Sunday, July 31, 2011

USF Reform Is Not For Sissies

My beloved, late Aunt Betty, well into her 90s, was fond of saying: "Aging is not for sissies."
Well, neither is serious Universal Service Fund reform, which is long overdue.
So repeat after me: "USF reform is not for sissies."
As everyone who follows telecom policy knows by now, a group of telecom providers – AT&T, CenturyLink, FairPoint, Frontier, Verizon, and Windstream – has submitted a USF reform plan to the Federal Communications Commission. They call their plan the "American Broadband Connectivity" plan, or ABC plan.
Shortly after the plan was filed with the FCC, here is what I said:
"The USF reform plan represents a major step forward in the effort to achieve a more efficient, technology-neutral, economically-sound universal service system. Capping the USF fund, directing support only to unserved areas, eliminating subsidy payments to more than one carrier in an area, introducing competitive bidding, and making the remaining subsidies more explicit are all positive market-oriented steps. While I would prefer even more substantial reform with deeper subsidy cuts, it is now up to the Commission, for the benefit of the nation's consumers, to seize the opportunity presented by the plan to quickly accomplish at least this much reform."
As I said, I would prefer a plan that contemplates more substantial cuts in the existing subsidy levels. The present subsidies, which amount to $8 billion annually, require a nearly 15% surcharge ("tax") on all long distance calls to fund them. More than half of the $8 billion per year goes to fund subsidies that are distributed in an overly indiscriminate way to telecom providers in so-called high-cost areas.
In comments filed this past May in the FCC's USF reform proceeding, I urged, along with my FSF colleague Seth Cooper, that the Commission cap the high-cost fund and then lower it over time. And we called for sunsetting the subsidy program, say, in ten years, and then reviewing whether, in light of technological and marketplace developments, it ought to be renewed on some basis for a further limited period.
That said, I don't get to design the reformed USF regime, the FCC does. And as I said in my statement above, the ABC plan has several positive, market-oriented elements. Capping the size of the fund, providing subsidies only to presently unserved areas and only to one provider, employing competitive bidding to determine the low-cost provider, rationalizing the intercarrier compensation system to eliminate existing arbitrage opportunities, and making the subsidy regime more technology-neutral are all market-oriented steps.
Now the ball is in the FCC's court, and the agency would be derelict not to seize the opportunity to achieve at least as much reform as proposed in the ABC plan. Note the emphasis on "at least."
There is a public policy rationale for transforming the existing regime from support of narrowband voice service to broadband service. But only if this transformation is accomplished in a fiscally responsible way that enhances overall consumer welfare. This means ensuring that subsidies are not distributed any longer in an indiscriminate way that discourages the use of the most efficient technologies or deters the development of further competition.
I always try to maintain my innate optimism about the ability of good public policy to win out in the end, even though I know it doesn't always.
In this instance, now that the ABC plan has been submitted, I would be even more optimistic if Chairman Genachowski would call together his fellow commissioners, join them in a circle, and all holding hands, have them chant in unison: "USF reform is not for sissies."    

Friday, July 29, 2011

FCC Marks End of Merger Price Controls By Better Recognizing Market Competition

On July 27, the FCC issued an order in which it declined to extend the three-year price cap "voluntary" condition it imposed on the Sirius-XM merger. It's welcome news to see the FCC decline to extend price controls on satellite radio services. The order is also revealing for the FCC's acknowledgment that Sirius-XM faces competition, including new competitive alternatives that have emerged since the merger was approved. The existence of such competition demonstrates the emptiness of the horror stories once repeated by the merger critics who sought to block or tie down Sirius-XM with conditions on the basis of narrow market definitions. The FCC's acknowledgment of such competition from close substitutes should be remembered as it analyzes competition in other dynamic markets, including its market analysis of mergers.

The FCC's order pointed out: (1) "[n]o specific proposals to extend the price cap condition were submitted in response to the Public Notice" and (2) "[n]umerous individual consumers commented, the vast majority stating that the Commission should remove the price cap condition and allow Sirius XM to set the price of its subscription packages in response to market forces." There, the agency concluded (3) "the record before us now does not support extending the price cap condition."

Remember that critics of the Sirius-XM merger, such as the National Association of Broadcasters, called the deal a "merger to monopoly." The slogan traded on an unduly narrow set of market definitions, suggesting Sirius-XM would face little or no competition in a field all to itself and be able to wield market power to charge consumers above-market prices. It was also a thoroughly disingenuous claim. As FSF President Randolph May pointed out in comments to the FCC:

If satellite radio constitutes a distinct market, why would the terrestrial broadcasters devote so many resources to trying to defeat the merger? The answer, of course, is that satellite radio does, in fact, compete with terrestrial AM, FM, and HD radio, and a combined XMSirius, with the cost savings realized, should be a stronger competitor than either alone.

