Friday, October 30, 2009

Kudos for Collegiality

I have been meaning to take note of the degree of collegiality among the five commissioners that seemed to prevail at the FCC's meeting last week at which the agency adopted its net neutrality rulemaking. It was evident from watching the Commission meeting that all the commissioners, even the two who disagreed with the NPRM's thrust, gave Chairman Julius Genachowski high marks thus far for his efforts to create a collegial working environment, including his efforts with respect to formulating the net neutrality rulemaking.

Regular readers of this space, or even irregular ones, know that I disagree – and fairly strongly so – with the notion that the Commission needs to adopt new net neutrality mandates, including one that prohibits "discrimination." The course upon which the Commission is embarking has the potential to turn the nation's broadband providers – whether wireline, cable, satellite, or wireless – into old-fashioned public utilities. Not what we need now.

That said, as the Commission moves forward in the net neutrality proceeding, and others as well, it is far better that, to the extent possible, the five commissioners operate in a collegial environment in which they feel free comfortably to express divergent opinions and exchange new ideas. Such a collegial environment is more likely to lead to sounder decisionmaking than a strained one. A collegial environment may lead the five commissioners to find common ground in some instances when there seems to be none – although in many cases, as exemplified by the partial dissents of Commissioners Robert McDowell and Meredith Baker in the net neutrality rulemaking, it is important to stand on principle where fundamental differences exists.

It is still early in his chairmanship, and things could change. And I know already that, as a matter of philosophical principle and policy perspective, I will disagree with Chairman Genachowski's conclusions on many issues. Nevertheless, judging from the remarks of his fellow commissioners at last week's meeting and from what I hear otherwise, he deserves kudos for trying to promote a collegial environment in the setting of a multimember body in which collegiality is an important value. On this score, he has my congratulations and best wishes as well.

Monday, October 19, 2009

No "Public Option" for the Internet

Whether or not there will be some new form of "public option" government-run or managed health provider as part of health care reform remains up in the air. But what ought not to be up in the air is the notion that the nation needs some new form of "public option" government-run or managed Internet. In a largely deregulatory competitive environment, the nation has made too much progress in the past several years in building out high-speed broadband Internet networks to now adopt an intrusive Internet regulatory regime that could threaten further advances.

The FCC is poised to consider initiating a new rulemaking this Thursday that, in one form or another, would impose new net neutrality mandates. I understand that any new regulations adopted, in theory, may be more or less intrusive. Indeed, I appreciate that FCC Chairman Julius Genachowski declared in his Brookings Institution speech that the FCC "will do as much as we need to do, and no more, to ensure that the Internet remains an unfettered platform for competition, creativity, and entrepreneurial activity."

With respect, this statement of professed regulatory modesty – to get the regulation "just right" on an ongoing basis – is inconsistent with normal bureaucratic imperatives at work once a prescriptive regulation is adopted. The notion that the Commission will get the Internet regulation just right on an ongoing basis indicates a regulatory immodesty inappropriate in such a technologically dynamic market segment.

Now, Chairman Genachowski may, in his own mind, lean toward a less intrusive public option for net neutrality regulation than other advocates. But the most rabid net neutrality supporters have no such leanings. They will continue to press, before and after the adoption of new regulations, for the most rigidly intrusive regime. Indeed, as I pointed out back in August, Robert McChesney, a founder and board member of the Free Press organization, the staunchest net neutrality proponent, recently said the following in an interview with "The Bullet," a publication of the Socialist Project: "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."

Professor McChesney's extreme vision of the public option for the Internet hopefully is not shared by Chairman Genachowski or a Commission majority. But the real point is this: Once the FCC bans all form of "discrimination" by Internet providers, as it apparently proposes to do, it will have taken a significant step in the direction of converting the Internet into McChesney's public utility. The non-discrimination ban at the heart of net neutrality regulation is the same non-discrimination prohibition that is at the core of public utility regulation.

In the last week or so, there has developed a broad array of opposition to the adoption of net neutrality regulation. The opposition comes from unions (CWA and IBEW), the business community (the National Association of Manufacturers and the U.S. Chamber of Commerce), Internet equipment and services suppliers like Cisco, and members of Congress from both sides of the aisle (House Democrats and Republicans, and Senate Republicans).

