Friday, December 24, 2010

Costco Connection - Net Neutrality Debate


For those of you who still get Time magazine, or whatever, instead of the Costco Connection, which I am told reaches 6 million Costco members, here is a link to a debate between Public Knowledge’s Art Brodsky and myself, on the topic, “Should Internet openness be ensured by regulation.

Costco Connection - January 2011 - Page 22-23

Guess which side at took.

You can even vote yea or nea to Internet regulation.

Anyway, when you are through with this month’s Costco Connection, you can send me this page for my scrapbook.

Monday, December 20, 2010

Internet Regulation - "When Hell Freezes Over"

The FCC is poised to take a significant step tomorrow to regulate Internet providers. When it does, its action will say a lot about what's wrong with an agency that was created in 1934 to regulate telephone and telegraph monopolies.

I always held out hope that, "until hell freezes over," the FCC really wouldn't take this unnecessary step to regulate the Internet. I guess the fact that the temperature here in Washington has not been much above freezing for about two weeks now is not a good sign.

The nub of the problem with the FCC's action can be neatly summed up this way: The Commission is acting on dubious legal authority, in the face of widespread, bipartisan opposition, to adopt a new Internet regulatory regime to "fix" a problem that doesn't exist. There you have it.

Indeed, at least up to now, the FCC itself hasn't argued that there is any market failure or consumer harm resulting from the absence of net neutrality mandates. Rather, it has, from the beginning, casts its regulatory initiative as an effort to "preserve" and "maintain" the openness that exists on the Internet.

In my view, the most harmful aspect of the new rules is likely to be the prohibition on "unreasonable discrimination." This is the same prohibition at the core of the Title II common carrier provisions in the Communications Act of 1934 directed to regulating telephone and telegraph monopolies. Remember Western Union and the "Bell System"?

The harmfulness of the anti-discrimination provision may be mitigated to the extent it is qualified and somehow limited in the Commission's order, say, by the agency explicitly affirming that paid prioritization is not generally to be considered unreasonably discriminatory. This should be done.

By the same token, the new rules will be more or less harmful to the extent that they make clear that the anti-discrimination and other neutrality mandates do not apply to wireless Internet providers.

And the most significant way in which the likely harm resulting from the FCC's order could be mitigated would be if the Commission's rules are written to require a showing of market power by the Internet provider and consumer harm resulting from the provider's practices as prerequisites to any finding of discrimination. In other words, absent a showing of market power and consumer harm, the actions of Internet providers would be deemed presumptively reasonable. In this way, the Commission would at least, in some fashion, acknowledge that it appreciates the difference between the competitive, dynamic marketplace that exists in today's digital environment and the monopolistic marketplace that prevailed at the time the '34 Act was adopted.

In a macro sense, the Commission's action tomorrow – if the agency does go through with it – will simply confirm its central failing as we now move into the second decade of the twenty-first century. It is this: Rather than devoting its resources to reducing or eliminating analog-age legacy regulations, or reforming analog-age regimes such as universal service, or command-and-control spectrum management policies, or delay-prone, unseemly "regulation-by-condition" merger review policies , the Commission's mindset is still grounded in extending regulation into new areas where there is no market failure.

I don't want to give up hope or my willingness to be surprised. But, frankly, it is unlikely the Commission's prevailing mindset will change meaningfully and materially until Congress adopts a new regulatory framework for communications along the lines of the Senator DeMint's Freedom for Consumer Choice Act, introduced this session, which is based on the Digital Age Communications Act he presciently introduced in 2005.

Wednesday, December 15, 2010

FCC Needs Fast-Track Fix to Stop Traffic Pumping

As 2010 draws to a close, among the important pieces of unfinished business at the FCC is the ongoing problem of "access stimulation" or "traffic pumping." The current intercarrier compensation system creates some unfortunate efficiency-killing arbitrage opportunities, and traffic pumping is one of them. Traffic pumping costs voice carriers millions of dollars each year. As long as rural voice services continue to be subsidized under the existing unreformed intercarrier compensation system, it is only sensible that the FCC immediately take narrow and targeted steps to prevent bad actors from taking advantage of the subsidy system it oversees.

Traffic pumping is a form of regulatory arbitrage arising out of the intercarrier compensation system's formula for assessing interstate access charges. To simplify, long-distance or interexchange carriers (IXCs) that originate interstate calls are required to make access charge payments to an end-user's local exchange carrier (LEC) that terminates such calls. Under the legacy intercarrier system, interstate access charges are particularly favorable to rural LECs. Rural competitive LECs, in particular, enjoy special exemptions that result in significant access charge revenues for those LECs. In other words, the current system subsidizes the cost of services provided by rural LECs through interstate access charges paid by IXCs that originate calls to LECs that terminate calls. The intercarrier compensation system is set up to transfer significant costs for voice services in rural areas onto voice services in urban areas--and thereby reduce the price of rural services for rural customers.

To simplify further, the current formula for assessing interstate access charges is premised on certain assumptions about the voice traffic history for rural LECs. Such rural LEC networks, it is assumed, have small customer bases and small associated amounts of per-minute interstate traffic that are terminated on their networks. But traffic pumping is a clever tactic for LECs to take advantage of interstate access charge regime, confounding the underlying assumptions of the system.

In recent years, some small LECs have entered into traffic pumping business arrangements with other entities to provide customers across the country a variety of "free" interstate and international conference call services or similar services that terminate on numbers in the LECs' networks. This results in surging amounts of interstate traffic being terminated on an LEC's network, despite the fact that no local customers are in any way associated with the terminating calls. LECs then bill IXCs for terminating the interstate calls they receive, reaping even larger above-cost interstate access charge revenues. And that means large interstate access costs incurred by IXCs. One recent study concluded that IXC losses due to traffic pumping amounted to some $2.3 billion.

The prevalence of traffic pumping practices eventually prompted the FCC to issue a Notice of Proposed Rulemaking to address the subject. As the FCC indicated in the NPRM,

We tentatively conclude that a rate-of-return carrier that shares revenue, or provides other compensation to an end user customer, or directly provides the stimulating activity, and bundles those costs with access is engaging in an unreasonable practice that violates section 201(b) and the prudent expenditure standard. On its face, the compensation paid by the exchange carrier to the entity stimulating the traffic is unrelated to the provision of exchange access.

That NPRM was issued in October 2008. Since then, however, the Commission has not acted on it. Instead, the Traffic Pumping NPRM docket has become a battlefield of ex parte filings. Meanwhile, traffic pumping practices continue, with numerous complaints filed by IXCs piling up at the FCC, at state public commissions, and at federal and state courts.

The National Broadband Plan sensibly acknowledges that "[m]ost ICC rates are above incremental cost, which creates opportunities for access stimulation, in which carriers artificially inflate the amount of minutes subject to ICC payments." As a prelude to long-term, comprehensive reforms of the intercarrier compensation system and universal service, the Plan recognizes the need for a quick fix to address regulatory arbitrage problems such as traffic pumping. Recommendation 8.7 in the Plan calls on the FCC to "adopt interim rules to reduce ICC arbitrage," which includes "rules to reduce access stimulation and to curtail business models that make a profit by artificially inflating the number of terminating minutes." In short, the Plan calls on the FCC, while it tackles intercarrier compensation reform more broadly, to make a band-aid fix for the problem it previously recognized in the Traffic Pumping NPRM.

The FCC should act fast to put an end to traffic pumping arbitrage activities. A clear problem exists. The Commission has already recognized the problem, and both the FCC and the National Broadband Plan have highlighted the need to address it. So what is the FCC waiting for? For starters, the FCC could set out some basic parameters defining the practice of traffic pumping and declare it impermissible for an LEC to apply its tariffed switched access rates to such conduct.

When it comes to traffic pumping, interim action by the FCC should be undeterred by any of the supposed complexities arising from the conceded necessary long-term, comprehensive reform of the intercarrier compensation system and universal service regime.

There is nothing that should be holding the FCC back from taking swift action against traffic pumping. Unfortunately, the FCC has been holding itself back and allowing arbitrage activity to continue. By 2011 it will be well past time for the FCC to have dealt with this problem. FCC efforts to tackle traffic pumping problems need not wait a day longer.

Monday, December 13, 2010

Preserving an Open FCC

I am much more concerned about preserving an open and transparent FCC than I am about preserving an Open Internet. It is not that I don't believe the Internet should be "open." It already is, and there is no need for the FCC, at least not now, to supplant the marketplace's discipline to try to fix what is not broken.

