position that the FCC definitely is without legal authority to sanction Comcast for the Internet service provider’s actions regarding BitTorrent. It may have such “ancillary” authority, but it may well not. To my mind, the agency’s authority is questionable, especially after it proclaimed it was adopting net neutrality “principles,” not “rules.” And the courts have not been at all reticent about holding – frequently – that the FCC has exceeded its regulatory authority. This being the case, the prudent course would be for the FCC not to take what amounts to a radical step towards Internet regulation in a matter that, for all practical purposes, has been resolved. As far as I can tell, BitTorrent, supposedly the offended party, is not urging the Commission to proceed to sanction Comcast, but rather working with Comcast and others in engineering forums to develop mutually-satisfactory network management techniques. We would have a different case for the FCC to consider if Comcast had not changed its disclosure practices and then proceeded to work with others in the Internet community to address network management issues that, with today's exploding P2P traffic, are of common concern to all.

So, the reason I find Chairman Martin’s proposed action the anti-thesis of conservative in the Burkean sense, is that it is simply imprudent. For an official to exercise the government’s authority just because he or she may possess the raw power, when there is no longer a sound reason or pressing consumer or other need for such exercise, is imprudent. Indeed, in this instance, not only is there not a present need to exercise such power in light of what has transpired since last November’s BitTorrent affair, its exercise in the service of delving into what are almost universally recognized to be difficult technical network management issues, is likely affirmatively to cause harm. Taking regulatory action, likely to cause future harm in the absence of present need, on the basis on uncertain legal authority, is unconservative.

The Dangerous World of "Deemed Granted"

As regular readers of this space know, I have written a lot about the FCC’s forbearance process this year because it has seemed to me that the agency has not availed itself sufficiently of what Congress clearly intended to be a deregulatory tool. Won’t repeat it here. For those coming to the subject late, I’ll just explain that “forbearance” refers to a provision, added to the Communications Act in 1996, giving the FCC the authority to decline to apply existing regulations when certain conditions relating to consumer protection and competitive developments are met. Apart from anything else, the fact that the FCC’s forbearance authority is well-nigh unique among regulatory statutes ought to indicate forbearance was not included in the Communications Act as window dressing.

There is my longer paper, “Why Forbearance History Matters,” explaining the history that led to adoption of the forbearance provision, and there are three blogs here, here, and here discussing various aspects of forbearance authority. The sum and substance of my view is that the forbearance provision, from the beginning, has suffered from a severe case of desuetude.

There was a House Commerce Committee hearing on forbearance this week. The particular focus was on section of the statute which says a petition filed with the FCC seeking forbearance “shall be deemed granted” if the Commission does not deny the petition within a fifteen month decisional window. Commerce Committee Chairman John Dingell is quoted in the July 23rd Communications Daily as declaring that the “deemed granted” provision “is dangerous and bad policy because it allows agency action to take effect without any formal vote or supporting records.”

Put aside that Chairman Dingell voted for the 1996 Act with the “deemed granted” forbearance provision. It may be that he now feels it is “dangerous,” and that the act ought to be changed. That is his prerogative. But taking the statute as written, consider this: The “deemed granted” language surely is another indication, and a pretty strong one, that Congress intended for the forbearance provision to embody a presumptive deregulatory tilt. After all, Congress just as easily could have said, if the Commission fails to act by the statutory deadline, forbearance petitions are “deemed denied.” It didn’t. The choice made is reflective of an intent to incorporate in the statute a deliberate deregulatory presumption. The point of the forbearance provision was to allow the FCC to adjust its regulatory regime to what Congress in 1996 understood to be fast-changing marketplace conditions.

To my mind, the congressional hearing more productively could have focused on whether the fifteen month statutory deadline for acting on forbearance petitions is too long, and whether, even if such a lengthy period makes sense in order to give the FCC the ability to take account of especially difficult cases, whether the Commission’s history of acting on the petitions reflects dilatoriness. With marketplace changes occurring so rapidly, a year or more is a long time for the Commission to have to decide whether regulatory relief is granted.

