Tuesday, December 17, 2013

Understanding the Un-Free Market for Retrans Consent Is the First Step for Reforming It

In a truly free marketplace, private parties have the liberty to pursue commercial deals with whomever they choose. By mutual consent, private parties operating in a free market are at likewise at liberty to bind themselves to negotiated terms and conditions. The parties must abide by the terms and conditions they’ve agreed to. And an impartial authority enforces the bargained-for expectation of the parties in cases where one side fails to perform as agreed.

Unfortunately, video programming services remain stuck under a decades-old legacy regulatory apparatus that in certain critical respects marks an unfree market. The retransmission consent and must-carry regulatory regime established by Congress and enforced by the FCC is a regrettable case in point.
For over 20 years now the retrans consent/must carry regime has subjected the market for video programming to forced access mandates and to restrictions on private bargaining. Under "must-carry" rules, video broadcasters are granted special rights against multichannel video programming distributors (MVPDs), such as cable and direct broadcast satellite (DBS) operators. Those rules allow broadcasters to compel carriage of their program content by an MVPD on a basic tier channel.
On the flip side, TV broadcasters can chose to forego their must-carry rights and instead require that MVPDs negotiate directly with them for permission to retransmit their video programming. But retrans consent regulations grant protections to broadcast networks and local stations by limiting the ability of cable operators to choose what broadcasters to bargain with and what programming to bargain for. In particular, network non-duplication rules block MVPDs from importing network programming from another affiliate of the same broadcast network as a designated local TV station, even if the local TV station is not carried by the MVPD. And syndicated exclusivity rules block MVPDs from carrying syndicated programming broadcast by out-of-market TV stations when the same programs are broadcast by local TV stations.
FSF Board of Academic Advisors member Bruce Owen recounted the history of political favoritism and protectionism behind retrans consent and must carry in his Perspectives from FSF Scholars paper, "The FCC and the Unfree Market for TV Program Rights." And in a Perspectives paper titled "Broadcast Retransmission Negotiations and Free Markets," FSF President Randolph May concluded the retrans consent regime "creates artificial constraints that make the negotiations anything but a free market situation" and has "the effect of conferring certain advantages that may work to the negotiating advantage of broadcasters and against the MVPDs."   
Now in a December 12 blog post at RedState, CEI's Fred Campbell took aim at the American Television Alliance's (ATVA) 2010 petition requesting that the FCC adopt certain retrans consent negotiation and dispute resolution rules. In so doing, he likened ATVA's efforts to obtain such retrans consent regulations with the efforts of pro-regulatory advocates to impose network neutrality regulations.
Fred Campbell is a former FCC Wireless Bureau Chief, a skilled analyst, and, in general, a free marketer. We at FSF are in considerable agreement with him on many communications policy issues and respect his work. But I believe a false equivalency has been made in his blog post between rules that modify an existing regulatory regime for one type of services and rules that subject a previously free market to new regulatory controls. 
Even if the FCC never acts on ATVA's petition, video programming negotiations between TV broadcasters and MVPDs are already un-free in significant respects. This is due to the 20 year-old restrans consent regulations, discussed above, that restrict who MVPDs can negotiate with. By contrast, prior to the FCC's Open Internet Order, broadband Internet access providers were free, if they pleased, to negotiate with content or "edge" providers regarding data transmission. The FCC's net neutrality regulations now restrict – or at least disfavor – certain kinds of two-sided pricing arrangements that may be consumer welfare-enhancing.
Surely there may be costs associated with all of the various proposals contained in ATVA's petition, just as there may be benefits associated with them. I leave the merits of ATVA's various proposals to others. The real focus should be on the more fundamental task of establishing a truly free market context for retrans consent negotiations, and for video services generally. The ultimate goal should be to eliminate regulatory intrusion in this space – and to thereby eliminate occasions for debate over whether this or that particular modification to the old regulations will tip the scales in favor of one class of competitors over another.
One promising vehicle for comprehensive free market reform is H.R. 3720, the Next Generation Television Marketplace Act. Just introduced again by Congressman Steve Scalise, the bill would finally eliminate outdated legacy video regulations that rest on an early 1990s snapshot picture of the video market. Among other things, the Next Generation Television Marketplace Act would repeal retrans consent regulations and allow negotiations for carriage of TV broadcast stations to take place in a deregulated and truly free market context.

Perhaps Fred Campbell may agree with me that this would be a good thing and that Rep. Scalise's "NextGenTV" bill represents the proper direction for reform.

Special Access: A Special FCC Debacle in the Making

Two developments last week caused me (regretfully) to refocus on the Federal Communications Commission's ill-begotten special access proceeding. I say "regretfully" because it is one of those never-ending, backward-looking FCC proceedings that make you cringe. But like Ol' Man River, the proceeding just keeps rolling along.

It has been more or less a decade, depending on how you count, since the FCC embarked on a quest to determine whether what the FCC calls "special access" services are priced unreasonably (read: "too high" to the FCC's mind) by what are still called the "incumbent" telephone companies, even in today's competitive telecom environment.

Back during the years of the Clinton Administration's FCC the agency had relaxed its regulation of special access rates after finding the services were subject to competition in certain geographic areas. The FCC's current proceeding is all about whether to re-regulate rates.

