Wednesday, July 31, 2013

FSF Seminar Panelists Supply Insights Regarding New FCC Chairman

On July 30, the Senate Commerce, Science and Transportation Committee voted to approve the nomination of Tom Wheeler to be Chairman of the FCC. The nomination was the subject of a June 18 hearing, which came just a few days after the Free State Foundation's "If I Were the FCC Chairman" lunch seminar. Of course, Mr. Wheeler's name figured into the FSF seminar panelists' discussion of what they would do if they happened to be the new FCC Chairman.
The FSF seminar panelists offered some distinct yet insightful perspectives on understanding the dynamics of technological change, policy imperatives for the new FCC Chairman, and the characteristics that Mr. Wheeler might bring to the agency. Their views are worth considering as the nomination process proceeds to the full Senate.
On the seminar panel were Gail MacKinnon, Executive Vice President and Chief Government Relations Officer, Time Warner Cable; Craig Silliman, Senior Vice President for Public Policy & Government Affairs, Verizon Communications; and Gigi B. Sohn, President & CEO, Public Knowledge. Their exchange, taken from an edited transcript of the event, follows below.
FSF President Randolph May, moderator for the seminar panel, prefaced the ensuing discussion by pointing to his May 9 Washington Times op-ed:
MAY:  I wrote this piece called "A Historian for the FCC."  It basically looked at Tom Wheeler's avocation as a historian.  As you know, one of his books focused on the role the telegraph played in winning the Civil War.  And essentially I was making a point that I hope he would look at history and realize we're a long way from the telegraph and some other things…. So one of the questions I'm going to ask these panelists later, probably, would be to put on their historian's hat and, with that in mind, think about the way that they would frame their administration if they were the chairman.

A bit later on, the panel turned to the subject of the FCC Chairman nominee:
MAY:  I want the panelists briefly to describe what character traits they think a new chairman should have, what's important for success for the new chairman in terms of the way he operates the Commission and the character traits he brings to that.

[W]e know that Tom Wheeler's a historian.  That's something that's been an important part of his life.  Is there anything in terms of the way that you think he should, as a historian, think about the job and that you would share with us?

The seminar panelists' responses:
MACKINNON:  Being a historian is a real asset, because as one senior entertainment executive once said to me, "It's the history you don't know that will kill you."   Tom Wheeler's been around for a long time.  He is somebody who knows how business works and he's a very thoughtful, deliberative human being.  I don't know him, personally, but what I've been told is he's open-minded and collaborative.  Those are very essential characteristics for somebody who is coming over and presiding over the industry, looking at industry on a daily basis.

SILLIMAN:  It would be presumptuous for me to speculate on how people think about the job and how Tom Wheeler will do.  But the scope of history is an interesting question for our industry that has a couple of angles. 

One is that communications technologies throughout the scope of history have served an empowering, enabling role, for people to spread and disseminate ideas, to open up their horizons to people beyond their direct physical proximity.  That spread of ideas has unleashed a whole round of human innovation, freedom, and other empowerment.  It's tremendously exciting.
The second lesson would be people sitting around ten years before Gutenberg came up with the printing press, or ten years before the development of the telegraph. People could no more foresee the technological changes that would be wrought and the societal changes that would be wrought ten years hence than we can here today.
We often feel, and rightfully so, that we are at the cutting edge of technology.  And we are.  But we also have to remember that the cutting edge is constantly moving out ahead of us.  We are six years into the smartphone revolution.  15 to 18 years ago, if you were an early adopter and you had dial-up Internet and maybe an analog cell phone, the idea that we could foresee 10 years, 15 years out what may be coming would be the ultimate hubris.  I don't think we can foresee years out now.
I think that's tremendously exciting, because we are going to see huge breakthroughs in the areas of energy management, education, healthcare.  A lot more things are going to be enabled by these communications technologies.  But in the policy realm what I would take from the sweep of history is: don't ever assume that standing in the static point, where we are today, that we can see out over the horizon 5, 10 years in an environment that has been characterized by this pace of technological change, either from the straight technology perspective, or the larger societal benefits perspective. When you're looking at these issues, don't make the mistake of locking yourself into today's vision of today's technology.  Make sure you have a framework that will evolve at the same rate as technology.

