Monday, August 31, 2009

DC Circuit: Vindicating Video Competition

In a sensible and straightforward ruling, the U.S. Court of Appeals for the District of Columbia Circuit struck down the Federal Communication Commission's (FCC) regulations limiting the market share of any single cable operator to 30% of all subscribers. In an opinion by Judge Douglas Ginsburg, the D.C. Circuit panel held that the FCC’s 30% limit is "arbitrary and capricious." The FCC's "open field" analysis supporting the 30% limit, ruled the D.C. Circuit, was contradicted by "overwhelming evidence" concerning "the dynamic nature of the communications marketplace" and by "the entry of new competitors at both the programming and distribution levels." The D.C. Circuit's ruling in Comcast v. FCC was significant for a few reasons.

First, the D.C. Circuit expressly recognized the increasingly competitive and dynamic marketplace for video:

First, the record is replete with evidence of ever increasing competition among video providers: Satellite and fiber optic video providers have entered the market and grown in market share since the Congress passed the 1992 Act, and particularly in recent years. Cable operators, therefore, no longer have the bottleneck power over programming that concerned the Congress in 1992. Second, over the same period there has been a dramatic increase both in the number of cable networks and in the programming available to subscribers.
Judge Ginsburg went on to write that "[t]here can be no doubt that consumers are now able to receive far more channels than they could in 1999, let alone in 1992."

Second, the D.C. Circuit shredded the FCC's proffered reasons for disregarding direct broadcast satellite (DBS) competition with cable service. The D.C. Circuit held that the supposed cost-prohibitive barrier to switching from cable to DBS was belied by evidence that almost half of all DBS customers previously subscribed to cable. It also rejected the FCC's claims that DBS competition was not significant because cable operators typically offer triple-play packages that bundle phone and Internet access with cable video. As the D.C. Circuit observed, DBS providers have partnerships with phone companies to offer bundled services. Moreover, the D.C. Circuit dismissed as non-empirical conjecture the FCC's assertions that cable consumers will not switch to competitors because they can't know the quality of competitor’s programming before they consume it. Finally, the D.C. Circuit similarly dismissed the FCC’s claim that the 30% subscriber limit is needed to help upstart networks secure financing. DBS companies already serve more than 30% of the video provider market.

Third, the FCC demonstrated a willingness to discipline a defiant agency. The D.C. Circuit struck down an earlier version of the FCC's 30% subscriber cap on cable providers, and ordered the FCC to consider DBS competition in reformulating its rules. But the FCC refused to do this, essentially dismissing DBS competition as insignificant (as recounted above) and insisting that assessment of DBS competition is difficult. Wrote Judge Ginsburg, "That a problem is difficult may indicate a need to make some simplifying assumptions…but it does not justify ignoring altogether a variable so clearly relevant and likely to affect the calculation of a subscriber limit—not to mention one the court had directed the agency to consider." In reaching an appropriate remedy, Judge Ginsburg had sharp words for the FCC, writing that "[t]he Commission's dereliction in this case is particularly egregious," that it "failed to heed our direction," and that "[i]t is apparent that the Commission either cannot or will not fully incorporate the competitive impact of DBS and fiber optic companies into its open field model." The D.C. Circuit vacated the FCC's order, thereby eliminating the 30% subscriber limit.

Incidentally, the D.C. Circuit reiterated that First Amendment protections apply in the context of video service and media regulations. For Judge Ginsburg and concurring Judge Brett Kavanaugh, the First Amendment burdens imposed by the subscriber limits were a factor supporting the vacating of the FCC's order. (Senior Judge Raymond Randolph maintained that the Administrative Procedures Act requires courts to vacate all unlawful administrative rules or orders without any multi-factor analysis.) The recognition of First Amendment protection for cable providers doesn't break any new jurisprudential ground, as that must likely fall to the U.S. Supreme Court. But the principled application of the First Amendment to media outlets is significant, not a mere afterthought.

