Sunday, January 30, 2011

Broadband Policy: One Year After the National Broadband Plan

"Broadband Policy: One Year After the National Broadband Plan" is not only the title of this blog, but just happens to be the theme of the Free State Foundation's Annual Winter Telecom Policy Conference this Friday at the National Press Club.

A mere coincidence – but at the bottom of this blog I might well plug the conference anyway.

In anticipation of the conference, and especially in light of the FCC's recent actions in two major proceedings, I have been thinking a lot about where communications policymaking stands now, and why. You may have guessed that the two actions I have in mind are the Commission's adoption of net neutrality regulations and its approval of the Comcast-NBCU transaction. That these actions are important is signified not only, or primarily, by the length of the opinions and orders (130+ pages for net neutrality and 270+ pages for the Comcast-NBCU transaction). They are important, most fundamentally, for what they tell us about the Commission's approach to regulation at this point in time.

And what they tell us, simply put, is that the Commission majority's mindset remains largely stuck in the regulatory paradigms that were developed in the analog age when both the telephone and broadcast environments were largely monopolistic. In today's parlance, I would say the Commission just doesn't "get it" – get that the digital revolution, and the concomitant switch from narrowband to broadband communications, has enabled the development of a multiplatform digital communications environment that is largely competitive across most services, whether we call these services "video, "voice," or "data."

Despite whatever the Commission otherwise may say, its actions speak louder than its words. Faced with a choice, the agency continues to choose to regulate communications and information service providers under broad, ill-defined standards, rather than opting to rely on the discipline of the competitive marketplace to protect consumers. Continually invoking language at the heart of the analog-era regulatory paradigm – "public interest," "reasonable," "unreasonable," "fairness," and "non-discrimination" – the Commission clings tenaciously to the exercise of regulatory power. Acting under the guise of "reasonableness" and the "public interest" and so forth, it exercises this regulatory power in the name of ensuring "fair competition" or "leveling the playing field," all the while picking marketplace winners and losers – and all the while disclaiming it is doing any such thing.

Of course, one could write a book about this, and I am beginning work on one. But here I just want to comment very briefly on the net neutrality and Comcast-NBCU orders to illustrate my point. With respect to net neutrality, the Commission deliberately eschewed reliance on any findings concerning marketplace competition and consumer harm in deciding to adopt neutrality mandates. Instead, in the key provision prohibiting Internet providers from engaging in "unreasonable discrimination," without finding market failure, the agency clung to the analog-era paradigm. This anti-discrimination mandate, applied to "common carriers" in Section 202 of Communications Act of 1934, originated in the Interstate Commerce Act of 1887, and was first applied to telephone companies in the Mann-Elkins Act of 1910.

It is now 2011.

In approving the Comcast-NBCU order, the Commission attached 25 pages of very detailed conditions governing many aspects of the business practices of the combined company over the next seven years. This in a multi-channel video marketplace the Commission continually has found, in a series of lengthy studies over many years, to be competitive. While the conditions are wide-ranging, from implementation of program access and program carriage mandates to requirements for sharing Comcast-NBCU programming with online video providers, in large part they are grounded the common element that alleged violations are to be judged lawful or not by the Commission (or arbitrators) based on whether they are "reasonable" or "nondiscriminatory" or reflect "fair market value" or the like. Indeed, a reasonableness requirement alone is found 14 times in the conditions.

And to further illustrate where this reliance on "reasonableness" leads: In the condition that requires Comcast to continue to offer stand-alone broadband service, the Commission mandates that it must do so at "reasonable, market-based prices." On what basis is the Commission going to determine that market-based prices are unreasonable? I would have thought that, if market-based, in a competitive market, by definition – or, at least presumptively – they would be reasonable.

There are many other examples that could be cited. But the main point here is that the Commission, at least in the form of its present three-person majority, exhibits unbounded – but unwarranted -- confidence in its ability, notwithstanding the dynamic marketplace and technological changes, to make judgments as to what is "reasonable" and "fair" and "nondiscriminatory" and in the "public interest. " There is no need to question the good faith of commissioners who hold fast to reservations of authority based on such open-ended legacy standards. But there is reason to question their judgment that consumers are better served by an agency mindset which eschews reliance on standards grounded in findings of marketplace competition and demonstrable consumer harm.