Trust me: The years-long quest upon which the FCC has been embarked to determine whether special access rates are "reasonable" makes Don Quixote's quest look like child's play.

And trust me on this too: The special access proceeding is a special debacle in the making – unless the proceeding gets shut down. In a blog published in June 2012 called "Special Pleading for Special Access Is Especially Counter-Productive," I said: "There are other candidates, but if one is looking for an indictment of what is wrong with the FCC's approach to regulation, there is no need to look further than the agency's handling of 'special access' services." Still true today, perhaps more so.

For anyone reading this not steeped in FCC regulatory lingo, you might be wondering what the heck is "special access," anyway. Here's the FCC's official definition:

"Special access services encompass all services that do not use local switches; these include services that employ dedicated facilities that run directly between the end user and an interexchange carrier’s (IXC) point of presence, where an IXC connects its network with the local exchange carrier’s (LEC) network, or between two discrete end user locations."

Translation: Special access services are dedicated circuits not used by ordinary residential consumers, but rather by businesses and carriers other than the telephone companies offering the services. The majority are copper-based TDM circuits with a T-1 (1.5 Mbps) capacity, but they also include TDM T-3 (45 Mbps) capacities as well.

Now back to last week's two developments. The National Cable & Telecommunications Association (NCTA) filed an Application for Review asking the FCC to curtail substantially the proceeding's currently-applicable data collection requirements. NCTA says that, in formulating the data collection mandates, the FCC's staff has "ignored critical concerns regarding the security of network maps and detailed customer proprietary network information (CPNI)." It's hard to believe, but the FCC's data collection mandates require every provider of special access or special access-comparable services to give the Commission all information concerning every circuit in the country. This includes every building location served by every provider.

Here is what NCTA says about the mandate in its application:

"The data collection punishes the very companies that are investing private capital to finally bring widespread competition to the special access marketplace. Cable operators are making significant investments to provide commercial customers with services that are more robust and less expensive than the services offered by incumbent providers, a result that the Commission has long encouraged through its limited regulation of competitive providers. Yet these same companies, which have never been subject to any recordkeeping or reporting obligations with respect to their competitive special access services, are now expected to devote thousands of hours and tens of millions of dollars to gathering virtually every scrap of information about the commercial services they provide (or could provide), the networks they operate, and the customers they serve (including detailed CPNI regarding every business in America that purchases dedicated services)." [My italics.]

There is more along these lines in the NCTA pleading, but the import of NCTA's plea should be clear. First, the prospects for the FCC ever gathering all, or even most, of the requested data are close to nil. It is simply unrealistic to think that all special access or special access-equivalent service providers are going to be able to provide information concerning every customer they serve in every location in America, even if they wanted to – and, let's be honest, they don't want to. They will resist, in ways subtle and not so subtle, disclosing what NCTA, rightly, calls competitively "sensitive information."
This data collection and analysis effort, if it goes forward, almost certainly will end up a huge mess. And, as NCTA correctly points out, even assuming for the sake of argument the FCC "possibly could complete" its data collection and analysis in 2015, "such analysis will be out of date immediately upon its release because the data the Commission is collecting is from 2010 and 2012."

Second, as NCTA's pleading makes clear, cable companies are investing significant amounts of private capital to compete in the special access marketplace, investments they claim will bring widespread competition to this market segment. They should be commended for these investments, and, indeed, the cable operators are by no means alone. All of the other service providers that, along with NCTA, have also protested the breadth of the FCC's data collection requirements are, by self-admission, competitors as well. These other competitors include, for example, established companies such as Level 3, XO, and Cogent, and fiber providers. In addition, Sprint conducted an RFP for backhaul services and received responses from more than 20 different vendors.

Third, and this is a point that the Commission often fails to appreciate: Assuming for the sake of argument the Commission would prefer for the special access market to be more competitive than the agency assumes it is, and assuming, again for the sake of argument, that the agency somehow could complete its data collection quest on a timely basis and conclude the incumbents' special access rates should be reduced by Commission fiat, the effect of this mandated rate reduction actually would be to deter the development of further facilities-based competition – competition that, in any event, already is progressing. This is because, by forcing the incumbents' rates down, it is more difficult for other competitors to compete. If the cable operators and other facilities-based providers conclude the FCC will be forcing down incumbents' rates, it is less likely these competitors will continue, in NCTA's words, "making significant investments to provide commercial customers with services that are more robust and less expensive than the services offered by the incumbent providers."

The reality is this: It is no doubt true that in some locations there is more competition than in others. Certainly there are many particular buildings across the country that, presently, are served by only one provider. But surely this is largely irrelevant unless the FCC proposes to regulate rates on a building-by-building basis. The agency's quest to gather information for all building locations in the country is a fool's errand. What is important is the unmistakable, long-term trend towards more competition and more choices for consumers in most locations – a trend enabled and furthered by the deployment of lower-cost, more efficient digital technologies.