But here's something that may be broken, at least with respect to the net neutrality proceeding: The FCC's own processes. FCC Chairman Julius Genachowski, rightly, has made a commitment to running the FCC in an open and transparent way, and in a way that facilitates informed public participation in rulemaking proceedings. And in certain respects he deserves credit for his efforts, thus far, in this regard.

But I am very puzzled to discover this curt document which was placed in the public file of the Open Internet proceeding on December 10 by the Deputy Chief of the FCC's Wireline Competition Bureau, the staff office primarily responsible for drafting the FCC's proposed Internet regulations:

The FCC document reads in its entirety: "Please enter the attached documents into the official record for the [Preserving the Open Internet proceeding]. The reproduction of copyrighted material is prohibited. Thank you."

What makes this December 10 filing by the FCC's Deputy Wireline Chief extraordinary is that the "attached documents" comprise more than 1900 pages of materials, ranging from white papers, excerpts from books and journal articles, and who knows what else. The attached 1900 pages of documents, without any index and seemingly pasted together in no particular order, may be found in the following links:











As someone who has written widely on adminitrative law topics, served as Chair of the ABA's Administrative Law and Regulatory Practice Section, and who presently serves as a Fellow of the National Academy of Public Administration, I can't recall previously encountering a "data dump" like this – of this extraordinary magnitude – at least immediately before the Sunshine Act cut-off date for further communications with FCC commissioners and staff.

At least to my way of thinking, a last minute data dump of this size is very curious. But, more importantly, it seems to call into question the FCC's commitment to operate in an open and transparent way – in other words, in a way consistent with sound principles of administrative law and fundamental due process. This is because it is very difficult to see how interested parties – even the most well-heeled ones – could review the 1900+ pages of documents and, if they thought warranted, respond in an intelligent fashion. The hallmark of sound administrative law and due process in rulemaking proceedings is to give interested parties sufficient notice as to the facts and law upon which the agency may rely in fashioning a new regulation and to give interested parties an opportunity to respond.

Now, I may be missing something, and, if so, I am willing to stand corrected. Perhaps all of these documents are already in the record. That would mitigate my concern. Even so, because they essentially are pasted together in random fashion, and because the net neutrality rulemaking record is so huge, it would take considerable time to verify this. Also, it may be that the FCC's putative pro-net neutrality regulation majority, and the agency's staff, already have determined with certainty – although this would be curious – that they will not rely in the putative decision on any of the documents. But this raises an intriguing question: Why the last minute data dump? Again, there may be a good answer, but at this point I am not aware of it.

I am convinced there really is no need for the FCC to proceed with Chairman Genachowski's Internet regulation proposal, and certainly no need, absent any current market failure or consumer harm, for the agency to proceed as presently scheduled on December 21. The "Open Internet" surely will be preserved, as is, in the meantime without any FCC action.

But preserving the Open FCC is much more fundamentally important to the public, over the short, medium, and long term. I have my doubts concerning how the FCC's dumping of 1900 pages of documents into the public record on the eve of the date it cuts off public participation is consistent with preserving an Open FCC.

Wednesday, December 08, 2010

Online Video and the Comcast – NBCU Transaction

If you want to know more about what's wrong with the FCC's merger review process, and there is plenty as I first documented in 1999, look no further than the agency's lengthy review of the proposed Comcast-NBCU transaction, and especially the entanglement of "online video" issues in the review. The Commission's regulatory venturing into this emerging market segment has contributed to the unduly prolonged merger review – which, by all rights, should be completed promptly.

It has been long-reported from "sources inside the FCC" and now assumed by almost all that the FCC will extract from Comcast some form of condition offered up "voluntarily" supposedly designed to prevent Comcast from inhibiting the development of online (or Internet or web) video. (Even as I write I am reading that Comcast is now offering up a proposed condition.) The purported rationale for such condition is to protect a rapidly-growing, alternative means of consuming video for those who do not wish to subscribe to the existing multichannel service of Comcast, or of its competitors, such as DirectTV, Dish Network, Verizon's FiOS, or the like.

Initially, it should be emphasized that such concerns more properly ought to be addressed in a generic, industry-wide rulemaking proceeding, rather than in the context of a specific merger review. But put aside for now that point of process. The FCC's venture into regulating online video says a lot about the bureaucratic imperative that continues to grip the agency in a time-warp vise, even as the communications environment becomes ever more dynamic. For rather than viewing the rapid development of online video as a reason – finally – to get serious about eliminating decades-old legacy regulations applicable to broadcasters, cable operators, and satellite providers, the FCC instead can't resist using the new means of accessing video as a rationale for extending regulation.

Now, I understand that, in theory, if Comcast possesses dominant market power as a distributor of video it might have the incentive, along with the ability, to somehow restrict the development of online video as an alternative distribution means. If Comcast possesses such market power, presumably it could try to require video content programmers to withhold content from Internet video sites if the programmers wish to have Comcast distribute their programming.

Although highly unlikely, perhaps at some point in the future the video distribution marketplace may revert to the monopolistic structure that prevailed through, say, the mid-90s. If so, I am not arguing there may not be a proper role for the FCC (or the antitrust authorities) to play in fostering competition. But such is simply not the case now.

This piece is not the place to reproduce the essence of the FCC's own series of thirteen video competition reports, which have chronicled the increasing competitiveness of the video distribution marketplace, or to repeat the contents of the almost-daily newspaper and online stories concerning the fierce competition among video providers. It should suffice to point out that when FCC Chairman Julius Genachowki testified before the Senate Commerce Committee in July 2009, he told the committee that since 1990, "an array of new choices – direct broadcast satellites, Internet-based video, mobile services, video offerings from telephone companies, and video games – have joined broadcast and cable television as a daily reality for millions of American families." In its most recently-released (and long-delayed) video competition report, the FCC stated in January 2009, based on data largely from 2006 sources, that "[t]he marketplace for the delivery of video programming services is served by a number of operators using a wide range of distribution technologies." And with respect to Internet video, the Commission concluded: "The amount of web-based video provided over the Internet continues to increase significantly each year."

Of course, since 2006, or 2009, or last week, the amount of Internet video available to consumers, much available for "free" and the remainder available at various subscription rates, has continued to expand exponentially. YouTube, is yesterday's news, of course, with the emergence of so many Internet-based video sites, such as AppleTV, Google TV, Hulu, and so forth and so on.

So, why has the FCC unduly delayed action on the Comcast – NBCU transaction while it considers online video merger conditions? Because the agency clings to the notion that, regardless of marketplace circumstances, a central part of its mission is to "level the playing field" -- to make sure that competition is "fair." Thus, it invites complaints for regulatory intervention from competitors who want the playing field "leveled" in their direction. Take, a new online video distributor being sued by many video networks, including NBCU, for alleged copyright infringement with respect to online programming distribution. According to an article in Broadcasting & Cable magazine, ivitv now comes to the FCC insisting that "Comcast's content contracts be free of exclusivity and other contractual barriers to innovation, competition, and fair value for consumers."

In light of the competitive video marketplace, it is bodacious, but not at all surprising, that ivitv would appeal to the FCC for advantages in the context of the Comcast-NBCU merger proceeding. But, frankly, it takes a certain amount of hubris on the FCC's part to indulge in the exercise.

Does the FCC think that it is in a better position than the marketplace to determine whether Comcast's (and other video distributors) contracts for content should be exclusive, and, if so, for how long? Does the agency appreciate that exclusivity – and the property rights which protect exclusivity – encourage innovation and investment in new programming? Does the FCC think it is equipped to determine a "fair" price at which video distributors who have acquired programming rights in contract negotiations ought to be required to make that programming available to online distributors?

Does the FCC believe it is better equipped to make these judgments than the marketplace it has repeatedly characterized as competitive? If so, the agency is wrong, and it should refrain from trying to do so.

And the Commission certainly should refrain from delaying any longer action on the Comcast-NBCU merger while considering issues such as online video – and net neutrality, for example - which should be considered, if at all, in generic proceedings. There is much that the FCC presently is considering in the way of expanding regulation that it should not be considering. It is time for the Commission to exhibit a seriousness of purpose by focusing more of its resources on completing with dispatch matters properly within its domain. Completing its review of the Comcast-NBCU transaction falls into this category.


Friday, December 03, 2010

FCC's Flexible TV Spectrum Proposal Promising for Wireless Broadband

On November 30, the FCC launched its first wave of proposals to increase the availability and efficiency of spectrum in order to meet surging consumer demand for advanced new services such as wireless broadband. Of the three notices issued by the FCC, one is a proposed rulemaking that would help prepare the way for wireless broadband service on spectrum that is now primarily dedicated to TV broadcasting. The FCC's open TV spectrum proposal could play a positive role in making more spectrum available to fulfill the future promise of wireless broadband.