A perusal of these letters will reveal, at bottom, this fundamental commonality:

· At present, there is little credible evidence that there is any "market failure" problem or existence of abusive consumer practices for which prescriptive government regulation is warranted. The three or four claimed examples of such potential abuses were all addressed absent prescriptive net neutrality regulations. Note that in the quote above, Chairman Genachowski says he wants "to ensure that the Internet remains an unfettered platform for competition." He doesn't say it is not now one.

· Absent a market failure and evidence of marketplace abuses that threaten consumer welfare, preemptive government regulation is likely to stifle incentives for continued investment in broadband networks and innovation in the entire Internet ecosystem.

· Unlike other segments of the economy, even in difficult economic times, just in the last two years the broadband providers have invested over $200 billion of private capital in building out and enhancing their broadband networks, without seeking government guarantees of bailouts.
As the newly-constituted FCC under Chairman Genachowski nears its rulemaking decision, it should adopt a considerably more modest mind-set, one that takes account of both the agency's own past history of regulatory over-reaching and an appreciation of the changing dynamics of today's digital environment.

What the FCC needs at this point, frankly, despite its oft-repeated mantra, echoed by industry, is not more and more data. Unless the agency is going to be making decisions, ordinarily reserved for the private sector, concerning the amount and timing of capital investment, the pace of new innovations and technological roll-outs, projected consumer demand for new services and applications, and the like, it already has more than enough data (which, by the way, becomes outdated very quickly in a dynamic market) to know that there is no need to adopt new Internet regulations.

Until there is a demonstrated market failure, the FCC would be well-served to have uppermost in mind certain regulatory principles and approaches -- cost-benefit analysis, the precautionary principle, the law of unintended consequences, and the laws of the bureaucratic imperative and the slippery slope – all of which should dictate a high degree of regulatory modesty.

Thursday, October 15, 2009

Network Freedom, Not Regulation, for Smartphone Apps

Last week, AT&T announced it will allow iPhone users to use Skype and other VoIP applications on AT&T's own 3G wireless network. iPhones users will soon have access to AT&T's competitors' Internet voice applications. What is important to keep in mind about this decision is who made it: the wireless carrier. Decisions about smartphone applications and their wireless network capabilities should be made in the marketplace, not at regulatory agencies.

Some recent studies have highlighted the competitive marketplace for wireless and for wireless smartphones. The FCC itself has recognized the dynamic nature of the wireless marketplace. Since Congress' 1993 deregulatory action, wireless innovation and competition have thrived in a marketplace subjected to only minimal regulatory barriers. There is a ready availability of competing handsets and carriers for consumers to choose from. (Apparently, RIM's BlackBerry Curve has moved past Apple's iPhone as the top-selling consumer smartphone.)

Absent a demonstration of anticompetitive practices by a producer with marker power, marketplace freedom should prevail over new regulatory restraints.

That said, AT&T's decision to allow iPhone users to access VoIP applications using 3G network capabilities hardly "proves" that network neutrality regulation needs to be imposed by the FCC on wireless networks. The competitive state of the wireless marketplace already favors continued marketplace freedom. Strictly speaking then, AT&T's turnabout on iPhone VoIP applications and its 3G network doesn't by itself make the case for marketplace freedom concerning smartphone apps and networks. Rather, AT&T's decision IS the free marketplace.

It was a decision made by a private, competing producer involving trade-off considerations and posing significant economic risks. Misguided calls to impose network neutrality regulations on wireless networks not only ignore the state of competition in wireless, they also ignore the complex technical and financially difficult judgment calls that businesses must routinely make.

A variety of conceivable factors can come into play when a competing marketplace producer makes decisions of this sort. For instance, satisfying iPhone user demand for access to VoIP applications using 3G network capabilities could increase AT&T’s good will, cementing its relationship with existing users and attracting increased numbers of new users. On the other hand, giving iPhone user access to VoIP applications using 3G network capabilities could have the overall effect of subsidizing its VoIP competitors, ultimately resulting in loss of significant business to those competitors. There is the possibility that business lost to VoIP competitors will result in a loss of revenue necessary to cover AT&T's high, up-front sunk costs for both building and maintaining its 3G network, which like all networks, has finite capacity. And loss of revenue makes it less likely that AT&T can subsidize iPhones so that consumers can purchase them for less than $200. Multi-factored business decisions of this kind should not be made by regulatory fiat.

