Senator Thune, Commissioner Pai Advocate Telecom Reform

I am grateful that Senator John Thune, Ranking Member of the Senate Committee on Commerce, Science, and Transportation, and FCC Commissioner Ajit Pai spoke at the Free State Foundation’s June 25 seminar, “Reforming Communications Policy in the Digital Age: The Path Forward.” And because it is such a pivotal time for communications policymaking, I am especially grateful that each used the occasion to deliver such important, substantive addresses.

Among those engaged in the debate, there are divergent views concerning the path forward for proper communications policy – in essence, one view embodies a pro-regulatory vision and the other a free market-oriented one. At the Free State Foundation, we work hard, based on our research and analysis, to articulate, on a principled basis, the case for the less regulatory, free market-oriented vision.

Senator Thune’s and Commissioner Pai’s Free State Foundation addresses constitute important contributions to the ongoing discussion concerning reform of our nation’s communications laws and policies. I urge you to review the full texts of their speeches here and here. But, in the meantime, please do take a few minutes to read the excerpts immediately below.

SENATOR JOHN THUNE - EXCERPTS

While some pro-regulatory advocates claim our communications sector is dominated by monopolies and duopolies, the evidence in the marketplace doesn’t support that view.  Monopoly markets are typically characterized by a lack of investment, a lack of innovation, no new entrants, and excessive profits. 

Since 1996, the private sector has invested $1.2 trillion into building and constantly upgrading our nation’s communications networks, including about $60 billion annually in capital investments over the last few years.  Regarding market entry, we have already seen rampant intermodal competition in the telephone and video markets.  Not to mention efforts by companies like Google and DISH Network who are committed to becoming serious new broadband players.

As for excessive profits for communications providers, again, there’s little evidence.  Former Clinton Administration Official, Everett Ehrlich, found that Fortune 500 broadband companies had an average profit margin of just 3.7 percent.  The average profit margin for Fortune 500 Internet companies who offer services on top of the broadband infrastructure?  A whopping 24 percent.  As Ehrlich points out, “this sizeable difference makes clear that providers of broadband connectivity are not extracting undue profits from broadband users.” 

Why does this all matter?  Because painting a picture of a dysfunctional communications and broadband marketplace is central to the efforts of pro-regulatory advocates who claim more government intervention into the online world is needed to fix a “broken system.”  Many of those who seek to regulate the Internet are using mistruths and hyperbole to scare both the public and policymakers into restricting economic and individual liberty. 

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The last time Congress significantly updated our communications laws was in 1996.  Back then, you had to pay for the Internet by the hour, and going online meant tying up your home’s telephone line.  There were only 100 thousand websites in 1996, and Google and Wikipedia had not been created yet.  Today there are nearly 900 million websites.

The bipartisan and deregulatory Telecommunications Act of 1996 encouraged intermodal competition and provided a light regulatory touch for information services.  Bipartisan leadership at the FCC reinforced the light touch for the Internet when implementing the law.  All of this fostered an era of convergence and innovation in the communications space.  Cable companies started to compete with telcos, telcos got into the cable TV business, and everyone started offering Internet access. 

The Telecom Act was far from perfect, but it got the job done.  Even so, it is best to view the Telecom Act as a transitional law for a transitional time, rather than as a permanent statute that will last 62 years without major revision, like its predecessor, the Communications Act of 1934.  The original Communications Act was designed for an era of actual communications monopolies; the Telecom Act was designed for the transitional era that took us from monopoly to competition; and now, we need a new policy framework for today’s converged, competitive, and Internet-powered world.

This, of course, is much easier said than done.  Modernizing the laws governing the communications and technology sectors is no small task, which is why I am glad my colleagues in the House of Representatives have already begun examining the regulation of the communications industry. 

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Now, I’m not saying that the Internet should be a lawless frontier free from any government oversight.  That is the sort of straw-man accusation leveled by those who want to avoid doing the hard work of justifying regulations for the Internet ecosystem.  Even so, policymakers must be careful to preserve the light-touch regime, first implemented by the Clinton Administration, that has been so successful in making us the digital envy of the world. 

Some people, however, want to completely upset that regime and instead want to see the Internet shackled with Title II of the Communications Act.  Title II is certainly not a “light touch,” not with its burdensome rate regulation, property valuation, and discontinuance provisions, along with many others. 

Traditional wireline telephony now makes up just 22 percent of the 443 million phone lines in America, and that rate continues to decline each year.  When consumers are rapidly abandoning traditional Title II services, it makes little sense to apply Title II regulations to today’s new technologies and business models.  Even Google seems keen on avoiding the morass of Title II—the Internet giant has specifically chosen not to offer telephone services with its Google Fiber broadband product because it wants to avoid the regulatory burdens that come along with it. 

Another reason I oppose Title II reclassification is because regulating an industry as if it were a public utility monopoly is the surest way to guarantee the industry will become a monopoly.  As I discussed earlier, the evidence in the marketplace makes it clear that our broadband market is dynamic and competitive—not at all like the early days of Ma Bell that Title II was intended for.  Public utility regulation traditionally is intended to do two things—protect the public from the harms of a monopoly, while simultaneously protecting that monopoly.  Since the broadband market is demonstrably not a monopoly, regulating it as a public utility would only make the industry less competitive and less innovative.  Or, in other words, make it more like a monopoly.

