Saturday, May 28, 2011

Memorial Day 2011

On May 30, 1884, less than twenty years after the end of the Civil War, Oliver Wendell Holmes, Jr., Civil War veteran and future Supreme Court Justice, delivered a Memorial Day address in Keane, New Hampshire. The speech, titled "In Our Youth Our Hearts Were Touched With Fire," was given before John Sedgwick Post No. 4, Grand Army of the Republic, in a white painted town hall on the village common.

As we remember those who have served – and especially those who have paid the ultimate price, what Lincoln at Gettysburg called "the last full measure of devotion" – it is worth contemplating Holmes's address, and particularly the beautiful ending:

"Such hearts--ah me, how many!--were stilled twenty years ago; and to us who remain behind is left this day of memories. Every year--in the full tide of spring, at the height of the symphony of flowers and love and life--there comes a pause, and through the silence we hear the lonely pipe of death. Year after year lovers wandering under the apple trees and through the clover and deep grass are surprised with sudden tears as they see black veiled figures stealing through the morning to a soldier's grave. Year after year the comrades of the dead follow, with public honor, procession and commemorative flags and funeral march--honor and grief from us who stand almost alone, and have seen the best and noblest of our generation pass away.

But grief is not the end of all. I seem to hear the funeral march become a paean. I see beyond the forest the moving banners of a hidden column. Our dead brothers still live for us, and bid us think of life, not death--of life to which in their youth they lent the passion and joy of the spring. As I listen, the great chorus of life and joy begins again, and amid the awful orchestra of seen and unseen powers and destinies of good and evil our trumpets sound once more a note of daring, hope, and will."

With all our differences and diversity – including our differences of opinion on the great issues of the day – surely we Americans should be united on this day, and every day, in honoring and remembering those who have served, and still do, to defend our freedom.

While Lincoln at Gettysburg spoke at a particular time in a particular place, and on hallowed ground, his words transcend time and place. To me, recalling the ending of his Gettysburg Address has always seemed especially fitting on Memorial Day:

"We here highly resolve that these dead shall not have died in vain -- that this nation, under God, shall have a new birth of freedom -- and that government of the people, by the people, for the people, shall not perish from the earth."

Here at the Free State Foundation, we are committed to free market, limited government, and rule of law principles. Whatever your own beliefs, as we remember and commemorate, best wishes to you for a safe and contemplative Memorial Day!

PS – In the past week, several long-time readers of this space have asked me for past Memorial Day messages. Here they are:

Memorial Day 2007; Memorial Day 2008; Memorial Day 2009; Memorial Day 2010

Tuesday, May 24, 2011

Section 706 and the FCC's Pro-Regulatory Proclivities

So, the Federal Communications Commission has now issued its Seventh Broadband Progress Report pursuant to Section 706 of the Communications Act. Section 706 requires the FCC periodically to determine whether broadband capability "is being deployed to all Americans in a reasonable and timely fashion." If the Commission's determination is negative, the Commission is directed to "take immediate action to accelerate deployment of such capability by removing barriers to infrastructure investment and by promoting competition in the telecommunications market."

Suffice it to say that by virtue of their indeterminateness "reasonableness" and "timeliness" are, to some extent, in the eye of the beholder – or, in this instance, in the eye of the regulator. Before Julius Genachowski became Chairman of the FCC, in each of the prior five Section 706 reports the agency had determined that broadband was, in fact, being deployed on a reasonable and timely basis. Under Chairman Genachowski's watch, the FCC has determined precisely the opposite in the last two reports.

This does not mean that in making such a negative determination Chairman Genachowski and his two Democratic colleagues are acting in bad faith. But it does drive home the point I made in a blog almost two years ago that "data" – no matter how sweet-sounding the oft-repeated "data-driven" mantra – not infrequently is viewed differently, and put to different uses, depending upon one's regulatory philosophy and perspective.

It is clear that the communications policy perspective of Chairman Genachowski and his two Democratic colleagues is presumptively pro-regulation. In my view, in light of the technological and market dynamism that characterizes the communications and information services marketplace, their perspective should be presumptively deregulatory. Be that as it may, viewed through its presumptively pro-regulation mindset, the FCC majority evaluated the data and determined broadband is not being deployed in a "reasonable" or "timely" manner.

As noted above, this negative determination may have important consequences because Section 706 directs the Commission to take immediate action to accelerate broadband deployment. And, we know that, based on recent history – for example, think net neutrality and data roaming mandates -- the actions taken by the Genachowski Commission are most likely to be adoption of more new regulations – despite the fact that the statute refers to "removing barriers to infrastructure investment."

