Tuesday, August 31, 2010

GAO Report Sees Wireless Competition But Mulls Regulation

The Government Accountability Office recently released a report to Congress, the title of which contained the GAO's own recommendation: Enhanced Data Collection Could Help FCC Better Monitor Competition in the Wireless Industry. The GAO report confirms the tremendous innovation in wireless services, particularly smartphones. And it acknowledges that in recent years wireless consumers continue to benefit from more choices and lower prices. Even so, the report tries to kick up enough dust about wireless competition to somehow justify calls for more extensive data collection requirements that seem premised on need for imposing new regulations on wireless.

The GAO report acknowledges that more consumers are benefitting from "generally lower prices, which are approximately 50 percent less than 1999 prices, and better coverage." Particularly in light of wireless innovation—faster speeds, the arrival of a variety of advanced handsets, and a growing abundance of smartphone applications—better prices for consumers should be the touchstone of any consumer-focused approach to wireless services.

However, the GAO report reduces this undisputed fact about lower prices to one consideration among many, balancing it against a handful of anecdotal opinions expressed to the GAO by "stakeholders." The report's overview of innovative and competitive trends in the wireless industry is combined with short summaries of opinions from different quarters—such as "consumer groups" and "some small carriers"—clamoring for new regulation of wireless. For instance, the report says that "[o]fficials with whom we spoke in Iowa noted that consumers are now facing higher than ever ETFs, which 'take people out of the market' by locking them in to specific carriers." And "[a]ccording to some small carriers and other stakeholders, exclusive handset deals are largely the result of the largest carriers' ability to exploit their market power in the mobile wireless market by requiring that device manufacturers enter into exclusive arrangements." The report also touches on prospective special access rate regulation or re-regulation, spectrum use and auction conditions, and even hints at "bill shock" regulation. (For more on "bill shock" see the FSF blog post "No Need for 'EU-Style' Wireless Mandates.")

Moreover, many of the supposed "stakeholder" grievances aired in the GAO report are premised on competitor welfare concerns, not consumer welfare concerns. The report's discussion about wireless competitive trends plays up concerns over "industry consolidation" as detrimental to certain small or regional wireless carriers. The "consolidation" theme is persistent in the report, despite being undercut by the report's own acknowledgment that recent wireless mergers that have been reviewed and approved by the FCC have resulted in larger numbers of consumers having access to multiple, competing national carriers, led to the proliferation of unlimited calling plans, and have reduced the percentage of roaming minutes used by consumers.

A consumer welfare approach recognizes that regulation designed to prop up certain "stakeholders" in a market can actually stifle innovation and competition, reducing choice and leading to higher prices for consumer "bagholders." For instance, contrary to the claims that ETFs "take people out of the market" echoed in the report, smartphones subsidized by carriers and offered to consumers with ETF contracts are what draw adopting consumers into the market. And now that wireless carriers are prorating ETF contracts, consumers now incur lower costs for breaking ETF contracts. (For more on this, see the FSF Perspectives piece "Let Competition and Choice Check Wireless ETFs" and the blog post "Fairly Disclosing ETFs vs. Price Regulating ETFs.")

In key respects the GAO dittos the FCC's recent wireless competition report (that was discussed in the FSF Perspectives piece "FCC Won't Face Up to Wireless Competition"). Both reports recount positive trends in wireless innovation and competition, resulting in a wider variety of consumer choice and decreasing prices. But, unfortunately, both reports also employ competitor-welfare and static market assumptions to raise doubts about just how competitive the wireless "ecosystem" really is and whether government interventionism will result in wireless competition "stimulus." In these respects, the light-touch regulatory environment in which wireless has so flourished has once again been called into question by a government report, and once again on dubious grounds.

Playing the observed trends in wireless innovation and competition against "stakeholder" calls for more regulation, the GAO report calls for the FCC to consider "expanding its original data collection of wireless industry inputs and outputs—such as prices, special access rates, capital expenditures, and equipment costs." At first glance, this might seem like an easy way of reconciling wireless innovation and competition with perceived consolidation and competitor concerns. As a general matter, data collection requirements are less burdensome than regulations of prices and service terms. But compliance with extensive data collection mandates can become costly. And here the additional data collection urged by the GAO appears premised on market concentration and competitor-welfare concerns. The FCC would presumably analyze the data with an eye toward regulating wireless prices and service terms to address the "stakeholder" concerns voiced in the report. This makes the GAO's recommendations appear less justifiable after all.