Thursday, August 27, 2009

Stimulus Strings Tied to Uncertainties

Recent news and commentary have highlighted large incumbent broadband providers' apparent disinterest in federal stimulus dollars. But it's hardly surprising that large incumbents would forego federal broadband grants. Given current and projected private investment in broadband infrastructure, why would anyone expect large broadband providers to suddenly subject themselves to the administrative and legal uncertainties that come with federal stimulus dollars? And why would they want to invite media and public criticisms that would certainly follow from taking taxpayer dollars? One can't read the minds of broadband provider execs, and any number of factors could be playing into their decisionmaking. However, regulatory uncertainties surrounding the broadband grant program and public anti-stimulus sentiment are likely to be contributing factors to the major broadband providers' pass on federal dollars.

The incumbent providers are making broadband investments with their own money and based on their own best judgments about how to provide service in the marketplace. As many stories point out, these broadband providers are investing annually billions of their own dollars into broadband infrastructure. It's estimated that broadband providers have invested over $200 billion in broadband deployment in recent years. This means they’re investing billions and billions more than the entire $7.2 billion federal stimulus appropriation.

Attached to federal stimulus dollars for broadband are statutory conditions governing network management that include 'nondiscrimination obligations.' Those statutory conditions have been interpreted expansively by the National Telecommunications and Information Administration (NTIA) and the Rural Utility Service (RUS) so that 'nondiscrimination obligations' go beyond the Federal Communications Commission's (FCC) 2005 'Broadband Policy Statement' by mandating a so-called 'non-discrimination condition' that prohibits the favoring of any lawful Internet applications or content over others. The literal letter of these new rules might be interpreted to prohibit innovative attempts by broadband providers to more efficiently manage their networks through flexible billing options that tie consumer prices to amount of usage. But the new rules could reach even further into network management practices. Through administrative action, the FCC could conclude that a particular broadband provider’s network management techniques do NOT fit with 'reasonable network management practices.' (The FCC is the primary venue for hearing complaints alleging non-compliance with the broadband grant program’s requirements.) Uncertainties arise from the fact that the FCC has little or no precedent in interpreting and applying its 'Broadband Policy Statement.' And the 'non-discrimination condition' contained in the NTIA/RUS rules gives the FCC an added new hook to rely on.

Through administrative interpretation and enforcement actions, agencies can routinely impose expansive new obligations on private parties without clear pre-existing rules. Arguably, the FCC did precisely this in its recent attempt to impose network management requirements on Comcast concerning peer-to-peer traffic. Without any official rulemaking or any administrative adjudication of the facts, the FCC declared the 'voluntary principles' of its 'Broadband Policy Statement' to be enforceable regulations, and then immediately held Comcast to be in violation. The net result of all this is regulatory uncertainty piled upon regulatory uncertainty, compounded by more regulatory uncertainty. Such and atmosphere of uncertainty could hardly make participation in the broadband grants program more appealing to broadband providers.

Another contextual factor to keep in mind concerning the federal broadband stimulus is the media scrutiny and public outrage over the spending activities of major financial and auto execs whose companies were receiving federal bailouts. America is still in the grips of the Great Recession and a bailout backlash sentiment still exists. Surely, no company wants decidedly negative headlines each time its CEO takes a trip on a private jet that the press, public opinion, and political officials all view as being fueled by federal stimulus dollars. Banks and broadband are apples and oranges, but people recognize the distinction between government and private industry. When private competitors forego federal funds, any perks lavished on their execs are the shareholders' problem. But when private competitors do take federal funds, the shareholders' problem becomes reasonably viewed as the taxpayers' problem. I don't know for sure, of course, but it is certainly plausible that a broadband provider would take these kinds of concerns seriously when considering the broadband grants program. Accordingly, a large broadband provider could simply see its current and existing private investment in broadband deployment as the safer path.