Now, it is the deployment of newer, more efficient IP technologies that brings me to the second of last week's developments. The Commission's staff suspended and set for investigation AT&T special access service tariff filings proposing to eliminate for any new customers or existing customers placing new orders certain discount plans with terms of sixty months or greater. AT&T said the purpose of eliminating such discounts for far-out years (i.e., 2020) is to prepare for the transition to an all-IP network. Recall that the incumbents' special access services are, for the most part, legacy copper-based circuits.

The FCC's action was a mistake, and it leaves one wondering whether the agency has any appreciation at all of the way its actions can adversely affect the transition to all IP networks that enable less costly, more efficient services. After all, here the tariff revisions simply proposed eliminating discounts for new customers and new orders. No one contends – I don't think even the FCC contends this – that AT&T or any other carrier could be ordered, in the first place, to offer specific long-term discount plans.

Without saying more about the Commission's tariff suspension action now, I simply want to commend to you two pieces that contain further analysis and commentary: Scott Cleland's blog, "Perspective on the FCC's Special Access Delay of Its IP Transition," and Fred Campbell's blog, "FCC Tariff Decision Is Not Consistent with the IP Transition, the National Broadband Plan, or the Law."
I'll conclude by repeating yet again what I said in my June 2012 "Special Pleading for Special Access" blog: "There are other candidates, but if one is looking for an indictment of what is wrong with the FCC's approach to regulation, there is no need to look further than the agency's handling of 'special access' services."
The Commission needs to reorient its pro-regulatory mindset in a meaningful way. As I have often urged, and as I did so again recently in an ex parte filing regarding the IP Transition, in today's rapidly changing digital environment, the agency's "default, or presumptive, position should be that, absent clear and convincing evidence to the contrary, legacy economic regulation should not be applied."

Friday, December 13, 2013

Another Message for Susan: Promoting Policies Premised on a Hypothesized Market Will Harm Consumers and Hinder Broadband Progress

On November 22, Susan Crawford participated in a teleconference in which she discussed marketplace competition and her book, “Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age.” Professor Crawford asserted that the U.S. market for broadband services is dominated by cable TV companies. She stated that consumers only have a choice of about 1.5 competitors, and that competition should be measured based on the market for the choice-limiting “bundle” of video and data services. When asked about statistics that seem to prove that competition is healthy and increasing, Professor Crawford stated that companies like AT&T are good at “shaping the numbers to make it appear like competition is right around the corner.”

Today, many statistics demonstrate that the broadband market is effectively competitive. Also, recent technological innovations and trends in consumer habits indicate that “the bundle” is not the only market relevant to analyzing the state of broadband competition. Broadband services are currently offered by many competitors that include cable, telephone, and satellite companies alike. In addition to a variety of service providers, consumers can also choose from a range of subscription options and modes of access to content. Although some obstacles to broadband innovation and investment may remain, the U.S. offers broadband access and a choice of providers to most consumers and leads the world in many measures that are indicative of broadband leadership.

Despite its curious failure to determine that the broadband market is effectively competitive, in the FCC’s most recent 706 Report, the Commission found that the broadband “market has responded” to consumer demand for increasingly fast Internet services. The report notes that “recent trends show [broadband] providers offering much higher speeds” and increasing data limits for customers. Mobile broadband providers have expanded their coverage, and are “deploying faster, and more spectrally-efficient mobile network technologies.” Yet there are several remaining barriers to infrastructure investment including costs and delays in building out networks, broadband service quality, lack of affordable broadband Internet access services, lack of access to computers and other broadband-capable equipment, and a lack of relevance of broadband for some consumers.

Although there may be some remaining obstacles to broadband deployment and adoption, the communications and information services marketplace today offers many consumers access to high-speed broadband services at affordable costs. Additionally, consumers may subscribe to broadband not only through their local cable providers, but also through phone, satellite, or Internet providers.

In her book Captive Audience, Professor Crawford asserts that Comcast possesses monopoly power with respect both to the provision of broadband services and the provision of video programming. In the recent teleconference, Professor Crawford seemed to argue that cable companies, particularly Comcast, dominate the broadband market because they have a price advantage in obtaining video programming for “the bundle.” However, companies other than cable providers are quickly gaining traction in the video marketplace. For example, companies like AT&T and Verizon now offer video services in addition to phone service and Internet service. According to Professor Crawford, being able to compete in the video market enhances the ability of companies to compete with cable companies in the broadband services marketplace. Following this line of reasoning, since companies like AT&T and Verizon are competing with cable providers in the video marketplace, they are also competing with cable providers in the broadband marketplace, which means that the broadband market is not monopolistic.

Looking more specifically at the video marketplace, the Wall Street Journal reported in November that Verizon and AT&T “are nearing the market share of cable operators in areas where they operate.” The top two cable providers, Comcast and Time Warner Cable, shed 435,000 video customers in the quarter, while AT&T and Verizon added 400,000. Verizon and AT&T are not the only companies competing with cable providers in the video marketplace.

The FCC’s 15th Annual Video Competition Report provided more evidence of a marketplace in which consumers have a choice of service providers and modes of access to content. By the end of last year, cable providers represented only 55% of the more than 100 million households that subscribe to all multichannel video programming distributors (“MVPDs”) overall. Meanwhile telephone and direct broadcast satellite MVPDs gained marketshare, claiming about 8.4% and 33.6% of all MVPD subscribers respectively. At the end of 2012, 98.6% of subscribers or 130.7 million households had access to at least three MVPDs, 35.3% or 46.8 million households had access to at least four, and some areas had access to as many as five MVPDs.

