Monday, March 15, 2010

Broadband Plan Not Costless

PFF's Adam Thierer has a good post debunking the notion that the broadband plan will somehow be costless. We don't need the CBO to figure out that this ain't likely to be so. Read Adam's post here.

Red Flags Over The FCC's Broadband Plan

Politico has posted what is described as a late draft of the executive summary of the FCC's "National Broadband Plan." Here are some quick reactions.

Foremost, the plan is breathtaking in its scope, although some of the goals propounded are clearly hortatory and admittedly long-term. As for the scope, I do not think it is ungraceful to acknowledge the hard work and good faith of Blair Levin and his team, while at the same time suggesting that an overly ambitious and diffuse plan, with too much government direction, ultimately is likely to make it more difficult to achieve the widely shared goal of getting broadband to the increasingly few unserved areas and the increasingly few unserved citizens. At least ot achieve that goal in a sound and economic fashion.

The plan's overly ambitious scope is somewhat at odds, right from the outset, with this up-front acknowledgement:

"Fueled primarily by private sector investment and innovation, the American broadband ecosystem has evolved rapidly. The number of Americans who subscribe to broadband has grown from eight million in 2000 to nearly 200 million last year. Increasingly capable fixed and mobile networks allow Americans to access a growing number of valuable applications through innovative devices."

Here are a few specific (not meant to be exhaustive) red flags based on the leaked executive summary:

· The suggestion of a "comprehensive review of wholesale competition rules" to ensure competition is troubling. In plainer English, this means considering requiring that some Internet service providers unbundle and share their networks with other would-be competitors. The FCC tried that approach of "managed competition" in the late '90s in implementing the Telecom Act of 1996. The result was not pretty. Investment was stifled. The court ultimately overturned the FCC's mandatory sharing rules – but not before a lot of damage was done. The FCC shouldn't even start down this road again.

· The focus on freeing up and allocating "unlicensed spectrum" is misplaced. Licensing spectrum, and creating property-like rights, ensures that the spectrum resource will be developed to its highest and best use. Consumers and taxpayers are the beneficiaries.

· The proposal to consider conditioning a spectrum block on the offering of a free or low cost service should be rejected. It is an uneconomic and inefficient way of addressing a problem that, if it exists, should be addressed on a narrowly targeted basis that provides support to low-income persons. Conditioning spectrum disserves consumers and taxpayers.

· The proposal to create new Connect America and Mobility Funds are problematic. It looks like, with the Universal Service Fund tax now at 15% on all interstate calls, the plan's drafters recognize that the legacy USF fund supporting voice calls no longer represents sound policy, if it ever did. The problem is that the plan apparently envisions creation of new mechanisms that will work somewhat similarly to the existing regime by collecting fees from telecom users assessed on the services they use. This approach provides government administrators with an unending pot of money to spend with no endgame in sight or defined. The money keeps flowing arguably long after even any perceived problem has been addressed. Witness the difficulty in reforming the existing universal service regime, more than a decade or so after nearly all economists agreed the program had outlived its usefulness. So, here, the plan proposes an overly long transition period of another ten years to sunset the support of the existing voice regime. A better approach is to have Congress appropriate funds directly from the Treasury, so there is greater accountability to the public, and to rely on Linkup-LifeLine programs (which the plan proposes) to provide targeted support to low-income persons who need subsidies to acquire service.

· The executive summary refers to "creating a robust public media ecosystem and modernizing the democratic process." Suffice it to say here that when government officials propose getting into the business of creating and foster the "public media" it inevitably means they will end up exercising control over the media they create, even though they will almost always deny it. This is troubling for many reasons, not least of which is the jeopardy to the First Amendment. Those who are some of the fiercest advocates of creating public media tend, whether inadvertently or advertently, not to recognize that the First Amendment is intended to protect against government censorship and control, not to offer cover for increased government control or interference with the media.

As for "modernizing the democratic process"? It should be enough to say great caution is warranted here. The Founders did a pretty good job, and they should be looking on at this effort warily.

Friday, March 12, 2010

Maryland's Political Speech Ban Bills

There is something profoundly unsettling about elected officials using the political process to stifle free speech about the political process. Unfortunately, a recent batch of bills introduced in the Maryland legislature seeks to do precisely that.