While I have acknowledged above that it is possible to draw different conclusions from the available data depending upon one's regulatory perspective, Commissioner McDowell in his dissenting statement persuasively argues that, in this instance, the majority's ultimate determination is highly questionable. As Commissioner McDowell points out, for the first time, the Commission claims the statutory terms "deployment" and "availability" refer to something other than deployment of physical network infrastructure. The Commission's apparent motivation in abandoning the previous understanding is to re-interpret the terms to encompass the notion of "adoption" of broadband, not just access to broadband networks. In other words, the Commission now factors into its "reasonableness" and timeliness" determination, in an amorphous, unconstrained way, various professed concerns about the rate of adoption (already over 65% of Americans use broadband at home). Without digressing here into a discussion of the proper modes of statutory construction, it is enough to say that the Commission's novel re-interpretation of Section 706 – after a contrary interpretation in previous reports – is almost certainly incorrect.

The Commission's concession that, for purposes of its Section 706 determination, it will completely exclude the deployment of wireless broadband capabilities – even though 4G wireless networks are now being deployed – casts further doubt on the validity of its ultimate determination. Even as the number of wireless-only households now exceeds 25%, the Commission has stubbornly refused to consider wireless phones a competitive alternative to landline phones in forbearance proceedings. It now appears that, even as the number of smartphone subscribers increases rapidly, the Commission will pursue a similar tack of simply ignoring wireless broadband network deployment and availability for purposes of its Section 706 determination. This despite Chairman Genachowski's very recent statement that "3G wireless services can deliver speeds capable of handling a dramatically wide array of consumer applications." And despite the acknowledgment in the Section 706 report that "[c]urrently, a number of wireless providers are building out nationwide fourth-generation (4G) mobile broadband networks."

The Genachowski Commission's inclination to interpret evidence – not to mention re-interpreting statutory terms – in a way designed to provide support for its pro-regulatory proclivities is likely, over time, to have adverse consequences. In the news release accompanying release of the report, the Commission states: "Despite the difficult economy, the private sector continues to invest tens of billions of dollars in broadband infrastructure each year -- $65 billion in capital expenditures in 2010 alone -- expanding capacity, increasing speeds on fixed networks and rolling out next-generation mobile services like 4G." In a recent press release, Broadband for America, an industry trade organization, claims that since 2008 cable operators, telephone companies, and wireless firms have invested over $250 billion in private capital in broadband networks." To be sure, private investment of this magnitude, during the "difficult economy," is extraordinary, and a testament to American private enterprise.

The Commission refuses to acknowledge, or fails to understand, that the costs imposed on broadband providers by increased regulations, such as the recently adopted net neutrality mandates, likely will have the effect of discouraging private investment. Discouraging private sector investment, especially on the huge scale indicated by the figures above, would be contrary to the goal, shared by all, for broadband to be made available to those remaining unserved areas (96% of American households already have broadband access), and for existing facilities to be continually upgraded with higher speed offerings.

In sum, the Commission, by filtering certain evidence through its embedded pro-regulatory lens, and departing from its previous interpretations of key statutory terms, has reached a determination in its Section 706 report that apparently it will use to adopt more new unnecessary regulations. I fear that, in the end, American consumers – and the American economy -- will be the real losers.


Finally, the Commission's handling of the evidence in this most recent Section 706 report has left me more convinced than ever that Congress should amend the Communications Act as l suggested in my recent essay, "A Modest Proposal for FCC Regulatory Reform." As I explain there, and in this more abbreviated "Rolling Back Regulation at the FCC" version published in the National Review Online, the Communications Act's forbearance and periodic regulatory review provisions should be amended to establish a presumption that, absence clear and convincing evidence to the contrary, the statutory consumer protection and public interest criteria for granting regulatory relief have been satisfied. I invite you to consider my proposal in conjunction with the way the FCC evaluated the evidence in its Section 706 report.


Wednesday, May 11, 2011

FCC's Wireless Competition Report Should Take Wireless Substitution Seriously

A year ago this month the FCC issued its annual Wireless Competition Report. So a new report from the Commission should be just around the corner. One of the biggest questions surrounding its forthcoming report is whether the Commission will finally take stock of wireless substitution for wireline services.

In its next Wireless Competition Report, the FCC should take the opportunity to more closely examine the growing phenomenon of wireless customers "cutting the cord" and going without wireline voice service altogether. The Commission should also forthrightly examine in its report the impact of wireless on the wireline market. Particularly when it comes to voice service, a strong case can be made that competition from wireless service is rendering legacy wireline regulation unnecessary and costly.

