Tablet Demand Points To a Multi-Device Mobile Market

This month comScore released an insightful report titled "2012 Mobile Future in Focus: Key Insights from 2011 and What They Mean for the Coming Year."

Among other things, the report details growing smartphone adoption and usage trends by consumers. "Nearly 42 percent of all U.S. mobile subscribers now use smartphones," and "[m]ore than half of the U.S. smartphone population used their phone to perform retail research while inside a store in 2011 Also, "64.2 million U.S. smartphone users … accessed social networking sites or blogs on their mobile devices at least once in December 2011," and "more than half of these mobile social networking users accessing social media almost every day."

But early evidence indicates that tablet adoption rates are eclipsing smartphone adoption:

Tablets quickly rose in popularity in 2011, taking less than two years to reach nearly 40 million tablets in use among the U.S. mobile population, significantly outpacing smartphones which took 7 years to reach similar levels of adoption.

As the report explains, tablet devices have potential to reshape the mobile and connected device landscape:

[T]ablets have emerged as the fourth screen, heralding a shift to an increasingly multi-device lifestyle that is becoming the norm for many consumers we call 'digital omnivores' who engage seamlessly with multiple online touchpoints throughout a day. Even when accessing the same content, each device has very different peak usage times throughout a typical day, highlighting their varying use cases and value propositions to the digitally-connected consumer.

The report points out that "only 8 percent of tablet traffic currently comes via mobile broadband." But it also suggests that "[a]s tablets continue on their upward climb in 2012 and mobile broadband plans become more accessible, it is highly likely that the share of mobile broadband traffic seen over tablets will rapidly increase and may eventually reach levels consummate with mobile phones."

Smartphone and tablet adoption and usage trends epitomize the dynamism of today's wireless market. This proliferation of new mobile devices and service options has proceeded in the absence of a restrictive regulatory apparatus. New regulation of wireless broadband along the lines of old monopoly-era assumptions is not only unnecessary; it would risk serious harm to future innovation. Wireless broadband must remain free from public utility regulations.

Until (Separations) Hell Freezes Over

The brief item below from the February 24th issue of TR Daily seems pretty innocuous, but it is really a window into much of what is wrong with the FCC. Docket No. 80-286 was opened so that the Commission could grapple with -- and revise -- its rules relating to the separation of costs between the interstate and interstate jurisdictions in light of the ways that then-changing technologies and the marketplace were affecting existing cost assignment methodologies.

But the docket was opened in 1980 (hence the Docket No. 80-286 moniker) and since then the Commission has done too little revising and grappling. It has done too much kicking the can down the road by "freezing" the existing system in place and just extending the freezes.

The cost assignments affect ratemaking, which makes changes somewhat controversial. But this is just another example of the Commission dragging out proceedings until the decisions become largely irrelevant.

The least the Commission could do is to close the docket and transfer everything in the files to a newly initiated proceeding with a new docket number. Thirty years is long enough for the life of one docket.   

"The FCC began circulating this week a further notice of proposed rulemaking that proposes to extend the jurisdictional separations freeze that has been in place since 2001 until June 30, 2014. The additional two-year extension would help provide telcos with stability while the Commission continues to grapple with reforms to the system.  In Common Carrier docket 80-286, the Commission is calling for an extension of the existing freeze on jurisdictional separations Part 36 category relationships and cost allocation factors, which are part of the process of regulating telcos’ recovery of the costs of regulated services through charges for regulated interstate and intrastate services.  Previously, the FCC has sought only one-year extensions."

Here Comes The Video Traffic Tsunami

I just came across this startling statistic concerning the explosion of wireless video traffic. Watch out for this  tsunami....

The average volume of video traffic on mobile networks has risen 10% since February, 2011, from 40% to 50% of total traffic. For particular mobile networks, it’s as high as 69% of overall traffic, according to Bytemobile’s “Mobile Analytics Report — February 2012.” http://www.telecompetitor.com/report-video-accounts-for-40-50-of-mobile-network-traffic/

Spectrum Sense and Sound Policy

If you didn't see the comments my colleague and I filed earlier this week at the FCC concerning the proposed Verizon Wireless - SpectrumCo transaction, they are here.

There is a good, short Introduction and Summary, but the key points are these:

• FCC approval of the proposed transaction will get currently unused spectrum into the hands of a wireless operator that needs it to better serve its customers with 4G service.