There is a pressing need to set aside more commercial spectrum to meet consumer demand for wireless broadband services. As NTIA's recent "Plan and Timetable" on making new spectrum available put it:

In recent years, owing in large part to the rise of smartphones, the amount of information flowing over some wireless networks has grown at over 250 percent per year, creating what is often referred to as a “spectrum crunch… For America to continue to lead the wireless revolution, we must put spectrum to its most effective uses and free up additional spectrum to meet the increasing demand for new technologies.

Whereas NTIA's report focuses on efforts to free up unused or underused government-owned spectrum for commercial wireless broadband services, the FCC's TV spectrum notice focuses on ways to make existing commercial spectrum in the UHF and VHF (or U/V bands) available for wireless broadband services. NTIA and the FCC are both committed to the goal of making 500 megahertz of spectrum available for commercial use in the next ten years.

The FCC's open TV spectrum notice proposes to give TV broadcast licensees in U/V bands greater flexibility, so as to allow such spectrum to be used for wireless broadband services on a co-primary basis with broadcasting. By adopting flexible use rules for the U/V band, the FCC would pave the road for future incentive auctioning for the use of such spectrum by wireless broadband service providers. The idea is that new rules would give TV broadcasting licensees incentive to voluntarily turn over a portion of their licensed spectrum to the FCC in exchange for a portion of the auction proceeds. The open TV spectrum notice also envisions the scenario in which some TV broadcast licensees might voluntarily turn over their spectrum in exchange for auction proceeds and the ability to co-locate their broadcasting on certain six-megahertz channels alongside other TV broadcasters.

The upshot of the FCC's proposed rulemaking is that TV broadcast licensees could continue to deliver over-the-air programming, while wireless broadband service providers would have more spectrum to meet future consumer demands, with the federal government generating auction proceeds for deposit in the U.S. Treasury.

The most immediate obstacle to spectrum auctions is the FCC's current lack of authority to turn over a portion of any auction proceeds to spectrum-vacating TV broadcasters. As the FCC's open TV spectrum notice stipulates, the agency requires authorization by Congress before it could successfully conduct and conclude such auctions. But circumstances should now favor the agency receiving congressional authorization. There is a growing recognition of the economic benefits -- indeed the economic necessity -- of freeing up additional spectrum for commercial use to meet future needs. And, while spectrum policy should not be dictated primarily by the nation's fiscal situation, Congress should find inviting the prospect of generating new revenue for a budget deficit-plagued federal government.

At this point it remains unclear just how eager TV broadcasting licensees would be to take such a deal. Reports about prior rounds of discussion between the FCC and broadcasters suggested broadcasters were wary if not outright resistant to even voluntary efforts to get TV broadcast licensees to relinquish a portion of their spectrum. But any continuing resistance by broadcasters to new flexible use rules and auction authority should be discounted to the extent that the FCC's proposal won't force any TV broadcaster to do anything.

In all, the FCC's open TV spectrum proposal is a shot worth taking. Giving spectrum licensees greater flexibility in how to maximize commercial use and value of spectrum makes good sense. Spectrum licensees in the business of serving consumers are in a better position to gauge consumer demands and meet them by deciding what uses spectrum should be put to than government bureaucracies.

The FCC should move quickly and decisively in advancing its open TV spectrum proposal. This means putting new flexible use rules in as soon as the process permits to tee up the work Congress must do to give the agency new auction authority.

This also means the FCC (as well as Congress) should remain focused on the small steps it now proposes to take, and not let itself get pulled into and distracted by other issues. To be sure, the property rights-driven spectrum reform movement and the spectrum "commons" counter-movement have raised a number of larger issues about spectrum policy that are worth debating in their own place. And in light of today's competitive media marketplace, there are a number of fundamental issues surrounding the efficacy of legacy public interest and other programming regulations, such as must-carry and retransmission consent. (The FCC's open TV spectrum notice's insistence that it is not trying either to enlarge or reduce must-carry and retransmission consent rules appears to be a sensible approach under the circumstances.) However interesting and important those surrounding issues ultimately may be, the FCC's open TV spectrum proposal should not be the occasion for deciding them.

But even for those who hope to eventually see more principled, sweeping changes in spectrum policy, there can be consolation in the FCC's open TV spectrum proposal. Professor Gerald W. Brock (a former FCC Common Carrier Bureau Chief and a member of FSF's Board of Academic Advisers) pointed out in his re-telling of FCC policy history in Telecommunications Policy for the Information Age that major policy changes have often begun with limited decisions narrowly focused on a specific issue brought before the agency. So it was, for instance, with the FCC's Carterfone ruling, which later led to the Computer Inquiry proceedings. Similarly, the FCC's initially limited grants of approval to MCI to operate long-distance private lines between major cities later led to competition in long-distance services. So perhaps there is room for optimism that the FCC's open TV spectrum proposal will eventually lead to a broader set of spectrum reforms. But again, just what that broader set of reforms might look like ought not to delay action on the open TV spectrum proposal.

Starting with the open TV spectrum proposed rulemaking, the FCC and Congress can take some modest but practical steps to bring about more flexible and efficient use of spectrum to sustain and spur economic growth. Hopefully, the agency and our elected officials will pursue this opportunity with focused determination and without delay.

Monday, November 29, 2010

Who Thinks the Post Office Is a Model for the Internet?

Net neutrality proponents, especially the most rabid, sometimes point to the U.S. Postal Service as a model for what the Internet should be.

So it was not entirely surprising, but nevertheless still disheartening, to see the recent statement from Tim Wu linking the Internet to the Post Office. In a November 24 New York Times article concerning Netflix's rapid rise as a humongous streamer of video on the Net, Wu stated:

“Netflix used an open-source network, the U.S. Postal Service, to launch an alternative distribution business without asking anyone for permission,” said Tim Wu, a Columbia University law professor and author of “The Master Switch: The Rise and Fall of Information Empires.” “Now they are using another open-source network, the Internet, to transform the business. It is much easier for Netflix to change, because they don’t have to undergo a kind of religious conversion like media companies will have to.”

Tim Wu, along with avowed Socialist professor Robert McChesney, is the intellectual godfather of the net neutrality movement. Wu is chair of the board of directors of Free Press, the most vociferous of the net neuters, and McChesney is the organization's co-founder.

Without in any way diminishing Ben Franklin's vision or achievement in establishing the early U.S. postal system, or the role the Post Office has played in the country's social and economic development, the suggestion, either explicit or implicit, that the U. S. Postal System ought to be a model for the way the Internet should be governed or regulated is extremely dubious.

While Professor McChesney has stated explicitly that the Internet should not remain private property, but rather a public utility closely controlled by the government, I suspect a very large majority of Americans do not want the Net to be converted, either all at once, or gradually through creeping regulation, into a government-run agency like the U. S Postal Service. Consider that the Postal Service lost $8.5 billion dollars in fiscal 2010, and it projects losses in the billions as far as the eye can see – despite continuing extensive cutbacks in service. With the Postal Service borrowing billions from the U. S. Treasury to fund its deficits, the Government Accountability Office has said the Post Office's business model is "not viable."

Contrast these ongoing billion dollar losses with over $250 billion in private investment over the past several years by Internet providers - Time Warner Cable, Verizon, Comcast, AT&T, and others - to build out and continually upgrade their broadband Internet networks.

While mail service is being curtailed in various ways, even as the Postal Service runs up huge Treasury debts subsidizing its losses, Internet service and speeds continue to improve. A recent survey by Democratic pollster Peter Hart indicated that 75% of Americans say the Internet is working well. And although the FCC strangely seemed embarrassed by the good news, its own recent survey showed that 91% of Americans are either very or somewhat satisfied with the speed of their home Internet service.

Again, without denigrating the Post Office's past achievements, there is little reason to think that Americans are inclined to want to remake the Internet in the Post Office's image as a government-controlled entity. Nor should they be. Indeed, I suspect American consumers are much more likely to believe the U.S. Postal Service would run a lot better if it had the freedom and flexibility to manage the system that – absent adoption of the proposed net neutrality restrictions – private Internet providers presently have.

It continues to baffle me why, with no sign of any present market failure or consumer harm, the FCC persists in wanting to take a real American success story and risk going postal.