COMMISSIONER AJIT PAI - EXCERPTS

I don’t mean to suggest that our nation’s broadband policy has been perfect. It hasn’t. There’s certainly more we should be doing to clear out the regulatory underbrush that deters infrastructure investment and broadband deployment. But when it comes to our fundamental choice of a regulatory model, the United States has gotten it right.

Of course, there are those who disagree, and their voices have become louder of late. Many are now claiming that the only way to protect the Internet from ruin is to reclassify broadband as a Title II service. In other words, they want to end the minimal regulatory environment for broadband and replace it with rules based on 19th century railroad regulation.

This makes no sense. The common-carriage rules of Title II were designed to control one company that had a monopoly on long-distance telephone service, not the 1,712 companies that now compete to provide broadband service to the American consumer.

And beyond the sloganeering, there are any number of complicated questions to which I have yet to hear an answer. How much would consumers’ broadband prices go up to pay for the universal service charges all carriers must contribute? Why should we apply anti-consumer rules like tariffing to the broadband world? How would the Part 36 separations process apply to apportion the various components of the network between the several states and the FCC for regulatory purposes? And why should we open the door to actual access charges, imposed on edge providers, content delivery networks, and transit operators without their consent?

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This means that uncertainty will hang over the marketplace for a long time. How many years would it take us to decide which parts of Title II merit forbearance? How many provisions must we even examine? When we still haven’t collected data in the special access proceeding, about a year-and-a-half after authorizing that collection, how could we possibly expect to timely gather data to handle the wider broadband market? And in a rapidly changing industry, how enduring would a particular FCC snapshot of the marketplace, upon which critical investment decisions would rely, really be?

But aside from the mechanics of implementing Title II, we need to ask a more basic question. Where would Title II regulation lead? One good indication is to compare the results produced by the American regulatory model to those of a more intrusive regulatory model: Europe’s. Rather than taking a light-touch regulatory approach to broadband, the European model treats broadband as a public utility, imposes telephone-style regulation, and purports to focus on promoting service-based (rather than facilities-based) competition.

The results of the public-utility model speak for themselves. Eighty-two percent of Americans (and 48 percent of rural Americans) have access to 25 Mbps broadband speeds. In Europe, those figures are only 54 percent and 12 percent, respectively. And these figures aren’t skewed by less developed countries; in France, the figures are 24 percent and 1 percent, respectively. Similarly, American broadband companies are investing more than twice as much as their European counterparts ($562 per household v. $244), and deploying fiber-to-the-premises about twice as often (23 percent v. 12 percent). Small wonder, then, that the European Commission itself has said that “Europe is losing the global race to build fast fixed broadband connections.”

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NOTE: There also was an excellent panel discussion at the event with John Bergmayer, Public Knowledge; Scott Cleland, Precursor LLC; and Adam Thierer, Mercatus Center at George Mason University. A transcript of that session will be published in due course.

Reminder! FSF's Policy Seminar is Next Wednesday, June 25!

Next Wednesday, June 25 is the Free State Foundation’s policy seminar titled, "Reforming Communications Policy in the Digital Age: The Path Forward," at the Capitol Visitors Center, Washington, DC. Senator John Thune, the Ranking Member of the Commerce, Science, and Transportation Committee, will deliver the Opening Keynote Address, followed by FCC Commissioner Ajit Pai, who will provide a view from the FCC. 

The discussion will continue with reactions from John Bergmayer, Public Knowledge, Scott Cleland, Precursor^® LLC, and Adam Thierer, Mercatus Center at George Mason University, and questions and comments from the audience. To register, click here. For additional information, click here.

House Committee Passes Bill To Permanently Ban Internet Access Taxes

As reported by news outlets, the House Judiciary Committee has just passed H.R. 3086 - "The Permanent Tax Freedom Act." The legislation was approved with a 30-4 vote. 

H.R. 3086 is sponsored by Chairman Bob Goodlatte, and co-sponsored by Reps. Eshoo, Bachus, Cohen, and Chabot. As the title suggests, the bill would extend the current moratorium on federal and state Internet access taxes by making it a permanent tax ban. The existing moratorium is set to expire at the end of 2014.

Congratulations to the sponsor, co-sponsors, and House Judiciary Committee. The Committee's vote on H.R. 3086 is an important step toward permanently ensuring that Internet access will remain tax free.

FSF’s Deborah Tate Presents Report from Aspen Task Force on Learning and the Internet

Deborah Taylor Tate, a Distinguished Adjunct Senior Fellow at the Free State Foundation and former FCC Commissioner, is a presenter today, June 17, at the Aspen Task Force on Learning and the Internet’s Task Force’s launch of its new report highlighting 26 ways to ensure kids have safe, vibrant learning opportunities in and out of school. The presentation, held at Aspen’s Washington, DC office from 3:30-4:30 p.m., will be live-streamed at www.aspeninstitute.org/events/live and bit.ly/IMbp1D. You can get the @AspenTaskForce report at aspentaskforce.org.