• The Commission should not review commercial sales agency and resale agreements that are independent of the spectrum acquisition and which are the types of agreements typically not subject to the FCC's review.

In light of the "spectrum crunch" that is acknowledged by FCC Chairman Julius Genachowski, this is a transaction that should be approved by the Commission without undue delay.

Voluntary Spectrum Auctions Signed Into Law

We have emphasized, time and again, the pressing need to make more spectrum available for flexible commercial use. Growing demands for wireless broadband services and the spectrum needed to realize the economic and other benefits of wireless make additional spectrum availability an urgent priority.

So it is welcome news that on Wednesday, February 22, the President signed legislation authorizing voluntary incentive spectrum auctions. Title VI, Subtitle D of H.R. 3630, authorizes the FCC to:

[E]ncourage a licensee to relinquish voluntarily some or all of its licensed spectrum usage rights in order to permit the assignment of new initial licenses subject to flexible-use service rules by sharing with such licensee a portion, based on the value of the relinquished rights as determined in the reverse auction…of the proceeds…from the use of a competitive bidding system.

More details are contained in the enrolled bill. FSF Board of Academic Advisors member and Professor Michelle Connelly provided an explanation of how this kind of incentive auction system would be put together in her FSF Perspectives paper "Proposed FCC Incentive Spectrum Auctions: The Importance of Re-Optimizing Spectrum Use."

Recent legislative debate over spectrum auctions centered around entry and use conditions. This debate was the subject of FSF President Randolph May's Perspectives essay "Spectrum Auctions and Communications Policy Reform" and prior blog posts. With the FCC now assuming responsibility for implementing the spectrum auctions, it remains of the utmost importance that market-based incentives, open entry and flexible use guide the agency's process.

Undoubtedly, we will have more to say as the voluntary incentive spectrum auctions proceed.

FCC Must Make Better Sense of Section 706

On February 6, the FCC released its order to reform and modernize the Lifeline program. This includes measures to curb waste, fraud, and abuse, elimination of the Link-Up program except for certain recipients on Tribal Lands, and launch of as a pilot program for subsidizing broadband services low-income consumers.

These are important reforms. Lifeline is directed toward individual low-income consumers, as opposed to universal service fund (USF) subsidies made to carriers. As we have stressed in FSF public comments to the FCC and in prior blog posts, programs like Lifeline should serve as the model for universal service policy. The FCC should eventually sunset all subsidies to carriers. It should strive to make a targeted and transparent approach generally embodied in Lifeline the exclusive mechanism for all future universal service subsidies.

However, it would be remiss not to mention that the FCC wrongly grounds part of the legal basis for its Lifeline reforms. In paragraphs 331 and 332 of its order, the FCC invokes Section 706 as a source of regulatory authority.

But as FSF's public comments to the FCC in its latest Section 706 Inquiry explain, that section is a directive that the agency exercise regulatory forbearance and other means to accelerate deployment "by reducing barriers to infrastructure investment" – operative term being "reducing" – and not an independent grant of regulating authority. In prior rulemakings the FCC has sought to re-interpreted Section 706 as a new source of regulatory power. And the Lifeline reform order provides the latest installment of the FCC's revisionist approach.

Here credit is due to Commissioner Robert McDowell. While voting to approve the Lifeline reform order he continued his principled dissent from the FCC's twisted reading of Section 706. As Commissioner McDowell noted:

Providing a subsidy to consumers for broadband access does not constitute infrastructure investment nor does it promote competition. I disagree with the Order’s line of reasoning that providing a government subsidy to individuals somehow translates into removing infrastructure barriers because it could free up revenue to be used for buildout.

Given the FCC's persistence in re-interpreting Section 706 to mean a power to regulate broadband, it appears that only a future court ruling will set things straight.

No Out-of-Bounds Outage Requirements

It looks like the FCC pulled back from some of the proposals for reporting outages by Internet providers. In a December 2011 post, "Stopping Regulatory Encroachment on Broadband,"I was critical of various FCC efforts -- including the proposed outage rules for IP VoIP services -- which would have the effect of extending legacy analog-era regulations to Internet providers.

It appears that the Commission's recent action is limited to fairly reasonable reporting requirements, and, for this, it deserves credit.