In addition to this variety of service providers, consumers today can also access content through a greater range of technologies and subscriber options than ever before; bundled service subscriptions are just one option available and may not provide a proper measure of the broadband services market overall. The FCC’s 15th Annual Video Competition Report cited an SNL Kagan study, which estimated that by the end of 2012, there would be 41.6 million Internet-connected television households, representing 35.4% of all television households. The FCC’s 15th Annual Report also noted the continued growth of non-cable MVPDs, rapid deployment and adoption of other new technologies that enable time and space shifting, and other developments that offer further options for consumer viewing.

Furthermore, consumers today can access video content through a wide range of devices, not just through set top boxes leased by cable providers as part of a “bundle.” Video access devices available today include IP connected MVPD provided set-top boxes, multi-room DVR and home networking solutions, cloud-based user interfaces, mobile applications, portable media players, gaming consoles, Internet-connected smart phones and table computers, and home monitoring systems that act as extensions of cable MVPD networks.

Today’s video marketplace offers consumers a choice of providers, subscription options, and devices. Subscribing to a “bundle” of video and data services offered by cable providers is not the only way to access video content anymore. The implications of this marketplace development are that cable providers likely do not have an advantage in the broadband market because other companies now offer video services, and can compete directly with cable providers for “bundle” customers.

Additionally, innovative modes of access to content and changing viewer habits also indicate that not all consumers prefer the cable “bundle” of video and data services: high-speed broadband access to over-the-top content may be enough for some consumers today. As the Wall Street Journal observed, the growth of telecom’s share of the video market is already having a significant impact on the cable industry, and offering high-speed broadband services will be the way to maintain subscribers given these changes. Thus, cable, telecom, and satellite providers must compete in the broadband marketplace to adjust to these developments, and the Wall Street Journal’s recent statistics indicate that such competition is currently underway.

Free State Foundation scholars have often analyzed the state of the communications and information services marketplace to respond to Professor Crawford’s arguments that the broadband market is not competitive. Recently, Free State Foundation President Randolph May posted a “Message for Susan” on our blog. That piece presented recent statistics, which demonstrate that the cable market is effectively competitive, and not monopolistic.  And by definition, Mr. May found that the same is true for the cable operators' competitors, AT&T, Verizon, and all the other broadband providers, including the various wireless and satellite operators. Mr. May urged Professor Crawford to stop branding Comcast and other cable operators "monopolies," and to stop calling for regulation of broadband companies as utilities like electric power companies, which by and large continue to retain dominant market power.

Citing an earlier response to Professor Crawford’s book entitled, Captive Audience’s Captive Thinking,” Mr. May argues: 

“Captive Audience" is flawed because Professor Crawford relies on an incorrect – indeed, a hypothesized – view of the communications and information services marketplace to construct the case for monopoly power. And then she offers anachronistic, legacy regulatory measures to remedy the supposed ills that exist in her hypothesized market.

In the recent teleconference, Professor Crawford again seemed to look at too narrow a market to draw conclusions about the overall state of competition. Rather than analyzing the state of the cable market based on “the bundle,” any assessment of the marketplace should be informed by the vast range of service providers, subscription plans, technologies, and content provision platforms available to consumers today. Recent statistics and articles, and the continued innovation and growth in the cable marketplace indicate that there is effective competition – not monopoly power in this market.

Of course there may be weak spots in an otherwise generally competitive market. As the FCC’s 706 Report pointed out, not all Americans currently have access to high speed broadband. However, the U.S. leads Europe in broadband progress, and offers broad choice to consumers in the cable and video marketplaces. Additionally, cable and telecommunications providers lead capital investment in the United States; AT&T, Verizon Communications, Comcast, Sprint Nextel, and Time Warner, all ranked in the top twenty of non-financial companies making capital investments in the U.S over the past year. The investments of these companies, among others, have allowed 99.5% of Americans to have access to broadband – via landline, wireless, or both – as of the end of 2012.  

These successes and other positive digital economy developments may be threatened if burdensome public utility-style regulations are implemented. As the Commission noted in its 706 Report, the broadband market in particular is responsive to consumer demands and is constantly evolving to improve weak performance areas. Critics should listen to Randolph May’s “message”: “It's no time to let captive thinking premised on a hypothesized market trump the competitive realities of the broadband marketplace. If such thinking ever were to lead to regulating broadband providers as public utilities, rest assured that consumers would be the real losers.”

Thursday, December 12, 2013

The Brouhaha Concerning the FCC's In-Flight Cellphone Proposal Is Misplaced

Today the FCC will be considering issuing a proposal that seeks comment on the Commission’s rules regarding the use of mobile wireless services onboard aircraft. In my view, the proposal to seek public comment should be adopted.

As reported in today's Washington Post, the announcement by the FCC's new Chairman a couple of weeks ago that the agency would issue the notice seeking comment on a rule change that might lead to in-flight cellphone use has drawn a lot of public attention, both positive and negative. This is not surprising given the strong feelings of consumers concerning the use of cellphones in flight. Some consumers reacted positively to the prospect of allowing in-flight calls and wireless services, while others criticized the idea.