SOHN:  The FCC chair has got to be a leader, and he has to have an agenda.  Within the first 30 days, he needs to get up there and say, "This is what I want to do and this is why."  I've even said this to Tom Wheeler….
He also needs to pick good people; people that really know the agency, not his best friends from college or the Supreme Court, or wherever else; people that care about this stuff and people that know how to run the agency.  As far as a historian is concerned, he needs to look at the history of broadcasting.  He needs to look at the history of cable and see the consolidation that's taken place.
Broadcasting was first proposed to be a common carrier service, believe it or not.  And Congress decided to do this public interest obligation thing, which hasn't worked out all that well.  Cable also started out not that vertically integrated in the 1984 Cable Act.  They were allowed to own the programming on their systems.  Both of those were huge policy mistakes.  And the chair needs to learn that the Internet cannot become the same thing.
The Internet is the most empowering technology we've ever seen.  But if it falls under the control of just a few hands or some really bad countries, it's not going to be that.  I started out 20-some-odd years ago trying to make broadcasters and cablecasters obey their public interest obligations.  Having completely totally failed at that, I look to the Internet as being the solution to the problem of top-down command-and-control media.  And it's got to stay that way.

For my part, I think it imperative the FCC Chairman actively takes a free market-oriented approach to communications policy. It's no secret that the communications industry is critical to our nation's prosperity. "One-sixth of the American economy can be directly linked to the industries the FCC regulates," according to Acting FCC Chairwoman Mignon Clyburn. And due to the ability of information technologies to offer new capabilities, enhance productivity, and increase efficiency, most of the remaining five-sixths of the economy can be indirectly linked to the communications industry. In light of the innovative and competitive conditions that now prevail concerning communications services, a market-based approach can better enable additional waves of creative and competitive breakthroughs than last-century's monopoly-era regulatory approach.
A free market-oriented approach to communications policy, in short form, includes the following: (1) recognition that today's rapidly-changing digital communications market has replaced the last-century, analog-era monopolistic assumptions upon which most of the FCC's regulatory apparatus is based; (2) seriousness in pursuing elimination of outdated regulations that can no longer be justified and that threaten to reduce or block further innovation and investment; (3) strong preference for technologically neutral policymaking that eschews silo treatment of different industry segments and recognizes the reality of intermodal competition between platforms; and (4) heavy presumption against new regulatory controls over dynamic products and services unless clear evidence of market failure and consumer harm can be demonstrated.  
With his broad background in communications policy as well as the history of technology, Mr. Wheeler has all the intellectual tools and experience necessary to pursue a free-market approach as FCC Chairman. Of course, effectively implementing such an approach – amidst disputes over how to design spectrum license auctions, appellate litigation over network neutrality regulations, the ongoing IP transition, and questions over the future of forbearance and legacy regulations – involves successfully addressing many practical challenges.
In any event, the viewpoints offered by the three panelists at FSF's "If I Were Chairman" seminar – all of whom are nationally prominent in the communications policy realm and known for their expertise regarding the FCC – were thought-provoking and stimulating. Worth keeping in mind as Mr. Wheeler's nomination moves toward a final vote by the Senate. 

Tuesday, July 30, 2013

Worthy Bill in Congress Would Prevent Double Taxation of Digital Goods

Legislation in Congress would create a common sense framework for state taxation of interstate sales of digital goods and services. It would thereby stave off taxation of the same transactions for digital goods and services by multiple states. Importantly, the bill would not impose any new taxes or mandate tax or no-tax decisions by individual states. For the sake of consumers and the future of the digital economy, let's hope this bill gains traction in Congress.
S. 1364 – the "Digital Goods and Services Tax Fairness Act" – would set sourcing rules for determining when states have jurisdiction to tax retailers or taxpaying consumers. Again, this would prohibit multiple states from imposing taxes on the same transaction.
The bill would also require states that decide to tax such transactions to clearly make that determination through legislation. Taxation of digital goods through state tax department interpretations would be impermissible.
Finally, S. 1364 would ban discriminatory state taxes on the sale or use of digital goods or services. That is, it would prohibit the sale or use of digital goods or services from being specially taxed or taxed at a rate higher than similar goods or services that are not provided electronically.
In my Perspectives from FSF Scholars essay, "Digital Downloads Should Be Protected From Discriminatory and Duplicate Taxes," I explained the merits of this type of legislation in a bit more detail. Similar legislation was introduced in the last Congress. It is encouraging that members of Congress are again taking up this matter.