NTIA and RUS acknowledge that the eligibility rules for the broadband grant program and its implementation are works in progress that will be adjusted as the process goes along. Both agencies have received some 2,200 broadband grant applications, with smaller private businesses or municipal broadband providers actively seeking federal dollars. But uncertainties surrounding the regulatory mandates accompanying implementation of the program and consideration of public opinion are two factors that hardly seem favorable to large, incumbent broadband provider buy-in.

Wednesday, August 26, 2009

Governor O'Malley's Budget Cuts

Yesterday Governor Martin O'Malley announced $454 million in budget cuts, including $17 million in savings resulting from 205 layoffs and the elimination of 159 vacant positions. You can read the outlines of the cuts here. To close the anticipated budget gap of $1.5 billion, there definitely will need to be more trimming of people and programs. Arguably, Governor O'Malley should have done more trimming earlier and even now.

Laying off workers and cutting services is never easy. People's lives are affected. But the reality is that Maryland's budget has gotten bloated, with excessive spending on too many programs and entitlements that might be nice if money grew on trees or if taxpayers were cash cows. But money doesn't and taxpayers aren't.

In a Washington Post news article on the day the cuts were announced, Patrick Moran, director of the American Federation of State, County and Municipal Employees in Maryland, is quoted to the effect that his union is "disappointed by the governor's decision to balance the budget on the backs of state workers and residents…Even in these tough times, it is essential that we remember our priorities in Maryland and that the people of this state come first." Very nice sentiments, indeed -- if you like platitudes.

What does it mean to say that "the people of this state" come first and the governor's proposing to balance the budget "on the backs of state workers and residents"? Isn't that all of us? Of course, cuts are going to affect state workers and residents – because the state government employs workers to provide services to residents, even including many residents who are not lawfully in the country. Does Mr. Moran have some cuts in mind for Maryland's budget that would affect only residents of Mars, or at least only those in other states? Or that would affect only government workers in states other than Maryland?

I seriously doubt it. The point is, rhetoric like Mr. Moran's is not very helpful – indeed, it's harmful -- because it implies no tough decisions need be made to trim the deficit. They do. The time for smoke and mirrors is rapidly drawing to a close, and the public will be best served by straight talk.



Monday, August 24, 2009

What Andy Kessler Doesn't Get

It is possible that Andy Kessler was a good hedge fund manager in his day. But his recent Wall Street Journal commentary ("Why AT&T Killed Google Voice,") reveals there is a lot he doesn't understand about communications policy and communications network economics. Apparently in a heat because Apple rejected Google's voice application for its iPhone, Mr. Kessler launches into a misguided attack on AT&T and other broadband providers. He's especially perturbed that wireless broadband service providers have entered into certain exclusive arrangements with handset device manufacturers, such as Apple. And he makes clear he'd prefer to pay less rather than more for his wireless services, or at least to be offered a pricing package designed to fit his own particular usage patterns.

A few basic points in response. Mr. Kessler says that "the trick in any communications and media business is to own a pipe between you and your customers so you can charge what you like." Andy, it's no trick. These communications pipes don't grow on trees. Over the last few years, service providers like AT&T, Verizon, and Comcast have invested over $200 billion in private capital building out wireline and wireless broadband networks with the latest technologies, including fiber optic lines and 3G and 4G wireless platforms. Curiously, Mr. Kessler – while complaining about the "pricing power" of the wireless providers – acknowledges that "Verizon Wireless, T-Mobile and others all joined AT&T in bidding huge amounts for wireless spectrum in FCC auctions, some $70-plus billion since the mid-1990s." He doesn't understand that implicit in his statement concerning AT&T, Verizon, T-Mobile, and others is an acknowledgement that competition already exists in the wireless market, albeit as a result of a huge amount of investment of private capital. Indeed, five facilities-based providers offer nationwide coverage.