There are times aplenty when the FCC deserves criticism for regulatory overreaching, so when it commits acts of regulatory reasonableness, I have no hesitancy in offering kudos.

Spectrum Policy - Who's Micro-Managing Who?

The current debate concerning the spectrum auction provisions in the House bill that would restrict the FCC's authority to limit auction participation and to impose extraneous conditions might seem confusing. Confusing, that is, absent some appreciation for the proper roles of Congress and the FCC, along with some appreciation of the FCC's problematic track record of imposing conditions for the sake of attempting to achieve some predetermined auction result.

Here's an example of the way that the discussion can become confused, especially with regard to misguided claims regarding who's micro-managing who. In the February 8 Communications Daily [subscription required], Steve Berry, President of the Rural Cellular Association, arguing against the House bill restrictions, said that Congress does not need "to micro-manage a market which is, to say the least, dynamic and changes as quickly as the technology changes."

Mr. Berry, whom I respect, is only half-right – the half of his statement that acknowledges the wireless market is dynamic and changes quickly as technology changes is surely correct. But the half that suggests Congress would be micro-managing the market by restricting the FCC's authority to limit auction participation and to encumber the auction with extraneous conditions surely is wrong.

As I said in a January 17 blog, "Implementing Spectrum Incentive Auctions," it is not micro-managing for Congress to make certain high-level policy decisions concerning the auctions. More specifically, with regard to the restrictions in the House bill, I said:

"It is one thing to say that Congress should not 'micromanage' FCC auction design, or 'inappropriately' restrict the FCC's flexibility. But it is another thing entirely to say that it is improper for Congress to make certain high-level policy decisions about the conduct of the auctions.

It is most certainly within Congress's prerogative, and, indeed, perhaps even within its responsibility, to make such high-level policy decisions in authorizing the incentive auctions. While Mr. Genachowski suggests that Congress should delegate absolute discretion to the FCC with respect to conduct of the auctions, after all, it is Congress, not the FCC, which ultimately is accountable to the people.

[S]urely matters such as preventing the FCC from imposing new net neutrality restrictions or from restricting eligibility to participate in the auction to certain bidders - the very matters Mr. Genachowski wants to reserve to the FCC - fall into the category of high-level policy decisions that are appropriate for Congress to make."

So, to be clear, what the House bill proposes is not to micro-manage the FCC auctions. To the contrary, it proposes to prohibit the FCC itself from micro-managing the auction process by encumbering it to the likely detriment of consumers and taxpayers. This is a very important distinction.

There are good reasons why Congress, in the exercise of its policymaking function, might want to prevent such FCC micro-management. For example, Congress likely is aware that the FCC's previous exercises in micro-managing auctions by way of favoring certain entities or excluding others did not turn out well. The PCS spectrum auction intended to favor certain "designated entities," such as the ill-fated NextWave. This resulted in valuable spectrum going unused for many years as the courts sorted out the FCC's mess. And the FCC's more recent experience with trying to micro-manage the 700 MHz "C" and "D" spectrum blocks resulted, on the one hand, in a loss of billions of dollars in foregone revenue to the U.S Treasury (that is, to U.S. taxpayers) and, on the other hand, in an ineffective plan to utilize spectrum for public safety purposes.

Another good reason for Congress wanting to prevent FCC micro-management is the fact that, as Mr. Berry acknowledges, the wireless market is, "to say the least, dynamic and changes as quickly as the technology changes." Not only is the wireless marketplace fast-changing, as Robert Hahn and Peter Passell point out in a recent post, but it is "an amazing place" that has delivered immense consumer benefits. Like many others, they point out that "charges for both voice and data use have been falling even as reliability and geographic coverage have been improving."

In recent actions, the FCC has indicated its disposition to constrain or somehow limit additional spectrum acquisition by AT&T and Verizon, while favoring spectrum acquisition by others. For example, the ad hoc merger condition imposed by the FCC in the Harbinger/SkyTerra deal restricting transfer of spectrum to AT&T and Verizon and the agency's handling of the proposed AT&T-T-Mobile merger are to this effect. And the general tenor of the two most recent wireless competition reports, refusing to find the wireless marketplace competitive, also is to the same effect. As Messrs. Hahn and Passell rightly suggest: "The risk here is that freezing the industry leaders in place while giving competitors indirect subsidies (in the form of less-than-competitive prices for spectrum) would slow innovation."