That Sirius-XM faces plenty of competition in the broader audio entertainment market was hinted at in the FCC's recent order. It contends that "there is evidence that new competitive alternatives have arisen since 2008." As the FCC explained:

it appears that since the Merger Order new audio services have emerged as viable consumer alternatives, including smartphone Internet streaming applications that can be used in mobile environments such as automobiles equipped with user-friendly interfaces. For example, Pandora Media Inc. ("Pandora"), which provides audio services via Internet streaming and smartphone apps, has demonstrated remarkable growth in popularity in the years since the merger. Other examples of apps that have emerged as alternatives since the Merger Order include Rhapsody, Slacker,, and iheartradio. Ford, Toyota, MINI, GM, Mercedes-Benz, and Hyundai are introducing Internet-based streaming services in their vehicles. In addition, data suggest that HD radio has increased since the merger.

Whether Sirius-XM will remain solvent or be a serious player over the long-run in the audio entertainment market remains to be seen. The issue is bigger than Sirius-XM or any one particular competitor it might face. In today's dynamic, digital marketplace, consumers enjoy a variety of information and entertainment options from different platforms operating on different pricing and service models. As pointed out in a prior blog, Thinking "Siriusly" About Satellite Radio Competition – or thinking seriously about competition in general – means that "continued investment and innovation depend on regulators at DOJ and the FCC not taking such a constrained, static view of marketplace competition that they end up maintaining in place or adopting new regulations, or preventing market-driven mergers, which have such investment and innovation-stifling effects."

Hopefully, the end of satellite radio price caps will mark the beginning of clearer thinking about market definitions in dynamic markets.

Tuesday, July 26, 2011

State Regulators Shouldn't Meddle with AT&T/T-Mobile Merger

A small handful of state public utility commissions (PUCs) have opened their own proceedings to review the AT&T/T-Mobile merger. This despite the fact that the U.S. Department of Justice and the FCC are conducting independent reviews of the proposed deal. While as a general matter, we contend that State Regulators Should Refrain from Reviewing Wireless Mergers, this month there have been some encouraging signs coming from some of the states in which PUC reviews have been opened.

First, as National Journal's TechDailyDose blog pointed out on July 5:

The Arizona Corporation Commission, the state agency that oversees telecom providers, approved AT&T's acquisition of T-Mobile USA, the nation's fourth biggest wireless provider, without a hearing and with a minimal condition requiring the firm to notify T-Mobile customers by mail of the deal.

Next, TRDaily reported on July 13 that the West Virginia Public Service Commission's (WVPSC) legal and technical staff issued a recommendation that the WVPSC approve the AT&T-T-Mobile merger. Among other things, the WVPSC staff's recommendation pointed to T-Mobile's lack of substantial in-state presence as a factor for its conclusion.

Most recently, on July 25 TRDaily reported that the Louisiana Public Service Commission (LAPSC) staff issued a Report and Recommendation that the LAPSC approve the AT&T/T-Mobile merger. The LAPSC Staff Report and Recommendation is noteworthy for its recognition of the need to avoid unnecessary and duplicative merger reviews that should instead be undertaken at the federal level:

Sprint's comments are largely focused on the impact the merger will have on a national level, even stating, 'the national market is the relevant geographic scope on which to evaluate the proposed acquisition.' Sprint's comments also [contain] several references to the FCC, the DOJ, to federal jurisdictional issues, and to the proceedings that are ongoing before those agencies. Yet Sprint would presumably have the LPSC review those same issues, through a protracted proceeding not contemplated 301.M [ the LAPSC's streamlined rules for reviewing and approving telecommunications service providers mergers and acquisitions]. Staff is confident the FCC and DOJ, with their expansive resources and expertise on these matters, will perform a thorough review of Sprint[']s concerns regarding the impact this acquisition may have on a national level.

Rather than focus the Commission's resources on an unnecessary duplicative review, the Staff recommends the Commission zero in on the requirements of Section 301.M…

California's PUC would do well to take this point into consideration. With ongoing, overlapping reviews of AT&T/-T-Mobile by DOJ and the FCC, the merger will most certainly be scrutinized.