Mr. Kessler calls the Google Voice application "the new competition." Andy, how wrong! What Google wants is to continue using the wireless networks of AT&T, Verizon and the others without having to pay a market price for doing so, regardless of the costs incurred in creating and operating the networks. (For years it has employed the same "ride the back of others on the cheap" strategy with respect to broadband wireline communications.) While Google made feints a few years ago designed to cause the FCC and others to believe it might actually bid at auction for spectrum and build its own network – in other words, become a real facilities-based competitor -- when the FCC adopted "open access" policies for that spectrum block, Google quickly dropped out of the bidding. It realized it was much cheaper to lobby the FCC than to build and operate a communications network.

Mr. Kessler's complaints about exclusivity arrangements between wireless providers and handset manufacturers demonstrate a surprising lack of appreciation that such arrangements provide the incentives that lead to the development of innovative devices such as the iPhone, or the new Palm Pre, available exclusively through Sprint. And his complaints about wireless prices are equally puzzling in that he doesn't relate prices in any way to the cost of providing service. Nor does he seem to know U.S. consumers enjoy the lowest wireless prices per minute and highest minutes of usage of any developed nation.

There are other basic errors in his piece, such as his complaint that, with respect to video, cable needs "a little competition." Doesn't he know that in most areas there is vigorous competition among the telephone companies and satellite and cable operators for video services?

The short of it is that Mr. Kessler shows little comprehension of the role that competitive markets and respect for property rights play in encouraging investment and innovation and, ultimately, enhancing consumer welfare. While most people rightly look at the U.S. wireless marketplace, largely deregulated since 1993, as a real success story, Andy seems to just want regulators to allow him to pay less money for any particularized service plan that he imagines he might fancy. And to make sure the government continues to allow Google to ride on the backs of others' network investment without bearing any burdens of such capital costs.

I'm not sure I'd want to invest in one of Andy's hedge funds, but I'd sure like to have a debate with him about sound communications policy.

Or at least have a talk at a backyard Beer Summit to explain what he doesn't get about network economics and today's digital marketplace environment.

Friday, August 14, 2009

Interesting, But Deeply, Deeply Flawed

The OECD's broadband rankings have been misused by those with an agenda to talk down the progress the U.S. has made during the last decade in making broadband available. Now over 90% of America's households have access to broadband, with a subscription rate of 60%. The agenda -- to drive policymakers towards exercising much more regulatory control over, and even government ownership of, Internet networks -- is not subtle or hidden.

At a June 5 Free State Foundation seminar, Ambassador David Gross, State Department's immediate past U.S. Coordinator for Communications and Information Policy, stated: "Almost everyone agrees that the OECD's broadband statistics are useful and certainly interesting. However, virtually everyone agrees that they are deeply, deeply flawed." And, true to his title, Ambassador Gross was probably speaking diplomatically. The transcript is here.

Now comes the OECD with a new report that purports to show that the prices paid by U.S. consumers for wireless services are higher than those paid by consumers in many OECD countries. Perhaps the report is interesting, but it also looks, like the broadband reports, to be "deeply, deeply flawed."

The fundamental problem is that the OECD assumes, for purposes of determining price values, hypothetical usage packages that do not reflect the reality of the extent to which U.S. consumers use their mobile devices each month. In short, the calling profile of the average U.S. consumer is nearly three times as much as the calling profile for the assumed "high use" OECD package and six times as much as the "medium" use package.

A report released in May 2009 by CTIA, the wireless industry trade association, indicates that Merrill Lynch's research shows the price per minute of service in the U.S. is the lowest of the 26 OECD countries and U.S. consumers have the highest minutes of use per month of the 26 OECD countries.

You can review both the OECD and CTIA reports, and you should do so. Aside from the pricing data, the CTIA report contains much data, fully consistent with other sources and not contested, which demonstrate the competitiveness of the U.S. wireless industry, and, concomitantly, the extent to which such competitiveness has led to a wide array of choices in applications and equipment for consumers.