Ultimately, the reasonableness of any possible expanded wireless data collection by the FCC will depend on whether such an expanded collection is mandated or voluntary and on how much more expansive or expensive that data collection would be. And given the growth in wireless innovation and competition that the GAO report readily admits, reasonableness here is on the side of continuing a light-touch regulatory treatment for wireless.

"The Open Internet We Now Have"

In an excellent editorial last week, the Washington Post argued that the FCC should not go forward with its proposal to classify broadband Internet service providers as common carriers subject to the same type of public utility-like regulatory regime that was applied to Ma Bell back when…back when there was a Ma Bell a quarter century ago. Instead, the Post called for Congress to establish "a clearly limited power to take action against anti-competitive violations, rather than encumbering this vital sector with detailed and prescriptive regulation, is the sensible approach."

Not surprisingly, now comes pro-regulation FCC Commissioner Michael Copps taking exception in a response published in today's Post. This is old ground. But two aspects of Mr. Copps' brief response are worthy of comment. He says the Verizon-Google proposal, which the Post commended as a basis for a potential legislative solution, would come "at the expense of the open Internet we now have."

Commissioner Copps regularly bemoans, as he does in his Post rebuttal, the action of the Bush Administration's FCC which adopted policies to ensure that Internet providers would be only lightly regulated, not subject to traditional public utility-like regulation normally reserved for monopolies. But he doesn't seem to recognize the fundamental contradiction between acknowledging the existence of the "open Internet we now have" and criticizing the lightly regulated environment that has allowed such open Internet to flourish. Instead, reflexively, Mr. Copps calls for more Internet regulation.

Now, Mr. Copps also repeats in his Post piece the line that this is not a debate "about regulating the Internet." To him, it is instead all about regulating "Internet service providers." Whoa! Bring in the Jesuits to resolve the metaphysical distinction between "regulating the Internet" and regulating the "Internet service providers." (Actually, it doesn't require bringing in the Jesuits to resolve this one. As I – and many others – have explained many times, it is wrong as a matter of law and policy to suggest that Internet service providers do not comprise an important component of "the Internet.")

There may be certain segments of our market economy where additional regulation and oversight may be justified, or even advisable. Think, perhaps, government inspection of egg production facilities, or mine safety, or oil rig safety. But, given that Commissioner Copps and other proponents of new Internet regulation acknowledge that we presently enjoy an open Internet, the case for new prescriptive government regulation in the dynamic and competitive Internet market segment – a segment in which there is presently no consumer harm - is extremely weak. As the Post put it, it simply doesn't make sense to risk "stifling innovation with unwieldy preemptive regulations."

Thursday, August 26, 2010

Google as Spymaster

Scott Cleland, Washington’s most perceptive and persistent Google-watcher, has a good piece on his blog concerning the implications of Google getting a no-bid spy contract from the U.S. government. Read it here.

It’s a pity Scott is often a lonesome voice raising questions like the one’s in his blog. But we can be grateful he is doing so.

"Establishing a Clearly Limited Power"

The Washington Post has an excellent editorial in today's paper on net neutrality. The Post's editorials have been consistently good on the net neutrality issue since the paper first echoed my sentiment last September in an editorial entitled, "The FCC's Heavy Hand." There the paper concluded that FCC Chairman Julius Genachowski's ideas for new net neutrality regulation constituted "an immodest proposal." Since then, with his latest proposal now on the table to classify broadband Internet providers as common carriers, Mr. Genachowski's regulatory proposals have become even more immodest.

While I certainly do not agree with all aspects of the Google-Verizon proposal, the Post is correct in urging that the agreement provides a good starting point for pursuing legislation that provides the FCC with delimited authority over Internet providers.