Wednesday, November 24, 2010

Thanksgiving Day - 2010

Long-time friends and supporters of the Free State Foundation know I often use the occasion of Memorial Day, Independence Day, and Thanksgiving Day, to write a special holiday message. It may be that in our hurly-burly world in which the news cycle – maybe even the earth itself – spins ever more quickly, taking time to reflect on the true meaning of these special holidays seems old-fashioned, if not a bit odd.

So be it. As I matter of personal privilege, I choose to be old-fashioned in this respect. It is worth setting aside some time on these occasions for reflection concerning America's blessings.

In thinking about what I might say this Thanksgiving, I went back and read last year's message. I hope it is not a sign that words may be beginning to escape me – I would fear not! But, upon re-reading, it seems to me that last year's message still resonates nicely in our current circumstances, especially with regard to our work at the Free State Foundation fostering free market, limited government, and rule of law principles.

So I am just reproducing below last year's Thanksgiving Day message, which I offer anew. I make no promises one way or the other for next Thanksgiving, except this – the Free State Foundation will still be standing strong for "free markets and free speech" as highlighted below.

Happy Thanksgiving, and thanks for your continuing friendship and support!


With Thanksgiving 2009 upon us, in the last several days I have been reflecting upon its meaning to me this year, and relating this meaning to the Free State Foundation's work, where we proclaim our mission to promote free market, limited government, and rule of law principles.

Of course, there are many ways we Americans think about Thanksgiving, including conjuring up our favorite cranberry sauce or stuffing, or deciding which team we're rooting for in the traditional Thanksgiving Day football games. Not to mention which Black Friday sales will draw us out of bed pre-dawn on Friday morning.

But I have no doubt that, aside from enjoying the turkey, the football games, and the shopping sprees, most Americans, and especially those who are more recent arrivals to our shores, marvel at the sheer abundance that prevails in America as we approach the end of 2009. And, even amidst the more difficult economic times, I have no doubt that, although not always consciously, and at times perhaps even grudgingly, most Americans recognize, and are thankful for, that abundance -- and for the success of the American experiment in democratic capitalism that has made such abundance possible.

The success of this experiment depends at its core on the protection of individual liberty – that is, the preservation of sufficient freedom from government interference and control that individuals and businesses can nurture the entrepreneurial spirit that fosters the drive for self-betterment, the willingness to take risks on new ideas and to innovate, and the willingness to invest capital in new businesses.

With the twentieth anniversary of the fall of the Berlin Wall earlier this month, we were reminded, but perhaps not often enough, of President Reagan's famous June 1987 injunction: "Mr. Gorbachev, tear down this wall!" Later in his Berlin speech, President Reagan proclaimed: "This wall cannot withstand freedom."

On this Thanksgiving, Reagan's freedom cry in Berlin called to mind for me that part of his January 1989 Oval Office Farewell Address in which, for the last time, he invoked John Winthrop's "shining city upon the hill" image. Here is what Reagan said:

"And that's about all I have to say tonight. Except for one thing. The past few days when I've been at that window upstairs, I've thought a bit of the "shining city upon a hill." The phrase comes from John Winthrop, who wrote it to describe the America he imagined. What he imagined was important because he was an early Pilgrim, an early freedom man. He journeyed here on what today we'd call a little wooden boat; and like the other Pilgrims, he was looking for a home that would be free. I've spoken of the shining city all my political life, but I don't know if I ever quite communicated what I saw when I said it. But in my mind it was a tall proud city built on rocks stronger than oceans, wind-swept, God-blessed, and teeming with people of all kinds living in harmony and peace, a city with free ports that hummed with commerce and creativity, and if there had to be city walls, the walls had doors and the doors were open to anyone with the will and the heart to get here. That's how I saw it, and see it still."

"An early Pilgrim. An early freedom man."

The Pilgrims didn't set sail seeking the prospect of more government control over the way they lived their lives, and practiced their beliefs. They were seeking less.

In that same farewell address, President Reagan also proclaimed:
"Countries across the globe are turning to free markets and free speech and turning away from the ideologies of the past. For them, the great rediscovery of the 1980s has been that, lo and behold, the moral way of government is the practical way of government: Democracy, the profoundly good, is also profoundly productive."

"Free markets and free speech."

This is not the time to rehearse the Free State Foundation's voluminous scholarly position papers, commentaries, blogs, event transcripts, and the like. They are available on the FSF website for the taking. But if America is to continue to be that "shining city on the hill," it is always a proper time – and, yes, Thanksgiving, is a particularly proper time – to reflect upon the importance of preserving free markets and free speech. For without free markets and free speech, America would not enjoy the abundance that we do today.

Much of the work we do at the Free State Foundation involves the ongoing fight to preserve free markets and free speech. It happens this is especially true with respect to our work in the communications law and policy realm, where, for example, new proposals for government regulation of the Internet threaten both. Indeed, as I have explained here, here, and here, proponents of the benign-sounding Internet regulatory regime called "net neutrality" turn the First Amendment on its head, arguing we have more to fear from private Internet providers censoring speech than from the government enforcing its own brand of content neutrality. History and our founding principles belie this notion. Our liberty is more secure when the promotion of "fairness" and "non-discrimination" in our media resides in the hands of citizens exercising choice in the competitive marketplace rather than in the hands of the government as enforcer.
For now, it is enough to reflect and be thankful. And I am especially grateful for the support of so many friends of FSF. There will be time enough to carry on the battles for free market, limited government, and rule of law principles.

In the meantime, and for now, Happy Thanksgiving to all!

Friday, November 19, 2010

Genachowski Approaches the Rubicon

A few days ago, after attending the NARUC Convention, I wrote this blog piece, "Genachowski at NARUC." Based on the fact that Chairman Genachowski at NARUC emphasized an FCC mission focusing on catalyzing private investment, creating jobs, and competing globally – and did not even mention net neutrality regulation – I stated my hope that he had abandoned his campaign for Internet regulation.

My optimism may have been misplaced. Based on comments made in an interview with The Hill's Sara Jerome, it looks like Genachowski may be intent on trying to force the FCC to promulgate new net neutrality mandates. In my blog, I stated:

"It is safe to say, even more so after this month's election, that if Genachowski continues to pursue net neutrality regulation, without further congressional authorization, he will jeopardize his ability to accomplish those important pro-growth goals that he emphasized at NARUC."

Put another way, Genachowski is approaching the Rubicon. It would be a big mistake to cross it.

If he tries to ram net neutrality regulation through the Commission, without further congressional sanction, when a significant majority of even this lame-duck Congress oppose this course, including some 70 Democrats, he will be taking a step that jeopardizes his ability to lead the Commission in ways that actually would help spur the private investment and job creation he professes to want.

Readers of this space are familiar with the reasons why I contend it would be unwise for Genachowski to continue to pursue the "solution in search of a problem" which is Internet regulation. Here are some of the salient points:

· There are many economic studies predicting that the imposition of net neutrality regulation will deter investment in Internet infrastructure. For example, a recent study by Stratecast, a division of Frost and Sullivan, forecasts that adoption of net neutrality regulation will impose in the first year "a seven billion dollar a year overhead on the economy with a commensurate job impact of up to 70,000 jobs. It is certainly true that no prediction of this kind is likely to be precisely right. But that misses the point. Even assuming that the prediction is off by 50%, do we want the government to impose new regulations at this time of 9.6% unemployment and sluggish private investment which will, according to most economists, deter jobs and investment?

· According to a recent poll by Peter Hart, the Democratic pollster, 75% of Americans think the Internet is working well. This is fully consistent with the conclusion of most economists that there is no present market failure or evidence of consumer harm in the broadband Internet marketplace. Obviously, if the Internet already were not characterized by openness, 75% of Americans would not respond the Internet is "working well".

· In the absence of market failure and consumer harm, one can only conclude the ongoing net neutrality campaign is being kept alive by the notion that the net neutrality campaign promise made by President Obama to Free Press and other pro-regulatory groups must be fulfilled. First, the FCC, as an independent regulatory agency, should not be in the business of fulfilling campaign promises. But if the agency were in that business, and in any event, an enterprising reporter should ask President Obama to explain to the American people how new Internet regulation is going to spur the jobs and private investment the president claims to want.

· In the interview with The Hill, Genachowski said net neutrality is needed so the country can improve its broadband deployment efforts. There is no dispute that 95% of U.S. households have access to broadband. To the extent that targeted government support is necessary to help reach the remaining unserved households, through direct subsidies or otherwise, such support may be appropriate. But it is wrong to suggest deployment of broadband infrastructure will be encouraged by net neutrality regulation. As shown above, the opposite is true.