Prior to AT&T's decision to allow iPhone users to access VoIP applications using 3G network capabilities, AT&T already allowed iPhone calls through VoIP applications when users relied on Wi-Fi Internet connections. At some future point, iPhones might also be made capable of tethering with laptops to give the latter devices Internet connectivity. Where the marketplace is as dynamic as the wireless broadband market, these kinds of product and service innovations will work themselves out.

Increased choice is an important element of consumer welfare, but so are incentives for producers to continue making investments to provide increasing choices to consumers in the future. However, the ability of carriers make those kinds of aggressive investments in infrastructure and applications, contingent on revenue recovery through exclusive, innovative new product and service offering arrangements, would be stifled by network neutrality regulations.

Monday, October 12, 2009

Google: Phone Giant or Internet Giant?

Those, like Google, who support net neutrality mandates are fond of referring to some of the broadband providers as "phone giants" or "cable giants." As if Google, with a market capitalization that is essentially the same as AT&T's, twice as large as Verizon's, and three times as large as Comcast's, is anything but an "Internet giant."

But now with the FCC having launched an investigation of Google Voice, we may find out whether Google is a "phone giant" as well as an "Internet giant." If I were Google's senior management, I'd be worried about where all Google's pro-regulatory advocacy is leading and whether, in the end (well, there often is no real "end" when the regulatory process gets started), Google might not have been better off negotiating in the marketplace rather than in the halls of the FCC.

Let's be perfectly candid. What Google principally has been trying to protect the last five years through its net neutering regulatory advocacy is its position, as a true Internet giant, of not paying any more than it currently pays for the use of ISPs' broadband capacity. Indeed, as I pointed out in a post last week, Google concedes, at least implicitly, that once the FCC fixes what it labels the "badly flawed" access charge/intercarrier compensation system it might well be called upon to pay more for its heavy broadband network usage.

Of course, Google has never made fixing the compensation system a top Washington priority because it benefits from the broken system. Instead it has devoted its regulatory resources to maintaining or re-imposing, as the case may be, legacy regulation in the form of "net neutrality."
The strategy Google has pursued calls to mind Sir Walter Scott's line: "Oh! What a tangled web we weave...."

It may be that Google can successfully manage the regulatory process. But the web is certainly getting tangled in a way that ought to cause concern to those, like me, who would prefer to maintain an unregulated Internet ecosystem – one in which even Internet giants like Google remain unregulated. (Note I am not saying that Google or the broadband ISPs should not be subject to the antitrust laws, consumer protection laws, disclosure requirements, or even certain FCC interconnection requirements and the like. I am referring to regulation – aside from whatever poll-tested label is applied – that, like net neutrality, resembles traditional common carrier regulation.)

The entanglement – and confusion – is illustrated by this statement, as reported in the October 13th edition of Communications Daily, from Public Knowledge:

“The FCC’s Wireline Competition Bureau today asked some very legitimate questions about the nature of Google Voice,” Public Knowledge said. “We should be clear that the Commission’s inquiry has nothing to do with issues of an open, non-discriminatory Internet, as AT&T alleged when it brought the issue of Google Voice to the Commission’s attention last month. Neither does it have anything to do with denying service to rural customers, as others have said. It has to do with the clash between traditional telephone services and new technological realities.”

If Google is not a phone giant, but rather an Internet giant, of course the Commission's inquiry has to do with "an open, non-discriminatory Internet" because Google concedes that its voice offering is by invitation only and that it is not open to customers in certain rural areas.

And of course the inquiry has to do, as Google concedes, with denying service to rural customers.

So, these first two assertions by Public Knowledge only serve to obfuscate matters. But the inquiry also has to do, as Public Knowledge says, with the clash between traditional telephone services and new technological realities. Or, as the FCC's inquiry letter puts it: "How does Google believe its various Google Voice services fit within the statutory classifications in the Communications Act of 1934, as amended (the Act) and the Commission’s regulatory classifications (e.g., interconnected VoIP)?"