Those who interpreted the FCC’s announcement as permitting passengers to make voice calls in-flight should relax. The so-called Notice of Proposed Rulemaking will not itself allow in-flight calls. The NPRM will merely seek public comment on proposed revisions to the Commission's rules to begin the process of considering whether any changes in the on-board wireless device use policies are warranted. The NPRM likely will also announce the Commission’s tentative decision to give airlines discretion to determine whether and how to provide and manage on-board wireless services, given the FCC's determination that “there is no technical reason” to prohibit on-board use of mobile devices.

If it is true, and I await public comment on the issue, that there is no technical reason from a spectrum management or spectrum interference point of view for the FCC to prohibit on-board wireless use, then, from my free market-oriented perspective, giving airlines discretion to determine policies governing in-flight wireless services is an appropriate way to approach the issue. The FCC has technical expertise regarding resolving concerns about spectrum interference issues, and it is appropriate for the agency to address those concerns utilizing its expertise. But, at the same time, absent any concerns that on-board wireless use poses spectrum interference issues that compromise airline safety, I don't see it as the FCC's role to dictate how the airlines run their operations with respect to passenger conduct.

If the FAA believes that the in-flight use of cellphones may compromise the safety of airline operations because cellphone use is likely to cause disruptions due to unruly passenger fights, the FAA may well have a role to play. Perhaps other federal agencies may have a role to play as well. And, most importantly, as I understand it, nothing in the FCC's proposed rule would require airlines to allow in-flight cellphone use. That decision would be left to the airlines themselves based on their own perceptions concerning the demands of consumers in the air travel marketplace.

When the FCC's new Chairman, Tom Wheeler, announced a few weeks ago that the FCC would be considering this change, he said: "I do not want the person in the seat next to me yapping…But we are not the Federal Courtesy Commission." I agree with Mr. Wheeler on both counts.

At the end of the day, I personally hope the airlines don't allow in-flight cellphone use, or at least certainly not in an unrestricted way that is likely to cause widespread passenger irritation. But, at the same time, as someone who has argued for a very long time that the FCC over-regulates and meddles in matters that ought to be left to the judgment of those businesses it regulates, sometimes to the point of counterproductive micro-management, I am with Mr. Wheeler on this one.

There will be time enough to be critical when the new Chairman proposes new regulatory measures that shouldn't be adopted. This is a deregulatory one that at least should be considered.

Wednesday, December 11, 2013

CTIA and Wireless Industry Leaders Support the Permanent Internet Tax Freedom Act

Today, CTIA and seven of the largest wireless companies in the U.S. expressed strong support for the Permanent Internet Tax Freedom Act. Collectively, CTIA and those major carriers serve more than 95 percent of America’s 325 million wireless subscribers. In a letter to Chairman Bob Goodlatte, who co-sponsored the bipartisan bill with Representative Anna Eshoo, the wireless industry leaders urged Congress to enact the Permanent Internet Tax Freedom Act before the current moratorium on Internet access taxes expires on November 1, 2014. The proposed legislation would make the current ban on Internet access taxes permanent.

As I discussed in my October 15 Perspectives, Internet access has remained essentially free from tax burdens due to the Internet Tax Freedom Act of 1998, which prohibited any state or political subdivision from imposing Internet access taxes. Since its enactment, the Act has contributed to nearly 15 years of economic growth and Internet investment, development, and adoption.

By enacting the Internet Tax Freedom Act of 1998, Congress recognized the importance of facilitating Internet access, and made it more affordable for consumers to go online. Failure to ban the imposition of taxes on Internet access will deter investment, slow innovation, and impose unnecessary costs on consumers.

The Permanent Internet Tax Freedom Act offers an opportunity for Congress to act in a bipartisan way on an important matter for the benefit of all Americans. It is noteworthy that the largest wireless carriers in the country signed the letter sent to Congressman Goodlatte by CTIA. Although the large carriers who signed the letter often disagree on other issues like spectrum management or auction rules, AT&T, Verizon, Sprint Nextel, T-Mobile, U.S. Cellular, Cellcom and Bluegrass Cellular expressed their united support for a permanent moratorium on Internet access taxes.

The enactment of a permanent ban on Internet access taxes provides one way to help ensure continued affordable access to this important resource, as well as to promote U.S. leadership in the global economy and the economic success of the digital marketplace.

Thursday, December 05, 2013

FSF President Randolph May Participates in the Administrative Conference of the United States Semi-Annual Plenary Session

Randolph May, President of the Free State Foundation and a Public Member of the Administrative Conference of the United States (ACUS), is participating in the ACUS 59th Plenary Session today and tomorrow, December 5-6, 2013, in Washington, DC.
ACUS is an independent federal agency tasked with promoting improvements in the efficiency, adequacy, and fairness of the procedures by which federal agencies conduct regulatory programs, administer grants and benefits, and perform related governmental functions. The ACUS membership is composed of federal officials and experts with diverse views and backgrounds from both the private sector and academia.