I'd like to see the Commission adopt a more free market orientation on any number of issues, and I'll certainly keep advocating for more market-oriented policies which reflect today's competitive realities. But as my mother often said, "it may take an act of Congress." And so it may. A big project still to be accomplished.

In the meantime, which in this case is likely not to be a short time, there is much the Commission can still do – one year after release of the National Broadband Plan – to improve communications policymaking. After a decade of delay – yes, a decade – everyone knows the antiquated universal service/inter-carrier Compensation regime is in need of radical overhaul. It is widely acknowledged that spectrum policy and spectrum assignments do not serve the nation well because they are grounded in legacy approaches. There are real questions about whether it makes sense for the Commission to dictate technological designs, for example, with respect to video navigation devices, or business practices, with respect to wireless termination fees and usage cap alerts.

In my view, there are distinctly free market-oriented solutions that should be brought to bear in resolving each of these policy issues. But I recognize there are other, different views as well on all these issues.

That's why I am excited, and getting more so as I put finger to keyboard, about FSF's upcoming February 4 conference. I assure you that there will be vigorous, but respectful, debate that reflects divergent philosophical perspectives and differences of opinion on specific issues. And there will be time for audience participation as well.

So, I hope to see you on Friday. The conference agenda is here. FCC Commissioners Meredith Atwell Baker and Robert McDowell, in keynote roles, lead an all-star lineup. Space is quickly becoming limited, so please don't just show up without registering. You may register by rsvp-ing to Kathee Baker at

Friday, January 28, 2011

A Plug for a Worthy Research Program

Time Warner Cable recently announced the second year of its Research Program on Digital Communications, which awards stipends designed to foster research dedicated to increasing understanding of the benefits and challenges facing the future of digital technologies in the home, office, classroom and community.

I've read most of the essays that were published as a result of the first year's stipends, and I heartily commend them to you. You can find these first essays, authored by well-known scholars such as Dale Hatfield and Christopher Yoo, here. Fernando Laguarda, TWC's Vice-President, External Affairs and Policy Counselor, is the director of the research program. Fernando, along with Gail MacKinnon and other TWC executives, deserves much credit for its development and implementation.

All this is a prelude to a plug for participation by scholars in this year's program. Certainly, still at the relative dawn of the digital age, there remain many worthy public policy issues to be examined and debated in a scholarly way. TWC's 2011 Research Announcement sets forth the program’s guidelines and the list of research questions. Researchers affiliated with universities and not-for-profits are eligible to apply for the stipends. More information can be found at the research program website or by following The deadlines for submission of applications are April 1, 2011 and November 1, 2011.

PS – While in the mode of plugging for worthwhile causes relating to digital age public policy, I can't resist adding that if you haven't already registered for the Free State Foundation's Third Annual Winter Telecom Policy Conference on February 4, you should do so now. The theme of the conference is: "Broadband Policy: One Year After the National Broadband Plan." FCC Commissioners Meredith Baker and Robert McDowell head an all-star lineup. The conference agenda is here. Register by rsvp-ing to Kathee Baker at


Wednesday, January 26, 2011

FCC's "AllVid" Regulation of Video Devices All Wrong

Nearly a month into the New Year, the FCC is now pursuing several more action items on its agenda for implementing the National Broadband Plan. Unfortunately, if the FCC's recent order imposing set-top box conditions on the Comcast-NBCU merger is any hint, one of those action items will be a broader set of regulatory controls on the design of video navigation devices. But leaving Comcast-NBCU's merger aside, the FCC should call off its "AllVid" plans for future regulation of video navigation devices. Continuing developments in the dynamic video market show that adherence to free market principles remains the surest way to promote continuing investment and innovation in video navigation devices for the benefit of consumers.

Media reports from this year's Consumer Electronics Show reveal the launch of a variety of new Internet-capable video devices. An increasing number of "smart TVs" being brought to market, for instance, are capable of downloading video content from the Internet. Cable companies and other multi-video programming distributors (MVPDs) are also pursuing new business arrangements with manufacturers of other innovative devices for delivering video content. Meanwhile, new broadband-enabled and video-capable tablet devices and smartphones are being brought to market — thereby giving video consumers mobility options.