Or put another way: Under the existing regulatory paradigm – the one Google has been fighting so hard to preserve – is Google a phone giant rather than an Internet giant? If it is a phone giant, will it be regulated the same way AT&T is regulated, or differently? Exactly how differently? And under what rationale?

Here are some fundamental truths:

While Google, Public Knowledge, Free Press, and their allies have been intent on imposing on digital broadband Internet providers the Computer II separation regime developed in 1980 in the analog world, that regime simply doesn't make public policy sense anymore. In today's digital environment, the line between "information services" and "telecommunications" services is necessarily indistinct. And the costs imposed by regulators trying to keep separate the two will outweigh the benefits to consumers. Indeed, even apart from the costs imposed by the constant litigation and regulatory uncertainty created by separation requirements, consumers will be harmed by the loss of the efficiencies that might be gained by integration and by the innovation deterred.

For years I have written about the inevitable blurring of the distinction between information and telecommunications services, and why a regulatory regime based on metaphysical techno-functional constructs no longer makes sense. Here's an early 2004 piece, "The Metaphysics of VoIP," on the point, and here's a law review article. If you wish, you can google many other pieces using the Internet giant's dominant search engine. What is needed is a regime that gets away from reliance for regulatory purposes on techno-functional constructs (see the FCC's inquiry letter) and looks at competition in the marketplace. To some extent, to its credit, the FCC's letter does seek information concerning competitive realities in addition to information about the particular techno-functional constructs of Google's service.

It is true that it would take a rewriting of the Communications Act to move away completely from a regulatory paradigm tied to techno-functional constructs to one that is tied much more closely to competitive marketplace realities. Nevertheless, there is much the FCC, under its existing authority, including its forbearance authority, can and should do to move in that direction. (How about that for an FCC workshop idea?)

The FCC should abandon the notion of imposing net neutrality regulations because, in essence, the definitional problems the agency will confront in trying to distinguish between the "edge" services it wants to protect as unregulated and the "core" services it wants to regulate with a non-discrimination rule are akin to the ones it will now face in trying to figure out how to classify Google Voice. And the agency will face the same definitional difficulties trying to distinguish "reasonable network management" practices from "unreasonable" ones.

In his most recent post on the subject, Google's Rick Whitt again says: "This [dispute about Google voice] is about outdated carrier compensation rules that are fundamentally broken and in need of repair by the FCC." It is about compensation rules. But it is about more than that, of course, because the compensation rules about which Google complains are tied directly to the regulatory distinction between information and telecommunications services that Google steadfastly defends – and to the same distinctions upon which net neutrality regulations ultimately depend.

I am quite certain that Google understands all of this, and, for now, I prefer to remain optimistic that the FCC Chairman and his fellow commissioners will come to understand it as well, if they don't already. When Chairman Genachowski said in his Brookings speech that his proposed net neutrality regulation "is not about government regulation of the Internet," I do not question his good faith. But the imbroglio over Google Voice already has demonstrated that net neutrality-type disputes (is Google discriminating?) inevitably are about Internet regulation, unless you really do consider Google a phone company and not an Internet company.

My hope – I am an optimist – is that before the FCC is forced to go too far down the road of deciding whether Google is a phone giant or an Internet giant, Google concedes that the regulatory distinctions upon which it has relied and upon which it continues to rely are not viable, and that they are not the basis, going-forward, for creating sound public policy for the entire Internet ecosystem. My hope is that Google will decide to shift its Washington-based efforts away from maintaining in place these outdated regulations – and, indeed, away from enacting still new Internet regulations in the form of net neutrality mandates – and towards joining the fight to fix the broken carrier compensation system it regularly decries.

PS-- Take note that I have used "Internet giant" and "phone giant" with my tongue largely in cheek as a reaction against the reflexive and tiresome use of the "giant" label by the net neutrality advocates. I am by no means opposed to large size per se. Indeed, I appreciate that Google's size -- as well as the size of the leading broadband ISPs -- have enabled these companies to invest in building out more broadband capacity and in making the Internet better.