· As I pointed out in my "Genachowski at NARUC" blog, the session in which I participated at NARUC on net neutrality fairly quickly devolved into a discussion of what could be done to increase broadband adoption. The current adoption rate of over 65% is quite remarkable, considering the short span during which broadband has been ubiquitously available, and it serves no purpose to denigrate this progress. Nevertheless, the country surely benefits in various economic and social ways as adoption moves up the demand curve, and there are some steps the government properly may take to help in this regard, such as providing broadband vouchers to low-income persons. But anyone who thinks seriously about take-up rates for a moment will agree that implementing net neutrality regulations will not increase adoption rates. Another question for an enterprising reporter to ask President Obama: "Do you believe that consumers are not taking up broadband service because they believe the Internet is not 'open?'" The answer is obviously "no."

· In The Hill interview, Genachowski said: "I am glad I am not doing law full time anymore because of issues like this." He should be glad, because if the Commission adopts his proposal to classify Internet service providers as common carriers, and, at the same time, attempts to forbear from applying certain common carrier requirements, this will be a risky, problematical legal route. In adopting the common carrier regulatory classification, the Commission would be reversing a determination that it took all the way to the Supreme Court in 2005 in the Brand X case. In the few years since, nothing has changed in the way that Internet access is delivered functionally by the ISPs. A close reading of Brand X will show that the Commission's position before the Court, and the Court's affirmance, turned on the acceptance of the assertion that, as a techno-functional matter, broadband Internet access fit the definition of "information services" contained in the Communications Act, and not the definition of "telecommunications services." As a former Chair of the ABA's Section of Administrative Law and Regulatory Practice, I understand – and I have written extensively about – Chevron deference and the discretion it affords the Commission to change its mind if it offers a reasoned explanation for doing so. (NOTE: My views here are my own, certainly not the ABA's or anyone else's.) Indeed, in Brand X, the Commission received Chevron deference for its determination that broadband Internet access services are unregulated information services. But the Commission would have to attempt techno-functional somersaults to try to rationalize why it now considers the same services it recently considered to be unregulated information services to be regulated common carrier services – all the while in the face of more Internet service provider competition than existed in 2005. Moreover, in the face of its heretofore overly restrictive interpretations of the agency's forbearance authority, it also may be problematic whether the Commission can sustain any exercise of forbearance authority in this case. At best, the Commission would be embarking on a course in which years of litigation would be assured, while investment and innovation would be chilled awaiting the outcome.

In light of the above, it ought to be clear that Genachowski should abandon any plans to force net neutrality regulation through a deeply divided commission. If he truly believes that new Internet regulation is needed, despite what are likely to be adverse impacts on his professed jobs and private investment goals, he should work with Congress to craft legislation explicitly authorizing such regulation on an appropriately circumscribed basis. It is clear that a very significant majority of this Congress, and an even more substantial majority of the next one, oppose the FCC going forward without such an authorization.

When the bill drafted by Commerce Committee Chairman Henry Waxman surfaced back in late September, I said in a statement that it contained positive elements, and that, while further changes were in order to guard against excessive regulation, it provided a basis for continuing to pursue discussions concerning legislation that would provide the FCC with circumscribed authority over broadband Internet services. One of the positive elements of the Waxman draft was that wireless services, the fastest growing and most competitive segment of the broadband Internet market, were not to be saddled with net neutrality regulation. Surely, with the widely-acknowledged spectrum constraints confronting wireless providers, and the almost universally accepted need for wireless providers to engage in delicate network management practices in a dynamic environment, it would be a mistake of significant proportions for the FCC to impose net neutrality mandates on wireless providers when not contemplated by the Waxman draft.

If the reports are true that Chairman Genachowski is preparing to move forward without congressional authorization, he is approaching his Rubicon. He should carefully consider the reasons why he should not cross it.

Wednesday, November 17, 2010

Calling for Speedy and Purposeful Action on the Spectrum Plan

After much anticipation, on Monday NTIA finally released its "Plan and Timetable to Make Available 500 Megahertz of Spectrum for Wireless Broadband." The report outlines federal agency efforts to implement the President's goal of making 500 MHz of spectrum available by 2020. Along with the "Plan and Timetable," NTIA released what it calls its "Fast Track Evaluation" of certain spectrum bands under consideration for reallocation and auction, calling for making 115 MHz available by 2015. Additional data collection, assessments, analyses by federal agencies are set to follow the course set out in NTIA's reports, with a first Interim Progress Report slated for April 2011.

NTIA's spectrum reports come not a moment too soon. Much more spectrum needs to be made available to accommodate surging, data-rich wireless traffic. And delays will seriously impede the ability of the wireless market to meet consumer needs in the near future. It is critical that federal agencies — and NTIA and the FCC, in particular — act with seriousness of purpose and speed in reallocating and auctioning new spectrum for commercial use.

The President's June 28, 2010, memorandum on wireless broadband affirmed the importance of making more spectrum commercially available, insisting "America's future competitiveness and global technology leadership depend, in part, upon the availability of additional spectrum." As the "Plan and Timetable" puts it, "[t]he U.S. wireless industry is an economic engine with a total economic impact estimated to be at least $40 to $50 billion annually. The industry estimates that over 2.4 million American jobs are directly or indirectly dependent on it." However, as Secretary of Commerce Gary Locke and Lawrence Summers point out in a Wall Street Journal op-ed, "while demand for America's spectrum resources is increasing at rapid rates—the amount of information flowing over some wireless networks is growing at over 250% per year — there has not been a corresponding increase in supply." A lack of new spectrum supply to meet increasing consumer demands will result not only in lost consumer benefits, reduced technological innovation, and lost economic opportunity, but also in reductions to existing wireless service quality due to wireless network congestion.

In implementing the President's spectrum reallocation and auction goals between now and 2015 and 2020, there will undoubtedly be many procedural steps along the way. NTIA, the FCC and other agencies must not let those steps become occasions for creeping delays. Federal agencies implementing the "Plan and Timetable" for making new spectrum available must take reasoned but rapid action. This means completing necessary steps on schedule and refusing to be derailed by extraneous issues or interagency disputes about secondary matters.

Given the lengthy delays that hampered past spectrum reallocation and auction efforts, NTIA and the FCC must treat this issue with the priority it deserves. Even modest delays can eventually pile up to make for huge delays, making a ten-year initiative take twelve years, or fifteen, or twenty. Consider, for example, the length of time it took between the passage of the Omnibus Budget Reconciliation Act of 1993 that gave the FCC auction authority and the 700 MHz auction and related DTV transition. The latter two events did not take place until 2008 and 2009, respectively. NTIA, the FCC and the other agencies must not let similar kinds of ongoing delays bog down the spectrum "Plan and Timetable."

Unfortunately, there is already at least some reason to be concerned about the pace of progress being made in implementing the "Plan and Timetable" for making 500 MHz of new spectrum available for commercial use. One might say that NTIA's reports got off to a slow start. While eyes were previously on the October 1 deadline set in both the National Broadband Plan and the President's memorandum, the public release of NTIA's reports comes a month-and-a-half later than many anticipated. According to a news account in TRDaily from last week, "[t]he reports were completed by an Oct. 1 deadline set by the Obama administration but have been in the interagency review process since then." NTIA's "Plan and Timetable" and "Fast Track Evaluation" also insist they were completed by October 1. But the lengthy interagency review process makes it seem like the real deadline for the reports' completion was open-ended. Agencies that take spectrum seriously should use hard deadlines and take those seriously too. (Hopefully, all federal agencies will have vetted and the public will see NTIA's first Interim Progress Report by its April 11, 2011 deadline.)

There may be any number of reasons why interagency review of NTIA's spectrum reports took so long. But rather than speculate about what those may be, one hopes that NTIA and the other agencies involved have now sufficiently greased the wheels when it comes to interagency collaboration and coordination so that future reports and activities concerning spectrum reallocation and auction will be made promptly or even ahead of schedule.

Another road bump to early progress in implementing the spectrum "Plan and Timetable" is the absence from NTIA's "Fast Track Evaluation" of any recommendation involving one particularly sought-after slice of spectrum. "NTIA is currently unable to make a recommendation concerning the 1755-1780 MHz band," it insisted, "because there was not sufficient time to complete the analysis of the band and to develop agreed-upon relocation transition plans by the October 1, 2010 deadline for this Report." (For some reason, the agency still included "1755-1780 MHz" in the report's title.) NTIA acknowledged that "[b]ecause this band is harmonized internationally for mobile operations, wireless equipment already exists, and the band provides signal characteristics advantageous to mobile operations, it continues to be a priority for analysis, pursuant to the Ten-Year Plan and Timetable."