From time to time, the FCC has acknowledged the increasing numbers of wireless subscribers. The Commission's recent Local Telephone Competition Report, for instance, states that as of the end of June 2010, the number of wireless voice subscribers nationwide had increased to almost 279 million – up almost 14 million from a year before and up more than 61 million from four years prior.

It's difficult to imagine how such a momentous spike in wireless subscribership could possibly leave wireline unaffected. And, in fact, the Commission has acknowledged the decreasing numbers of switched access lines. Its Local Telephone Competition Report indicates that the number of switched access lines for both ILECs and non-ILEC telecommunications providers total some 122 million. (ILECs and non-ILECs also serve a combined total of approximately 29 million VoIP subscribers). This number for switched access lines is down from approximately 133 million the year before and down from over 172 million from June 2006. In addition, the number of ILEC access lines and VoIP subscribership has declined relative to increases for non-ILECs. On June 30, 2010, ILEC total end-user switched access lines and VoIP subscriptions equaled just over 102 million, down over 10 million from a year prior and down nearly 40 million from four years earlier. Non-ILEC total end-user switched access lines and VoIP subscriptions equaled nearly 49 million as of June 30, 2010, up over 4 million from a year prior and up almost 20 million from four years before.

The FCC has also acknowledged the increasing numbers of consumers who have "cut the cord" and now rely exclusively on wireless. For instance, one 2010 survey cited by the Commissionshows that a fast-growing number of households — now approximately one-quarter of all households — have "cut the cord" and rely exclusively on wireless: "For the last 3 years, the proportion of households subscribing to both landline and mobile wireless service has fluctuated around 59%, while the proportion of households that subscribe only to mobile wireless increased from 13.6% to 24.5%." The latest iteration of that survey suggests those same trends are continuing. Age demographics alone should suggest these cord-cutting trends will continue, as the number of wireless-only subscribers increases among users in younger age brackets. The chart below conveys a general sense of the upward trajectory of wireless-only subscribership as a percentage of all wireless subscribers.

Furthermore, when it comes to assessing wireless in competition with wireline, one should also take into account the degree of wireless choices available to consumers. Consider the Commission's findings in its 2010 Wireless Competition Report that "[t]he percentage of the population served by at least two mobile broadband providers increased from 73 percent in May 2008 to nearly 90 percent in November 2009," "the percentage of the population served by three or more providers increased from 51 percent in May 2008 to 76 percent in November 2009," and "approximately 58 percent of the population is served by at least four mobile broadband providers." A forthcoming Wireless Competition Report should provide an updated set of numbers. But the continuing presence of wireless alternatives to wireline services in the voice market is a certainty.

Unfortunately, the FCC's Qwest Phoenix MSA Order from last year followed a string of prior orders in which the Commission has declined to incorporate these insights regarding wireline and wireless subscribership into its overall regulatory approach to wireline services. This despite the Commission's concession that "most subscribers to wireline and wireless engage in some usage substitution," and that "[t]he increasing percentage of residential customers that rely solely on mobile wireless voice service suggests that an increasing percentage of voice customers view wireless and wireline services as close substitutes, increasing the likelihood that wireless services may materially constrain the price of residential wireline service."

The Commission excluded wireless as a substitute for wireline in its market analysis in the Qwest Phoenix MSA Order by suggesting mere usage substitution is not the same as access substitution, and that conclusive proof of the latter would be required to show price-constraining effects. The Commission insisted that "[k]nowing the percentage of households that rely exclusively upon mobile wireless is insufficient to determine whether mobile wireless services have a price-constraining effect on wireline access services." But the Commission suggested that what it calls conclusive proof of price-constraining effects might not itself be enough to treat wireless as a substitution for wireline, claiming that cord-cutting "could be driven more by differences in consumers' age, household structure, and underlying preferences than by relative price differentials."

The Commission's refusal to consider wireless substitution in the Qwest Phoenix MSA Order runs contrary to a commonsense look at the data regarding increasing wireless subscribership, decreasing ILEC access switches, and increasing wireless-only subscribership that is bound to continue rising in light of associated age demographics. But it should also be remembered that the wireless substitution issue was subsumed by the FCC's rollout of a new and controversial market power analysis in the Section 10 regulatory forbearance context and its application to one particular metropolitan statistical area.

The next Wireless Competition Report now offers the FCC a better place to take a fresh look at the big picture of wireless competition and cord-cutting. The Commission should take that opportunity to face up to the substitutability of wireless for wireline. Once that long overdue step is taken, the Commission can then begin to recognize that aspect of market competition into its future rulemakings, regulatory reviews, and forbearance proceedings.