Unfortunately, the California PUC's review of AT&T/T-Mobile has expanded into a series of hearings and public workshops, with interest groups calling for a series of conditions on the merger's approval. Whatever one's view about the competitive aspects of AT&T/T-Mobile and whether the merger should ultimately be approved, Multiple Government Regulatory Reviews Burden Telecom Mergers with Too Many Conditions.

Monday, July 25, 2011

DC Circuit Vacates [Net Neutrality] Rule

Did you hear about the D.C. Circuit's opinion last week vacating the Commission's major new rule?

Here are just a few key quotes from the decision:

"Here the Commission inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters."

"The petitioners also maintain, and we agree, the Commission relied upon insufficient empirical data…."

"As we have said before, this type of reasoning, which fails to view a cost at the margin, is illogical and, in an economic analysis, unacceptable."

"By ducking serious evaluation of the costs that could be imposed upon companies from use of the rule…."

As you are reading this, you could be forgiven for thinking that the D.C. Circuit has ruled, anticipatorily, on the FCC's net neutrality regulations (aka the "Open Internet" rules), which were voted on last December but which have not yet become effective. But, alas, you would be wrong, and my blog title with the bracket is meant, for now, as only a tease. Sorry.

The above quotes are taken from the D.C. Circuit's July 22 opinion in Business Roundtable v. Securities and Exchange Commission in which the court vacated the SEC's rule requiring public companies to provide shareholders with information about, and their ability to vote for, shareholder-nominated candidates for the board of directors. Obviously, the SEC is not the FCC. And the SEC's enabling statutes required, in the Business Roundtable case, the SEC to consider the rule's impact upon efficiency, competition, and capital formation.

Nevertheless, the court's analysis, which ultimately concludes the SEC's shareholder information rule is arbitrary and capricious under the Administrative Procedure Act's judicial review standard, is certainly relevant to considering review of the FCC's net neutrality mandates. Quoting from the Supreme Court's leading case, the D.C. Circuit explained: "We must assure ourselves the agency has 'examine[d] the relevant data and articulate[d] a satisfactory explanation for its action including a rational connection between the facts found and the choices made.' Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)."

The court's critique of the SEC's reasoning, as illustrated by the quotes above, surely has some applicability to the FCC's reasoning – more properly, the deficiencies in its reasoning – regarding the net neutrality order. Without rehashing the FCC's order here, the agency's market failure and competition analysis is decidedly thin, based much more on possible hypothetical problems that could occur in the future rather than on evidence of market problems that have occurred.

And the costs imposed by the regulation were certainly downplayed or ignored as evidenced by the fact that the FCC had failed completely to analyze the regulatory costs pursuant to the Paperwork Reduction Act requirements. A reviewing court is not likely to be impressed by the fact that such consideration is now taking place – a half-year after the rule was voted on -- rather than before. The House Energy and Commerce Committee's Report, dated April 1, 2011, accompanying its resolution of disapproval of the FCC's net neutrality regulation contains an excellent analysis of the FCC's arbitrary reasoning.

In short, in broad outline, the FCC's failure of reasoned decision-making mirrors that of the SEC's regarding promulgation of the shareholder information regulation. My guess is that, like the D.C. Circuit in Business Roundtable, a court reviewing the FCC's net neutrality regulations will find the Commission, in the words of State Farm, failed to make a rational connection "between the facts found and the choices made."

And, finally, there is this to consider: There was no question whatever with respect the SEC rule as to the agency's jurisdiction to promulgate the rule. With regard to the net neutrality order, the FCC's jurisdiction to regulate the business practices of Internet service providers is, to put the matter charitably, by no means clear. Indeed, many think it is highly doubtful. As Free State Foundation advisory board member Daniel Lyons explained recently in this Perspectives piece, jurisdiction-stretching agency orders should not receive Chevron deference upon review.

I understand that the FCC's lawyers can go about distinguishing the court's opinion in Business Roundtable from review of the FCC's order adopting new net neutrality regulations. But, in my view, the D.C. Circuit's decision is another foreboding sign.

Friday, July 22, 2011

City Should Stick to the Law and Evidence When it Comes to Cellphones and Health

Recently in the news is the San Francisco Board of Supervisors' latest misguided attempts to impose health warning mandates on stores selling cellphones. This latest stab by the San Francisco Board comes in the wake of yet another published scientific study suggesting cellphones do not pose the kinds of dangers that certain San Francisco politicians persist in claiming they might.