Wheeler FCC Off to a Good Start in Handling Transaction Reviews

Yesterday, the FCC's International Bureau approved Verizon's buyout of Vodafone's stake in Verizon Wireless. It did this applying the FCC's new foreign ownership rules that are intended to reduce processing delays and, at the same time, stimulate foreign investment in the U.S.

The Commission, under new Chairman Tom Wheeler's leadership, deserves credit for acting quickly on Verizon's petition seeking approval of the buyout. To be candid, there was no legitimate reason for the Commission not to act quickly. But many times in the past, even absent legitimate reasons for delay, there still have been undue delays – many beyond "undue" – in acting on transaction reviews.

If the FCC's relatively quick action is an indication that Chairman Wheeler intends to speed up transaction reviews, then I certainly applaud him for it because, as I have long argued, the pace of marketplace change often outruns the pace of FCC decisionmaking.

For almost fifteen years, in a pretty steady drumbeat, I have been critical of the FCC's abuse of its transaction review process, especially the way the agency often uses the review process to extract conditions from the applicants unrelated to the impacts, competitive or otherwise, created by the transaction. You can read the first Legal Times piece, "Any Volunteers?" here. In the instance, in addition to acting without undue delay, the Commission did not use the transaction review process as an opportunity to apply any such unwarranted conditions.

So, while the Verizon-Vodafone transaction is by no means a good test of how the agency will handle other, more controversial transactions, nevertheless I am happy to credit Tom Wheeler and his team for getting off on the right foot in the handling of this particular transaction.

Tuesday, November 26, 2013

Thanksgiving Day 2013

On at least a couple of previous Thanksgivings, I have quoted from William Bradford's account of the Pilgrims taking leave of the port of Delftshaven in 1620, crossing the Atlantic, and settling in Plymouth Colony. Bradford's written account of the Pilgrims’ journey ends this way:

“Besides, what could they see but a hideous and desolate wilderness, full of wilde beasts and wilde men? and what multitudes of them there were, they then knew not: for which way soever they turned their eyes (save upward to Heaven) they could have but little solace or content in respect of any outward object; for summer being ended, all things stand in appearance with a weatherbeaten face, and the whole country, full of woods and thickets, represented a wild and savage hew. If they looked behind them, there was a mighty ocean they had passed, and was now as a main bar or gulph to separate them from all the civil parts of the world.”

This may be the end of Bradford's account, and no doubt it paints a bleak picture of what he foresaw for the Pilgrims in the new land – in the "desolate wilderness." But I find it a good beginning for thinking about America on Thanksgiving, about the road we have traveled in the almost four centuries hence. And, most importantly, in thinking about the idea of America.

Certainly, as always, we continue to face challenges, and serious ones, as we strive to create the "more perfect Union" of which our Founders spoke in our Constitution's Preamble. But, with all our challenges, America remains a bountiful country, with much opportunity for advancement for those who wish to work hard and share in the bounty.

I understand there are deep divisions in the country concerning important matters of domestic and foreign policy. But, frankly, despite what you may be told by today's instant pundits, any real student of history knows that this is nothing new. There is a reason why in the earliest days of our Republic, Jefferson's Democratic-Republicans (yes, that is what they called themselves!) emerged to do battle with Adams' Federalists. There were important philosophical differences between the two parties concerning the proper purposes of government and the legitimate extent of government power. And it has been ever thus, and that is as it should be in a democratic republic.

On Thanksgiving and throughout the year, I am unabashed in proclaiming my belief in American exceptionalism. I am unabashed because I have deep faith that the idea of America as expressed in our Constitution and Declaration of Independence is exceptional. The Declaration proclaims, "all Men are created equal, and they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the Pursuit of Happiness." And the Constitution's Preamble states that it is ordained to "secure the Blessings of Liberty to ourselves and our Posterity."

Understanding how far America has come since William Bradford looked upon the "desolate wilderness" in 1620, it is difficult not to be optimistic about our country's "exceptional" future, and I am.

As I said above, I am not naïve about the serious challenges confronting the country today as in the past. And I full well understand that citizens have very different approaches to resolving the important issues of the day.

At the Free State Foundation, consistent with our understanding of the meaning of the Declaration and the Constitution, and the ideas they seek to embody, we advocate free market, limited government, and rule of law principles, with an emphasis on protecting individual freedom, free speech, and property rights as a sure means of promoting the nation's social and economic well-being. In other words, as a means of preserving liberty while increasing America's bounty for all.

We are grateful for many things on this Thanksgiving Day, but we are especially grateful for the freedom we still enjoy in America to vigorously advocate these principles and to espouse our perspectives and policy prescriptions. And, we are grateful that, if you differ, you still enjoy the same freedom.

So, looking backward over four centuries since the Pilgrims' landing, but mostly looking ahead to the future, here's wishing you a safe, happy Thanksgiving. As always, we're most grateful for your support of the Free State Foundation and our work, and for your friendship.