I could stand corrected, but it is my impression that the Commission, and I don’t just mean the one as presently constituted, rarely has decided a forbearance petition much short of the statutory deadline. The more usual course is for the FCC to act on petitions on the last day. It just shouldn’t be the case that the agency always needs the full amount of time to act on almost all forbearance petitions. I would have preferred to see the hearing focus on spurring a more timely decisional process when the Commission does act, rather than on whether the deregulatory default in the case of exceedingly rare failures to act should be changed.

A final thought, a footnote if you will: So, as I write this, the Commission is faced with yet another last-minute forbearance decision, this time on the pending Qwest petition. My understanding is the agency must act tomorrow, or Qwest’s pending petition for regulatory relief in four urban markets will be “deemed granted.” I wrote about the Qwest petition last week in “Forbearance Relief: More on Rearview Mirror Regulation.” One issue that apparently has contributed to another last minute decision is wrangling over whether the agency ought to consider, in its required competition analysis, evidence concerning the number of consumers who have “cut-the-cord.” All I will say is this. Having in mind that the world is a really dangerous place (as in really dangerous) in many venues beyond the doors of the Portals, it does strike me that the notion the agency may decide not to consider the extent of the cut-the-cord phenomenon in Phoenix or elsewhere is more “dangerous” (in context) than the operation of the “deemed granted” provision. Maybe Chairman Dingell would even agree with me on this point!

Forbearance Relief: More on Rearview Mirror Regulation

In a blog yesterday, I said that all too often, when the FCC acts, it appears to be looking through a regulatory rearview mirror, rather than looking forward. I had in mind then reports that the Commission may be considering adopting an enforcement action against Comcast regarding its past network management practices. Today, the rearview mirror regulatory phenomenon comes to mind with respect to reports the Commission plans to deny Qwest's forbearance requests for regulatory relief in four urban markets, even in the Phoenix market, which appears the most competitive.

I have said many times that, in my view, the Commission errs in taking a much too static view, rather than a more dynamic one, when it considers forbearance requests. It too easily retreats into this mode, even though at other times it recognizes that, indeed, the telecommunications marketplace is anything but static. For example, in an order issued last year granting AT&T's forbearance request for regulatory relief for certain broadband serivces, the Commission considered potential competition and "the emerging and evolving nature of this market." It concluded that in light of these factors, it "would not give significant weight to static market share information in any event."

In the event of considering all forbearance requests, the Commission should not give undue weight to static market share information. Thanks largely to the rapid pace of technological change facilitating new market entry, the communications marketplace is characterized by dynamism. According to trade press reports, the Commission staff's draft analysis of the Qwest petition doesn't take into account wireless subscribers who have "cut the cord." Apart from any other aspect of the staff's analysis, this doesn't seem to make any sense. Surely, the rapidly growing number of those who are discontinuing landline service is one important indication that non-Qwest competitive alternatives are now available. There are other indications as well, of course.

All the evidence must be considered. But to ignore the cord-cutters seems akin to the railroad regulators ignoring competition for freight carriage from the trucking industry and the airplanes when they came on the scene. Come to think of it, thanks in large part to Jimmy Carter's efforts, the railroads, truckers, and airlines have all been deregulated for nearly three decades.

The FCC needs to check itself --constantly -- to avoid the rearview mirror regulatory phenomenon, especially when it is considering forbearance requests. As I explained in a recent paper, "Why Forbearance History Matters," when Congress included the unique forbearance authority in the Telecom Act of 1996, alongside the periodic regulatory review requirments, it meant for forbearance to be used by the FCC as a deregulatory tool to address changing market conditions.

Hard Cases Make Bad Law: On Regulatory Bits and Torrents

An item in today’s trade press caught my eye, and in a way that makes me think the FCC itself needs to do some rethinking before again moving in an unduly and unnecessarily regulatory direction. Sometimes regulation from the FCC comes in bits and sometimes in torrents. Either way, all too often, as economist Dennis Weisman, a member of the FSF Board of Academic Advisors, put it in a paper released earlier this year: “The FCC seems perennially to be regulating through the rearview mirror - time and again failing to grasp the manner in which the pace of technological change is so thoroughly and irreversibly transforming the telecommunications marketplace.”