FCC's Slow-Motion Merger Review

As reported in recent news accounts, the Federal Communications Commission (FCC) has been dragging its feet in conducting its review of the AT&T-Centennial merger. The FCC is now almost four months past its self-imposed 180-day deadline for such reviews.

Although the propriety of the FCC’s practice has been questioned by some, the FCC engages in merger review pursuant to its authority for approving the transfer of FCC-granted licenses resulting from the completed merger.

AT&T filed its application with the FCC to acquire Centennial--a regional wireless and broadband carrier with more than one million subscribers in six states plus Puerto Rico and the Virgin Islands—back on November 21, 2008. The FCC’s 180-day merger review period ended back on June 14, 2009. No date for the conclusion of the review has been set yet by the FCC.

Agency delay is harmful to the merging parties that stand to gain from efficiencies and economies of scale. In a competitive, dynamic market, such delay is also harmful to the consumers who would otherwise benefit from improved services and prices from the merged parties. As the Department of Justice’s Antitrust Division Chief recently stated, “the vast majority of mergers are either procompetitive and enhance consumer welfare or are competitively benign.” If a proposed merger poses real anticompetitive concerns, prompt and decisive agency decision-making gives the merging parties finality and lets them turn their attention elsewhere. Agency delays keep potential merging parties in a state of suspended animation.

Aside from the undesirable economic dislocations, FCC merger review delays have also been the device by which FCC has extracted extra-regulatory “concessions” by merging parties. FSF President Randolph May has called this phenomena “regulation by condition,” with merging parties agreeing to conditions that may have nothing to do with any claimed antitcompetitive effect of the proposed merger. As FSF advisory board member and professor of law Christopher Yoo has written about the precarious position of merging parties subjected to lengthy FCC merger review:

as their need for regulatory approval becomes increasingly urgent, they begin trying to obtain clearance of their merger emphasized by the FCC. Because these conditions are purportedly not the result of agency action, the FCC need not engage in any extended analysis of whether it represents a change in policy or how to integrate the conditions into the larger regulatory scheme.
For instance, in the AT&T-BellSouth merger, FCC approval was obtained at the price of a network neutrality condition based on conjectures about imagined future network discrimination practices. Whereas FCC rules typically arise through the formal APA process that includes public comment and a larger contemplative element, “voluntary” merger conditions are the largely the result of private negotiations made under time-sensitive conditions.

The FCC should only consider imposing merger conditions to address alleged anticompetitive claims raised by a particular proposed merger. A more modest step would be for the FCC to take its 180-day shot clock for merger approval seriously. The AT&T-Centennial merger delay is simply another exhibit pointing to the need for the FCC to engage in self-restraint.

Thursday, October 01, 2009

Google's Discriminating Voice

"We believe it is 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)… 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."
FCC, 2001

"We agree with AT&T that the current carrier compensation scheme is badly flawed, and that the single best answer is for the FCC to take the necessary steps to fix it." – Richard Whitt, Google, September 25, 2009.

The tale behind these two quotes could make for a very long, sad story, or a shorter one. Because I have written much about this before [see here and here for starters], and because those who follow the FCC and its ways will understand the shorter story, I'm going to opt for that version here. And I fear the longer version, rightly, would give the uninitiated even more reason to be discouraged about the FCC's past performance and future prospects for implementing, within the confines of its congressional mandate, economically-sound, pro-competitive communications policies.

The story involves Google Voice, Google's "application" that allows consumers to make telephone calls to some but not all locations from its Web-based platform. Somewhat curiously, the service is "by invitation only." And, significantly, calls to certain locations are blocked so the Google Voice customer can't reach them. In a September 25 posting, Richard Whitt, Google's Washington Telecom and Media Counsel, explains the selective call blocking this way:

"This afternoon AT&T filed a letter with the Federal Communications Commission, alleging that Google Voice is preventing its users from making outbound calls to certain phone numbers with inflated access charges, and asking the Commission to interveneLocal telephone carriers charge long-distance companies for originating and terminating calls to and from their networks. Certain local carriers in rural areas charge AT&T and other long-distance companies especially high rates to connect calls to their networks. Sometimes these local carriers partner and share revenue with adult chat services, conference calling centers, party lines, and others that are able to attract lots of incoming phone calls to their networks….Google Voice's goal is to provide consumers with free or low-cost access to as many advanced communications features as possible. In order to do this, Google Voice does restrict certain outbound calls from our Web platform to these high-priced destinations."

