Wednesday, April 29, 2009

Constitutional Reckoning Still to Come

Yesterday, the Supreme Court handed down its long-awaited decision in the Fox Television case concerning the FCC's regulation of "indecent language" aired by broadcasters. Acting under the authority of a decades-old federal statute banning indecent broadcasts, in 2004 the Federal Communications Commission adopted new policy sanctioning the broadcast of "fleeting expletives," even when used in a nonliteral sense. Previously, the FCC had required more than the isolated use of the expletives (what the Court termed the "F-Word" and the "S-Word") before sanctioning broadcasters.

On administrative law grounds, the Court's five-to-four majority determined that the FCC's new "fleeting expletives" policy was not "arbitrary" or "capricious" within the meaning of the Administrative Procedure Act. For administrative law scholars and aficionados (and I count myself among this group), the six different decisions of the Justices are a rich vein to be mined.

But here I am concerned primarily with what was not decided. As Justice Scalia said at the end of his majority opinion: "It is conceivable that the Commission's orders may cause some broadcasters to avoid certain language that is beyond the Commission's reach under the Constitution. Whether that is so, and, if so, whether it is unconstitutional, will be determined soon enough, perhaps in this very case." Fox and other broadcasters had argued that the FCC's sanctions for fleeting expletives violated their free speech rights under the First Amendment. While the appeals court indicated in dicta it agreed, it did not rule on the constitutional issue because it found, in any event, that the FCC's action was arbitrary and capricious.

Now the case goes back to the appeals court for further proceedings, where presumably the broadcasters will continue to press their First Amendment argument. In a concurring opinion, Justice Thomas made clear that he thought the Court should reconsider the viability of the Court's precedents in the Red Lion and Pacifica cases, which limited broadcasters First Amendment rights, largely on the basis of perceived spectrum scarcity. In a brief cogent opinion, Justice Thomas elucidates the "doctrinal incoherence" of those analog era decisions and explains that, even had they been doctrinally coherent at the time, they are not so in today's much changed digital era of media abundance.

Justice Thomas concludes that "[t]he extant facts that drove this Court to subject broadcasters to unique disfavor under the First Amendment simply do not exist today." I was gratified that in making this point, Justice Thomas cited my very recent law review article, Charting a New Constitutional Jurisprudence for the Digital Age, which appears at 3 Charleston Law Review 373 (2009).

So, it now appears likely that the constitutional reckoning concerning the FCC's new policy is still to come, perhaps soon. In my article which Justice Thomas cites, I stated: "Hopefully sooner rather than later, the Court will revisit Red Lion, Pacifica, and Turner in order to establish a new First Amendment paradigm for the electronic media, one that is much more in keeping with the Founders’ First Amendment vision." The article makes clear that the First Amendment issues at stake go far beyond the government's regulation of "indecent" speech. Under the existing First Amendment paradigm, other speech regulations, such as the Fairness Doctrine and "must carry" obligations, have been sustained.

I concluded the article this way:

"Perhaps it was predictable, maybe even likely, that the First Amendment’s protections would be limited substantially during the twentieth century’s analog age that tended towards a monopolistic or oligopolistic communications marketplace. But, now, in the face of proliferating competitive alternatives attributable to profound marketplace and technological changes, it ought to be considered predictable, and, yes, even likely, for the Court to establish a new First Amendment jurisprudence befitting the media abundance of the twenty-first century’s digital age."

Because I believe the First Amendment's free speech protection, including protection of the electronic media, is central to the preservation of a healthy democracy, I remain optimistic that such a new First Amendment jurisprudence will be established sooner rather than later.

Monday, April 27, 2009

The "Common Carrier" Free Press

In the face of opposition led by Free Press, Time Warner Cable recently withdrew, for now, its announced plans to conduct a trial of consumption-based billing (CBB) in four cities. I explained in my April 16 piece, "The 'Free Lunch' Free Press," why the trial should have been welcomed. Ultimately, the investment in broadband facilities must be recovered from the body of the provider's subscribers. In other words, there is no free lunch.

You should read the entire piece, but the core point is this: For reasons of fairness and economic efficiency, "it is not necessarily best for consumers -- for overall consumer welfare in an economic sense -- for all subscribers to be charged the same flat rate for service, regardless of the amount of their own usage."