Wednesday, May 04, 2011

Video Competition Should Lead FCC to End Old Regulation

The FCC's preparations are underway for its forthcoming Video Competition Report. The Commission confesses its information and outlook toward the video marketplace is outdated. So for what will be its 14th report analyzing the state of video competition, the Commission has issued a notice seeking information about much of the abundant variety of content, aggregation, and delivery services that characterize today's innovative video market.

Although cable video services are primarily governed by the Cable Act of 1992, the video market landscape of 2011 is fundamentally different. That changing landscape has upended many assumptions behind the 1992 Act as well as other regulations dating back to the 1990s or earlier. Direct broadcast satellite (DBS) video services are subject to antiquated regulations as well. And the more the Commission's forthcoming report recognizes the abundance of choices in today's vibrant video market – which it already does either explicitly or implicitly – the less plausible the Commission renders any continuation of old regulation based on an increasingly arcane snapshot of yesteryear's market.

In seeking an up-to-date look at video competition the Commission should use its report as the occasion to promptly begin eliminating out-of-date regulation that now hinders further innovation and competition. And, to the extent that congressional action is required to accomplish this, the Commission should recommend such deregulatory action to Congress.

The very fact that the Commission is calling for comment and information on how new forms of video content, aggregation, and delivery are impacting and providing substitutes for (multi-channel video programming distributor) MVPD services should be revealing. Implicit in the Commission's line of inquiry is the realization that the days of perceived cable monopoly are over. Although the FCC has frequently admitted that market share alone does not equate to monopoly, the chart below showing franchised cable companies' market share of MVPD subscribers conveys some sense of where the market was in the mid-1990s.

In the years immediately following, consumers in areas once served by only one incumbent cable provider began enjoying additional choices. As the next chart shows, by 2001, the competitive potential of two national direct broadcast satellite (DBS) service providers had begun to materialize.

More recently, telco providers have entered into the MVPD business with competing services. Although at this point AT&T and Verizon claim only a small percentage of MVPD subscribers compared to cable and DBS companies, such telco providers still claim approximately 6.5 million MVPD subscribers. Meanwhile, DBS has continued to make further incursions into cable companies' market share throughout the last decade.

In large part, such dramatic changes in the video marketplace prompted the U.S. Court of Appeals for the District of Columbia Circuit to declare in Comcast v. FCC (2009) that the cable bottleneck no longer exists. These changes are reflected in the final chart below based on numbers cited in the FCC's recent notice.

This last chart does not take into account other types of video services that were factored into the prior two charts, such as satellite master antenna (SMATV). More significantly, broadband-delivered video services are not factored in this market share snapshot, even though the presence of potential competition offered by broadband is now too serious to ignore.

Broadband services now provide an additional source of delivery for video programming. Consumers today obtain video content through online services such as iTunes, Netflix's subscription service, and Amazon. Hulu and a number of individual broadcast and cable TV programmer websites offer streaming content to consumers for free by using ad-supported models.

In addition, consumers have a growing variety of choices for devices to use for receiving video programming. An increasing number of "smart TVs" being brought to market, for instance, are capable of downloading video content directly from the Internet. Roku, Boxee, and Apple TV also offer content delivery services through their respective new devices. Broadband-connected video game consoles such as Sony PlayStation 3 and Xbox 360 are also increasingly popular devices for obtaining video programming. Just last week, in fact, Xbox began offering additional video content through a new Hulu Plus application. Not to be forgotten, new broadband-enabled tablet devices and smartphones are giving video consumers mobility options.

By taking into account a broader view of this rapidly changing, dynamic market, the Commission's forthcoming video competition report should be the occasion – now long overdue – for reducing regulation of cable and DBS services premised on an old, static picture of the market. A broadened perspective on video competition and substitutes should mean that outdated regulation of cable and DBS services – such as cable must-carry/retransmission consent regulation or its CableCARD regulation for cable set-top boxes – should be prime candidates for elimination. Both types of regulation are premised on an antiquated monopolistic mindset toward cable video.

It was expressly on a monopolistic premise, in fact, that must-carry regulation barely survived First Amendment challenge in a pair of 5-4 U.S. Supreme Court rulings from 1994 and 1997. In a market where conditions are competitive, however, must-carry forced-speech mandates are untenable under the First Amendment. And in Section 629 of the Telecom Act of 1996, Congress inserted a special sunset clause regarding set-top box regulation, requiring the Commission to remove regulation when there is "effective competition." The state of today's video market should prompt the Commission to invoke that sunset provision.