What's more, remote control innovations are also changing how consumers can operate their video navigation devices. Apps are now created to allow smartphones to be used as remote control devices, and manufacturers are also experimenting with creating remote controls with one-push button options for streaming or downloading content from the Internet — such as a "Netflix button." Of course, future TVs and video navigation devices could also make remote controls less significant by incorporating voice activation and motion sensor capabilities like the new Xbox Kinect.

All of these innovations involve complex engineering design decisions that balance new technological capabilities — such as processing speeds, video resolution, search capability, storage capacity, and sound quality — with corresponding technological constraints — such as size, weight, and cost. Device designers must also balance features such as interoperability and openness with concerns over security and protection of third-party copyrights. In a free market, competing manufacturers make their own judgments about how to approach these types of device engineering trade-offs and what functions or features should be optimized to best meet divergent consumer demands.

Strangely enough, it's in the midst of this sea-change in video delivery technologies and device functionalities that the FCC has proposed to impose new regulatory requirements on certain MVPDs regarding video navigation devices. By invoking a provision from the Telecommunications Act of 1996, the FCC issued its "AllVid" proposal in 2010. Under the FCC's proposed technological standards mandate, MVPDs must install a "gateway device or equivalent functionality" in homes using video navigation devices. In particular, the FCC proposes to require placement of:

the network-specific functions such as conditional access, provisioning, reception, and decoding of the signal in one small, inexpensive operator-provided adapter, which could be either (i) a set-back device – which today could be as small as deck of cards – that attaches to the back of a consumer's television set or set-top box, or (ii) a home gateway device that routes MVPD content throughout a subscriber's home network. The adapter would act as a conduit to connect proprietary MVPD networks with navigation devices, TV sets, and a broad range of other equipment in the home. The AllVid adapter would communicate over open standards widely used in home communications protocols … enabling consumers to select and access content through navigation devices of their choosing purchased in a competitive retail market.

The FCC contends "AllVid" regulation will help realize the agency's view that "there is true promise in the basic concept of separating operator-specific communications functions into a device that can then communicate with individual retail devices or a network of retail devices throughout a subscriber's home." "AllVid" therefore implies that the FCC can make engineering and other technological design decisions better than the free market. Or at least it implies that the FCC can pull levers that will spur competitors to create a more innovative and competitive video device market than the one we now have today.

But when it comes advanced technologies in dynamic markets, the reality is FCC regulation is much more prone to restrict innovation than to unleash it. Revealingly, "AllVid" would prohibit MVPDs from including some of the so-called "adapter" functions in the video navigation devices they make available to their own subscribers. This means that consumers would be unable to lease a DVR or other type of advanced device with all functions integrated into that one device. Subscribers would instead need to get an "AllVid" adapter containing some of the functionalities to go with the leased DVR or other device in order to obtain full functionality. This proposed restriction on what MVPDs can make available to consumers mirrors the FCC's current "integration ban" for set-top box regulations.

As I pointed out in an earlier FSF Perspectives piece, "The FCC's Continuing, Costly Video Navigation Device Regulation," most consumers prefer to lease set-top boxes from their cable or other MVPD provider in order to avoid fronting extra money for the equipment, making separate trips to the store to purchase equipment, and being stuck with outdated equipment (such as non-HD DVRs). That is a major reason why the FCC's existing set-top box regulation — including its ban on set-top boxes integrating content and security functionalities — has created significant regulatory compliance costs and brought no discernable benefit to consumers.

More importantly, the FCC's regulatory approach attempts to artificially prop up the agency's idiosyncratic and narrow view of one particular market segment. The regulatory foundation for "AllVid" is an outdated picture of the video marketplace. For "All-Vid" is the latest iteration of a set-top box regulatory regime that was envisioned back in the mid-1990s when cable companies did not face the degree of competition they now face from direct broadcast satellite and telco video entrants.

Nor was online video distribution through broadband Internet a factor in 1996. Via broadband connections, consumers today can obtain video programming through services such as Amazon's Video on Demand, iTunes, and Netflix's subscription service. Hulu and a number of individual broadcast and cable TV programmer websites offer streaming content to consumers for free by using ad-supported models. Roku, Boxee, and Apple TV also offer content delivery services through their respective new devices. In addition, broadband-connected video game consoles such as Sony PlayStation 3 and Xbox 360 are becoming increasingly popular devices for obtaining TV and movie programming.