Apparently, the San Francisco Board is seeking to amend the wireless warnings ordinance it adopted last year that required stores to post each phone' "specific absorption rate" or SAR – a measure of radiation absorbed by a user's body. This prompted an industry lawsuit against the city, since the federal government has broad authority over the electromagnetic spectrum and wireless and exclusive authority over wireless "entry" under. As the initial lawsuit complaint spells out plainly, federal government clearly occupies the field when it comes to radio frequency (RF) emissions and SARs, including a number of FCC regulations dealing specifically with SARs. CTIA later amended its lawsuit complaint to include a First Amendment challenge to the ordinance. So now the San Francisco Board is trying to get around the lack of scientific merit, federal preemption, and First Amendment problems by dropping the SARs warning and instead imposing some kind of generic warning about radiation.

Frankly, the San Francisco Board has little to no credibility when it comes to wireless handset technologies and medical health issues. Its ordinance and revision efforts are unwarranted, unwise, and a waste of time. The better approach is found in the American Legislative Exchange Council's Resolution Opposing State and Local Mandates Requiring Warning Labels on Wireless Devices and Packaging. The San Francisco Board should direct any concerns they have to the federal authorities that actually have jurisdiction over the matter.

Thursday, July 21, 2011

Court Ruling Factors First Amendment into Video Regulation Review

In prior blog posts we have analyzed D.C. Circuit rulings that call into question the relevance and legitimacy of legacy video regulation in light of today's dynamic video market. Now comes Cablevision v. FCC (2011), a ruling issued in June by the D.C. Circuit. Directly at issue was whether the FCC had the delegated authority to adopt program access regulation "closing the terrestrial loophole." The D.C. Circuit upheld most of the particular regulation at issue on statutory grounds. But the real significance of Cablevision is the latest jurisprudential wrinkle it provides regarding the analytical basis for video regulation and the requirements the FCC must meet to justify such regulation under the First Amendment.

First, Cablevision v. FCC confirms a subtle shift in the D.C. Circuit's analytical basis for upholding video regulation in the face of First Amendment challenges. Early and mid-1990s video regulations were upheld by the U.S. Supreme Court in Turner v. FCC I (1994) and Turner v. FCC II (1997) against First Amendment free speech claims on the basis of a perceived "bottleneck" for cable video services. Such regulation was said to satisfy intermediate level scrutiny because it responded to concerns about so-called cable bottlenecks. But as the D.C. Circuit observed in Cablevision:

The video programming industry does indeed look very different today than it did when Congress passed the Cable Act in 1992…Although cable operators then controlled approximately 95% of the national market for video programming… by 2007 their share had decreased to 67%, and it has apparently continued dropping in the face of competition from DBS providers and, more recently, from telephone companies offering fiber optic services…In addition, the number of programming networks has increased dramatically while the percentage of networks vertically integrated with cable operators has declined.

Echoing a prior ruling, Cablevision v. FCC (2010), the D.C. Circuit ruling from last month characterizes the video market as "mixed," with some geographical areas experiencing higher levels of competition than others. Now one might question whether the D.C. Circuit's characterization of the video market as merely "mixed" provides an oversimplified understatement of the competitiveness of today's market. And such a characterization is perhaps less forceful than the D.C. Circuit's assertion in Comcast v. FCC (2009) that "the record is replete with evidence of ever increasing competition among video providers…Cable operators, therefore, no longer have the bottleneck power over programming that concerned the Congress in 1992."

Those considerations aside, one should still recognize that by characterizing the video market as "mixed" in both cases the D.C. Circuit is effectively analyzing First Amendment challenges to legacy video regulation on a basis that differs from what the Supreme Court set out in Turner I and cases that followed.

This slight shift in the legal rationale for analyzing video regulation subject to First Amendment challenges makes it more likely that the Supreme Court will agree to revisit and perhaps reformulate its First Amendment jurisprudence regarding video regulation.

In such a future case the Supreme Court could, for instance, reexamine its precedents that give less speech protection to certain broadcast, cable, or other media than to print publications. On such an occasion, the Court could even address whether competition now present in the video market requires that legacy video regulation be subjected to strict scrutiny rather than to intermediate scrutiny – a possibility explored in prior writings by FSF scholars.