Communications Daily says that FCC Chairman Kevin Martin has scheduled a vote for August 1 on a draft order he has circulated that would find that Comcast violated the agency’s network neutrality principles last November with respect to Comcast’s network management practices. Free Press filed a complaint with the Commission after it came to light that Comcast had -- in Free Press’s view -- taken improper steps to degrade BitTorrent’s enabling of peer-to-peer traffic. The core of the Free Press complaint seeking FCC enforcement action is that the broadband provider’s actions did not constitute “reasonable” network management practices, a category of practices which the Commission clearly exempted from the purview of the network neutrality principles. Free Press claims Comcast violated the strict no-discrimination mandate which the organization reads into the principles.

It might be, simply as a matter of sound business practice, that Comcast should have more adequately disclosed its peer-to-peer network management practices. Indeed, Comcast has acknowledged as much, enhancing its information disclosures concerning network management shortly after the BitTorrent practices came to light. But sound business practices and FCC legal enforcement actions are two entirely different things.

Although it might have been different had Comcast and BitTorrent, and for that matter most parties interested in the dispute (other than Free Press and its network neutrality allies), proceeded in a “take-no-prisoners” fashion to force the Commission to decide what, at best, would be described as a classic “hard case” -- as in the proverbial “hard cases make bad law” dictum. But the parties didn’t proceed that way. And looking at where we are today rather than last November, argues in favor of the FCC now dismissing the complaint.

Here’s why. Comcast has changed its practices and announced that by the end of this year it will have implemented system-wide a protocol-agnostic network management technique that addresses the very real network management issues in a way that does not single out certain peer-to-peer traffic. Indeed, in March, Comcast and BitTorrent announced they are now collaborating to address network management issues attributable to congestion caused by peer-to-peer traffic. And in April, Comcast and Pando Networks, a firm specializing in peer-to-peer content delivery, announced they would lead an industry-wide effort to develop a P2P Users’ Bill of Rights. Then, in May, Comcast and many other industry participants, representing the various perspectives, began meeting as part of an Internet Engineering Task Force P2P Infrastructure Workshop to discuss technical traffic management issues.
I do not doubt that the filing of the Free Press complaint and the threat of a potential enforcement effort spurred on the cooperation between Comcast and BitTorrent and the industry-wide efforts described above. All well and good.

In light of what has transpired, however, it would not be well and good for the Commission now to proceed further. When it adopted the network neutrality principles in 2005 in a document it clearly labeled a Policy Statement, it stressed “we are not adopting rules in this policy statement.” Thus, under relevant administrative law precedent, the principles are not binding in a way that creates enforceable legal obligations. Rather, they are in the nature of guidance to the Commission’s staff and interested parties as to how the Commission might choose to interpret provisions of the Communications Act or its own legislative regulations that do create binging legal obligations. But in this instance, there are no other provisions of the statute or regulations that clearly create a legal obligation that Comcast allegedly violated.

I say “clearly” because I understand that Free Press and others, now apparently abandoning the claim that the network neutrality principles announced in the policy statement are enforceable, contend the Commission has “ancillary” jurisdiction to take an enforcement action. Absent the adoption of a pertinent Commission rule or precedent dealing with network management practices of the type at issue here, I find the claim problematic. But the main point I want to make is that, by almost all accounts, the Commission’s ancillary authority to grant the relief on the Free Press complaint is quite uncertain.

In the face of this legal uncertainty -- and the facts that Comcast has changed its practices, that most of the industry players have moved on to grapple in a collaborative way with the very real network management issues brought about by the explosion of peer-to-peer traffic, and that the industry is in a much better position than the FCC to do the grappling -- there is no good reason for the FCC now to do anything other than dismiss the Free Press complaint. To do otherwise would be regulating while looking through the rearview mirror. The telecommunications landscape, and especially that part of it involving broadband and the Internet developments, is changing quickly enough, that the agency always needs to be looking forward, not backwards.