By trying to insert itself further into today's dynamic video market through technological device design mandates, the FCC risks freezing into place rules geared more toward a monopolistic, static market. But as several video programmers reiterated to the Commission late last year:

[V]ideo distribution services are not static - programmers and content creators consistently invest in the creation of new services, features, and enhancements, such as 3D networks and program interactivity, made possible by advances in technology pioneered by program networks and their partners. Standardizing the output from MVPD networks would essentially freeze the status quo, thereby reducing the incentive to innovate and stifling the development of new features and services that consumers demand.

Imposing a single government-mandated standard for video navigation devices can also create stronger incentive for wrongdoers to attempt to compromise security. As the video programmers contend: "[c]ontent security issues are best left to multiple, private, and voluntary solutions which are inherently more flexible and able to deal with advances in technology more adroitly than government regulation."

Given the innovation and choice in the video market we see today, if there is any provision in the 1996 Telecom Act relating to set-top boxes that the FCC should be invoking it is the sunset provision. Congress placed into Section 629 a unique provision that calls upon the FCC to sunset regulation of set-top boxes when the market becomes effectively competitive. The FCC should now invoke the sunset provision, or at a minimum keep from expanding its regulation of video navigation devices.

Market innovations of the type demonstrated at CES and described here overwhelmingly show that consumers are offered abundant choices for video device delivery options in an effectively competitive market, not a static monopolistic market. And the fact that video market developments have taken forms that no regulator in 1996 possibly could have predicted is no reason for regulators in 2011 to look past them now. The FCC should respond to staggering innovation and vibrant competition with deregulation, not more regulation.

Wednesday, January 12, 2011

Lessons for Modern Regulators from Hippocrates, Schumpeter and Kahn

In my January 3 blog, "Alfred E. Kahn, RIP," mourning the passing of Fred Kahn and celebrating his life, I took note of his many high positions in government and academia, and I praised his signal accomplishments in applying his academic learning in practical ways to improve public policy. His contributions in achieving deregulation of airline rates and in advocating less regulation of telecommunications providers in a competitive environment are monumental.

And I proudly took note of Fred's contributions to the Free State Foundation as a member of its Board of Academic Advisors.

In my January 3 piece, I commended to you the chapter in FSF's New Directions in Communications Policy book, "Lessons for Modern Regulators from Hippocrates, Schumpeter and Kahn," in which Professors Dennis Weisman and Glen Robinson explain the relevance of Professor Kahn's teaching to proper resolution of today's top communications policy issues. As I said: "Suffice it to say here that, in no way, is Fred out of place in such exalted company."

Since then, several readers have asked me where they can find the essay by Professors Weisman and Robinson. It can be found, of course, in the New Directions book, available on Amazon, along with nine other excellent essays by members of FSF's Board of Academic Advisors.

In this instance, I have decided to make available here the Lessons for Modern Regulators chapter, because in addition to constituting a fine tribute to Fred Kahn, it has much continuing relevance to today's top communications policy issues. Immediately below are two excerpts from the essay, prepared in 2009, which highlight the importance of Fred's contribution to the field of regulatory economics and which illuminate his placement alongside Hippocrates and Schumpeter:


"[W]e suggest our regulator take some guidance from three inspirational teachers of medicine, economics and regulation, Hippocrates, Schumpeter, and—in our own day—Alfred Kahn. No doubt it will seem paradoxical that in advocating the need to escape from 'habitual modes of thought and expression' we should draw on one teacher who died more than two millennia ago, and another who died nearly 60 years ago. We take comfort in the knowledge that our third teacher is still actively teaching the lessons of the other two. Some lessons endure.

Hippocrates, the father of modern medicine, is popularly known today for his famous oath, 'First, do no harm.' It is a wise admonition not only for physicians but for all persons charged with responsibility for the well being of others, public regulators included. For the regulator we translate the lesson from Hippocrates into a basically conservative admonition not to invent a solution to a problem that doesn’t exist (or at least one that will persist long enough to justify the investment of energy to solve it).

Joseph Schumpeter is best known today for his theory of dynamic capitalism, reflected in his famous description of competition as a struggle among firms to capture the market by a process of 'creative destruction.' Schumpeter believed that regulators should seek to foster the competitive process rather than mandate the competitive outcome.