Given this risk, and the FCC's pro-regulatory disposition as evidenced by its recent actions, it is entirely appropriate, as I wrote in my January 17 piece, for Congress to establish broad policy restricting the FCC's authority to limit auction participation or otherwise encumber auctions by imposing extraneous conditions. If you wish, you might call this policy-setting "macro-managing" the auctions. But it is not micro-managing them.

Properly understood, Congress would be constraining the FCC from exercising its unbounded discretion under the indeterminate "public interest" standard to try to micro-manage the auction rules, or, for that matter, the license transfer process, on the theory that it is somehow creating "more" competition. This manipulative approach, as the FCC has yet to learn but should have, rarely works to the benefit of consumers in markets as dynamic and already workably competitive as the current wireless marketplace.

In such markets, the FCC shouldn't be allowed to try to manage competition by micro-managing the regulatory process.        

    

FCC Should Remove Outdated Section 652 Restrictions on Cable Operators and CLECs

On January 31, the FCC approved Time Warner Cable's merger with Insight Communications. The FCC concluded that economy of scale and other efficiencies likely resulting from the deal would be in the public interest.

Insight provides competitive telecommunications service in addition to cable video services. Section 652 prohibits mergers involving competitive local exchange carrier (CLECs) absent consent of local franchising authorities (LFAs) such as city or county governments, at least in certain circumstances. But uncertainty exists over whether Section 652 applies specifically to cable operator/CLEC mergers. In the case of Time Warner/Insight, only two LFAs were at issue. And the FCC ultimately deemed Section 652's LFA-approval provision waived.

The FCC's waiver decision in Time Warner/Insight makes sense, as far as it goes. But when it comes to Section 652, the FCC should go even further. As I explained in an FSF Perspectives paper from August, the "Section 652 Cross-Ownership Ban Shouldn't Apply to Cable Operators and CLECs." The FCC now has before it petitions seeking declaratory or forbearance rulings on this point.

There are good reasons for concluding that Section 652 was never meant to apply to cable operator/CLEC mergers. In my Perspectives paper I also explain why there are no good reasons for giving LFAs a veto on such deals. (The 2010 Comcast/CIMCO merger, for instance, involved some 274 LFAs.) As my paper concludes:

If Chairman Julius Genachowski is serious about regulatory reform and directing the FCC's resources to "identifying outmoded or counterproductive rules," the Commission should address Section 652 without delay. One way or the other – through a declaratory ruling or regulatory forbearance – the FCC should make clear that Section 652's unnecessary regulatory restrictions do not apply to mergers between cable operators and CLECs.

WSJ's Crovitz on Wireless and Spectrum Auctions

For a succinct overview of what's at stake in the current debate over federal spectrum policy for the future of wireless innovation and economic vitality, look no further than L. Gordon Crovitz's Wall Street Journal column for today on "Spectrum Dinosaurs at the FCC."

With wireless broadband data demands rising and wireless carriers transitioning to 4G networks, a coming "spectrum crunch" stands in the way. Congress is closer to approving voluntary incentive auctions to be conducted by the FCC that would free up badly needed spectrum. But as Crovitz explains, "[t]he question now is whether the FCC will have an open auction, a rigged auction, or miss this window to have any auction."

FSF President Randolph May discussed this same issue in his January blog post, "Implementing Spectrum Auctions." Crovitz's column now makes the case for an open, market-driven and consumer-welfare oriented spectrum auction. Read it from start to finish.

Saying NO to Maryland's New Tech Tax

Remember Maryland's ill-fated computer services tax? State officials wanted to cover the state's budget deficit by tapping a new revenue source. The tax was unpopular and never took effect.

But the idea of taxing innovation and economic efficiency has now been brought back to life in the Maryland legislature. The newest tech tax targets? Online remote sales and digital downloads.

Back in 2007, the Maryland legislature stuck computer services with a 6% sales tax rate. The tax was quickly rammed through the legislature in a special session, without public debate, and signed into law by Governor Martin O'Malley. This triggered an immediate backlash from businesses and everyday citizens. Public officials who supported the computer services tax backpedaled and soon caved. It was repealed just a handful of months later.