Hard cases make bad law, not only at common law, but in agency adjudications. This is an instance that calls for a good dose of prudential regulatory self-restraint.

We're Number One

Nielsen, the independent market research firm, just released a report that shows the U.S. ranks first out of sixteen countries surveyed with respect to mobile Internet usage penetration. Over 15% of the wireless subscribers in the U.S. surveyed were identified as active users of the mobile Internet. Among others, the U.S. ranked ahead of the UK (No. 2); Italy (No. 3); France (No. 7); Germany (No. 8); and China (No. 9). The Nielsen report, with many other statistics, is here.

Ah, statistics. I have no doubt, if not carefully analyzed, that they can be abused and misused for rhetorical purposes. This certainly has been the case with respect to the OECD broadband reports, which purports to show the U.S. far behind other countries in broadband penetration. There are many reasons which have been widely discussed why these OECD reports don’t present an accurate account of the remarkably rapid growth in the ubiquitous availability and usage of broadband in this country.

So without at this point vouching for all of Nielsen’s statistics, it does seem hard to gainsay the conclusion that, “[i]n the U.S., Mobile Internet has become a mass medium.” This is a very positive development from a competitive and economic standpoint. The U.S.’s lead in the Nielsen rankings should be taken as an indication that this country’s generally free market-oriented wireless and broadband policies are working.

Where we have run into trouble with regard to broadband and wireless is when our policymakers have been seduced by notions that government regulation or intervention is needed “to make the market work better” or to solve, in an anticipatory fashion, some “marketplace abuse” that doesn’t yet exist and may never do so. Forays into net neutrality regulation, such as the FCC’s ill-fated 700 MHz auction for the C Block, have not turned out well. Without imposing new regulatory mandates, wireless providers are moving towards implementing more open platforms in response to marketplace demands.

The pace of innovation in the wireless world is almost dizzying, especially if you are past a certain age -- say, thirty. But it’s real, and today’s release of Apple’s latest IPhone, running on AT&T’s 3G network, will operate at faster speed and incorporate even more new features and functions. And it’s cheaper still. This latest phone, along with those of AT&T’s competitors, are sure to spur even more mobile Internet usage that will be reflected in Nielsen’s next report.

The FCC should not be thinking of ways to intervene in the market, but rather ways to promote additional facilities-based entry so there will be even more marketplace competition. Two current matters before the Commission come immediately to mind. The agency is considering imposing a mandate requiring the winner of the next auction for Advanced Wireless Spectrum (“AWS”) to provide the public with “free” access to the proposed national wireless broadband network. This mandate to encumber the auction in this way will decrease substantially the revenues realized to the detriment of America’s taxpayers. As I said above, the rapid growth in broadband availability and usage in this country has been remarkable. The FCC’s own data shows that broadband service is available in 99% of the nation’s zip codes in which 99% of the nation’s population lives.

To the extent there is a concern about what the FCC called in its AWS news release “the ubiquitous availability of affordable broadband services,” the proper way to address that concern is by carefully and narrowing targeting any subsidies to low-income consumers or to truly unserved areas. The people in Aspen don’t need more subsidized communications service. The FCC should not adopt a regulation requiring the AWS auction winner to provide a ubiquitous free service because this mandate surely will result in less efficient use of the spectrum than would responsiveness to the marketplace and foregone revenues to the U.S. Treasury. For more on this, see my recent testimony at Chairman Markey’s hearing on universal service.

On the other hand, the FCC should ensure that it is processing the Clearwire-Sprint Nextel application to form a new company to build out a new high-speed WIMAX wireless broadband network in as timely fashion as it can. With the Sprint-Clearwire combination, and the backing of major strategic partners such as Comcast, Google, and Intel, the proposed WIMAX network offers the prospect of introducing another nationwide competitor in the broadband marketplace. Yet another broadband provider would make the existing competition more robust.