Now, with respect to the FCC's recent notice seeking information concerning the video marketplace, when a regulatory agency begins asking questions about successful new products and services it naturally raises worries over whether the agency might actually be seeking new rationales for expanding its regulatory authority rather than opportunities for reducing regulation in light of more competition. Might a broadened Commission inquiry into video mark the beginning of broader new regulation of the dynamic video market? Recent Commission activities – such as its adoption of regulatory conditions regarding online video in the Comcast-NBCU merger as well as its "AllVid" proposal to expand regulation of video navigation devices to all MVPDs – give real plausibility to such worries. (I discuss these in a prior FSF Perspectives paper.) Hopefully, those worries will go unrealized this time.

And, hopefully, in re-examining its old cable and DBS regulations in light of new marketplace conditions, the Commission will act consistent with the President's Executive Order for improving regulation and regulatory review. The President's Order calls on federal agencies to review their regulations to remove barriers that are needlessly hurting businesses and our economy, and to ensure that existing regulations "promot[e] economic growth, innovation, competitiveness, and job creation … [and] use the best, most innovative, and least burdensome tools for achieving regulatory ends." In February, Chairman Julius Genachowski stated he "expect[s] the FCC to perform its responsibilities consistent with the principles in the executive order."

The Commission's report should provide us with a fresh set of numbers about competitive conditions regarding several aspects of today's dynamic video market. And the report will give the Commission the perfect opportunity to finally face up to what common sense observation of today's video market reveals: rapid innovation and competition prevails, the old cable bottleneck doesn't exist, and outdated regulation of cable and DBS service based on a legacy monopolistic outlook is ill-suited for the current competitive environment. Consistent with the principles in the President's Executive Order, the Commission should use its report to remove old regulatory barriers rather than erect new ones that could stifle further innovation and competition in the video market.

Monday, May 02, 2011

Rolling Back Regulation at the FCC - Part II

The House Commerce Committee's Subcommittee on Communications and Technology has scheduled a hearing for Tuesday, May 3, on FCC process reform, and all five commissioners are to testify. FCC regulatory reform is certainly fertile ground, and I hope the committee is gearing up to do some serious plowing. [Just as I am about to post this, I see that the Subcommittee apparently has postponed Tuesday's hearing.]

In a piece entitled "Rolling Back Regulation at the FCC" published on April 18 in National Review Online, I suggested a modest change to the Communications Act, in the nature of a process reform, that could go a long way towards effectuating Congress's intent that the Telecommunications Act of 1996 be implemented in a deregulatory way. I explained that two entirely new provisions in the 1996 Act – the forbearance and periodic regulatory review provisions -- were intended by Congress to be primary tools for reducing regulation as competition developed, but that both have largely failed of their purpose. (For further detail, see my April 7 FSF Perspectives piece, "A Modest Proposal for FCC Regulatory Reform: Making Forbearance and Regulatory Reform Decisions More Deregulatory.")

In order for the forbearance and regulatory review provisions to achieve their intended purpose, I proposed that both be amended by incorporating an evidentiary standard that, in effect, would establish a deregulatory presumption. The Commission would be required to presume, absent clear and convincing evidence to the contrary, that the consumer protection and public interest criteria in the two provisions have been satisfied. The substantive criteria relating to consumer protection and the public interest would not be altered, and the revision would not dictate the outcome of any particular regulatory relief proceeding. But with the rebuttable presumption in place, the FCC would bear a considerably steeper burden in order to retain legacy regulations in the face of competition. Surely this is what Congress had in mind when it directed the agency in the regulatory review provision to determine whether a regulation is "no longer necessary in the public interest as a result of meaningful economic competition between providers of such service."

Now a point of clarification. In suggesting the forbearance and regulatory review provisions be amended to incorporate a deregulatory presumption by virtue of inclusion of the "clear and convincing" evidentiary standard, I did not mean to suggest that all entities regulated by the Commission should not be able to avail themselves of these provisions for regulatory relief. I was primarily focusing on the mechanism for achieving the deregulatory goal, not the scope of coverage. But to be clear: The two provisions should be revised so that all entities subject to Commission regulations are included, say, by adding "and a multichannel video programming distributor and any other regulated entity" after "telecommunications carrier," and "multichannel video programming service and any other service regulated by the Commission" after telecommunications service, each time "telecommunications carrier" or telecommunications service" appears.

As I noted in my National Review piece, my proposal does not lessen the need for comprehensive reform of our communications laws. But, in the meantime, if adopted, the proposal could go a long way towards forcing the FCC to eliminate what President Obama called, in his recent executive order, "outmoded, ineffective, insufficient, or excessively burdensome" regulations.

I received many favorable responses to my proposal. Perhaps in the course of the hearing on FCC reform, Committee members can ask the FCC commissioners for their reaction to this idea, along with many others.