Alfred Kahn is one of the foremost contemporary scholars of regulated industries, as well as one of the most distinguished regulators (both at state and federal levels). In both capacities he has been a leading proponent/practitioner of deregulation. In his scholarship and in his practice as a regulator Kahn has built on the principles of Hippocrates and Schumpeter. Borrowing from the former he has emphasized that regulatory intervention in the competitive process could create more harm than good, and from the latter Kahn viewed competition within a framework of dynamic processes over time."


"We began this essay with the idea that the collective wisdom of Hippocrates, Schumpeter, and Kahn could constructively inform the role of regulation in the rapidly evolving telecommunications industry. The objective of regulation in telecommunications, regulating the monopoly prices paid by consumers, is no longer the primary focus of regulation; competition has made that objective largely moot. Today regulators have shifted their focus to regulating that competition in order to ensure its success. While there may be some legitimate role for regulation to play in facilitating the transition from monopoly to competition, we think it is one that poses great risks of undermining the very competition it is supposed to foster. As a result, due deference to the Hippocratic oath calls for a more limited role for ex ante regulation going forward. Schumpeter believed that the regulators’ efforts to control transitory market power were misguided because they interfered with the competitive process—dynamic efficiency always trumps static efficiency. It would be difficult to point to an industry more technologically dynamic than the telecommunications industry. Kahn recognized that the regulator’s penchant for competitive handicapping interfered with market rivalry in a manner that served to harm rather than benefit consumers. And both Schumpeter and Kahn would counsel that regulators should serve to protect the integrity of the competitive process rather than protect selected competitors. Their counsel, though often unheeded, is precisely on point."

There is no need here to try to improve upon the insights of Professors Weisman and Robinson regarding Alfred Kahn's contributions and his dedication to enhancing consumer welfare.

Finally, I said last week that I know that in the not too distant future I will have to remove Fred's name from FSF's Board of Academic Advisors list. But I haven't been able to bring myself to do so quite yet.


Monday, January 10, 2011

A New Year’s Resolution for the FCC

By Deborah Taylor Tate

With unemployment hovering near 10 percent, mortgage rates climbing, and many Americans still not in recovery from the biggest recession since the Depression, my hopes for the New Year, like those of many fellow Americans, are simple. We need a return to productivity, new job opportunities, and safety and security of home and homeland that will finally lead to new engines of growth.

So what would be my hope for the FCC's 2011 New Year's Resolution?

First, the FCC must return to being an independent agency. Too many FCC Chairmen have been confused about the agency's authority, allegiance or its family tree, creating a dotted line from the Oval Office to the Chairman's office. Before long, however, the new Congress will probably make painfully clear that the agency is a legislative creature and that the FCC should operate independently from the Executive branch.

In fact, the FCC may well want to take a look in the mirror the next time it chastises broadcasters regarding their "public interest obligations." The public, not Pennsylvania Avenue, should be the agency's focus. Such independence often means being unpopular – with the President, with Congress, with industry. That kind of unpopularity, however, often means you are doing your job, as required by law. And as President Truman said, "If you want a friend in Washington, get a dog."

Second, the FCC should provide leadership for economic recovery. Sectors within the FCC's oversight offer some of the best promises for a way out of the recession. And the U.S. has always been the global leader in techno-intellectual property; we invented the Internet and most of the spin-offs. We should not relinquish that global position. House Oversight Committee Chairman Darrell Issa is promising to provide just that kind of dogged determination by looking at regulations that may be stifling our economy, rather than sustaining it. In fact, the decades old 1996 Telecommunications Act was visionary in actually directing the FCC to forebear from enforcing part of, or all, regulations that are no longer necessary. In this day and age of total platform convergence between voice, video, and data and platform competition from numerous sectors, Section 10 forbearance should be at the top of the FCC's to-do list for 2011, as well as other steps to reignite investment, entrepreneurship, and innovation
Programs such as Lifeline and Linkup, which provide much needed communications services to the truly low-income, based on strict eligibility requirements, should be reenergized and not retrenched. Even with so many Americans unemployed, less than half of those eligible are now taking advantage of this assistance. Rather than reducing access to this critical program providing temporary assistance, companies should be encouraged to expand and experiment in this area. The words "life-line" resonate more today than ever before regarding access to communications, which is now crucial to truly reducing joblessness.