Political speech bans introduced in the Maryland House of Delegates this session include: HB 616, HB 690, HB 917, HB 986, HB 1087, and HB 1251. These legislative proposals run the range from bans on independent expenditures for public contractors, to forced-speech disclaimer requirements, to taxpayer-financed political campaign programs with “rescue funds” for less successful candidates, to bans on corporate political campaign contributions, and to requirements that shareholders explicitly authorize political spending. In particular, both HB 917 and HB 1251 ban corporate political contributions, and appear to allow unions to make such contributions.

Many of these bills are clearly contrary to principles laid down by U.S. Supreme Court precedents, and others are likely unconstitutional by a reasonable application of those precedents. Buckley v. Valeo (1976), for instance, bars government restrictions on independent political expenditures. Davis v. Federal Election Commission (2008) prohibits "rescue funds" designed to give public funding to electoral candidates whose opponents whose private spending exceeds a certain amount.

And the recent Citizens United v. FEC (2010) struck down speech restrictions based on speaker identity. In that case, the Court reiterated that the worth of speech doesn’t depend on the speaker’s identity, regardless of whether it’s a corporation, union, or an individual. Rather, the Court concluded that the First Amendment prohibits "restrictions distinguishing among different speakers, allowing speech by some but not others," because "restrictions based on the identity of the speaker are all too often simply a means to control content." (I discussed the case at some length in my FSF Perspectives piece "What Citizens United Means for Free Speech in the Digital Age").

To the extent these bills are part of elected officials' pushback against the Citizens United ruling – which struck down as unconstitutional bans on independent political contributions by profit and not-for-profit corporations as well as unions – the are ill-advised and ultimately futile. The wheels were already coming off the restrictions on independent political contributions when last year the U.S. Solicitor General told the Supreme Court that the federal government could ban books under the law. Or e-books. (Directly at issue in the case were speech restrictions applied to a movie.)

Political campaign finance restrictions also make far less sense in a world where websites, blogs, YouTube, Podcasts, and other forms of new media allow public and private individuals and associations to reach a far wider audience than every before with little to zero barriers to entry into the political speech marketplace.

One must also point out the absurdity of using taxpayer dollars in a time of recession and budget shortfalls to pay for political campaign speech. Is that really such a priority?

Most important of all, limits on government power to restrict speech are grounded in the U.S. Constitution's First Amendment. The issue here isn't so much about giving corporations a right to freedom of speech; it's really about consistently limiting the powers of government to ban speech by individuals or by associations of individuals however constituted—as corporations, non-profits, unions, or other organizational forms. Political speech bans adopted under the guises of campaign finance limits stifle public criticism of current office holders and also help tilt the field toward incumbents up for re-election. The First Amendment was enacted to help ensure the right of citizens to criticize the government. And that same First Amendment will stand in the way of legislative attempts to squelch that right.

Maryland's Mobile Millionaires

The Wall Street Journal has an editorial in today's paper entitled "Maryland's Mobile Millionaires." With the final data now in for 2008, the editorial takes note of the decline in the number of tax returns filed by millionaires in the last reporting year – from 7898 in 2007 to 5529 in 2008. Most significantly, instead of increasing after passage of the Governor Martin O'Malley-led "millionaire's surtax" in 2007, millionaires' tax payments declined by approximately $257 million in 2008.

As the Journal editorial points out, certainly not all the decline in the filing of millionaire returns is due to flight from Maryland. Millionaires die too. And they lose money in stock market declines. But no doubt many just decided to take up residence elsewhere, or to extend their winter vacations in Florida beyond 180 days.

The WSJ editorial concludes:

"States like Florida and Texas have no personal income tax, so the savings for a rich person who stops paying taxes in Baltimore or Montgomery County can be in the hundreds of thousands of dollars each year. Montgomery County, outside of Washington, D.C., is Maryland's wealthiest and was especially clobbered, losing nearly $4 billion in taxable income in 2008, with some 80% of those lost dollars from high-income returns. Thanks in part to its soak-the-rich theology, Maryland still has a $2 billion deficit and Montgomery County is $760 million in the red. Governor Martin O'Malley's office tells us he wants the higher rates to expire 'as scheduled at the end of 2010.' But there are bills in both chambers of the legislature to extend the surcharge. The state's best hope is that politicians in other states are as self-destructive as those in Annapolis."