Please read the entire editorial. But here are two key excerpts:

"And the proposal includes many good elements -- especially its designation of the FCC as an adjudicatory body such as the Federal Trade Commission rather than one with intrusive regulatory authority. In a realm as complex and evolving as the Internet, where the challenges vary from year to year and it is impossible to predict the direction of innovation, this is essential. Allowing the FCC to enforce on a case-by-case basis can leverage expertise and create a body of useful precedent, rather than stifling innovation with unwieldy preemptive regulations."

"The FCC stands poised to reclassify broadband service providers as content carriers, a category that would subject them to the same sort of regulation that telephone companies are saddled with, even giving the FCC the ability to set rates. The agency's chairman says that the FCC won't use this power -- but this could change in another administration. Such a move would be a serious step backward. A better route would be legislative enactment of something like the Google-Verizon plan, with an emphasis on transparency about decisions that providers are making. Giving the FCC the authority to nudge things in the right direction will be a good first step. As the Internet evolves, the nature of needed oversight will evolve as well. Establishing a clearly limited power to take action against anti-competitive violations, rather than encumbering this vital sector with detailed and prescriptive regulation, is the sensible approach."

This emphasis on adoption of an adjudicatory case-by-case approach, rather than one permitting the FCC to exercise intrusive regulatory authority, is very important. And the notion that Congress should delineate the FCC's "clearly limited power" to focus on anti-competitive actions, rather than allowing the agency free rein to adopt detailed prescriptive regulations, is key to maintaining an environment that does not discourage the innovation and investment that is much needed for continued Internet progress.

Shortly after last Spring's D.C. Circuit's Comcast decision, I offered in this piece some legislative language for consideration. It contains many of the same elements endorsed by the Post. I still commend it to you as an approach worthy of Congress's consideration as a way forward.

Obviously, there will be differences of opinion as to legislative language. Ultimately, unlike in the process of writing think tank pieces, there will be compromises made in the process of writing legislation that reflect the realities of the political process. But there should be widespread agreement now, in line with the Post editorial, that Congress should be given time to work its will.

As I pointed out here a few days ago, one of the most vociferous advocates of hard-line Internet regulation is urging Mr. Genachowski to act now in order "to fire up the base in time for election." This is decidedly not a reason for acting. Rhetoric of this kind only serves to compromise and denigrate the idea that the FCC is an independent regulatory agency, and that its actions are based primarily on its collective institutional expertise and experience, not on campaign promises or partisan considerations. Such partisan rhetoric ill-serves the agency, and the public interest.

It's time for Chairman Genachowski to pull his Internet regulation proposal off the FCC's table.

Tuesday, August 24, 2010

“Firing Up the Base” Is Not a Reason for Net Regulation

In an August 20 blog posting with the subtitle, "What Democrats Need to Understand," Public Knowledge's Harold Feld argues that one reason FCC Chairman Julius Genachowski should reject any forthcoming "industry consensus" on net neutrality and act quickly to adopt new neutrality mandates is that this "would fire up the base in time for election."

Of course, this is decidedly not a proper reason for the FCC to scuttle or short-circuit the negotiations that are now taking place among a broad and diverse segment of the market participants who comprise what we have come to call the Internet ecosystem.

And the mere fact that one of the chief and most vociferous advocates of new Net regulations suggests that the FCC should act to "fire up the base" is indicative of what is wrong with so much of the pro-regulation advocacy of Public Knowledge, Free Press, and their allies. These groups continually try to politicize an issue, which, most of all, needs to be decided based on technical, economic, and marketplace expertise. Witness the blog attack earlier this year by Mr. Feld on Philip Verveer, the Obama Administration's State Department Coordinator for International Communications and Information Policy and stellar public servant, for venturing to say that if the U.S. were to move to regulate Internet providers, this could have the unfortunate effect of causing foreign countries to see such action as a justification for exerting more control over the Internet in their own countries. Ambassador Verveer's offense in Mr. Feld's eyes: Getting "so off message" from what Feld views as President Obama's and Democrats' talking points.

It is true that President Obama campaigned in favor of net neutrality regulation and promised that "as president I'm going to make sure that my FCC commissioners are applying as we move forward." And since assuming office, he has reiterated that he would like to see new net neutrality regulations adopted.