Monday, July 29, 2013

Washington (DC) Should Follow Washington (State)

For well more than a decade now the jurisdictional line between interstate and intrastate communications has become increasingly blurred. As communications have moved from narrowband to broadband networks, and from analog to digital platforms, with transmissions circumnavigating the globe in little more than nanoseconds, at times it can become impractical, if not impossible, to determine whether a transmission is properly classified as an interstate or intrastate communication. In any event, implementing such jurisdictional separations can be costly. 

Accordingly, for many years I have expressed concerns regarding the ability of the states, through the exercise of their jurisdiction over intrastate communications, to impede the development of modern telecom networks through overzealous regulation. Because intrastate and interstate communications travel over the same networks, the FCC and the states share jurisdiction over the same physical plant. So an unnecessarily burdensome, unduly costly regulatory regime in one jurisdiction may affect the delivery of telecom services in the other by impacting incentives to invest in upgrading and building-out networks.

This is truer in today's increasingly "IP world" than ever before, as more and more traffic transitions from legacy analog telecom networks to Internet Protocol-based platforms, regardless of the specific technology employed.

Certainly there are a litany of state actions over the years that might be cited as cases in which the states' exercise of their jurisdictional claims have failed to take into account the changing telecom environment and technological advancements.

But, consistent with Louis Brandeis' observation that the states may serve as "a laboratory" for experimentation, there are other instances when states, by their example, have led the way. In some sense, especially in the last couple of years, this is happening in the communications arena where many states have adopted deregulatory policies. Indeed, some of the states are ahead of the FCC in adjusting their regulatory regimes to account for technological advances and today's competitive marketplace realities.

For instance, more than half the states have adopted legislation or otherwise acted to restrict state regulation of VoIP services. This is consistent with the recognition that there is no public interest reason to subject these IP services to legacy telecom regulation.

And on July 22, the Washington Utilities and Transportation Commission issued an Order remarkable for the clarity with which the agency explained its determination to deregulate legacy wireline services. The order addresses a petition for regulatory relief filed by Frontier Communications earlier this year. The state commission determined that:

Frontier faces strong competition for the majority of [its] services throughout most of that geographic area….[T]his docket affords the Commission the opportunity to acknowledge the realities of the 21st Century marketplace by reducing unnecessary regulation and bolstering the ability of Frontier and its competitors to provide effective competitive telecommunications services to the ultimate benefit of this state’s consumers. [Page 2] 
I commend the entire decision to you. But for those short on time, here are a few key excerpts that demonstrate the extent to which the Washington commission, historically not known for its deregulatory tendencies, is attuned to the changing communications marketplace.

Wireless, VoIP, and bundled service options to basic single-line service place competitive pressures on providers of such basic service. Even if Frontier were the only provider of single line basic service, should Frontier seek to raise its rates for such service customers could opt for one of these other service options – in fact, that is what has been happening. While we understand Staff and Public Counsel’s strong desire to define services narrowly to protect the interests of those consumers with the fewest competitive alternatives, we do not believe the legislature intended the Commission to adopt such a rigorously constricted approach in assessing competitive conditions. Indeed, the narrow market definition Staff and Public Counsel propose would undermine legislative intent by virtually ensuring that Frontier could never demonstrate the existence of effective competition for these services. [Page 19]

To the extent possible, consumers, not the Commission, should determine whether other providers’ services are viable alternatives to the incumbent telephone company’s services. The record evidence overwhelmingly demonstrates that most consumers consider wireless, VoIP, and CLEC services, individually and in bundles, to be alternatives to Frontier’s basic residential or small business services….We would be ignoring reality if we were to accept Staff and Public Counsel’s definition of the relevant market as limited to stand-alone, single landline residential and small business services provided at Frontier’s tariff rates. [Pages 19 - 20]

And, finally, in its Conclusion, the Washington commission summed up this way:

