Change

Change. It has become this year’s political mantra. Maybe it will, or maybe, it won’t trump Experience.

With change dominating the presidential campaigns, I’ve been thinking about change too. Based on my experience —oops, I am burdened with some of that, almost 35 years worth, to pick a popular figure— communications law and policy is an area ripe for change. Of course, like Rudy Giuliani is fond saying in the debates, there is good change and bad change.

I am under no illusions that the presidential candidates are going to start talking anytime soon, or ever, about the nitty-gritty of communications policy. But perhaps as the campaign progresses, we will hear more about their views concerning general regulatory philosophy, and issues such as broadband policy. How these issues are handled is important to the future of the nation’s economy.

In the meantime, with change in the air, or at least on the airwaves, the FCC itself should think of 2008 as a “change year” and itself as a “change agent”. It can and should implement some fundamental reforms. Certainly the communications marketplace is changing at a dizzying pace, and the FCC must keep pace to the extent it can consistent with the current Communications Act if its policies are not to become a deterrent to innovation and investment, and a drag on the nation’s economy. What is really needed to accomplish the task of fundamental reform commensurate with the dynamics of the increasingly competitive marketplace is a much different, transformational communications law like the Digital Age Communications Act (DACA) introduced in December 2005 by Senator Jim DeMint.

Fundamental reform such as DACA, which would substitute the current techno-functional-centric stovepipe regulatory regime with one that ties regulatory activity to the realities of marketplace competition, may have to wait further gestation. You can read more about this fundamental reform in my Federal Communications Law Journal article, Why Stovepipe Regulation No Longer Works: An Essay on the Need for a New Market-Oriented Communications Policy. In the meantime, the FCC itself can take important actions. Here are a few, and I’ll be saying much more about these and others as we go along this year:

· The agency should move forward with universal service reform. This bloated subsidy system needs fixing to reduce what is, in effect, a 10% tax all telecom users now pay to provide untargeted subsidies. These untargeted subsidies are wasteful, and they distort competition and impede innovation. The Commission should permanently cap the existing high-cost fund, stop basing subsidies to wireless carriers on the “identical support” received by incumbent wireline carriers even if their costs are less, and adopt “reverse auctions” as a means of determining which provider can serve designated areas on the least costly basis. (You can read more here.)

· The agency should return in a serious way to a consistent deregulatory broadband policy. In 2002, the Commission announced that broadband services should exist in a “minimal regulatory environment that protects investment and innovation in a competitive market.” This policy rested on findings that, even then, the broadband marketplace was developing in a competitive fashion, with cross-platform competition the key feature. It is even more so today, with cable, telephone, wireless, and satellite companies competing to provide voice, data, and video services in various packages and configurations. The power companies are sitting on the near sidelines as potential competitors as well. Although the FCC won a hard-fought landmark Supreme Court victory in 2005 in the Brand X case upholding its authority to implement its deregulatory broadband policy, the agency, in the past year or so, nevertheless mistakenly and too frequently has strayed from the policy of minimal broadband regulation. The imposition of a net neutrality “open access” mandate for 700 MHz spectrum is one example. Chairman Martin’s initiatives in favor of increased cable regulation, such as various anti-bundling regulations, are another. After all, today’s “cable” firms are broadband providers. The Commission as a body needs to get back on course with a consistent deregulatory broadband policy, rejecting calls for unbundling and net neutrality regulations. Integral to this effort, the Chairman and Commissioners must begin consistently thinking of the former telephone, cable, satellite, and wireless companies as broadband companies in competition with one another. It is true, of course, that such competition is more or less vigorous, depending on the discrete application or service. But it is important to understand that the marketplace has changed in this fundamental way.

· In line with the above point, as an institutional matter, the FCC should implement an organizational reform that creates a Broadband Services bureau that combines the current Media, Wireline, and Wireless bureaus. Many functions performed by the individual bureaus, such as information-gathering, policy analysis, and regulatory review, ought to be able to be performed more efficiently in a single Broadband bureau with a unified, slimmed-down staff. I understand that some legacy regulatory activities from the various “industry” bureaus are stand-alone, and that, at least for now, eliminating the individual bureaus won’t eliminate these activities. But having a Broadband bureau under unified staff leadership should help focus the agency on the marketplace reality that most wireline, wireless, and cable services are broadband, and the companies in the formerly distinct segments now compete against each other. Hopefully, having such a unified bureau, would lead to a more consistent deregulatory broadband policy.

· The agency should promptly approve the XM-Sirius merger. In an industry a dynamic as communications, absent exigent circumstances which don’t appear to exist here, it should not take a year for the FCC (or the Justice Department, for that matter) to determine whether a proposed merger should be approved. There is much that can be done to improve the FCC’s merger approval process, some of which would require statutory changes. For a more on this, see my articles, “Reform the Process” and “Any Volunteers?” Because I consider satellite radio part of a broader audio information and entertainment market that includes terrestrial broadcast stations, wireless audio services, iPods, MP3 players and similar devices, and the Internet, FCC approval of the merger would indicate an appreciation of the dynamic and competitive nature of the communications marketplace. Most importantly for present reform purposes, the agency should exercise self-restraint and eschew imposing last minute “voluntary” conditions unless they are truly necessary to prevent demonstrable competitive harm that the Commission explains on a reasoned basis. The Commission ought to flat-out stop using the merger review process as a forum for imposing company-specific regulation that is better considered, if at all, in industry-wide generic proceedings. The agency doesn’t need an act of Congress to accomplish this change.

There’s that word again—change. I know there are other ideas as well for fundamental reform in communications policy and the way the FCC operates. Again, I will be discussing more of these in the future. And your feedback is always welcome.