And what about a real good housecleaning from top to bottom of every FCC docket, complaint, and filing that has not been acted upon in – say, five years? When I served at the Tennessee Regulatory Authority we held an open docket every Monday to dismiss hundreds of stagnant, old filings. If FCC Commissioner Robert McDowell is correct that there are a million American consumer complaints regarding broadcasters, the agency should set up a rocket-review, dismiss all those that do not meet review criteria, and refer the rest to a mediator or some other fast-track alternative dispute resolution process.

Third, the FCC needs to make public and personal cyber security a priority. With breaches of private information – including the government's – occurring frequently, over 90% of our children online, and consumers' financial security threatened, just what steps are being taken to insure the safety, integrity, and security of the Internet? What is the agency doing to educate the public regarding cyber security risks? Workshops, hearings and speeches have been held all around the nation to discuss net neutrality – hardly a matter of pressing importance like cyber security. (One was held at a high school in December.) We actually need good network management practices to protect our children online, reduce the multi-billion dollar impact of piracy, and insure the stability of the network for crucial, time-sensitive uses such as telesurgery. While the majority of Americans – and Congress and two FCC Commissioners – were firmly opposed to the FCC's endeavor to regulate the Internet, the agency has spent two years working to do just that.

Finally, just as networks and technologies evolve, so must the agency as well. As competition provides consumer protection regarding choice and pricing, what is the new role of the FCC in a highly competitive, converged world? Will the FCC remain the "gold standard" among "independent regulators" vis-à-vis the communications regulatory authorities in other countries? Or, will it saddle American companies with overly burdensome regulations here, reduce their ability to compete globally, stymie investment and destroy jobs? Will this governmental agency be part of the solution to our national jobs-deficit – or an added burden to our economy?

So, at the FCC I hope the New Year will be one of agency independence, empowerment of both companies and consumers, and concentrated agency action on the safety and security of our homes and our homeland. The agency should follow through on this New Year's Resolution rather than make 2011 yet another year of overreaching and over-regulating.

And, at their first meeting of the New Year, the FCC might follow the lead of the new Congress and read the Constitution aloud. It has relevance to much of the FCC's work too.

Thursday, January 06, 2011

Government-Owned Broadband Networks Make a Bad Budget Worse

As highlighted by a recent 60 Minutes segment, several state governments and countless local governments are facing the specter of financial ruin. The Great Recession and its impact on state and local tax revenues have brought to light years of runaway spending and crafty accounting to paper over growing structural deficits. The 60 Minutes segment also pointed out that since many local governments are heavily reliant upon their own state governments for funding sources, many cities and towns could face some of the severest financial shortfalls in the year ahead.

However daunting these financial challenges may be for local governments, one thing responsible cities and towns should do in the year ahead is keep from making their financial problems worse by engaging in expensive and risky new ventures. Unfortunately, the situation could already be worse than it should have been for some local governments that have made heavy investments on money-losing municipal broadband projects. Municipal broadband operations funded and operated by a couple of towns in North Carolina, for instance, are putting growing strains on local budgets. The tale of these two cities ought to be a cautionary warning to other municipalities considering getting into the broadband business.

The towns of Mooresville and Davidson face looming multi-million dollar debts thanks to their joint purchase and operation of MI-Connection Communications System. Acquired by the towns from the bankrupt Adelphia Communications cable systems in December 2007, MI-Connection provides cable, voice, and broadband Internet services to businesses and residences. Purchase of the system required a massive start-up investment of approximately $80 million by Mooresville and Davidson. And the towns poured an additional $12.5 million into the system in 2008 to provide system upgrades.

Although public officials in Mooresville and Davidson who voted to establish MI- Connection maintained that user subscriptions would pay for the system, MI- Connections' long-term debts and yearly expenses are now straining the towns' budgets. In early 2010 the Mooresville and Davidson city councils both voted to loan MI- Connection nearly $580,000 to cover the system's debts. The towns were also asked to provide additional assistance to make up for MI-Connection's financial shortfalls. According to a Davidsonnews.Net report, "[t]his year's system budget calls for Davidson and Mooresville to kick in a total of $6.46 million to help pay this year's costs -- $4.44 million from Mooresville and $2.02 million from Davidson."