Our assessment of the merits of Frontier’s Petition for relief from traditional regulation is guided by the remarkable transformation in the telecommunications industry that continues to occur…. If alternative providers of telecommunications services exist and the Company no longer serves a significant captive customer base, we will substantially reduce historic regulation, particularly economic regulation, in favor of the disciplines of an effectively competitive marketplace. In the world as it exists today, our traditional role must devolve to one increasingly focused on preserving and promoting conditions for competition. [Page 26]
As I said, in years past the state commissions often have adopted regulatory postures that had the effect, whether intended or not, of deterring innovation and investment. Not so with regard to the states that recently have acted to preclude regulation of VoIP services. And not so with respect to last week's Washington UTC decision. 

And now for the moral of the story: The FCC commissioners and staff could benefit much from an open-minded reading of the Washington state commission decision. Put bluntly, the FCC has been too slow to provide regulatory relief in the face of what the Washington commission called "the remarkable transformation in the telecommunications industry that continues to occur." The FCC has been too slow to "substantially reduce historic regulation, particularly economic regulation, in favor of the disciplines of an effectively competitive marketplace."

Many examples of the FCC's reticence to "reduce historic regulation" could be given. Here I will simply point out that, in rejecting several forbearance requests for regulatory relief, the FCC has continued its failure to account properly for the obvious competitive impact of wireless and VoIP services. And, based on its actions thus far, it appears unlikely the agency will consider in a timely fashion the competitive impact of over-the-top Internet video services on traditional cable and satellite video services still shackled by outdated legacy regulations.

So, again, if anyone at the FCC needs a copy of the Washington state commission's decision for inspiration, please just click here

Thursday, July 25, 2013

FCC Report Reconfirms the Reality of the Video Market's Competitiveness

In the communications context, the word "disconnect" probably brings to mind what happens when a subscriber stops paying for their telephone or cable video service. Increasingly, however, the term has come to characterize the FCC's regulatory policy toward cable and video services.
On July 22, the FCC released its 15th Video Competition Report. Last year's Report confirmed what we already knew about the video market: namely, that it's innovative and competitive. The 15th Report reconfirms those conclusions. An updated swath of data compiled in the 15th Report points – yet again – to the proliferating video choices enjoyed by consumers.
But by bolstering the case for the video market's competitiveness, 15th Report data also magnifies the serious disconnect in the FCC's video policy. Much of the FCC's video regulations are based on 1990s analog-era monopolistic assumptions about cable "bottlenecks." Prior to the 15th Report it was already obvious that last-century rationales for extensive regulation had been rendered obsolete by innovation and competition in the video market. The latest data only restates the obvious: the disconnect – like a broken chain – between 1990s monopolistic assumptions and today's competitive video market conditions is growing.