Monday, November 25, 2013

Condition-Free Auctions Promote Economic Efficiency and Successful Outcomes

On November 19, the Digital Policy Institute hosted a webinar entitled, “Spectrum Auctions and Band Plans.” Panelists included Free State Foundation President Randolph May, Association of Independent Television Stations President Preston Padden, and National Association of Broadcasters Executive Vice President of Strategic Planning Rick Kaplan. The panelists, each with decades of experience regarding communications law and policy, discussed the proper approach the Commission should take to ensure the success of the upcoming spectrum auctions. The resounding message was the importance of achieving a successful auction in order to meet the constantly growing demand for increased spectrum.
Free State Foundation President Randolph May advocated an unencumbered, condition-free auction to maximize the highest and best use of spectrum as the statute authorizing the Commission to conduct auctions dictates. Mr. May reminded the audience that experience shows that when the FCC begins to deviate from the principle of an unencumbered auction the results are “not always pretty.” He cited as examples the flawed PCS C block and 700 MHz auctions.
In the PCS auction, the FCC extended long-term credit to financially weak bidders, with the apparent intention of encouraging small businesses and rural bidders. This manipulation of the auction resulted in a decade of bankruptcy litigation, delayed the availability of spectrum, and cost consumers over $65 billion according to some estimates. In the 700 MHz C block auction, the FCC required the winner of the 22 MHz C license to provide non-discriminatory network access for all devices and applications. This vague “open access” mandate lacked detail on the freedom of a new licensee to set prices or innovate and disincentivized bidding. This condition-encumbered C block sold for 29% of the price as comparable or even less valuable blocks. Additionally, in auctioning the D block in the same 700 MHz auction, the FCC imposed significant conditions on the use of the spectrum and imposed eligibility rules on bidding. The results of this auction were also unsuccessful, since the D license failed to sell even for a reserve price that was one-third of the average obtained for other comparable licenses. As Tom Hazlett, Professor of Law & Economics at George Mason School of Law stated, “this is evidence that regulatory rules and spectrum allocation procedures continue to distort markets.”
Preston Padden seconded these points, and reminded the Commission of another hurdle to a successful auction: The Commission does not currently have in its possession the spectrum it is purporting to auction. In addition to structuring a condition-free auction to encourage efficient bidding, the Commission must also incentivize broadcasters to relinquish their spectrum. He stated, “absolutely the best course is to rely on the market forces of an open auction as Congress intended.”
Voicing a different perspective, Rick Kaplan cautioned against rushing into the incentive auction, and emphasized the importance of other auctions, which must be executed before the FCC pressures broadcasters to give up their spectrum. He pointed to interference problems in previous auctions and urged the FCC to take its time to formulate the right band plan. Finally, he asked for those broadcasters that do not donate their spectrum to be held harmless, and stated that freeing up spectrum is not the only thing that defines a successful auction: “Success is having a wireless broadband ecosystem that works together – that means no interference.”
Although it is certainly important to auction spectrum in ways that support a reliable, interference-free wireless network, it is also crucial that the incentive auction take place soon and achieve success. In order for the U.S. to continue to be a world leader in broadband and the communications and technology sector, the FCC must ensure that there is sufficient spectrum available and that it is used efficiently. A report released by Deloitte last year examined spectrum strategy issues that may threaten U.S. leadership in mobile broadband. The report found that “demand for mobile services has accelerated, fueled by a multitude of innovative devices and an explosion in applications. Demand growth is likely to intensify as mobile broadband uses appear in a widening array of business and government segments,” and “a successful TV broadcast spectrum auction should be a top priority as a highly visible step toward meeting the 2020 goal of freeing up 500 MHz of spectrum for mobile broadband.” In light of these facts, Randolph May stated in the recent webinar that the incentive auction “should happen sooner rather than later because wireless needs more spectrum. It’s a good thing in terms of adding to our economy and benefiting consumers. In order to keep up with the rest of the world and serve our own nation’s interest, having more mobile and more spectrum is a good thing.”
Many recent reports continue to emphasize the importance of conducting a condition-free auction to maximize revenue and to ensure the highest and best use of spectrum. I cited several of these in my September 25 Perspectives, “No Picking Favorites,” as did Free State Foundation Visiting Fellow Greg Vogt in his August 13 piece, “Achieving Unanimity.” There seems to be widespread agreement that imposing eligibility constraints on the incentive auction will threaten the success of the auction.
FSF President Randolph May summarized these key issues in the recent webinar:
We have to get it right. My hope would be that we have an opportunity, particularly with the newly reconstituted Commission, that this [incentive auction] be a top priority…. I do think there’s widespread agreement that if it can be done properly and consistent with rule of law principles it is possible to repurpose spectrum while also conducting an auction in which broadcasters aren’t coerced but participate voluntarily. I think its ultimately important, especially given the fact that the wireless market is competitive and that we don’t have a problem with concentration, that we don’t have an incentive to game the auction to reach preconceived results. The FCC should conduct an unconditioned auction.
Although panelists at the webinar at times reflected divergent perspectives of various stakeholders and observers in the communications sector, there was general agreement that the success of the incentive auction should be a top priority for newly appointed Chairman Wheeler and the Commission. Promoting the availability and reliability of spectrum will fuel the continued growth and development of the digital marketplace, respond to consumer demands, and help the U.S. maintain its mobile broadband leadership.