To put these multi-million dollar municipal broadband debts into perspective, the Town of Mooresville has a fiscal year 2010-2011 budget of approximately $83.5 million, while the Town of Davidson has a fiscal year 2010-2011 budget of almost $8.5 million. The $4.4 million MI-Connection received from Mooresville was paid in part by a $3.6 million withdrawal from the town's savings. And according to a Lake Norman Citizen report, "[i]n Davidson, one-fourth of the town's operating budget for this year is going to prop up the cable company, as is a new trash pickup fee of more than $200 per home."

MI-Connections and its supporters boast that the system's cash flow has improved and that it now has a clean audit. (MI-Connection's earlier audit for the prior fiscal year ending June 30, 2009, set off alarm bells at the North Carolina Treasury Department, prompting a Department letter to MI-Connection's governing board, insisting that "[t]he System has serious financial problems which the System's governing board must address immediately." MI-Connection lost $6.4 million that fiscal year.) But that doesn't speak to the fact that the system lost more than $6 million during its most recent fiscal year. MI-Connection still faces massive debts that will require significantly more user subscriptions and returns per customer in the face of competition from direct broadcast satellite (DBS), cable and telco providers if it is to quit losing money.

And the picture doesn't get any rosier when considering that MI-Connection's debt obligations are now increasing. Although MI-Connection previously paid only interest on its bonds, beginning September 1, 2010, principal payments became due. MI-Connection's debt payment schedule contained in a fiscal year 2009-2010 audit calls for annual debts payments of over $7 million for each of the next five fiscal years, starting 2011.

Although Mooresville and Davidson financed MI-Connection through the sale of municipal bonds, the towns' treasuries must ultimately be tapped should MI-Connection default. The towns' budgets would be further squeezed should they have to inject additional dollars into MI-Connection to keep the system operating. And ultimately the towns' taxpayers would bear the burden.

So for local governments already experiencing budget woes due to overspending, unfunded liabilities, and steep declines in local tax revenues brought on by the economic downturn, the MI-Connection saga offers some important lessons. Bankrolling municipal broadband projects deep in the red will almost certainly bring greater budgetary strains in the short run. And given the enormous start-up costs for municipal broadband projects, bailouts for struggling or failing projects can devastate town treasuries in the long run.

Of course, economic circumstances may already be precluding future municipal bond issues by towns eager to jump into the cable, voice and Internet business. In the 60 Minutes segment, Wall Street financial analyst Meredith Whitney predicts many local governments will be unable to meet their financial obligations, resulting in municipal bond defaults that could disrupt the entire market. While Whitney's focus was on major metropolitan cities, a recent New York Times story (reposted at shows that many small cities are also in dire financial straits, facing significant unfunded pension liability problems. Cash-strapped towns facing massive unfunded pension and retiree health care burdens are highly unlikely to obtain favorable future financing of municipal broadband projects.

As local governments enter 2011 facing hard choices about how to balance their budgets, they should recognize that undertaking municipal broadband projects will almost certainly make their money problems worse. There is good reason to be skeptical of the ability of local governments to operate broadband networks at a profit. Local governments do not typically possess the resources to oversee the design, operational, and marketing decisions that are crucial to driving innovation and to competing successfully against private sector providers in a market characterized by rapidly advancing technology. Ultimately, money-losing municipal broadband projects strain the financial ability of local governments to provide traditional, core public services such as police, fire, and sanitation.

By contrast, private sector investors — and not local taxpaying residents — bear the financial risks if private systems falter. For cities and towns now looking to dig themselves out of financial holes, buying and propping up municipal broadband networks will likely only make the holes deeper.

Wednesday, January 05, 2011

Infamous No. 78 (of the Net Neutrality Order)

One of the most important – and famous – of the Federalist Papers is Alexander Hamilton's No. 78, which explained the principle of judicial review in a way that became an accepted part of our constitutional understanding, especially when relied upon in Chief Justice Marshall's famous Marbury v. Madison decision.

In our world of communications law and policy, Paragraph No. 78 of the FCC's net neutrality regulation order, released on December 23, may well be the most important paragraph in the document. And, from my perspective, it may become as justifiably infamous as Federalist No. 78 is justifiably famous.

Paragraph 78 flatly rejects the position advocated by the Free State Foundation and others that only "discriminatory" practices that are committed by Internet providers which possess market power and which cause consumer harm are prohibited by its new net neutrality regulation.