Unfortunately, the Governor and some in the Maryland legislature seem to have forgotten the lesson. This month bills containing Governor O'Malley's proposed budget were introduced in the Maryland Senate and House (SB 152 and HB 87). If enacted, the proposed budget would extend the 6% sales tax rate to downloaded "digital products" of several stripes, such as music, videos, books, ringtones, and more. It would also impose sales tax collection obligations on remote (that is, out-of-state) online retailers that have website ad commission sales arrangements with Maryland residents. This means that online retailers with no physical presence in Maryland would charge the 6% sales tax rate on purchased goods and remit the money collected to Maryland tax officials.The lesson of the computer services tax is that policymakers shouldn't harm businesses and consumers with tax burdens on hi-tech services that are crucial to optimizing beneficial solutions and cost efficiencies. By enabling businesses and consumers to order goods from remote retailers through the Web or to download products directly through the Internet, broadband networks offer the benefits of convenience and increased speed. Such technology also reduces delivery and transaction costs. This makes digital e-commerce platforms economic force multipliers.

These tech tax provisions in the proposed budget will, of course, place direct and indirect burdens on all those using Internet-related technologies. But there are some particularly problematic aspects to the current budget proposal's targeting of e-commerce.

For starters, language included in the current budget proposal is overbroad. Definitions and provisions relating to "digital products" appear to subject to taxation, not just digital products downloaded in business-to-consumer transactions but also digital products downloaded in business-to-business transactions. This would create multiple taxation problems that tax laws typically protect against. Here, the result of compounding taxable events would be increased costs to businesses for inputs. And those costs surely will be passed on to consumers in the form of higher prices for outputs.

As a matter of tax policy, the budget proposal's treatment of remote online sales is counterproductive. It would likely generate little revenue, and it could cause Maryland residents to lose business.

The budget proposal would impose sales tax collection obligations on remote online retailers that have website ad commission sales arrangements with Maryland residents.

More specifically, it would attach tax collection obligations to remote online retailers that have web advertising affiliate agreements with in-state residents. Under such agreements, online affiliates typically place ad banners on their websites for goods sold by retailers like Amazon and Overstock.com. The affiliates receive a small commission when buyers click on the ads and purchase such goods.

But if this provision regarding online remote sales is adopted by the Maryland legislature and signed by the Governor, it would likely backfire. Significant numbers of Maryland residents with ad banners for remote retailers on their websites would find their ad affiliate agreements cancelled. As a study released by the Maryland Comptroller in November states, "[r]eportedly over 200 companies including Overstock.com and Backcountry.com have terminated their affiliates in one or more states that have enacted affiliate-nexus laws." And so the state would lose its trigger for imposing sales tax collection obligations on online remote sellers. (For more detail, see my FSF Perspectives paper from November, "Taxing Ad Affiliate Internet Sales Would Be Maryland's Mistake.")

For that matter, imposing tax collection obligations on out-of-state retailers likely violates the U.S. Constitution’s interstate Commerce Clause. Current U.S. Supreme Court jurisprudence recognizes Congress as the authority to address interstate e-commerce taxation matters.

Even if these glaring defects of the Governor's proposed budget were to be corrected, there are still good prudential reasons for Maryland to think twice before imposing sales taxes on digital downloads and on purchases from remote online retailers. Consider, for instance, the adverse effects of such taxes on Maryland's business climate. The just-released Tax Foundation's 2012 State Business Tax Climate Index once again places Maryland near the bottom compared to other states with respect to its business climate. Maryland (#42) must avoid doing further damage to its competitiveness vis-à-vis its neighboring states, such as Virginia (#26), Delaware (#12), and Pennsylvania (#19). According to the Comptroller's study, none of those three neighboring states currently impose taxes on digital goods. And both Virginia and Delaware already have lower general sales tax rates than Maryland.

Characteristics of digital age technologies only heighten the need for Maryland to make itself a competitive place for businesses to start-up or relocate to. Such technologies are highly portable. Therefore, it is not difficult of purveyors of digital goods to relocate to states without growth-inhibiting taxes and regulations.

The Governor and the Maryland legislature shouldn't repeat the sorry history of the computer services tax. Making up for budget deficits by taxing innovation and economic efficiency doesn't make sense. Putting a priority on fiscal responsibility and cutting wasteful spending does.