Second, Cablevision v. FCC is significant simply for taking First Amendment challenges to regulation of video market competitors seriously. The D.C. Circuit struck down the Commission's regulation that categorically treated as "unfair" all conduct involving terrestrially-delivered programming if similar conduct was designated "unfair" according to Communications Act Section 628(c)(2)'s provisions regarding satellite-delivered programming. In the court's words, the Commission "failed to justify its assumption that just because Congress treated certain acts involving satellite programming as unfair, the same acts are necessarily unfair in the context of terrestrial programming." At least when it comes to conduct in the video market not expressly prohibited by Congress, the court concluded that the Commission is required to consider and ultimately justify its prohibition of the types of conduct at issue. The D.C. Circuit's ruling pointed out that one of that the "substantially narrowed scope of [the Commission's] regulation…focusing on the effect of terrestrial withholding in individual cases…is one of the reasons why its [other] rules survive First Amendment scrutiny."

In other words, under the First Amendment the Commission cannot simply impose new video program regulations mirroring its old regulations without either statutory authorization or adequate analytical justification when using its ancillary powers. The ruling essentially requires that any FCC regulation of conduct in the video market involving programmers and multichannel video programming distributors (MVPDs) lacking express statutory authorization be justified by an analysis of the competitive aspects of the types of conduct at issue. And even where such justification exists, the First Amendment requires the Commission to provide a case-by-case process for inquiring into particular purposes or effects of conduct of particular video programmers and MVPDs such as cable operators and DBS providers.

The Communications Act, the Cable Act, and the Administrative Procedures Act, have long been recognized as providing statutory limitations on the FCC's power to adopt and enforce regulation of competitors in the video market. And the D.C. Circuit has given at least a slight nod to First Amendment considerations in recent cases. For instance, ruling by the D.C. Circuit in Comcast v. FCC (2009) offered First Amendment considerations for its remedial order vacating FCC regulation limiting video subscribership, though the Court invalidated the regulation on APA grounds.

But despite its upholding most of the FCC's expansion of video regulation, in this latest Cablevision ruling the D.C. Circuit took First Amendment claims head-on and made free speech considerations a matter of consequence to the validity of legacy video regulation. Without drastically reshaping First Amendment jurisprudence regarding video regulation, Cablevision suggests that First Amendment considerations will be taken more seriously in the times ahead, as they should be.

Monday, July 18, 2011

Engaging Regulatory Reform Efforts

The flurry of federal regulatory activity taking place in the last couple years has led to renewed attention to regulatory reform efforts to scale back the growing scope of government agency rules and ease the burdens of bureaucratic restrictions. In a newly-published article in Engage titled "Prospects for Regulatory Reform in 2011," Susan Dudley provides an excellent introductory and overview of current regulatory reform initiatives, with a special attention to legislative efforts in the 112th Congress. Dudley formerly served as Administrator for the Office of Information and Regulatory Affairs (OIRA) and currently serves as director of George Washington University's Regulatory Studies Center.

Dudley's Engage article begins with a useful background section, tracing regulatory reform implemented in the mid-1970s to mid-80s, as well as mid-90s reform proposals from the 104th Congress. Dudley focuses primarily on two categories of reforms for the 112th Congress to consider. The first category includes procedural reforms – that is, reforms to the processes by which regulations are adopted. The other category emphasized by Dudley includes decision criteria reforms – in other words, "improving upon the decisional criteria by which regulatory alternatives are evaluated." Both categories include a handful of different legislative approaches to regulatory reform that merit careful consideration by Congress.

And speaking of procedural regulatory reforms, FCC process reform, in particular, is a subject of continuing interest in policymaking circles this year. Free State Foundation recently posted the panel discussion transcript for its lunch seminar entitled "Regulatory Reform at the FCC: Why Not Now?" The panel followed a keynote address by Congressman Cliff Stearns, Chairman of the House Commerce Committee's Subcommittee on Oversight and Investigations. FSF President Randolph May moderated the event, and offered his own views in testimony at a June hearing on "Reforming FCC Process" before the House Commerce Committee's Subcommittee on Communications and Technology.

Wednesday, July 13, 2011

States Should Defer to DOJ on Antitrust Reviews of Interstate Wireless Mergers

Recent press reports point out that a handful of state attorneys general offices are now undertaking their own respective antitrust reviews of the proposed AT&T/T-Mobile merger. The reviews being conducted by Arizona, Florida, Hawaii, Illinois, Minnesota, NewYork, Pennsylvania, Texas and Washington come on top of the pending review of the merger by the U.S. Department of Justice's Antitrust Division and the review proceeding at the FCC.