If policymakers will avoid imposing new regulations when markets are already workably competitive, while acting to promote additional facilities-based competition when this can be done without imposing new regulations, it is likely that the U.S. will retain its leadership in the high-tech area, including the mobile Internet.

Independence Day 2008

For me, birthdays are a time for looking back as well as forward. After the traditional joyous “Happy Birthday to You” chorus usually comes the insistent “How Old Are You Now?” line. “How Old Are You Now?” “How Old Are You Now?”

Confronting that question has a way of focusing the mind in the nature of a taking stock exercise. What has been accomplished thus far and what remains to be done? What promise has been realized? What promise thus far unrealized?

With the approach of this July 4th, perhaps especially because it is a quadrennial election year, I have been thinking of America’s birthday in terms not unlike the way I think of my own. “America, how old are you now?”

Two hundred thirty two years old if you reckon from July 4, 1776. Or even if you prefer 1788, when New Hampshire became the ninth state to ratify the Constitution, still old, by most accounts. Old, indeed. But I have had fixed in my mind of late counting another way. And by this reckoning America seems very young.

Think of America in this way. When I was born in 1946, there were still Americans living who were born during the Civil War. It’s true. I recall as a young man reading their obituaries in the newspaper. And when those Americans were born during the Civil War, there were still many Americans living who were born during the Revolutionary War, some of whom who were born in 1776, in America’s birth year. Viewed this way, America is only three lifetimes old. Or, more truly, three lifetimes young.

I’ve been turning over this thought in my mind for a week or so now – America as 232 years old, or America as three lifetimes young. I can see America through both lenses. But ever the glass-half-full optimist, I think I prefer three lifetimes young.

To be sure, at the Founding, for all its promise and ideals, America was a construct in which the gap between aspiration and reality was monumental. A nation that proclaims in its ringing Declaration of Independence that “all men are created equal” and sanctions human bondage in its Constitution of 1787 is built on a contradiction that must be eliminated. The elimination took the shedding of the blood of brothers and much more so that the Union could continue the journey towards fulfilling the promise of the Founding ideals.

The flaw in America’s original construct should never be ignored or forgotten. But neither should the promise of the Founding ideals ever be forgotten, or the achievement of the Founders be diminished. For the ideals were as monumentally important, for America and the world, as the gap between aspiration and reality.

So, on this Independence Day, I opt to think of America as only three lives young, rather than 232 years old. Either way, I think of America as a Republic always looking forward – towards a future full of promise in a never-ending quest to secure the rights of “Life, Liberty, and the pursuit of Happiness.” As the Declaration announces, it is to secure these inalienable rights that “Governments are instituted among Men.”

The Constitution’s preamble says we bound ourselves together in order to form a “more perfect” union, not an already perfected one. The Free State Foundation’s website proudly proclaims the Foundation’s purpose to promote, through research and education, free markets, limited government, and rule of law principles. To my mind, these fundamental principles are central to preserving the rights of life, liberty, and the pursuit of happiness that is the core object of our constitutional commitment. And they are central to the success of America’s constant striving to become a more perfect union.

So, on this Independence Day 2008, it is appropriate to recognize how much of America’s promise already has been fulfilled, how much already has been accomplished. But there is much more work to be done in a still young nation that ever will be in the process of becoming a “more perfect” union.

Happy Birthday America!

Eleven Point Four. We Won't Pay!

“Eleven Point Four. We won’t pay!
Eleven Point Four. No way, no way!”

You could almost hear – or maybe it was my imagination – a background chant at Tuesday’s hearing on the “Future of Universal Service” convened by Rep. Ed Markey in his capacity as Chairman of the House Subcommittee on Telecommunications and the Internet.