Presumably, it is good that Americans, on average, use their wireless devices much more, on average, than do their counterparts in OECD countries. U.S. consumers must perceive value in doing so.

Before any policymakers begin to use the new OECD report as a pretext for regulating the highly successful U.S. wireless industry, they should understand, to borrow from Ambassador Gross, that the OECD report may be interesting, but "deeply, deeply flawed."

Monday, August 10, 2009

Riding the Back of the Internet Public Utility Tiger

There is a remarkable interview with Robert McChesney, a founder of the Free Press organization, in the current edition of a publication called "The Bullet." The Bullet is published by the Socialist Project. The interview with McChesney, a long-time guru to those advocating more government control and regulation of the media, may be found here on the Socialist Project's website.

To appreciate – or I should say understand – the radical vision that undergirds Robert McChesney's views concerning media policy, you should read the entire interview. The extreme nature of his anti-capitalistic views ought to be at home in only a few places in the world, say, in Hugo Chavez's Venezuela, Castro's Cuba, or perhaps Putin's Russia.

Here I only want to focus attention on what McChesney has to say about network neutrality. Again, read the entire interview, but this is a key statement:

"The battle for network neutrality is to prevent the Internet from being privatized by telephone and cable companies. Privatization would give them control over the Internet, would allow these firms to privilege some information flows over others. We want to keep the Internet open. What we want to have in the U.S. and in every society is an Internet that is not private property, but a public utility. We want an Internet where you don't have to have a password and that you don't pay a penny to use. It is your right to use the Internet."

I understand that there are several definitions that one might put forward for "net neutrality," and that the fact that this is so has caused some to suggest, including those broadband providers that would be subject to net neutrality mandates, that net neutrality might be a relatively benign concept. Well sure, it all depends on the definition. But it would be a big mistake to ignore what a founder of Free Press says he wants net neutrality to mean – "an Internet that is not private property, but a public utility" and one in which "you don't pay a penny to use."

I have explained over and over again for many years that, for most of its proponents, net neutrality means regulation of the Internet as a common carrier or traditional public utility. In the FCC's broadband policy proceeding and other venues, Free Press acknowledges that this is its position. See my recent pieces here and here, and my reply comments in the FCC's broadband proceeding.

Professor McChesney also says this in the Socialist Project interview:

"[W]e have had much success around the net neutrality struggle. I expect within the next twelve months, we will have a formal law passed by U.S. Congress, signed by President Obama, and backed up by orders from the Federal Communications Commission (FCC). Network neutrality is well on its way to becoming the new law of the land."

It may be that Professor McChesney's vision of a government takeover and control of the Internet, running it as a public utility, will come to pass. If it does, this takeover will occur in the form of net neutrality mandates that, initially, may seem to some as benign as the net neutrality label itself. But the ultimate harm to consumers caused by diminished private sector investment and discouraged innovation will be substantial.

Finally, the risk to free speech posed by government policing Internet "neutrality" and "non-discrimination" regulations should be cause for concern to all those who appreciate that the First Amendment's free speech values are not promoted by government control of the means of speech. I sounded an early warning about the threat to the First Amendment posed by net neutrality mandates in this September 2006 Broadcasting & Cable commentary entitled "Net Neutrality and Free Speech," and at greater length in this 2007 law review article entitled "Net Neutrality Mandates: Neutering the First Amendment in the Digital Age."

There is an old Chinese proverb, one of President John F. Kennedy's favorites, that goes like this: "Those who ride the back of a tiger may find themselves inside."

There will be a tremendous push at the FCC and in Congress during the next year to implement net neutrality mandates and the Robert McChesney/Free Press vision of the Internet as a public utility. Those who underestimate the push – or who suppose they might be able to work out the "right type" or "a manageable type" of net neutrality mandates -- are riding the back of a tiger. And I think I know where they are likely, ultimately, to be found.