There is an additional point that should be made as I read some of the Free Press' post-withdrawal statements as the organization continues to press its case against consumption-based billing. Free Press risks becoming "The 'Common Carrier' Free Press" in addition to the "Free Lunch" Free Press. As I have said countless times during the past five years or so, all net neutrality-like mandates -- and, make no mistake, a prohibition on CBB is a net neutrality mandate -- in effect constitute common carrier-like regulation of broadband providers not dissimilar from the common carrier regime to which AT&T was subject in the twentieth century's monopolistic communications era.

The core elements of common carrier regulation are a non-discrimination mandate and/or some form of rate regulation. Of course, most net neutrality mandates proponents routinely claim that "prohibiting discrimination" is a chief aim. Less often do they say – at least openly – that they also advocate rate regulation. But rate regulation almost always lurks, is inherent really, in broadband restrictions sounding in net neutrality.

Free Press claims that its opposition to TWC's proposal was based on the notion that TWC's prices are too high. Thus, in its initial press release announcing it was organizing a nationwide protest, Free Press referred to TWC's allegedly "healthy broadband profit margins." In its April 16 press release issued celebrating its victory after TWC withdrew the planned trial, Free Press charged TWC with a "price gouging scheme" and "unfair price hikes."

Most recently, in an April 22, 2009 letter to Congress calling for an investigation of all CBB trials by any broadband provider, the rate regulation agenda of Free Press becomes even more apparent. Free Press first says that "no provider has disclosed useful cost information." You might think this would mean Free Press is poised to retract its days-earlier claims concerning healthy profit margins, unfair price hikes, and the like. But no. It is just an opportunity for Free Press to suggest that "the usage fees are well above the marginal cost of providing Internet service." And to suggest that the prices for Internet service "bear little or no relation to costs." And to suggest that the prices may be "arbitrarily above costs."

The point should be obvious, and you don't have to be a brain surgeon, or even a public utility lawyer or an economist, to get it: The only way we really would ever know whether a broadband provider's prices are above marginal or average costs (or any other variation of these two, and there are others), or whether rates are "fair" or "arbitrary," would be to conduct a full-blown rate case. But wait. If you have ever tried, or otherwise participated in any way in a public utility rate case, or even witnessed one, then you know that, ultimately, the determination and assignment of "costs", especially with respect to operators engaged in providing multiple products over the same network facilities, approaches the metaphysical.

Although I know the exponential growth of Internet traffic, spurred by video, poses non-frivolous network management challenges for broadband providers in light of capacity constraints, I am in no position to offer firm opinions on the "marginal" or "average" costs of TWC or other broadband providers. But I am strongly of the opinion it would be a serious mistake for policymakers or regulators to start down the road towards undertaking the nearly impossible task of trying to determine those costs, and, in effect, imposing a rate regulatory regime on broadband Internet providers. It is far preferable, given the extent of already-existing broadband competition, with the prospect of more to come, to rely on marketplace competition to protect consumers. As I said in my April 16 piece: "It would be foolish for TWC to adopt offerings, whether consumption-based pricing or otherwise, which do not meet consumers' marketplace expectations."

We don't need rate regulation of Internet broadband services, or anything roughly resembling rate regulation. What we need, instead, is for the "Free Lunch" Free Press and the "Common Carrier" Free Press to step back and consider whether all consumers won't be much better off if we don't impose a 20th Century common carrier regulatory regime on the competitive 21st Century broadband Internet marketplace.

Wednesday, April 22, 2009

The Wrong Time for Regulatory Intervention in the Wireless Market

On April 3rd, Free Press submitted a letter to acting Chairman Michael Copps requesting that the FCC reaffirm that wireless services are explicitly subject to the Commission's Internet Policy statement. In the letter, Free Press expressed concern that wireless carriers were preventing consumers from running applications and services of their choosing on their wireless devices. The Commission would be making a mistake if it chose to take any regulatory action in response to the Free Press letter.

The wireless market is competitive and one area where carriers are competing for consumers is in the implementation of "openness" on their networks. To appeal to subscribers, carriers have embraced the emergence of applications marketplaces such as the Apple App Store, Google Android Market, Blackberry App World, and, soon, the Verizon Hub service. Truly for the first time, a typical subscriber, using a variety of phones on a variety of networks, is able to customize his or her wireless experience. Now is not the time for the government to intervene in an attempt to define and enforce its idea of "openness" when, clearly, competition is moving wireless carriers in that direction naturally.

AT&T and T-Mobile have recently come under fire for limiting their customers' access to certain applications on the Apple App Store and the Google Android Market respectively. AT&T allowed Apple to release a Skype application, but required it to operate only over Wi-Fi and not on its commercial network. Meanwhile, T-Mobile requested that Google bar users on the T-Mobile USA network from accessing applications that would allow them to tether their phone's data connection to a computer. Some question whether these examples set a precedent for carriers to limit the applications their users can access.