 According to 2010 numbers contained in the 14th Report, 98.5% of all households – that is, 128.8 million households – had access to at least three multichannel video programming distributors (MVPDs). And 32.5% of households – 42.9 million – had access to at least four MVPDs. The 2011 numbers contained in the 15th Report show further improvements: 98.6% – 130.7 million households – had access to at least three MVPDs, and 35.3% – 46.8 million – had access to at least four.
Market share data can easily be overemphasized as an indicator of competitiveness, especially where markets are driven by rapid changes in technology, services, and consumer behavior. Yet, even in terms of market share, data cited in the 15th Report further further reinforces the video market's competitiveness. Between year-end 2010 and June 2012, "cable MVPDs lost market share, falling from 59.3 percent of all MVPD video subscribers at the end of 2010 to 57.4 percent at the end of 2011, and 55.7 percent at the end of June 2012." Meanwhile, direct broadcast satellite (DBS) market share increased from 33.1% in 2010, to an estimated 33.6% at the end of June 2012. And "telco" MVPD entrants served 6.9% of the market in 2010, increasing to 8.4% in 2011.
Also, the 14th Report called attention to the entry and growth of online video distributors (OVDs) as a potent source of value and competition. Data in the 15th Report further highlights the increasing popularity of OVD services with consumers:
SNL Kagan estimated that there were 26.6 million Internet-connected television households (i.e., accessed via an Internet-enabled game console, OVD set-top box, television set, or Blu-ray player), representing 22.8 percent of all television households, at the end of 2011, and estimated that by the end of 2012, the number would grow to 41.6 million, or 35.4 percent of television households.
Of course, traditional TV viewing far outweighs online video viewing. A cited study by Nielsen found that in the second quarter of 2012 Americans watched an average of nearly 32 hours per week of traditional TV and 2.5 hours of time-shifted TV, but watched approximately 4.5 hours per week of video using the Internet. Nonetheless, "SNL Kagan reports that the availability of large libraries of archival content and the availability of new content, coupled with the availability of broadband and an increasing number of Internet-connected devices, has enabled OVD substitution."
Further, the 14th Report acknowledged the ongoing replacement of analog systems with digital, rapid expansion of high-definition broadcasting and TV ownership, multi-casting, digital video recorder (DVR) options, video-on-demand functions, as well as TV-Everywhere and other mobility capabilities. The 15th Report reveals across-the-board increases in deployment, functionality, and adoption of such advanced video technologies. For instance, as of 2012, more than 74% of households have sets capable of receiving digital signals, including HD signals. Nearly 44% of households have DVRs. More than 5% of MVPD subscribers qualifying for TV-Everywhere access used it to view content in the month of September 2012. By year's end 2012, more than half the geographic footprints of the top eight cable operators had transitioned to all-digital video.
Of course, the 15th Report nowhere admits the effectively competitive state of the video market. While the statute doesn't expressly require any "effective competition" conclusion, such non-responsiveness to the evidence seems counterintuitive. Perhaps the FCC avoids any such conclusion out of fear it could be used in court to challenge any number of FCC legacy cable regulations.
Still, one can reach an "effective competition" conclusion through an admittedly abbreviated analysis supplied by the FCC itself. Consider today's nationwide market for video subscription services in light of the FCC's "competing provider test" for determining whether a local franchise area is effectively competitive. According to the test, effective competition exists if at least two unaffiliated MVPDs offer comparable video services to half of the area's households and the number of households subscribing to service other than the largest MVPD exceeds 15%.
Now recall that 98.6%, or 130.7 million households, had access to at least three MVPDs. Plus, 59.3% of households subscribe to cable, 33.6% subscribe to one of two DBS providers offering service nationwide, and 8.4% subscribe to a "telco" MVPD service. The nationwide MVPD market would pass the "competing provider test" for effective competition with flying colors. At the very least, it cuts cable bottleneck assumptions to pieces.
Ultimately, the underlying premises for video regulation need to be completely reexamined by Congress.  The legacy cable and satellite video regulatory apparatus needs to be dismantled. And First Amendment concerns with government regulation of video service providers' editorial and speech activities need to be respected. A market power framework that considers anticompetitive conduct and consumer harm could supply the analytical basis for a more targeted approach that reflects actual marketplace conditions.
A First Amendment-friendly, market-power approach to video regulation was recently sketched out by D.C. Circuit Judge Brett Kavanaugh in Comcast v. FCC (2013). At issue was an FCC order requiring Comcast to carry the Tennis Channel on a particular cable channel tier, pursuant to a statutory provision regarding program carriage agreements (Section 616). "In restricting the editorial discretion of video programming distributors," wrote Judge Kavanaugh in his concurring opinion, "the FCC cannot continue to implement a regulatory model premised on a 1990s snapshot of the cable market." Over the last sixteen years, Judge Kavanaugh explained, "the video programming market has changed dramatically, especially with the rapid growth of satellite and Internet providers," the result being that "neither Comcast nor any other video programming distributor possesses market power in the national video programming market." Judge Kavanaugh therefore concluded that "[u]nder the constitutional avoidance canon, those serious constitutional questions require we construe Section 616 to apply only when a video programming distributor possesses market power."
Until Congress replaces the legacy regulatory system, we face the unfortunate prospect of a still further disconnect between "a 1990s snapshot of the cable market" and actual competitive video market conditions. Expect future Video Competition Reports detailing innovative video services, competing business models, and changing consumer habits. And, absent a course change by the FCC, expect the agency, even in the face of abundant dynamic market indicators and pro-consumer data points, to continue avoiding the obvious about today's effectively competitive video market.