Some catch-up by NTIA is in order regarding the 1755-1780 MHz band. The characteristics of the 1755-1780 MHz band as described by NTIA are consonant with a spectrum scan conducted by T-Mobile this summer that included the 1755-1780 MHz band in eight major markets. The conclusion from that spectrum scan was that the 1755-1780 MHz band in particular holds significant promise for commercial use. Accordingly, NTIA must live up to its word in treating that slice of spectrum as a priority in implementing the spectrum "Plan and Timetable." NTIA should demonstrate its seriousness of purpose by getting its "Fast Track Evaluation" of the 1755-1789 MHz band completed, and fast.

Going forward, federal agencies – and especially NTIA and the FCC – must act with a continued sense of urgency and purpose in implementing the spectrum "Plan and Timetable." Issuance of NTIA's spectrum reports may be a major first step. But absent accelerated, continuous, purposeful effort to accomplish spectrum reallocation and auction goals, the ambitious interagency initiative will stumble over innumerable bureaucratic tripwires.

Tuesday, November 16, 2010

Genachowski at NARUC

It may not have had the eloquence – or, by definition, the profound significance – of "Lincoln at Gettysburg." But, nevertheless, "Genachowski at NARUC" is worthy of a close reading. I am referring, of course, to FCC Chairman Julius Genachowski's speech on Monday to the NARUC Convention in Atlanta. To my mind, the speech is one of the most significant given by Genachowski since becoming chairman. Now, the words hopefully will be followed by actions that demonstrate a seriousness of purpose and a sense of urgency on the Chairman's part.

You can read the entire speech for yourself, but here I want to highlight a couple of observations. At the outset, Chairman Genachowski declared:

"At the FCC, our primary focus is simple: the economy and jobs. We’re focused on seizing the opportunities of communications technologies to catalyze private investment, foster job creation, compete globally, and create broad opportunity in the United States."

And then he added:

"The rest of the world is not standing still. And I know all of you are asking the same questions we’re asking: What can we be doing to get our country moving in the right direction? What can we be doing to drive private investment that will grow our economy and create quality jobs? What can we be doing to make America more competitive in the global economy? What can we be doing to improve the lives of the American people?"

And finally this:

"If there’s one thing I want to communicate to you today it’s this: Notwithstanding the tall wall of challenges in front of our country, our sector – the information technologies and

communications sector – can play a big role in driving economic success for the U.S., in the near-term and the long-term."

To me, this focus on job creation, private investment, and the global economy struck just the right note at this time of economic stress. And, importantly, Chairman Genachowski followed up this focus on the nation's economic and competitive position, and the need for policies that spur investment and innovation, in a substantive fashion.

He devoted the lion's share of his speech to explaining the importance of spectrum policy reform - and particularly the need to free up additional spectrum for wireless through incentive auctions and otherwise - and to reform of the inefficient and costly universal service regime. He explained why actions on the spectrum front (we'll have more to say about the recent NTIA action shortly) and on universal service reform are so integral to the development of sound broadband policies, which, in turn, will promote private investment and economic growth.

And what he didn't say is – perhaps – as significant as what he did say. There was no mention whatever in his address of net neutrality regulation or the Open Internet or Third Way proposals for Internet regulation. Now, it may be that Genachowski just decided not to address the highly controversial net neutrality issue before NARUC, and that he has not abandoned plans to try to ram his net neutrality regulation proposal through what we would be an agency deeply divided along party lines.

But it may be – and you know me to have an optimistic frame of mind - that Chairman Genachowski didn't mention net neutrality because he has decided it is time to drop the Internet regulation proposals and, as far as broadband policy goes, to focus the Commission's attention, and its resources, on accomplishing meaningful reform in the spectrum and universal service areas. If so, this would be a very wise and commendable decision on his part. It is safe to say, even more so after this month's election, that if Genachowski continues to pursue net neutrality regulation, without further congressional authorization, he will jeopardize his ability to accomplish those important pro-growth goals that he emphasized at NARUC.

A note: By applauding Chairman Genachowski's speech, and his focus on spectrum policy and universal service reform, I don't want to suggest that I will agree with all facets of his proposals in these areas. I am sure I won't, and we at FSF will continue to articulate market-oriented solutions. But he has his eyes on the right balls.

A final word about net neutrality regulation. The reason I was in Atlanta for the NARUC meeting was to participate in a panel discussion very ably moderated by Betty Ann Kane, Chairman of the District of Columbia Public Service Commission. The title of the panel was, "A Brave New World: How Would Reclassifying Broadband Impact Communications Service." We had an interesting discussion, but most interesting to me was this: More than anything else, the panel's focus turned to questions about increasing broadband adoption, and what the government's role should be on that score. There was little or no argument with my assertion that the Internet currently is characterized by openness. As I said: "That's why Chairman Genachowski and other net neutrality proponents say net neutrality regulations are needed to 'preserve' or 'maintain' Internet openness, rather than to fix an existing problem related to market failure or evidence of consumer harm."

As the discussion centered on the question of the government's role relating to adoption, I pointed out that there are some actions the government properly might consider, such as providing LifeLine/Linkup-like voucher support to low income persons, and others that are better left to the marketplace. But I emphasized this key point: The still-hypothetical harms that net neutrality regulation is intended to address have nothing to do with the adoption question, and it is not necessary or appropriate to take the radical and risky step of classifying Internet providers as common carriers in order for the government to play a proper role in encouraging further broadband adoption.

Monday, November 15, 2010

Maryland Must Fix Its Business Tax Climate To Bring Jobs and Investment

On October 26, the Tax Foundation issued its State Business Tax Climate Index. Authored by economist Kail Padgitt, the Index evaluates and provides a competitive ranking of all fifty states according to how they tax businesses. Maryland ranks near the bottom. Officials and citizens in Maryland should consider the state's abysmal Index ranking a pointed reminder of the need to foster an economic atmosphere more conducive to innovation, investment, and jobs. Right now, Maryland needs some business tax climate change.

Just as businesses compete with other businesses for customers, states compete with other states for businesses and job creation. By creating economic climates favorable to start-ups and business migrations, states benefit from increased investment, jobs, and, ultimately, state tax revenues. One significant way that states compete with each other economically is through their respective tax systems. As the State Business Tax Climate Index puts it, "[t]ax competition is an unpleasant reality for state revenue and budget officials, but it is an effective restraint on state and local taxes." Interstate tax competition, including business tax competition, is especially important in difficult economic times: "[t]his means that state lawmakers must be aware of how their states' business climates match up to their immediate neighbors and to other states."

The State Business Tax Climate Index is based on five weighted components: state corporate tax, state individual income tax, state sales tax, state unemployment tax, and state property tax.

Overall, Maryland ranks 44th in the Index for state business tax competitiveness. Although Maryland's corporate tax and sales taxes put it in a relatively competitive position relative to other states, Maryland's individual income tax index puts it near the cellar, at 49th place. A state's individual income tax factors into a state's overall business climate, as the Index relates, because "a significant number of businesses, including sole proprietorships, partnerships and S-corporations, report their income through the individual income tax code." And, "[t]axes can have significant impact on an individual's decision to become a self-employed entrepreneur." Also, "[c]omplex, poorly designed tax systems that extract an inordinate amount of tax revenue are known to reduce both the quantity and the quality of the labor pool," thereby raising business costs. Maryland likewise lands near the bottom of the pack due to its unemployment insurance tax burdens (#47) and its property tax burdens (#40).

The need for Maryland to establish and maintain a competitive position is particularly challenging considering the relative positions of its neighboring states. Virginia, for instance, stands at #12 in the state business tax climate standings. As the title of an October 21 Baltimore Business Journal op-ed reads, "Maryland will keep losing business to Virginia if lawmakers don't change." Tax reform is crucial for Maryland to attract or keep businesses that have recently opted for Northern Virginia. Overall, #44 Maryland also falls behind Delaware (#8), Pennsylvania (#26), and West Virginia (#37). And while Maryland does compare favorably to New Jersey (#48), it should be kept in mind that New Jersey may be poised to become more competitive in the future. Recent state income tax reforms in that state have moved it out of last place on the Index list—a distinction New Jersey had held for a handful of years running.