Late last year I described the unnecessary and costly nature of duplicative state public utility commission (PUC) reviews of telecom mergers in a Perspectives paper titled "Multiple Government Regulatory Reviews Burden Telecom Mergers with Too Many Conditions." In that paper I pointed out that:

The existing multi-level, multi-agency telecommunications merger review process involves costly, time-consuming, redundant reviews by federal and state regulators. And it often results in merging carriers being subjected to numerous approval conditions that are unrelated to specific harms posed by such mergers.

Telecom mergers are already subject to review by two federal agencies – the FTC or DOJ as well as the FCC. Thus, I concluded that:

Once market power concerns are addressed by FTC-DOJ reviews, a law of diminishing returns kicks in with regard to subsequent FCC and state PUC merger reviews. There is little reason to expect seven, thirteen, or two-dozen government agencies will provide an optimum outcome that would not otherwise be reached through reviews conducted by one, two or even a few government agencies.

For similar reasons, I also made the case why state PUCs should stay out of the AT&T/T-Mobile merger in a blog post from June titled "State Regulators Should Refrain from Reviewing Wireless Mergers."

Most – if not all – of those same considerations that weigh against state PUCs creating a multi-state regulatory review pile-up on proposed interstate wireless mergers also weigh against state AGs creating their own multi-state review pile-up on such mergers. State antitrust analyses of intrastate conduct and effects based on consumer welfare criteria possibly might embody more disciplined approaches to interstate wireless mergers than state PUC "public interest" standards.

Nonetheless, state antitrust reviews pose similar concerns regarding expensive, repetitive, delay-prone processes that are most likely unnecessary in light of DOJ's antitrust review process.

Tuesday, July 12, 2011

In Wireless Report, FCC Sees Competition But Blinks

On June 27, the FCC released its annual Wireless Competition Report for 2011. The Report contains plenty of positive data points concerning wireless innovation, competition, and choice of service and price options. Numbers in the Report show that the wireless market is dynamic and highly competitive.

But the Commission passed up an opportunity to look more closely at the impact of intermodal competition and wireless substitution in the advanced telecommunications marketplace. And the Commission disregarded Congress's directive in Section 332(c)(1)(C) of the Communications Act that its Report "shall include…an analysis of whether or not there is effective competition" in the market."

This means another lost opportunity for the Commission to lay the groundwork for removing outdated, monopoly-era legacy wireline regulations. And the agency's agnosticism when it comes to effective competition gives it cover for a slate of proposals for imposing new wireless regulations that have been circulated in Congress and by the Commission itself.

Positive numbers from the Report include expanded coverage of the population by competing wireless voice providers. 99.2% of the population is served by two or more wireless voice providers, 97.2% is served by three or more providers, and 94.3% are served by four or more providers. Numbers for wireless broadband coverage and competition also stack up well. 91.9% of the population is served by two or more wireless broadband service providers, 81.7% is served by three or more providers, and 67.8% is served by four or more providers.

In addition, the Report indicates downward trends in prices. Average revenue per voice minute has continued to decline, lowering to $0.049 per minute in 2009, from $0.054 per minute in 2008 and $0.112 per minute in 2002. "[T]he unit price for text messages continued to fall in 2009" as "price per text yields dropped for the fifth consecutive year in 2009 to $0.009, a 25 percent decline from the previous year."

The Report also cites a survey indicating that a growing number of households – approximately 26.6% – are now wireless-only. And it also points out that "[a] Nielsen Company survey shows a similar rising trend in households who have 'cut the cord.'"

Given the Commission's goals for universal broadband access, shouldn't it be an agency imperative to gain better insight into the substitutability and competitive effects of wireless in delivering broadband services? Unfortunately, the Report's subsection on intermodal competition in voice services provides no analysis, no conclusions, nor any substantive insights regarding competitive pressures in the voice services market resulting from wireless and cross-platform competition.

Wireline telecommunications providers are in many instances still subject to legacy regulatory burdens premised on monopoly-era assumptions about competition in the market. On their face, those assumptions now appear unwarranted in light of competition from wireless and other competitors. But the lack of any such assessment in the Report suggests the Commission isn't much interested in better understanding what kind of competitive pressures wireless creates in the voice services market. The result is another missed opportunity for the Commission to reconsider the competitive underpinnings of its monopoly-era legacy regulation for wireline.

Repeating its approach to the 2010 Report, the Commission backs away from its statutory obligation to make an "effective competition" determination. In this year's Report the Commission again adopts an "effective competition" agnosticism regarding the wireless market, meaning no amount of positive data could satisfy the Commission that an effective competition finding is warranted. According to the Report,"[i]t would be overly simplistic to apply a binary conclusion or blanket label to this complex and multi-dimensional industry." But as Commissioner Robert McDowell responded in his concurring statement: "Nonetheless, this is what Congress asked us to do." The FCC effectively disregarded its statutory duty under Section 332(c)(1)(C).