All consumers now pay an 11.4% surcharge, in effect, a tax, on all interstate telephone calls. This tax funds the various universal service subsidy programs. In 2000, the tax was 5.5%. I got the sense at Tuesday’s hearing that at some point between 5.5% and 11.4%, a threshold, a Universal Service Rubicon of sorts, was crossed. Because it seemed clear from statements at the hearing that a bipartisan consensus is developing that the current regime is broken and needs meaningful reform. Many of the committee members who spoke, including significantly Chairman Markey, referred to the 11.4% surcharge on all calls as an impetus for getting on with the business of reform. Consumers finally have begun to pay attention to the size of the dollar amount of the item typically denominated as “Federal Universal Service Charge,” or some such, on their bills.

Chairman Markey is to be commended for holding a future-oriented hearing on universal service. As a hearing witness, I offered the committee some key guiding principles for reform and some specifics for applying them in today’s competitive and rapidly-changing technological environment. The principles are pretty simple but fundamental: Market forces, rather than subsidies, should be relied on to the greatest extent possible to achieve the universal service objectives. If there are to be subsidies, they should be targeted narrowly and financed broadly. The current regime is at odds with these principles, which is why, despite more competition and new, less-costly technologies, the surtax on telephone calls has climbed to over 11%. You can read my full testimony here.

With an apparent emerging consensus that the current regime largely has achieved the goal of making voice service ubiquitous – universal, if you will – the hearing, quite appropriately, focused mostly on broadband. The question is whether broadband service should now be brought into the existing universal service subsidy regime, or one similar. I addressed this question in my testimony. I pointed out that, without any significant government subsidies, market forces already have worked to make broadband service widely available to the American public. I urged policymakers to “retain this minimally regulated environment that has encouraged so much private sector broadband investment in a relatively short time.” And, if policymakers determine that some subsidies nevertheless are desirable to achieve more ubiquitous deployment at a faster rate, I urged they be distributed through some form of competitive bidding process that narrowly targets disbursements only to unserved high-cost areas or low income persons. Any such subsidies should be financed through general Treasury appropriations.

At bottom, I urged: “Any broadband subsidies deemed necessary should not be disbursed or financed through an unreformed universal service regime that resembles the existing one. To do so would perpetuate a system that is economically inefficient, wasteful, and competition-suppressing. It would saddle the broadband world – and the American public – with an outdated relic of the narrowband world.”

Finally, another indication of what I take to be the gathering reform momentum is the bill introduced by Reps. Joe Barton and Cliff Stearns on the day of the hearing. Rep. Barton is ranking member of the Energy and Commerce Committee and Rep. Stearns ranking member of the Telecom subcommittee. To my mind, their “Universal Service Reform, Accountability, and Efficiency Act of 2008” is the most reform-minded, consumer-friendly universal service bill ever introduced. It deserves very careful consideration. Most importantly, the Barton-Stearns bill would not bring broadband into the existing subsidy regime, with all of its competition-distorting rules and built-in inefficiencies. With respect to narrowband, recognizing that the goal of universal voice service largely has been achieved, the bill would cap the universal service funds at their current sizes. Among other things, it would substantially change the subsidy distribution method to incorporate competitive bidding mechanisms for high-cost areas without affordable service and curtail subsidies presently going to high-income areas. (Aspen is the proverbial example of a high-income area that currently receives substantial subsidies under the current regime.)

Chairman Markey deserves credit for holding a hearing on “The Future of Universal Service” at which a serious conversation about serious reform was begun. And Reps. Barton and Stearns deserve much credit for fashioning a bill that ought to contribute significantly to pointing the way forward.

“Eleven Point Four Percent. We won’t pay!
Eleven Point Four Percent. No way, no way!”

Maybe the background chant I was hearing during the hearing was all imagined. But my sense is that something has changed, that the consumer’s “pain at the phone” threshold has been crossed. And that, as a result, there is now an opportunity for meaningful universal service reform that leads to a less costly, more efficient system that is also much less competition and technology-distorting than the existing regime.

Communications Policy in the Next Administration

As in other areas, the differences between the communications policy visions of Barack Obama and John McCain are stark, at least as presented by their surrogates at this week's Federalist Society debate at the National Press Club. And the surrogates are no newcomers to communications policy -- former FCC Chairman Reed Hundt representing Obama and former FCC Chairman Michael Powell representing McCain. You can find the audio and video for the debate here.