The State Business Tax Climate Index does provide a positive point for Maryland to build on:

In 2008, Maryland added four individual income tax brackets, one of which will expire at the end of 2010. With expiration of the 6.25% rate on income over $1 million, Maryland's top state-level income tax rate in 2011 will be 5.5% on income over $500,000. In combination with its highest in-the-nation county-level income taxes, Maryland's personal income tax system will still rank poorly, but its Individual Income Tax Index score will improve.

Maryland will want to do better than a poor ranking if it hopes to prevent business relocations as well as job and other economic investment opportunity losses to its more competitive neighbor states. The path to a more favorable business tax climate, however, should not be based on special tax breaks and exemptions for select companies or industry segments. Unfair favoritism and manipulation of the tax system could bring some short-term benefits to well-lobbied interests, but it can also make a state's tax system more complex, increase compliance costs, and – most importantly – do nothing to address the underlying business tax climate problem. As the Index puts it:

The ideal tax system—whether at the local, state or federal level—is simple, transparent, stable, neutral to business activity, and pro-growth. In such an ideal system, individuals and businesses would spend a minimum amount of resources to comply with the tax system, understand the true cost of the tax system, base their economic decisions solely on the merits of the transactions without regard to tax implications, and not have the tax system impede their growth and prosperity.

Maryland should keep that ideal tax system in mind when evaluating its own tax system. For the sake of Maryland's economic future, the Legislature needs to take a serious look at bringing further reforms to the way it taxes individual incomes, and also take a hard look at reforming its unemployment insurance and property tax systems. Maryland shouldn't be satisfied with losing out on jobs and economic growth because of a bottom-tier business tax climate.

Thursday, November 04, 2010

Now What? New Directions in Communications Policy

As Barack Obama famously declared after his 2008 election, "elections have consequences."

Well, now what?

First, it should be said much of communications policymaking need not be partisan. Historically, in fact, a good deal of communications policymaking has been accomplished on a bipartisan basis – and this includes the good and the bad, and there has been plenty of bipartisan blame for the latter.

Next, forgive the sacrilege, and with apologies to FCC Chairman Genachowski and all those who (when convenient) parroted the Chairman's mantra that the new FCC would be entirely "data-driven." No. An important element of policymaking necessarily is dependent upon policy preferences and perspectives. As I pointed out in a blog as early as September 2009, as the Chairman's newly-minted "data driven" mantra even then already was being overworked, "regulatory philosophy matters a lot" in deciding how to interpret and make use of data.

I did not mean then, and do not mean now, to denigrate the value of seeking and considering data in the policymaking process. But I did mean to emphasize that it is either naïve or disingenuous to suggest that being "data-driven," in and of itself, is sufficient for the development of sound policy. It is not. It is crucial that policymakers have a proper regulatory perspective and philosophy.

I gave several specific examples in the September 2009 blog of why this is so, and concluded:

"The upshot is this: The extent to which one starts with a basic assumption that markets work better than government intervention or the other way around is part and parcel of a regulatory philosophy. Whether one embraces cost-benefit analysis, or appreciates the law of unintended consequences, or the principle of "first, do no harm" is part and parcel of a regulatory philosophy. So is the extent to which one accepts, especially in regard to communications markets, the power of Schumpeterian dynamism to change markets, as opposed to embracing a static or snapshot market view."

If "elections have consequences," and regulatory philosophy matters, again, now what?

For his part, Chairman Genachowski should abandon his proposal to impose net neutrality regulation on Internet providers. In the absence of market failure or more than a few isolated instances of even allegedly abusive practices, the pursuit of Internet regulation in the form of prescriptive neutrality mandates has been a fool's errand. In truth, the errand primarily has been spurred on by Free Press and a few like-minded allies, and FCC Commissioner Michael Copps, all of whom have a view – a regulatory philosophy if you will – that places a high priority on government control, if not ownership, of the communications media. Both Free Press and Commissioner Copps openly acknowledge they look to self-avowed socialist and Free Press co-founder Robert McChesney for direction on communications policy. On this score, lest you think I exaggerate, see my blog of this past June, "Not Mao Zedong or a Communist…But a Socialist." The American public is in no mood to look towards an avowed socialist for direction on communications policy.

Of the 95 House and Senate candidates, Democrats all, who signed the pro-net neutrality pledge, all 95 lost. Surely it would be wrong to assert that all their defeats are attributable to their pro-Internet regulatory position. But it is would be wrong too to ignore the obvious fact that there is no widespread popular support for regulating the Internet and Free Press-style government control of the media. The willingness of the "lost 95" to sign the pledge was a tell-tale sign of their anti-market perspective.

As for the Republicans now in control of the House, it would be a mistake for them to confuse undertaking proper oversight of the FCC's actions with initiation of a series of ill-conceived "investigations." What is needed by the House Republicans are not new investigations, but new directions. They need to develop a platform embracing free market-oriented communication reform. In today's competitive and dynamic communications marketplace, such reform platform is long overdue. And, obviously, such a market-oriented platform should be embraced by Senate Republicans, and by like-minded Democrats in both Houses. There is no reason why this cannot be an arena for bipartisan accomplishment. Indeed, it was President Carter and his agency appointees that, working with Congress, deregulated the airlines and railroads to the benefit of consumers. And it was President Clinton and his appointees that, again to the benefit of consumers, first articulated the policy that broadband Internet providers should not be regulated as common carriers.

As I wrote shortly before the election in, "Reforming Communications Policy: The Constitutional Underpinnings," communications law and policy would benefit greatly from closer alignment with important constitutional values. This would mean less regulation carried out under the indeterminate "public interest" standard which governs so much of the FCC's regulatory activity, and which provides agency officials with relatively unbridled discretion. And it would mean more respect for the Fifth Amendment property rights of owners and operators of communications networks and owners of media content, as well as for the First Amendment free speech rights of those subject to the FCC's regulatory reach.

FSF's website and blog contain hundreds of long papers and short pieces documenting and explaining the need for meaningful communications policy reform. And for those who want to immerse themselves further, in August 2009 Carolina Academic Press published FSF's book, "New Directions in Communications Policy." The book contains essays by eleven leading law and economics scholars suggesting various avenues of policy reform in areas ranging from broadband to spectrum, and from universal service and inter-carrier compensation reform to media deregulation.

Finally, it should be emphasized, above all, that free market-oriented communications reform would benefit consumers and our nation's economy. Through the further investment and innovation that such reform would spur, new jobs would be created. This ought to be reason enough for the new Congress, and for the FCC, to get serious about developing new directions in communications policy.

Sunday, October 31, 2010

UTOPIA: A Costly Lesson in the Failure of Government-Owned Networks

Back in the news this month is UTOPIA, a broadband network venture of several Utah municipalities facing mounting debts. As recently covered in Communications Daily and other news outlets, UTOPIA member cities are considering a $60 million bailout to sustain the project. With local taxpayers potentially on the hook for even more money if the pricey bailout plan fails to make good on its promises, UTOPIA provides an unfortunate – but highly instructive – example of the financial perils of government-owned broadband networks.

Government ownership and operation of broadband networks poses potentially serious problems and pitfalls. Threshold concerns raised by government-owned broadband networks include whether government might use its taxing and rights-of-way powers to its give its own networks advantages over existing or potential private competitors, whether government has the institutional incentives and competency to provide advanced information services undergoing rapid innovation, and (particularly in the case of UTOPIA) whether taxpayers are sufficiently protected from financial failures. Whatever the potential upshots to government-owned broadband projects may be, the potential downsides should strongly caution any community against getting their government in the business of broadband business.

When it comes to government-owned broadband networks, a cautionary case in point is the struggling UTOPIA – the Utah Telecommunications Open Infrastructure Agency. UTOPIA member-city governments built and operate a fiber network, also allowing private ISPs to use the infrastructure to offer services. Launched less than a decade ago, the project was initially funded by a $185 million bond issue for which member cities have (thanks to refinancing) pledged over $500 million to back with sales tax revenue if subscriptions fall short.

In fact, subscribership has run far below the project's initial projections. UTOPIA initially predicted it would run fiber to some 70,000 homes and businesses in six of its member cities and achieve a 40% subscription rate by 2008. The Salt Lake Tribune reported this summer that UTOPIA only had around 10,000 subscribers. The Salt Lake Tribune also reported that "[i]n January, Utopia called on its member cities to begin covering the network's bond payments, something the original Utopia promoters promised never would happen."

UTOPIA has never covered its annual operating expenses. It lost $51 million alone in fiscal year 2009. One recently reported estimate put project loses at approximately $250,000 a month. The Utah Taxpayers Association claims that UTOPIA's budget projects 2011 losses of approximately $20 million.