Friday, November 22, 2013

Liberty and Competition, Lincoln and Wheeler

This week, on November 19th, the nation celebrated the 150th anniversary of Lincoln's Gettysburg Address. Regular readers of this space know I am fond of quoting Lincoln. It would be difficult to improve upon the eloquence of the Gettysburg Address, and, to my mind, the speech bears re-reading more than just once a year on the anniversary of its original deliverance.

Considering Lincoln this week made me think of one of my favorite Lincoln quotes, and recalling that quote made me think of the FCC and its new chairman, Tom Wheeler. No, I am not comparing Tom Wheeler to Abraham Lincoln, so hold the tweets! But Wheeler is a certified Lincoln scholar (see his two books on his bio page), so he is likely familiar with the quote. And I hope he appreciates the point I wish to make.

On April 18, 1864, in his "Address at a Sanitary Fair" in Baltimore, Lincoln said this:

"The world has never had a good definition of the word liberty, and the American people, just now, are much in want of one. We all declare for liberty; but in using the same word we do not all mean the same thing."

If you are not familiar with what Lincoln said about the meaning of liberty that day, you may want to read the short Sanitary Fair address. But what got me thinking about Tom Wheeler – and, frankly, the rest of his FCC commissioner colleagues – is this: What if the word "competition" is substituted for "liberty."

In other words, like so: "We all declare for competition; but in using the same word we do not all mean the same thing."

Certainly, all of us involved with communications policymaking – including those in Congress and FCC commissioners – declare we are for "competition," that we are "pro-competitive." Indeed, in adopting the Telecommunications Act of 1996, Congress declared the statute's intent right up front "to promote competition and reduce regulation."

But what do we mean when we declare for competition? I know by using the same word we do not all mean the same thing.

In his "Opening Day at the FCC" blog, Chairman Wheeler said this:

"During my confirmation hearing I described myself as 'an unabashed supporter of competition because competitive markets produce better outcomes than regulated or uncompetitive markets.' Yet we all know that competition does not always flourish by itself; it must be supported and protected if its benefits are to be enjoyed. This agency is a pro-competition agency."

I certainly agree that competitive markets produce better outcomes than regulated or uncompetitive markets. And, in the abstract, or at the theoretical level, it is hard to argue against Mr. Wheeler's assertion that competition must be supported and protected, so I don't want to quibble.

What I want to do instead is to say a bit here about what "competition" means to me, and what I hope it means to Chairman Wheeler and his colleagues as they move forward in deciding real-world issues on the FCC's plate. Of course, the matter of what "competition" means in various contexts is an ongoing conversation. You can find more than seven years' worth of publications on the subject, with much elaboration, on the Free State Foundation website.

Promoting sustainable competition in the communications marketplace means, foremost, encouraging investment in facilities by service providers, regardless of the technology platform employed. When the Commission (or Congress) creates regulatory regimes that seek to promote competition by granting non-facilities-based providers access or sharing rights to the facilities of others, this is really a form of "managed competition," which most often fails to produce sustainable competition, while at the same time harming consumers. Such mandated access regimes depend, ultimately, on the Commission continuing to regulate the prices and other terms and conditions of access.

Once such a mandatory access, sharing, or unbundling regime is established, even with the notion that it is intended to be temporary, say, as a means to allow new entrants to gain a "leg up," it is very difficult, as a matter of political economy, for the regime to become anything other than permanent, or at least semi-permanent. The Commission almost always is cast at sea in trying to get the "promoting competition" regime just right – in the exact sweet spot, so to speak – amidst all the self-serving pleas for "fairness," "nondiscrimination," and "leveling the playing field."

Even assuming the Commission's best intentions, with the technological dynamism and competitive forces that largely roil today's communications marketplace, it is very difficult for the FCC to possess the foreknowledge and necessary information to ensure that its "leveling the playing field" efforts will actually promote competition rather than deter it. This is because – absent getting the regulated prices, terms, and conditions "just right" – these efforts to establish access or sharing regulations are likely to discourage further investment by those with facilities and also by those who otherwise would invest in new facilities but for the advantage they perceive they have gained through regulation.

While I don't want to discuss them now because I have done so many times before in this space and will do so, I'm sure, many times again, here are a few examples of such past Commission regulatory efforts to promote competition that are highly problematic from a consumer welfare perspective: the Unbundled Network Elements facilities-sharing regime; the Net Neutrality anti-discrimination regulations; the set-top box integration ban; the program access and program carriage video regulations that apply to cable broadband providers; the leased access provisions that apply to cable and satellite operators; and the order requiring Comcast to provide online video distributors with regulated access to Comcast's broadband facilities.

It is not a criticism of the commissioners' good intentions to say that the costs – and I mean not only the direct costs, but also the costs to consumer welfare through the loss of economic efficiency – of such regulatory efforts at "promoting competition" very frequently outweigh the benefits. It is rather a plea for the new Chairman and his fellow commissioners to exercise a high degree of regulatory modesty in today's dynamic telecom marketplace.

As the newly reconstituted Commission moves forward to tackle thorny issues, such as the IP transition and the incentive auction, the agency will be confronted with incessant pleas from various parties seeking "fairness" and a "level playing field" in the name of promoting competition. I have no doubts that the new Chairman and his fellow commissioners will all declare for "competition."

I hope that in using the same word they mean the same thing I do.