It is perhaps in this context of President Obama's campaign promises about making sure what "his FCC commissioners" are doing that Feld misunderstands – or abuses -the FCC's proper role. The FCC is an independent regulatory agency, not an executive branch agency. The president cannot dictate the actions of the commissioners. With the advice and consent of the Senate, he gets to appoint the commissioners. But they are not "his commissioners," in the same way, say, that the Secretary of Commerce is "his Secretary," or the EPA Administrator is "his Administrator." And it is wrong to think of the commissioners this way, for it changes the way that the public thinks about the FCC and what it is doing.

There is no gainsaying that the FCC, even as one of the independent agencies, sometimes responds to political forces. As I have said before, this is not unexpected, or entirely wrong. But at least in theory, and certainly under the Progressive-era and New Deal vision, the FCC (along with its sister independents such as the FTC and SEC) were created (with requirements for bipartisan memberships, and staggered and fixed terms) in a way to establish their independence from presidential direction and control. This has been understood to be the way of thinking about these independents since the Supreme Court's famous 1935 decision in Humphrey's Executor v. United States.

With their presumed insulation from presidential control and ordinary politics, the congressional framers of the FCC and other independent agencies emphasized that these agencies' actions would be guided primarily by the specialized expertise and the institutional knowledge of their commissioners.

So it is sad to see Mr. Feld suggest that the FCC Chairman should act on net neutrality in order to "fire up the base in time for election." Such talk, much less actions based on such talk, only serves to diminish the FCC in the eyes of the courts, where its record on review historically has been less than sparkling. And, more importantly, in the eyes of the public, which already casts a skeptical eye at the motives underlying the actions of many government officials.

Monday, August 23, 2010

High Tech Forum

Richard Bennett, a very knowledgeable technologist and a good writer to boot, has started a new blog, High Technology Forum.

Richard says that, rather than taking positions on particular issues, the new site “is all about explaining the technical issues around networks in general and the Internet in particular.”

Richard has been involved with the Internet since shortly before Genesis, that is to say before Al Gore. I commend to you his new blog. 

Friday, August 20, 2010

A Right Way and a Wrong Way to Consider Mergers

Yesterday the Free State Foundation filed reply comments by Professor Richard Epstein, FSF's Distinguished Adjunct Senior Scholar, in the FCC's proceeding considering the proposed merger between Comcast and NBCU. If you have not seen them, the comments are here and the press release announcing the comments is here.

The comments are principally directed towards rebutting the opposition to the merger by Consumers Union and the other self-denominated consumer groups. The comments contain a detailed, but readily understandable, explanation of the fundamental analytical errors that discredit the groups' case. As Professor Epstein points out, comparing the mistakes these same groups made ten years ago in opposing the AOL-Time Warner merger to the mistakes they make today: "Errors of this magnitude do not just happen by chance. They are dependent upon systematic analytical mistakes." On this score, read the comments and decide for yourself.

Today, in light of all the ongoing special pleading for conditions not only by consumer groups, but also by various competitors of Comcast and NBCU who seek to use the merger proceeding to gain an advantage vis-a-vis the merged entity, it is worth highlighting what Professor Epstein had to say about the FCC's process:

"The FCC has some power to add conditions to any merger that it approves. That kind of power is, in general, perfectly appropriate in cases where it requires one of two companies to a merger to divest itself of assets in certain submarkets where the surviving firm might acquire undue market power. But that form of regulation should not be used to subject a single company to regulations that should be adopted, if at all, only for the entire industry, and then only after some opportunity for notice and comment on the proposed regulation. Just that position was taken by the Free State Foundation in its initial comments in this proceeding when it urged the FCC not to engage in the unseemly and unwise practice of "regulation-by-condition." In particular, I strongly endorse on grounds of administrative transparency and regulatory consistency this observation of FSF: 'Too often, 'regulation-by-condition' has been a method by which the Commission has imposed policies on merging parties that the Commission should only be imposed, if at all, through rulemaking.'

The soundness of this FSF position is confirmed during this proceeding as countless special interests have implored the FCC to impose on the applicants all manner of extraordinary and intrusive conditions. These proposals include major initiatives ranging from the adoption of a net neutrality mandate to various new program access requirements. It is critical for the FCC to exercise a strong measure of institutional self-restraint so that these collateral initiatives do not end up siphoning off all the gains that this merger might produce if allowed to go forward in its current form. There is no place in this proceeding for so-called 'voluntary' conditions that do not bear on those competitive concerns that are uniquely and specifically tied to the distinctive features of this merger. General rulemaking provisions are the only proper vehicle for setting up industry-wide rules. Any ad hoc restrictions could easily distort the competitive balance between rival firms that is so critical to the consumer welfare in this dynamic industry."