For the FCC, the upshot to avoiding a finding of "effective competition" in the wireless market is that it renders new regulations more tenable. Over the last year, Congress and the Commission have proposals for wireless mandates includes: next generation wireless disclosure regulation, early-termination fee regulation, handset exclusivity regulation, bill shock regulation, text messaging and common short code regulation, smartphone app regulation and smartphone design regulation (such as FM chipset mandates). Not to mention the FCC's net neutrality regulation of wireless, adopted last year.

The Commission's agnosticism toward the existence of an "effectively competitive" wireless market gives such proposals for new wireless regulation a better chance of favorable reception in policymaking circles. And in the absence of any recognition of robust market competition, courts are more likely to subject regulation to less exacting scrutiny and to give greater deference to agency regulatory intervention.

Nonetheless, hard data in this year's Wireless Competition Report suggests a dynamic market that continues to be characterized by investment, innovation and competition. The numbers suggest that consumers of wireless voice and broadband services are benefitting from a wireless market that is effectively competitive. So while the Report's official glosses on that data might be pro-regulation, the data itself is strongly pro-consumer.

Monday, July 11, 2011

New Study Sheds Light on Costs of Heavy Wireless Taxation

On this blog we've pointed to the problems with the heavy wireless tax burden shouldered by consumers. Federal, state, and local taxes, fees, and surcharges hit wireless consumers hard. Now a recent study by Glenn Woroch, executive director of the Center for Research on Telecommunications Policy at the University of California Berkeley, describes in more detail the toll that wireless taxes are taking on consumers.

The study – "The 'Wireless Tax Premium' Harms American Consumers and Squanders the Potential of the Mobile Economy" – contains an estimate that "at current levels the American consumer forgoes over $15 billion in surplus annually compared to when cell phones receive the same tax treatment as other goods and services." Other insights from the study include a comparison of states' wireless taxes with states' "sin taxes" on cigarettes and beer. The study's comparison reveals the startling fact that wireless is overwhelmingly subject to higher state tax rates than beer.

As the study makes all too plain, our nation's tax treatment of wireless is at odds with our nation's policy for increasing wireless broadband deployment and affordable access. Federal, state, and local policymakers who have a say-so when it comes wireless taxation need to be reminded that while such taxes may generate government revenues, they also impose serious costs. Those costs include those imposed directly on consumers as well as those imposed indirect to the economy through dislocation and lost opportunities.

Sunday, July 10, 2011

What Did The FCC Know And When?

Remember Senator Baker's famous Watergate question: "What did the President know, and when did he know it?"

Here's another: What did the FCC know about its broken intercarrier compensation regime, and when did it know it?

We don't need to find any missing 18 minutes of tape to know the answer to the above question. It's right in the FCC's official books.

Here's what the FCC said back in 2001:

“We believe it essential to re-evaluate these existing intercarrier compensation regimes in light of increasing competition and new technologies, such as the Internet and Internet-based services, and commercial mobile radio services (CMRS). We are particularly interested in identifying a unified approach to intercarrier compensation – one that would apply to interconnection arrangements between all types of carriers interconnecting with the local telephone network, and all types of traffic passing over the local telephone network.”

“The existing intercarrier compensation rules raise several pressing issues. First, and probably most important, are the opportunities for regulatory arbitrage created by the existing patchwork of intercarrier compensation rules.”

Of course, with the development of even more competition and the deployment of even newer technologies, the patchwork intercarrier compensation regime is even more problematically anachronistic today than it was a decade ago. In short, the regulatory arbitrage enabled by the current uneconomic regime creates significant inefficiencies in our telecom networks and increases consumer prices.

Well, ten years later it looks like the FCC may – in light of past inaction I emphasize "may" – shortly be prepared to finally address in a serious way intercarrier compensation reform, along with reform of the universal service subsidy regime.

That's why the Free State Foundation's seminar on Wednesday, July 13, at 8:45 AM, at the National Press Club is so important and timely. We have an excellent lineup of leading experts ready to explain what should be done, when, and how: Tom Tauke, Verizon; Jerry Ellig, Mercatus Center; James Assey, NCTA; Mike Romano, NTCA; and Deborah Taylor Tate, former FCC Commissioner and FSF Distinguished Adjunct Senior Fellow. Event details and RSVP information are in the sidebar to the right.