So, Google justifies its call blocking to rural locations on the basis that it objects to paying the "inflated access charges" that AT&T and other carriers must pay under the existing access charge/intercarrier compensation regime. As the quote at the top of this post indicates, Google agrees the compensation regime is "badly flawed." It says, beneficently, the "single best answer" is for the FCC to fix it. But until the FCC does, no doubt Google is perfectly happy to go on discriminating against those callers who wish to call certain rural areas in which certain call centers, adult chat lines, and the like happen to be located.

In short, before it stops blocking calls, Google is waiting for Godot – in this instance, that would be the FCC – to fix an intercarrier compensation regime that has been broken since shortly before Genesis. Remember it was 2001 when the FCC said, in light of increasing competition and new technologies, that it was an essential, pressing matter to fix intercarrier compensation. (It has repeated this admonition over the years at regularly-scheduled intervals.) And recall that in 2001 the FCC explicitly bemoaned the opportunities for arbitrage presented by the existing system that rests upon outmoded techno-functional regulatory and jurisdictional distinctions that ought no longer to dictate policy in today's digital environment.

Now, you might think that I am going to go after Google for the discrimination that appears inherent in the operation of its telephone service, a discrimination apparently not tolerated by AT&T and other providers classified as "telecommunications" carriers rather than "information service" providers. After all, Google is one of the foremost proponents of net neutrality and a non-discrimination mandate, and the way it runs Google Voice appear to run counter to net neutrality principles. But going after Google for hypocrisy regarding its net neutrality posture would be part of the longer story, the one I am not telling here. In any event, I do not favor government-dictated net neutrality mandates, and I don't want to urge that Google be subject to them. I prefer avoiding going any further down the net neutrality regulation road than the FCC already has traveled.

What I want to urge the FCC to do is to devote its energies to really important priorities like fixing the "badly flawed" intercarrier compensation regime instead of initiating a new net neutrality proceeding. The FCC was correct in 2001 when it said fixing intercarrier compensation rules was an essential, pressing matter. Yet it is 2009, and despite taking many rounds of comments amounting to tens of thousands of pages, and several notices to "update" and "refresh" the record, the agency has done nothing.

The FCC's failure to act has impaired sustainable facilities-based competition, retarded new investment, and impeded the development of new technologies. Why has the FCC not acted? Mainly because the agency has lacked the political will – even though it is supposed to be an "expert" agency, not one driven by politics – to change a system in which rural carriers are allowed to charge what Rick Whitt rightly calls "inflated access charges." The FCC's inaction has been an institutional failure of the highest order.

Now, a decade on – truth be told, the FCC started the task in the '90s – the FCC apparently still is not making intercarrier compensation/universal service reform a top priority, even though all knowledgeable communications policymakers and scholars know it should be. Instead, the agency will devote major resources to developing, in an anticipatory rulemaking, new Internet regulations that almost certainly will be overly broad, even though, to date, only a few isolated "neutrality" incidents have occurred and they have been remedied quickly through voluntary action or the through the existing complaint regime.

I suggest the new FCC should readjust its priorities, committing itself to reforming outdated legacy regulations like the current intercarrier compensation/universal service regime that cause all consumers to bear enormous costs supporting uneconomic subsidies and arbitrage opportunities. Once the Commission has completed this task, there will be time enough, in light the then-existing marketplace realities, to determine whether new Internet regulation is warranted.

Despite Rick Whitt's acknowledgment that the "badly flawed" access charge compensation system needs fixing -- and that when it is fixed Google will then be pleased to play by the rules other service providers must play by -- we can be pretty sure that Google is not all that anxious to have the system fixed. It appears much more eager to see the FCC chasing neutrality bugaboos, betting – perhaps wrongly -- that when the dust settles it will remain just outside the edge of the new Internet regulation's reach.

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