If the ups and downs and the business failings of some telecommunications and broadband technology companies over the last fifteen years teach anything, it is that the broadband Internet marketplace is competitive and tumultuous. Some companies are winners, and others are losers. And when private broadband providers fail, private company investors and shareholders are saddled with the financial losses. But when government itself becomes a broadband provider – banking its projects with municipal bond issues and backing them with direct taxes – then citizen taxpayers are ultimately left holding the bag whenever government broadband network projects go belly up. Meanwhile, the active presence of government-owned broadband networks can discourage or delay private providers from expanding their operations or entering into the market to bring consumers competing, sustainable services.

So UTOPIA's prior losses and potential future losses should be cause enough for serious concern by UTOPIA member-city citizens. But as pointed out earlier, UTOPIA member cities have now begun deliberations on a UTOPIA bailout plan that includes an approximately $60 million bond issue to sustain the project. At least a handful of UTOPIA city governments have already pledged to throw more money into the project.

Unfortunately, some of the proffered reasons for propping up UTOPIA are less than persuasive. UTOPIA backers have made much of a feasibility study purporting to show how the chances for a turnaround are plausible if certain changes and large infusions of new money are put into the project. Keep in mind, however, that it was overly optimistic plans and studies of that kind that helped launch UTOPIA in the first place. Given how UTOPIA subscriptions and revenues have not panned out as previously planned, isn't a strong dose of skepticism warranted when considering new proposals to inject even more taxpayer money into the project?

Also keep in mind the much-cited feasibility study was performed by a private consulting company providing a variety of support services to government-owned broadband projects, including network design and build-out. This is not an imputation of bad motives behind the study, but the source does suggest an inherent lack of impartiality that should be factored in to any evaluation of the study. Not to be forgotten, Communications Daily and other outlets report that the Utah Taxpayers Association claims additional factors were not included in the feasibility study, such as potential future competition and demographic analysis of its prospective subscriber base. Given the financial stakes of a UTOPIA bailout, those claims are certainly worth exploration and could shed additional light on the study's merits.

Finally, no one should be impressed by the rationale that additional funding is necessary to save prior financial commitments from ruin. One might call it the government-owned broadband equivalent of the "too big to fail" meme. By itself, the claim in no way establishes that investing new funds will salvage a faltering business. And however one tries to answer the question of whether a $60+ million bailout of UTOPIA will, in fact, make the project sustainable, outside observers should see UTOPIA as an example of how faltering government-owned networks can back local government officials and taxpayers into a corner. UTOPIA member-cities and their citizens now have to either accept big losses or incur additional losses in the hope of cutting those losses while risking further losses if the project continues to struggle.

There may be good reason in some circumstances for government to run its own proprietary networks in order to carry out governmental functions. And there may even be instances where total lack of broadband service availability in remote areas might make limited government involvement a plausible option. (The latter seems increasingly less likely as wireless broadband and satellite broadband services continue to be rolled out.) But owning and operating broadband networks involves unpredictable capital and operating costs, market uncertainties, and financial risks that taxpayers should prefer not to be responsible for. The ongoing struggles of the dreamily-named UTOPIA should serve as a warning to others — and particularly to taxpayers — about the real-world hazards of government owning and operating broadband networks.

Wednesday, October 27, 2010

Reforming Communications Policy:The Constitutional Underpinnings

One of the chief benefits of the rise of the Tea Parties has been the increased awareness of constitutional principles they have brought to public policy debates. Whether questioning the constitutional authority for ObamaCare's compulsory individual mandate or the massive bailout of automobile manufacturers, raising such constitutional concerns is not unhealthy in a regime grounded in the rule of law. Indeed, it is unhealthy not to at least consider such concerns.

In that spirit, and in advance of Tuesday's elections, I want to offer here, in admittedly brief and broad outline, some thoughts on ways in which communications law and policy would benefit from closer alignment with widely shared constitutional values. I am not making the claim that existing constitutional jurisprudence necessarily dictates reform along the lines I advocate. It doesn't – for now.

But that doesn't mean that communications policy shouldn't be reformed in ways that do not run so much against the grain of the Founders' constitutional understandings. And it doesn't mean that, as we work to envision what communications law and policy should look like in the digital age, that we should not have in mind certain underpinnings of our Constitution.

Here are some thoughts to get started:

· The Public Interest Standard: So much of the FCC's regulatory activity is carried out under the vague and indeterminate delegation of authority to the agency to act in the "public interest." Although the Supreme Court said in 1928, and has repeated often since, that delegations of authority to administrative agencies must contain an "intelligible principle," the Court nevertheless has refused to rule that the public interest standard violates the non-delegation doctrine and is not likely to do so any time soon. This does not mean that when Congress updates the Communications Act to account for the rise digital age competition and convergence – as it should do sooner rather than later – that Congress should not provide the FCC with more specific policy direction. Under the public interest standard, unelected agency officials simply have too much unbridled discretion. And, by delegating authority in vague terms, our elected legislators escape accountability for having to make tough public policy choices. This is not the accountability to the public that our "separation of powers" framework is intended to foster. Congress should replace directives for the FCC to act in the "public interest" with explicit directives, especially commands to the agency to take into account marketplace competition.

· The First Amendment: It is time to recognize that we live in an age of media abundance and, yes, despite decades-old rote incantations to the contrary, media diversity. Legacy regulations that restrict the speech rights of media purveyors, even media operators routinely demonized as "giant corporations," are inconsistent with our free speech values. There are many examples, but in this category would fall program content restrictions still applicable to broadcasters and the "must carry" rules that require cable operators to carry local television stations.

And the incessant push for net neutrality mandates - requirements that Internet providers carry all traffic without discrimination - amounts to nothing more than a "must carry" regime for ISPs. Absent evidence of a market failure that would justify converting, either formally or as a matter of practical effect, today's Internet providers into common carriers, net neutrality mandates raise serious First Amendment issues by compromising ISPs' free speech rights. Supporters of net neutrality who claim these government-enforced non-discrimination restrictions promote free speech values evidence a profound misunderstanding: The First Amendment is intended to protect against censorship by the government, not by private entities. More than two decades ago, Ronald Reagan's FCC got rid of the Fairness Doctrine that required broadcasters to "balance" their coverage of public issues. In the digital age, we don't need anything resembling a Fairness Doctrine for the Internet.

· Property Rights: In order to encourage investment and innovation, a reformed communications policy needs to demonstrate more sensitivity to property rights than does the current regime. Property rights – protected by the Constitution's Fifth Amendment – are implicated in many ways by FCC regulation, from the proposed net neutrality regulations which would, as a practical matter, require capacity set-asides and infrastructure build-outs for carrying traffic that ISPs might prefer not to carry, to the potential for confiscatory rate regulation in the guise of enforcing non-discrimination carriage mandates. And the various existing and proposed program "access" requirements applicable to cable operators, adopted, again, in the name of enforcing non-discrimination, surely implicate the property rights of those who invest in building and operating the platforms that, in effect, are turned into semi-public utilities.

Just witness the bizarre bazaar that is the Comcast-NBCU merger proceeding, as program "competitors" seek to use the leverage of the Commission acting under the indeterminate "public interest" standard to extract conditions that require the merged entity to treat all post-merger Comcast and non-Comcast programming in a perfectly equal fashion. And witness further the claims that multichannel video providers, who presumably bargain and pay market prices to create or acquire programs that they believe will be attractive to their subscribers, also should be required to make the programming they own available to everyone on the Internet on "fair" and "reasonable" terms – to be decided by the FCC. Some of this type of government-mandated access and rate-setting arguably was justified in the more monopolistic, bygone era – but not in today's rapidly changing, much more competitive digital environment. The efforts to carry on with, or even expand, the old "fairness" and "non-discrimination" and "reasonable access" rules shows a lack of respect for the property rights of the owners of content and of the platforms in which service providers invested to distribute such content.

As stated above, this is not intended to be an exhaustive or definitive exposition of the proposition that communications law and policy should be reformed in ways that conform more closely with important constitutional values, such as protection of free speech and property rights, and separation of powers principles. Rather, it is simply a part of our ongoing project at the Free State Foundation to pay close attention to the Constitution as we continue our work looking towards meaningful – yes, even "radical" in the sense that the transition from the analog to digital age is radical – reform of our nation's communications policies.

I sense that there is change afoot, fueled in no small measure by the rise of the Tea Parties and their attention to constitutional principles, which, after Tuesday's election, may make the prospects for meaningful communications policy reform more promising.

And here at FSF we'll keep working at it.