Now you know the answer to what the FCC knew and when it knew it. Please bring all your other USF/ICC questions and comments to the seminar to get all the skinny.

Tuesday, July 05, 2011

"Broadband for All" - Spreading the Freedom Flame

I just had a chance over the Independence Day weekend to read FCC Commissioner Robert McDowell’s address, “Broadband for All: A Networked and Prosperous Society” which was delivered on June 27 in Stockholm. I heartily commend it to you. And as you will shortly see, while the speech is an important read at any time, it was entirely fitting to read the address on July 4th.

Commissioner McDowell’s address is about the power of the Internet and the power of governments, and what ought to be the proper relationship between the two. Not only in this country, but around the globe. Referring to the Internet, McDowell declares: “The power of competition, private sector leadership and regulatory liberalization has wrought a wonderful explosion of entrepreneurial brilliance, economic growth and political change.”

According to McDowell, “deregulation has produced not only increased transmission capacity but falling costs as well.” This is of more than mere academic interest. What it means is that:

“As the costs of computing power and transmission decrease, more people have the opportunity to own these transforming technologies and become more empowered than at any other time in human history. This transformation is not only vital to the advancement of human rights, but to the reduction of poverty as well. Each day, new studies prove that the proliferation of communications technologies spurs efficiencies and economic growth.”

No one really doubts the truth of the above statement. It is the relationship between the power of the Internet and the exercise of government power that engenders more controversy. For there are some who look to government to enable and promote “more” or “better” Internet speech, or to ensure “fairness” or “balance” for Internet users, or to enforce “non-discrimination” mandates. There are others, like Commissioner McDowell and myself, who believe that, at least absent a demonstrable market failure, governments should not interfere with, or exert control over, private sector Internet providers.

It is difficult to put the matter better than McDowell did in Stockholm:

“Perhaps the most important lesson here is that as we look across the globe, it is state interference with the ’Net that has been undermining liberty, not private sector mischief. Government control of the Internet is antithetical to the entire notion and architecture of the Internet itself. By definition, the Internet is decentralized and defies authoritarian top-down control – be that technical control, political control or both. In fact, its very structure is helping to shape governments in its image.”

We all know about governments around the world that have tried, sometimes successfully for a while, sometimes not, to control the Net in order to suppress the freedom of their people. No need for recitations here.

Without suggesting or even implying that the adoption last December of net neutrality regulations by the FCC places the United States in league with countries like China, Iran, and Syria that affirmatively interfere with their citizens’ use of the Internet, I do suggest that, in the absence of a market failure or evidence of abusive practices, it was wrong for the FCC to adopt new regulations arrogating to itself the power to control important aspects of private Internet providers’ offerings. And, as I have written often, I believe, as a matter of law, this assertion of government control by the FCC likely violates the First Amendment. Here is just one early piece, “Net Neutrality Mandates: Neutering the First Amendment in the Digital Age.”

It is not necessary to suggest – and I don’t – that the United States is in the league of the world’s offender nations to make the obvious counterpoint: America should lead the world, not follow, in promoting the fundamental idea that the power of the Internet should not be stifled by government power over the Internet. And, of course, the FCC’s role, and the way it sees itself, is important here.

On this score, Commissioner McDowell had this to say: “To me, the core mission of the FCC is to promote freedom, especially the freedom of speech – or the freedom to communicate.”

You don’t have to try to square Commissioner McDowell’s sentiment with a parsing of the Communications Act’s provisions to appreciate that the FCC ought to understand its role similarly in today’s digital environment. Indeed, the freedom-enabling power of the digital revolution ought to compel this free speech-centered view of the FCC mission – a view in which the FCC comes to appreciate that the First Amendment was adopted by the Founders to protect speech from abridgement by government, not to grant power to the government to protect us from private speech restraints.

Speaking of the Founders and revolutions brings me back to the Fourth of July just celebrated. In my Independence Day message, I focused on some of the natural law antecedents to Jefferson’s Declaration of Independence. In his famous 1821 letter to John Adams, nearly a half-century after the Declaration, Jefferson wrote: "The flames kindled on the 4 of July 1776, have spread over too much of the globe to be extinguished by the feeble engines of despotism; on the contrary, they will consume these engines and all who work them."

Commissioner McDowell’s Stockholm speech is in the worthy tradition of carrying forward the Founders’ freedom message to our Internet age, and spreading the flames kindled in 1776 around the globe.