There is a right way and a wrong way for the FCC to consider mergers. Professor Epstein's comments surely should serve as a guide, both as to substance and process, if the FCC wants to pursue the right way.

Sunday, August 15, 2010

Outside the Beltway Disconnect on Communications Policy

A week of traveling, first to San Francisco and then to Seattle, left me with the distinct impression, with respect to communications policy, that there is a fundamental disconnect between the policies the Obama Administration's FCC is pursuing and those that citizens living outside the Beltway would wish to have pursued. This disconnect is not unlike the gulf that appears to exist between the Obama Administration and the American public on other issues, say, health care reform.

In talking policy and politics with colleagues, friends, and family - and more than a few random acquaintances – it seems to me that, of all the issues on people's minds, "Net Neutrality" is pretty far down on the list. I am not suggesting my conversations and observations by any means represent a scientific poll. But I am suggesting that, even in the liberal redoubts of San Francisco and Seattle, the issues foremost on voters' minds revolve around the economy and jobs.

James Carville's famous injunction – "It’s the economy, stupid!" – has more relevance today than it did in 1992. If you want to discuss net neutrality, you generally have to bring up the topic yourself.

That being so, it remains a mystery, and well-nigh a tragedy, that the Obama Administration's FCC, under the leadership of Chairman Julius Genachowski, has devoted so much of its time and energy to trying to implement net neutrality mandates that will turn Internet providers into traditional common carriers. The effect of such new regulatory mandates will be, to some greater or lesser degree that defies precise advance calculation, an inhibition on the willingness of Internet providers to invest and to innovate – and, thereby, to create jobs. One recent study, by the Advanced Communications Law & Policy Institute at New York Law School, estimates that, if the FCC imposes net neutrality common carrier mandates on Internet providers, the U.S. economy will suffer a $310 billion economic loss in Gross Domestic Product over five years, along with a loss of 502,000 jobs. This is the study's most conservative scenario for adverse GDP impact and job loss.

With the stakes so high for the nation's economy and for jobs, the FCC Democratic majority's single-minded focus on imposing net neutrality regulation is more than a bit puzzling.

There are many instances one could cite as further evidence of the disconnect between the FCC and the American people. But after a week outside the Beltway one in particular sticks in my mind. Recall the way the FCC tried to spin the results of its own survey that it bills as part of its "broadband speed initiative." In a news release, the Commission trumpeted that the survey indicated 80% of broadband users do not know the speed of their Internet connection. Buried at the very end of the FCC's news release was this: "Fully 91 percent of broadband users say they are 'very' or 'somewhat' satisfied with the speed they get at home. The comparable number for mobile broadband, which is not yet technologically capable of the same speeds as home broadband, is 71 percent satisfaction."

Only an FCC bent on a mission of adopting new Internet regulations – even absent evidence of market failure or consumer harm - would choose to downplay the high level of consumer satisfaction with broadband service. It is obvious by the way the FCC spun the survey results that Chairman Genachowski must have been disappointed to learn the vast majority of consumers are satisfied with the speed of their Internet connections. This refusal to credit the positive, while emphasizing the negative, simply is further evidence of the disconnect between the FCC and the public at large. Most Americans know, intuitively, and without the benefit of an FCC survey, that the nation has made tremendous progress since the FCC decided in 2002 that broadband Internet providers should not be subject to common carrier-like regulation.

More evidence of the inside-outside the Beltway disconnect is provided by the fact that close to 300 members of the U.S. House of Representatives and Senate, including a large number of Democrats, have openly opposed Chairman Genachowski's latest net neutrality proposal. Presumably, these representatives have a better sense, especially in an election year, of what the public thinks the FCC should be doing than do the unelected commissioners.