It is not very smart – much less a sound basis for making policy – for Maryland's politicians to hope that their brethren in other states are equally as self-destructive. It could turn out to be a false hope.

Wednesday, March 10, 2010

Comcast-NBCU: Vertical Integration And The Difference It Makes

The Congressional Research Service (CRS) just released "The Proposed Comcast-NBC Universal Combination: How it Might Affect the Video Market." Prepared early last month, the now-public CRS report takes no overall stance on the proposed merger itself. Rather, it notes that the U.S. Department of Justice and the FCC will likely approve the Comcast-NBCU deal. Nor does CRS report make any hard predictions about the likely effects of the merger, if approved. But the report does provide an overview of some of the arguments that recently have been advanced from different quarters about the perceived benefits or perceived harms that the merger would bring.

Although the CRS report purports to summarize claims being made about the proposed Comcast-NBCU merger made by others, the report does seem to offer an overly sympathetic treatment to claimed vertical integration threats to programming access. The report reads:

Perhaps the greatest danger that a vertically integrated company poses to a non-integrated competitor is to deny the competitor access to must-have programming that it owns or controls. Lack of access could even foreclose competitors from the market. Inferior or more expensive access to that programming also could place non-integrated rivals at a competitive disadvantage.

The report then discusses disputes over cable company ownership of regional sports networks (RSN) as a situation that "[t]he FCC has identified…where a vertically integrated cable company is likely to benefit from exclusivity, to the detriment of competition and consumers." The report points out that Section 628 of the Communications Act and the program access rules adopted by the FCC to implement that section, among other things, prevent vertically integrated cable operators from discriminating in the prices, terms, and conditions at which it makes its satellite-delivered programming available to its competitors. The CRS report insists those same rules "prohibit a vertically integrated cable operator from having exclusive access to the programming in which it has an attributable interest." (Whether the statute permits application of the program access rules to terrestrially-delivered programming as the FCC concluded in a recent rulemaking order is a matter of debate and will likely be litigated.)

All of what the CRS report says in this regard may be true, or at least mostly true. But taken in a vacuum, it can also be somewhat misleading and thereby exaggerate the potential competitive harm. Vertical mergers do not typically present the kind of competitive harm to consumer welfare characteristic of horizontal mergers. As the FCC observed in the Adelphia Order, "vertical transactions, standing alone, do not directly reduce the number of competitors in either the upstream or downstream markets."

FSF Distinguished Adjunct Senior Scholar Richard A. Epstein addressed some of these issues in his recent FSF Perspectives paper "The Comcast and NBCU Merger: The Upside Down Analysis of Dr. Mark Cooper." Describing the potential harm from merger transactions as "increase in market concentration to the extent that it allows the new firm to raise its prices above the competitive level," Professor Epstein wrote: "As a matter of basic theory, this risk may materialize in horizontal mergers, but rarely will appear in vertical ones, which involve the integration of two facilities or services at different levels in the chain of production." And, " the vast bulk of this transaction lies on the vertical side of the line, which involve the linkage of a transmission company — Comcast — with a content company—NBC Universal."

Absent contextual emphasis on the contrasting competitive dynamics of horizontal and vertical mergers, one can easily read too much into conceivable harms posed by a vertical integration like Comcast-NBCU. The CRS report, however, puts vertical integration threats to programming access more in the context of "big-is-bad" concerns. The report's opening line reads: "The proposed combination of Comcast, the largest distributor of video services in the United States, and NBC Universal (NBCU), a major producer and aggregator of video content, would create a huge, vertically integrated entity with potentially enormous negotiating power." But reduction of transaction costs and technology economies resulting from vertical mergers that make a merged entity bigger typically benefit consumers.

In addition, it's worth remembering that although the FCC has previously concluded in the Adelphia Order and NewsCorp-Hughes Order that a vertically integrated cable or DBS provider might have incentive to temporarily foreclose RSN access to its competitors, it has not so held that cable or DBS providers have the incentive to engage in permanent foreclosure. Regardless, Comcast will not be acquiring any RSNs in the proposed merger.

Of course, the CRS will hardly be the last word out of Congress on Comcast-NBCU. The Senate Commerce Committee will continue the ongoing examination of the merger with a hearing Thursday. FCC Chairman Julius Genachowski will testify about the Commission's license transfer approval process. DOJ Antitrust Division Chief Christine Varney is also set to speak. But all such testimony and discussion of the proposed merger should be considered in the context of a vertical integration.

