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.

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.

Liberty and Competition, Lincoln and Wheeler

This week, on November 19^th, the nation celebrated the 150^th 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.

Strong IP Rights Add Value to the U.S. Economy

According to a study released this week by the International Intellectual Property Alliance (IIPA), copyright-based industries added an unprecedented $1 trillion to the U.S. economy in 2012, accounting for 6.5% of the total economy. The copyright-based sector of the economy also grew faster than the national economy from 2009 – 2012 at a rate of 4.73% compared to a rate of 2.14% for the rest of the national economy. Nearly 5.4 million people are employed in copyright-based industries, and those employees generally make 33% more than the average annual wage. The main industries that are part of the core copyright industry include computer software, videogames, books, newspapers, periodicals, journals, motion pictures, music, radio, and TV broadcasting.

These impressive statistics indicate the importance of continuing to provide support and incentives in the core copyright-based industries. To do so, it is crucial that copyright law strikes the right balance between protecting property rights and fostering creation. Proper and enforceable intellectual property protection is indispensible to promoting and maintaining a vibrant copyright-driven sector, and a healthy digital age economy as a whole. The author who conducted the study for IIPA, Steven Metalitz of Economists, Inc. stated, “to foster continued growth of this dynamic sector, we need strong and modern copyright laws that take into account changes in technology and the continuing harm caused by copyright piracy, especially as legitimate digital distributors continue to emerge.”

For more on the proper approach to intellectual property protection in a digital age economy, see the series of Perspectives from FSF Scholars by Free State Foundation President Randolph May and Research Fellow Seth Cooper:

•                The Constitutional Foundations of Intellectual Property

•                Reasserting the Property Rights Source of IP

•                Literary Property: Copyright's Constitutional History and Its Meaning for Today

•                The Constitution's Approach to Copyright: Anti-Monopoly and Pro-Intellectual Property Rights

FSF President Randolph May to Participate in "Spectrum Auctions and Band Plans" Webinar November 19

Randolph May, President of the Free State Foundation, will participate in a webinar on November 19 hosted by the Digital Policy Institute (DPI), an interdisciplinary research think tank based at Ball State University. Other panelists joining Mr. May for this webinar, “Spectrum Auctions and Band Plans: Maximizing Auction Revenues and Minimizing Post-Auction Problems,” are Preston Padden, Executive Director of the Broadcaster’s Coalition, and Rick Kaplan, Executive Vice President of Strategic Planning at the National Association of Broadcasters.

Among the many key legal and policy issues the panel will address are: the FCC’s proposed system for broadcasters choosing to relinquish spectrum; whether eligibility restrictions on wireless carriers wanting to bid would reduce the overall auction revenues and, correspondingly, broadcasters’ incentives to cede spectrum; the methods whereby broadcasters not choosing to give up spectrum but are relocated in repacked spectrum will be reimbursed for their costs; and the continued availability of broadcast service for TV viewers.

The webinar, Tuesday, November 19, 2 p.m., EST, will go live here just prior to start time.

 

 

A Message for Susan: Dynamic Markets Make Predictions Hazardous

I was thinking of Susan and her book again this weekend. Yep, that would be Professor Susan Crawford of Benjamin Cardozo School of Law and her book Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age. 

I was thinking of Susan because, in catching up on my stack of weekend reading, I came across this recent Wall Street Journal article, "Cutting the Cable Cord and Getting 'Phone TV'" [subscription required]. I'll get back to the article shortly, but first a word about Captive Audience. 

As you may know, the whole premise of Professor Crawford's book is that Comcast especially, but other cable operators as well, are monopolies and that, therefore, they should be operated as public utilities. Just like the electric utilities – rate regulation, non-discrimination obligations, and all. 

I have discussed Professor Crawford's book in more detail in earlier pieces, including this one, "Captive Audience's Captive Thinking." Please read the entire piece if you haven't done so. But, for my purpose here, I'll just reproduce the way I began the essay: 

"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 my view, the book more appropriately might have been titled, "Captive Thinking: Viewing Today's Telecom Industry Through An Analog-Era Lens." 

The book's central thesis is unmistakably clear: Comcast possesses monopoly power with respect both to the provision of broadband services and the provision of video programming. While less clear, at times it appears Professor Crawford may be making the same monopolistic power claim with regard to Time Warner Cable and other cable operators. 

While it doesn't come until the very end of the book, the proposed remedy for this supposed monopolistic power is unmistakably clear as well: "America needs to move to a utility model."

I am confident that if you read, or even skim, Professor Crawford's book, you will see that I have fairly captured the essence of her views. Indeed, on the very first page, she calls Comcast "a monopoly provider of wired high-speed Internet access" and then on page 2 asserts that, as a result of its merger with NBCU, Comcast "would probably make content too expensive for any potential data distributor." By page 53, Professor Crawford has concluded, "cable's advantages eventually became unbeatable." 