Now back to the Left Coast, from whence I just departed. Communications Daily reports [August 16 edition; subscription required] about 100 persons showed up for a MoveOn.org rally at Google headquarters to protest the company's net neutrality agreement with Verizon. MoveOn.org, Free Press, Public Knowledge, and their allies maintain that Google has sold out on its commitment to seeing strong net neutrality mandates put in place. Apart from the merits of the Google-Verizon agreement, the small size of the California turnout ought to give pause to those at the FCC, and elsewhere in Washington, who may have convinced themselves there is a groundswell of support among the American body politic for imposing new Internet regulations.

I said early on that it is not only a mystery, but also a tragedy, that the Obama Administration's FCC has chosen to go to such great lengths to impose net neutrality mandates, given the lack of evidence of market failure and given the widespread satisfaction of American consumers with their broadband Internet service. I may never understand this mystery. But I do understand the tragedy.

The tragedy is that the FCC's single-minded pursuit of net neutrality regulation necessarily has diverted attention and resources away from addressing other significant issues which, if done right, could have a positive impact on the economy and jobs. I have in mind, for example, reform of the antiquated and economically inefficient "universal service" telephone regime that now levies a surcharge of nearly 14% on all long distance calls. A "telephone tax" of this size, necessitated by the payment of subsidies to inefficient carriers using high-cost legacy technologies, as well as to multiple providers serving the same geographic area, obviously has a suppressive effect on economically efficient activity. The universal service regime should have been reformed long ago, and this should be a top priority of the Commission.

Another priority should be spectrum reform. The Genachowski FCC, to its credit, has emphasized the economic benefits to be realized from more efficient spectrum utilization, especially a "repurposing" of spectrum so that wireless providers are able to meet surging consumer demand for new, innovative next generation wireless broadband services. The attention in the National Broadband Plan devoted to this subject was noteworthy, and particularly welcome. But implementing reform of spectrum policy, in conjunction with Congress, is a major undertaking, one again requiring substantial Commission attention and resources.

Perhaps the Commission's traditional August "recess" will provide time for some much-needed reflection and reevaluation. There would be no shame at all if Chairman Genachowski decided, especially in light of the D.C. Circuit's recent Comcast decision holding the FCC lacks authority to regulate Comcast's broadband network management practices, the agency should abandon its efforts to impose net neutrality regulation. There would be no shame, and indeed much credit, in acknowledging, in light of the serious questions concerning the FCC's legal authority to act on its own, that the agency should leave the matter of regulation of Internet providers to Congress.

If the FCC took this course, the agency could turn its full attention to the more urgent matters at hand, matters that, unlike net neutrality with its likely negative impact on the nation's economy and jobs, would most likely have positive economic consequences.

If the FCC did this, with talk still prevalent of a potential "double-dip" recession, the agency would reduce, or even eliminate, the disconnect that presently exists between it and the American public regarding the policies and priorities it is pursuing.

Thursday, August 05, 2010

No Internet Regulation Without Congressional Authorization

I just read a press report – which may or may not turn out to be true - that the talks at the FCC among the various parties trying to reach a compromise on net neutrality have broken down. (Google and Verizon are apparently still negotiating.) If it is true the talks among the broader group have broken down, this certainly does not mean FCC Chairman Julius Genachowski should move forward with his proposal to classify Internet providers as common carriers.

According to Bloomberg News’ Todd Shields, Chairman Genachowski told reporters that any resolution “that doesn’t preserve the freedom and openness of the Internet for consumers and entrepreneurs will be unacceptable.” Implicit, if not explicit, in this statement – see the use of “preserve” - is a recognition of the reality that the Internet is presently is free and open.

That being so, and the FCC has not seriously suggested otherwise since it began its campaign last fall to impose net neutrality regulation, the default position certainly should be no new Internet regulation without congressional authorization.

If Chairman Genachowski were suggesting that action is needed right now to “restore” the openness of the Internet in light of a demonstrable market failure harming consumers, we would be having a different conversation. But he is not. Often the best way to “preserve” a state of affairs that is working well is to do nothing. Or at least follow the Hippocratic oath: “First, do no harm.”

Most Americans think the government has enough real problems on its hands – and this includes the FCC's hands – to waste time addressing phantom ones. Maybe Americans need a new rallying cry: "No Internet Regulation Without Congressional Authorization!"