There were some sharp partisan jabs, mostly by Reed Hundt, which struck me as a bit at odds with his candidate's professed notion of trying to reach out to all sides and transcending "politics as usual."

But putting aside the entertainment value of the debate's sharpness, for those interested in the future of communications law and policy the debate was very instructive. There is no doubt that Mr. Hundt presented Obama's vision as one in which traditional analog-era regulation plays a much more prominent role than it does in McCain's. This difference in the willingness to maintain (or in some instances re-impose) regulations put in place long ago in the twentieth century's monopolistic communications environment ran throughout the debate.

Here I'll just highlight one instance in which I think the difference in regulatory philosophy is particularly stark, and important -- in the way in which the two surrogates approach the net neutrality controversy. Mr. Hundt enthusiastically embraces what he called the "broadband future-oriented modern version of common carrier," with an "absolute rule against discrimination." Mr. Powell vigorously disagreed, saying that adopting Mr. Hundt's common carrier regime would amount to "the first fateful step of inviting the federal government towards regulating the Internet." Responding to Mr. Hundt's embrace of the need for net neutrality legislation that strictly prohibits discrimination, Mr. Powell said at this point it is "far from clear what problem you are trying to solve," and that the "consequences of empowering legislation around difficult technical and architectural questions is dangerous." While not denying there could be instances of anticompetitive conduct that should be addressed, Mr. Powell said, "the better approach in a new and vibrant market is to put greater emphasis on an enforcement model, an antitrust model." For the core of the back-and forth regarding net neutrality, you can tune in beginning around the 26 minute mark of the replay.

Mr. Hundt is at least forthright in conceding net neutrality mandates are simply another name for a traditional common carrier regime. Some net neutrality advocates shy away from doing this for fear such directness harkens too much to the past. I have explained on many previous occasions why such a regime, with rate regulation and a no-discrimination prohibition at its core, is not an appropriate model to apply on a forward-looking basis to broadband Internet providers in today's competitive communications environment. Perhaps this model was appropriate for the railroads in the nineteenth century, and for AT&T throughout much of the twentieth century, although respected scholars such as Bruce Owen, a member of FSF Board of Academic Advisors, have serious doubts. (See Bruce's scholarly essay on this point here.) But relatively fewer scholars in the field of regulatory law and economics share Mr. Hundt's (and Obama's) view that the Internet should be subject to a public utility-style common carrier regime.

Anyway, as they say, the debate speaks for itself, and tuning in is a worthwhile way for all those interested in communications policy to spend an hour or so.

Maryland’s Budget System: An Imbalance of Power?

In 1916, the citizens of Maryland approved a budget system that gave primary budget authority to the Governor. Almost a century later, the debate continues about whether the legislature gave away too much of its power and should ask the citizens to restore it.

Those who argue that it is time to increase legislative authority maintain that more legislative power would allow more citizen participation and flexibility into the budget process. I believe that the General Assembly already has significant budgetary power and that allowing the General Assembly to rearrange the Governor’s budget would exacerbate Maryland’s spending problem (often referred to as the structural deficit). As noted in the September 18, 1916, issue of the Baltimore Sun by William Milnes Maloy, one of the members of the Goodnow Commission that recommended the current allocation of budgetary responsibility, “If the Maryland legislator served his State as well as he serves his county or district, a budget system would not be necessary in Maryland. …it must be said that most of the members of Parliament, of Congress and of every State Legislature in the Union are more mindful of the public interests of the localities they respectively represent than of the general welfare of the nation or the State.”

You can read my arguments and those on the other side by Prof. Roy Myers in a new report issued by The Maryland Budget and Tax Policy Institute, a project of the Association of Maryland Non-Profits.