The reality is that these applications marketplaces have replaced the traditional heavily-restricted carrier-run download sites that limited consumers to only a select handful of specifically chosen applications. Instead, this new model for wireless content is driven by any and all software developers that might be interested. Apple, Google, and Blackberry have all released their software development kits and set up portals for individual vendors in order to encourage involvement and applications development. The Apple App Store currently features over 28,000 applications that have been downloaded over 500 million times reinforcing Apple's claim that "there's an app for that."

And it is clear that U.S. consumers still love their phones. According to CTIA, at the end of 2008, the U.S. wireless industry had over 270 million subscribers, up from around 255 million at the end of 2007. CTIA has also found that cell phones are involved in the everyday life of 87% of the U.S. population. FierceWireless' breakdown of subscribership by carriers shows that, other than Sprint, the major wireless carriers, including AT&T and T-Mobile, have seen significant growth in their subscription rates over 2008. AT&T increased from 71.4 to 77 million subscribers, T-Mobile from 30.8 to 32.8 million subscribers, and Verizon from 67.2 to 80 million subscribers. Only Sprint saw a decline in subscribers from 52.8 to 49.3 million.

Much of this growth seems to be attributable to people flocking from landline phones to data plan-equipped wireless phones in order to take advantage of their newly developing capabilities. A report from Nielsen Consulting on wireless substitution showed that at the end of June 2008, 17.1% of U.S. households had replaced their landline phones for wireless phones. This percentage has grown by 3-4% every year and does not appear to be slowing. In January, the FCC's report on the state of competition in the CMRS marketplace estimated that U.S. subscribers who paid for mobile Internet access increased 28% from the first quarter 2007 to the first quarter of 2008. Revenues from wireless data services have risen to more than $32 billion in 2008, a 39% increase over 2007.

As wireless carriers strain to operate under existing spectrum limitations, some form of network management is always going to be necessary in order to ensure that services are able to be delivered efficiently and economically. But as evidenced by the market's recent move towards open platforms, carriers are still under intense competitive pressure to offer a superior product that appeals to constantly evolving consumer preferences. Given this competitiveness and the fast-changing nature of the wireless industry, the various parameters of services are clearly better set by the marketplace, rather than government fiat. Commission regulation at this point would just be unnecessary and counterproductive.

Monday, April 20, 2009

Maryland Tax Freedom Day Needs to Come Even Earlier Through Spending Reform

Tax Freedom Day in Maryland came Sunday, April 19, a full nine days earlier than it did last year. Calculated by the Tax Foundation, Tax Freedom Day is the number of days Americans work to pay their federal, state and local income taxes.

Marylanders this year will labor five days longer than the average American to pay off their tax burdens. But the average number of tax working days are down across the nation, the Tax Foundation, says because "the recession has reduced tax collections more than it has reduced incomes" and the federal stimulus package includes some large temporary tax cuts.

The thousand plus rain-soaked tax protesters who crowded the Annapolis dock area last Wednesday, April 15, clearly felt they were "taxed enough already" – hence the TEA party.
Not many would have been reassured that overall they were working fewer days to pay their taxes, because too many Marylanders were working less than they wanted to. On Friday, officials announced that unemployment in the Free State had reached a 17-year high of 6.9%. That means a lot of people will be paying a lot less taxes in the coming year.

This will likely mean even lower revenues for the state and its counties. The structural deficits that have been projected by the General Assembly's Department of Legislative Services will likely get even higher than the $8 billion estimated over the next four years.

That makes even more relevant the call for spending mandate reforms to cure the structural deficits in a Perspectives paper I did for the Free State Foundation.

You may have heard that the "structural deficits" caused by mandatory spending increases had been cured by the "hard choices" to pass $1.3 billion in Maryland tax increases in November 2007. Unfortunately, the recession started the next month. As legislative analysts pointed out in early April, from fiscal 2006 to fiscal 2012, general fund revenues are projected to have grown by 17%, while spending went up twice that rate over those six years, plainly unsustainable growth.

What to do? Raise taxes again? Not when Maryland's Tax Freedom Day is the 5th latest in the nation.

No, the solution is the reforms of the spending mandates, formulas, entitlements, pensions and health benefits I recommend in my paper. Many of them should be frozen at current levels. Much of this spending has inflation factors such as cost-of-living increases built into them. They need to be tied more closely to revenues so Marylanders don't have to work any longer they have to pay for government.