Friday, March 05, 2010

"Public Interest" Media Regulation

Anyone interested in the radically changed media marketplace environment -- an environment in which media consumers have more choices and more diversity than ever before -- should read Adam Thierer's testimony before the FCC yesterday on "Serving the Public Interest in the Digital Era."

As usual, Adam, president of the Progress & Freedom Foundation, does a very good job in setting forth the case against continued, and especially expanded, "public interest" regulation of the media by the FCC.

As Adam explains, there are practical and normative reasons counseling against such media regulation -- as well as constitutional ones.

Thursday, March 04, 2010

Delaying Deregulation, Again

At Free State Foundation's Winter Conference, FSF President Randolph May stated that it was his experience that agencies tend to err on the side of regulating. The Federal Communications Commission's history with Section 10 forbearance seems to fit the mold. How else to describe the FCC's hesitation to use Sec. 10's deregulatory mechanism that Congress provided it in the 1996 Telecommunications Act? The FCC has declined to use its regulatory forbearance powers on a sua sponte basis that the '96 Act almost certainly countenances. And the FCC has hardly been prompt in deciding on forbearance petitions filed by telecommunications providers, instead waiting until its statutory shot clock period and time extension runs the full fifteen months before making its decision.

Just this week the FCC granted itself a ninety-day extension for its consideration of Qwest's petition that the FCC forbear from continuing to impose certain regulations in the Phoenix Metropolitan Statistical Area (MSA). This is keeping with the Commission's regrettable pattern of granting itself extensions in similar forbearance proceedings. (This is something I wrote about in greater detail last year in my FSF Perspectives piece "Delaying Deregulation: Forbearance at the FCC"). Hopefully the Commission won't be furthering that pattern by holding off on a decision until just before the final buzzer.

One can reasonably question why it would take the Commission over a year's time to make its decision. This may be a particularly apt question with respect to the Phoenix MSA since the FCC had previously considered the state of telecommunications service in that same area as part of the Qwest 4 forbearance proceeding. (The FCC previously denied the Qwest 4 forbearance petition, but more on that denial in a minute.)

Perhaps the Commission is seeking extra time to make its decision on Qwest's Phoenix MSA forbearance petition in conjunction with a prospective remand order on the Verizon 6 MSA and Qwest 4 MSA petitions. This week's extension order does note that the Verizon 6 and Qwest 4 remands are "relevant" to the Qwest's Phoenix MSA petition since they involved the same unbundling regulations.

Last fall, the U.S. Court of Appeals for the District of Columbia took the Commission to task for acting contrary to its own precedents in denying forbearance relief to Verizon. As FSF President May wrote in his FSF Perspectives piece "Assessing the FCC's Competition-Assessing Competence," although “in a couple of forbearance cases, the FCC has acknowledged that potential competition should be considered in assessing whether continued regulation was necessary," when considering Verizon's forbearance petition, the FCC "focused single-mindedly on present market share, ignoring the fact that potential entrants constrain whatever market power the existing providers may possess." The D.C. Circuit remanded to the FCC, instructing the commission to provide consider potential market competition or to give a reasoned explanation for its departure from its precedent. Just days later and on the exact same grounds the Court remanded the FCC's order rejecting the Qwest 4 forbearance petition. (In October, 2009, FSF submitted comments to the FCC on the Verizon 6 / Qwest 4 remand.)

As I related in a prior blog post, one of the unhappy consequences of litigating FCC orders rejecting forbearance petitions is that even court rulings favoring forbearance petitioners have resulted in victory without any immediate enforcement remedy. Instead, forbearance petitioners are kept waiting well after the expiration of the shot clock for the FCC to reformulate and issue orders on remand.

Hopefully the FCC will use its extra time as an opportunity to get things right on all accounts—Phoenix MSA, Qwest 4 and Verizon 6—by carefully considering both actual and potential marketplace competition. Regardless of the Commission's specific ruling on any of those petitions, the most important thing will be for the Commission to return to its precedents that take both actual and potential marketplace competition seriously. Let's hope the Commission won't be erring on the side of regulation by attempting to rationalize a departure from those precedents by mistakenly treating modern communications markets as static rather than dynamic.