So, in the style of the campaign debate moderator, my question to the FCC: Why not seize the change mantle and get started now with reforms such as those suggested above?

The Threat to the Net from Net Neutering

I’m still catching up a bit on some reading missed during the holiday period, and this piece, “Technology in 2008,” from the Economist.com caught my eye. The subtitle is “Three Fearless Predictions.”

The first fearless prediction --that surfing the net will slow-- makes me fearful. Read the whole piece, but the first paragraph gives you the gist: “Peering into Tech.view’s crystal ball, the one thing we can predict with at least some certainty is that 2008 will be the year we stop taking access to the internet for granted. The internet is not about to grind to a halt, but as more and more users clamber aboard to download music, video clips and games while communicating incessantly by e-mail, chat and instant messaging, the information superhighway sometimes crawls with bumper-to-bumper traffic.”

Stop taking access to the Internet for granted. The information superhighway sometimes crawls with bumper-to-bumper traffic.

To some extent this prediction about a slowing Internet rests on the projected exponential increase in user-generated content, one that is already occurring in what the article calls “tsunami” proportions. According to the Economist, “everyone, it seems, is suddenly a budding Martin Scorsese, bent on sharing his or her home-made videos with fellow You-tubers.” The increase in simultaneous uploading and downloading, coupled with the explosive growth in wireless Internet traffic, Internet television and the like, will have “users screaming for yet more capacity.”

It may be that in the near-term (2008?) the Economist prediction is only half-right. Or maybe only a third or fourth-right. No matter. There is no doubt, is there, that our nation’s various Internet service providers – cable, telephone, wireless, satellite -- will need to continually upgrade and expand their networks to provide more capacity, including capacity to end users?

Unfortunately, as we begin 2008, there are still many, including many policymakers who should know better, who are screaming, not for more capacity, but just for “net neutrality” regulation. There is no surer way to ensure that we will face a capacity crunch than to impose net neutrality regulation on Internet service providers. As I have explained many, many times in this space, regardless of the language used to describe it, net neutrality regulation is no less traditional public utility regulation than the common carrier regime which characterized regulation of AT&T back in the last century at a time when the carrier exercised dominant market power.

It is impossible to prohibit and enforce the non-discrimination mandates that are at the very core of all net neutrality regulation without also ultimately regulating prices. Put another way, net neutrality regulation prevents Internet service providers from finding, or even experimenting with, innovative ways to respond to consumer demand for new services by using price differentiation methods that characterize most markets.

Imposing net neutrality regulation in today’s competitive, dynamic environment will stifle investment in new network facilities by Internet service providers, both existing ones and others who might consider entering the market with an investment in new facilities. This is the inevitable effect of public utility-type regulation that puts in place regulatory straight-jackets and price controls that cap the providers' ability to earn a market-based return on invested capital. It is why I have called net neutrality regulation "net neutering".

So, net neutrality regulation hardly seems to be the right prescription for dealing in a rational way with potentially severe looming Internet bandwidth constraints. Indeed, it would be just the wrong medicine at the wrong time.

Favoring Property Rights In Spectrum

Sprint Nextel and T-Mobile have just submitted a filing at the FCC in support of a proposal to license new fixed services in the “white spaces” of the TV bands. They state that the TV bands, because of their favorable propagation techniques, are well-suited for the delivery of lower-cost and reliable backhaul services needed to operate their wireless services.

What caught my eye is the support for establishing a regime of licensed, rather than unlicensed, use for the so-called “white spaces.” While proposals for unlicensed spectrum use seem to be in high fashion these days, just like all sorts of proposals for “open access” and “unbundling” of communications networks, licensing has the advantage of establishing a property rights-like regime in which the rights and obligations of the license holder can be defined. When the license is bid at auction, this regime allows the spectrum to go to those who value its use most highly in accordance with the rights defined by the license.

Although often the assertion is otherwise, as a practical matter, in an unlicensed regime, there still must be “rules” (sometimes more gently called “protocols” or “standards”) to police against interference to licensed uses. Otherwise, there is little or no incentive for the spectrum to be used in the most efficient, most innovative, and highest value manner. Rather, in an unlicensed regime, without a set of defined property rights in the spectrum, the incentives necessarily run in the direction of “use as much of the spectrum as you can whenever you can” because it is “free” or a “commons.” In other words, the tendency runs in the direction of inefficiency.

This notion of spectrum as a free resource is not unrelated to the dangerously fashionable notion in some quarters that communications networks, having been constructed and operated with billions of dollars of private risk capital, ought now to be shared under mandatory “open access” or "net neutral" regimes that will necessarily require government management and rate-setting.

I haven’t studied all of the questions that might be relevant to establishing any technical rules that might needed for use of the TV bands. As a general rule more flexibility in use when defining the parameters of the licensing rights is preferable to less flexibility. And to the extent that Sprint Nextel and T-Mobile justify their support for a licensed regime for the TV white spaces as a means to provide backhaul for their wireless services in order to avoid what they call unreasonable special access costs, I am not here endorsing their characterization of the current level of special access prices. One thing of which I am sure, though, is that, whatever one believes about the existing state of competition, it is far better for the FCC to try to facilitate even more alternatives, in ways consistent with respect for property rights and property rights-like regimes, than it is for the agency to consider re-regulating the incumbents’ special access services.

In the first few days of this new year, I may already have missed some not-so-encouraging communications policy developments. That's okay. I am afraid there will be plenty to discuss in the days and weeks ahead. But, as 2008 begins, I am happy to take note of an FCC filing that essentially embodies a property rights-protective approach over one that is the antithesis.