The Commission explicitly declares that its regulatory reach extends beyond practices that are "only" anticompetitive and that cause consumer harm. It characterizes these terms as "unduly narrow." According to the Commission, the "broad purposes" of the rule cannot be achieved "by preventing only those practices that are demonstrably anticompetitive or harmful to consumers."

Paragraph No. 78 is so important because, by disclaiming reliance only on anticompetitive injury and consumer harm (generally present only when an Internet provider possesses market power), the Commission leaves itself largely at sea in enforcing its rules. By "at sea," I mean, of course, that the Commission, as it acknowledges, is leaving itself with nearly unbridled discretion in deciding which Internet provider practices will be permitted and which will not.

The Commission says that its new rule rests on the proposition that Internet service providers should not pick winners or the losers on the Internet. But the prospect of the FCC arrogating to itself the power to pick such winners and losers, without even requiring any showing of anti-competiveness or consumer harm, is more than a little unsettling.

For now, I just want to call your attention to Paragraph No. 78. In the coming days, we will have more to say about the FCC's order, and especially about how Paragraph 78, in conjunction with other parts of the Commission's order, unless substantially cabined in a principled way, is likely to lead to an unstable, litigious regulatory environment. And an unstable, litigious, regulatory environment is not conducive to further investment and innovation in the Internet ecosystem.

Sunday, January 02, 2011

Alfred E. Kahn, RIP

Alfred Kahn passed away on December 27. His Washington Post obituary is here.

Fred, a lifelong Democrat, was, of course, the person most responsible, as President Carter's Civil Aeronautics Board Chairman, for deregulating the airlines in the late 1970s. He also served as President Carter's anti-inflation czar, as well as Chairman of the New York Public Service Commission.

Professor Kahn was also an eminent scholar, especially of public utility regulation. His two volume treatise, The Economics of Regulation: Principles and Institutions, published in 1970-1971, remains a classic in the field of regulatory economics.

Much more could be said about Fred's contributions to economics, his honors, and his positions. Here I just want to note - very proudly – that, from its inception, Fred served as a member of the Free State Foundation's Board of Academic Advisors. And, for Fred, it was not just an honorific title. He took the role of "academic advisor" seriously. He would often react to drafts and pieces published by me with cogent comments, always offered constructively. I will be forever grateful for what I learned from him, and for his willingness to serve on FSF's Board of Academic Advisors.

Tempting as it might be, this is not the place to use Fred's vast knowledge and writings to argue for or against any particular current public policy issue. But it is not out of place - and I think Fred would wholeheartedly approve – to remind ourselves of a central tenet of Fred's teaching, one that became engrained in him through his experience with airline deregulation and as a telecom regulator. In a famous 1984 article in Telematics entitled The Uneasy Marriage of Regulation and Competition, Professor Kahn stated there is "no rational half-way house between thorough regulation and free competition." And, then, he enjoined: "Between regulated monopoly and unregulated competition, regulated competition represents the worst of both possible words."

As they undertake their duties as "regulators" in today's technologically dynamic, increasingly competitive communications marketplace, FCC commissioners and state public utility commissioners could benefit greatly from taking Fred's teaching on this score to heart. As he put it in a1998 book, Letting Go: Deregulating the Process of Deregulation, to avoid the above-described "worst of all possible worlds," it is absolutely necessary for regulators to "let go" as competition emerges. Federal and state regulators should be handed a copy of Letting Go at the same time they remove their hands from the Bibles upon which they swear their oaths of office.

For those who want to know more about Professor Kahn's impact and influence on regulatory economics, and communications policy, but who don't have time to read his original works, I commend to you the first chapter in FSF's 2009 book, New Directions in Communications Policy. In Lessons for Modern Regulators from Hippocrates, Schumpeter and Kahn, Professors Dennis Weisman and Glen Robinson explain the relevance Professor Kahn's teaching to proper resolution of today's top communications policy issues. Suffice it to say here that, in no way, is Fred out of place in such exalted company.

I know in the not too distant future I will have to remove Fred's name from the list of FSF's Board of Academic Advisors. But, for now, I am going to leave it there as I remember Fred and his contributions to the economics profession, to the field of public utility regulation, and, most of all, to the country.

For now, Alfred E. Kahn, RIP.