End of story! 

Except of course, it is not the end of the story – because Professor Crawford fails to appreciate the ongoing dynamism of today's digital age communications marketplace, and the capacity of this marketplace to foster competition and consumer choice. Simply put, Professor Crawford's hypothesized view of her hypothesized market, dominated by Comcast and other cable operators, has turned out to be wrong, certainly at least for now and for the foreseeable future. 

Recall that Professor Crawford suggests the Comcast – NBCU merger "would probably make content too expensive for any potential competing data distributor." Now back to the WSJ article, "Cutting the Cable Cord and Getting 'Phone TV,'" which begins: "The way things are going 'cable TV' may have to be replaced by 'phone TV.'" It contains lots of figures indicating the extent to which AT&T and Verizon are taking market share away from cable operators against whom they compete. For example, the article reports that, according to recent third quarter results, "[t]he top two cable providers, Comcast Corp. and Time Warner Cable, Inc., shed 435,000 video customers in the quarter, while AT&T and Verizon added 400,000." 

According to analyst Craig Moffett, "[t]he third quarter results are a reminder that the biggest threat facing the cable industry is competition from phone companies…." 

The article reports that cable executives and analysts contend Verizon and AT&T have largely won market share using discounted pricing and promotional packages. This sounds like marketplace competition to me, and competition that is benefitting consumers.

And AT&T CEO Randall Stephenson is quoted to this effect: "It’s going to be a dogfight between us and cable for the next 20 years. They will invest, and they will step up. We will invest. It will go back and forth." This dogfight sounds like marketplace competition to me – indeed, vigorous competition – and competition that is benefitting consumers.

And by the way, in this competitive environment, "they will invest" and "we will invest" are not empty words, but proven reality. According to a recent study by the Progressive Policy Institute, AT&T, Verizon Communications, CenturyLink, Comcast, and Time Warner Cable all ranked in the top twenty of non-financial companies making capital investments in the U.S over the past year. All this investment is the result of marketplace competition, and it is benefitting not only consumers but the nation's economy as well.

Let me be perfectly clear. I don't have a dog in this competitive dogfight. And unlike Professor Crawford, I don't pretend I can predict ultimate winners and losers among the competitors in a dynamic marketplace, or know how the market structure will evolve in the years to come. In any event, it's not my business to predict winners or losers.

But what I do know is this: With the ongoing technological changes and evolving business models and experimentation, the marketplace in which Comcast and other cable providers presently operate is competitive. Of course, by definition, 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.

So, I think it is seriously wrong for Professor Crawford to brand Comcast and other cable operators "monopolies." And it would be a mistake of huge proportions to heed her call to regulate broadband companies as utilities, just like electric power companies, which by and large continue to retain dominant market power. Imposing a utility-like regulatory straight jacket on broadband providers, say, to prohibit experimentation with various usage-based billing plans tailored to the needs of different customers' preferences, is a sure-fire recipe for stifling innovation that benefits consumers and investment that benefits the nation's economy.

I wish I could get Susan to agree that 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.

Upcoming Global IP Summit and the Constitutional Foundations of Intellectual Property

This Friday, November 8^th, the U.S. Chamber of Commerce's Global IP Center is hosting a summit focused on the importance of a strong yet balanced intellectual property system. The event will bring together the associations and policymakers who are leading the country in innovation and intellectual property management strategy. I am looking forward to attending the event, and engaging in discussions of the challenging issues facing intellectual property rights law and policy today.

Recognizing the value of protecting intellectual property rights is crucial for the continued growth and development of the economy, and particularly the technology and communications sectors. Free State Foundation scholars Seth Cooper and President Randolph May authored a series of four Perspectives from FSF Scholars, which explore the foundational principles of intellectual property grounded in our constitutional system. If you are not already familiar with these pieces, it is certainly worth reading them to prepare for tomorrow’s exciting Global IP Summit:

• The Constitutional Foundations of Intellectual Property
• Reasserting the Property Rights Source of IP
• Literary Property: Copyright's Constitutional History and Its Meaning for Today
• The Constitution's Approach to Copyright: Anti-Monopoly and Pro-Intellectual Property Rights

FSF President Randolph May to Participate on Panel at Nebraska Law’s 6th Annual Space and Cyber Law Washington, DC Conference

Free State Foundation President Randolph May will participate on a panel at the University of Nebraska Law School’s 6th Annual Space and Cyber Law Washington, DC, Conference at the Willard Hotel, November 5, 2013. The panel, titled "Regulation v. Market Based Mechanisms for The Internet’s Future," discussion is structured around the 100 year anniversary of the Kingsbury Commitment, the first antitrust consent decree relating to the U.S. telecommunications system and arguably the beginning of modern regulation of this system.