Increasing Broadband Adoption

This piece by FSF Distinguished Adjunct Senior Fellow Deborah Tate is very useful in showing how the FCC can quickly implement targeted measures that should increase broadband adoption without jeopardizing the overall effort to reform the bloated and ineffcient USF regime. That USF reform effort is still desparately needed.

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Monday, August 03, 2009

New Potential for Forbearance at FCC

A noteworthy item on the FCC forbearance front is Qwest's recently-filed forbearance petition requesting regulatory relief for certain services it provides in the Phoenix-Mesa-Scottsdale Metropolitan Statistical Area (MSA). It seeks relief from unbundling obligations, dominant carrier requirements, price cap regulations, certain Computer III requirements, and some other rules. Qwest's new forbearance petition is its second petition seeking forbearance relief from these regulations for the greater Phoenix MSA. This time around Qwest maintains that it "provides 'an even stronger case for forbearance for the Phoenix MSA.'" How the FCC handles this new forbearance petition will be interesting for a couple of reasons.

First, Qwest's new forbearance petition for the Phoenix MSA will be considered by the FCC under part of its new procedures for forbearance petitions. How the FCC's new procedures might affect the outcome is uncertain. When considering Qwest’s prior forbearance petition, the FCC rejected calls to adopt new forbearance procedures. In a display of administrative discipline, the FCC insisted it would only consider adopting new procedures in its rulemaking proceeding.

Qwest's new forbearance petition must satisfy the formal burden of proof that the FCC has now erected. And Qwest is bound by the FCC's new procedural rules limiting petition withdrawal. Since Qwest's new forbearance petition was filed before the FCC issued its new forbearance procedures, however, the FCC itself suggests that Qwest's new petition won’t be obligated to meet the FCC's new "complete as filed" requirements.

Second, and more significantly, the FCC will have to take potential marketplace competition in the MSA seriously in its analysis under the Section 10 forbearance provision of the Telecom Act of 1996. (Or the FCC will at least be required to explain why potential competition should no longer be relevant to its own forbearance analysis.) This should weigh in Qwest’s favor for its new forbearance petition, particularly because the FCC failed to take potential marketplace competition seriously when it denied Qwest’s prior forbearance petition.

The importance of potential marketplace competition follows from the D.C. Circuit's recent ruling in Verizon v. FCC (also discussed in an earlier post). In that case, the Court held that the FCC had arbitrarily and capriciously departed from the FCC precedent in relying only upon existing market share in denying a Verizon forbearance petition. The Court remanded to the FCC for reconsideration of Verizon’s forbearance petition. For its part, the FCC will have to either consider potential marketplace competition or explain its departure from precedent.

Here's the connection between Verizon v. FCC and Qwest's prior forbearance petition: Qwest's prior forbearance petition was denied largely according to the same rationale that the FCC had used in wrongfully denying Verizon’s petition. Qwest's own court challenge of the FCC's denial of its prior forbearance petition was deferred pending the outcome of Verizon v. FCC.

Just this month, the FCC's General Counsel filed a motion with the D.C. Circuit requesting remand to reconsider Qwest's prior forbearance petition. The General Counsel acknowledged that "[t]he Qwest Forbearance Order involves the denial of petitions for forbearance of the same regulatory requirements" that were at issue in Verizon v. FCC, and it said that remand would enable the FCC "to issue a ruling on the Qwest petitions in light of the Court’s guidance provided by the Verizon decision."

So Qwest's new forbearance petition for the Phoenix MSA will be considered in light of the new arguments and information proffered by Qwest and under the FCC's new formal burden of proof. And both Qwest's new forbearance petition and its prior forbearance petition for Denver, Minneapolis-St. Paul, and Seattle MSAs should hopefully be analyzed by the FCC in light of both existing market share and potential marketplace competition.

In today's technologically dynamic and rapidly changing marketplace environment, it certainly doesn't make sense for the FCC to shut a blind eye to potential competition, which, after all, operates to constrain any market power that Qwest may retain.