Broadband Policy, Dollars and Sense

The United States has had a generally deregulatory broadband policy since 2002 when the FCC declared that broadband services “should exist in a minimal regulatory environment that promotes investment and innovation in a competitive environment.” Despite the fact that, since 2002, the broadband marketplace has continued to become more competitive and broadband services more ubiquitous and innovative, the FCC has not adhered in a consistent fashion to its declared deregulatory posture. When it has strayed, the results have not been good.

Take the recent 700 MHz auction of spectrum for wireless broadband services. FCC Chairman Kevin Martin insisted a portion of the spectrum to be auctioned be encumbered so that the auction winner would be required to use the spectrum consistent with net neutrality principles. The spectrum would be an “open access” zone in which all content, applications, and devices would be required to be treated on a “non-discriminatory” basis. With 80 years of common carrier non-discrimination regulation as historical context, potential bidders knew a regulatory quicksand pit when they saw one. The result: The auction bids fell way below the FCC’s reserve price, and the spectrum block, so-called prime real estate for advanced wireless services, will continue to lay fallow. And, in the meantime, the U.S. Treasury is deprived of the funds that would have been realized in an unencumbered auction.

Now Chairman Martin apparently is proposing another encumbered auction for another chunk of spectrum that can be used to provide broadband services. This time the auction winner would be required to offer a “free” broadband service of some bandwidth capacity to some percentage of the nation’s population over some future build-out schedule. And, for good measure, this free service would be required to filter out “indecent” programming.

The FCC should have learned its lesson from the 700 MHz auction. It is unsound public policy to encumber spectrum auctions in this way, rather than auctioning the spectrum on an unencumbered basis that allows market mechanisms to work properly. The spectrum is devalued, and U.S. taxpayers lose. And the FCC establishes a regime that will, assuming a bidder meets whatever “reserve price” the Commission in its wisdom sets, will invite, nay, ensure, regulatory scheming and litigation over the “free” block rules far into future. There will be attempts by all interested parties to use the regulatory process to game the regime, with ongoing battles over bandwidth requirements, the build-out schedules, and the interpretation and enforcement of the “indecency” regulations. What about a waiver of this rule? Why not a waiver of that rule? For how long? Pretty please! Any casual observer of the FCC’s regulatory history knows this to be true and understands the troubles such encumbrances promise.

Like virtually all goods and services, broadband capacity is “scarce.” Indeed, it takes huge capital investments to build-out broadband networks, and once built-out, unless periodically upgraded and modernized, they quickly can become less than the moving target that is called “state-of-the art.” It is important, therefore, that regulators allow the broadband market, like other competitive markets, to work in a way that uses price signals to respond to changing consumer demand. Of course, a zero-price of “free” is no price signal at all.

U.S. broadband penetration has been remarkable over the last several years, with over a 100 million lines now in service, and broadband service available in over 99% of the zip codes in America. To be sure, these figures do not demonstrate that broadband service is ubiquitous, or that everyone who would like broadband, has it, or even that those that have it, have as much bandwidth capacity as they would like today or tomorrow. There is still more progress to be made, and, truth be told, there most likely always will be with respect to ever-increasing demand for more bandwidth.

If policymakers determine that measures are needed to address broadband penetration or usage rates in certain high-cost geographic areas or among certain low-income persons, any such measures should be carefully and narrowly tailored to address those areas or persons in the most economical and efficient manner. But to continue the progress already made, policymakers should not abandon market mechanisms for regulatory encumbrances, whether they happen to be in the form of requirements for “free” service, “open access” zones, or “net neutrality” mandates.

In a not unrelated development, Time Warner announced earlier this week that will experiment in a few markets with plans that tie bandwidth usage to price. In other words, heavy users would be required to bear more of the burden for the capacity demands they place on Time Warner’s network than light users. In another context, this is just a variation of the point made above – that in a competitive marketplace, price signals must be allowed to allocate a scarce resource if overall consumer welfare is to be enhanced. Hopefully, the pro-net neutrality crowd won’t be allowed to derail such pricing experiments or plans if they prove to be a sound way to address network management issues and capacity constraints.