The Aspen Task Force on Learning and the Internet is a group of 20 innovative and respected minds in technology, public policy, education, business, privacy and safety. The Task Force’s goal was to understand the ways in which young people learn today and to optimize learning and innovation within a trusted environment. Ms. Tate is the ITU Special Envoy and Laureate for Child Online Protection.

Changes in Attitudes: Competition Policy and the FCC

Remember the opening line from “Changes in Latitudes, Changes in Attitudes,” one of my favorite Jimmy Buffet songs:

“I took off a weekend this month

Just to try to recall the whole year.”

Those lyrics – which I am now singing to myself, and you can too – kept coming to mind this past weekend, in this sense. There is so much happening, and so quickly, on the communications policy front that I often spend the weekends just trying to recall what happened during the past week – and trying to make sense of it all.

I am not necessarily proud to admit that this is the way I spend a good part of my weekends. It ain’t “Margaritaville,” for sure. But we are in a critical time for determining the future direction of communications policymaking, so I do so freely in the hope of changing attitudes, if not latitudes.

Here are some observations that I put together this past weekend, relying on current FSF work, regarding “Competition Policy and the Role of the Federal Communications Commission,” net neutrality regulation, and FCC Chairman Tom Wheeler’s promotion of municipal broadband systems. As you might suspect, they are all related.

First, I put “competition policy and the role of the FCC” in quotes because this is the title of the House Commerce Committee’s Third White Paper seeking public comment as part of the committee’s process to update the Communications Act. I have said many times that the Communications Act is in need of updating, and I am pleased that Free State Foundation scholars have participated actively in the House committee’s process.

A proper understanding of “competition policy and the role of the FCC” is at the core of understanding why and how the direction of communications policy needs to change. While I hope you will read the entire paper, I want to highlight and emphasize a key portion of the Free State Foundation submission:

A combination of rapid technological innovation, consumer choice, and disruptive changes in the communications market has altered forever the traditional competitive landscape. These profound structural and technological changes point to the need for a competition policy that leaves free from government regulation those market processes that continue to propel further innovation and competition for new services. Regulatory intervention is only warranted in instances where there is convincing evidence of a market failure that is likely to harm consumers. Absent such evidence of market failure, service and product suppliers should be free to exercise their informed business judgment in an entrepreneurial fashion. Their success will be shaped by how an ever more sophisticated generation of telecommunications consumers respond to their business offers.  The interaction of both sides of the market place will outperform any effort by the FCC to chart through government design the direction of future innovations in the ever larger and more complex Internet marketplace.

This statement of competition policy principle should guide Congress as it considers revising the Communications Act. And it also should be a guide for the FCC, presently, under the present statute when the agency is not otherwise constrained by a contrary statutory direction.

Which brings me to net neutrality, where the Commission is certainly not constrained by the statute to take any action at all. Indeed, since the agency’s second judicial rebuff in its attempt to impose net neutrality mandates, I have suggested many times that it would be prudent to await further direction from Congress. While it may be, at least in the D.C. Circuit’s view, that the Commission is authorized to act, it is not required to do so.

But let’s assume that the Commission’s majority is determined to move forward to adopt some form of net neutrality regulation. The specific approach the Commission takes matters a lot, of course. For reasons I have delineated over and over, classifying Internet providers as common carriers under Title II almost certainly would stifle the future development of the Internet. Internet providers – and the reach could extend to so-called edge providers as well – shouldn’t be turned into public utilities like electric companies and put in the same regulatory straightjacket devised to control monopolies.

If the Commission adopts new net neutrality regulations, it should adopt the approach proposed in the rulemaking notice to the effect that it will not interfere with the Internet providers’ practices if they are commercially reasonable. If implemented properly, this “commercial reasonableness” approach could provide the ISPs the flexibility they need to experiment with offering new services responsive to changing technological capabilities and consumer demand.

Here is the way I explained proper implementation in my blog, “The FCC’s Approach to Net Neutrality: The Wrong Approach for Regulatory Presumptions,” published on June 4th.

In light of the technological dynamism and multiplatform competition that exists in the broadband marketplace – with cable, telephone, fiber, satellite, and various wireless companies all offering consumers alternative choices for Internet service – the proper approach for the Commission is to presume that, absent clear and convincing evidence of market failure and consumer harm, Internet providers’ practices, including practices involving prioritization of services, are commercially reasonable. In other words, the rebuttable presumption should run in favor of not imposing new public utility-style regulations on Internet providers.

In short, absent convincing evidence of market failure and consumer harm, “commercial reasonableness” should be presumed, not the other way around. Were the Commission to adopt this approach, it would take a step in the direction of adopting rules that, while perhaps unnecessary, represent a possible way forward. This would be a principled approach consistent with the Free State Foundation submission to the House Commerce Committee.

Now, finally, about Chairman Wheeler’s ongoing suggestions that he’s contemplating getting the FCC to act to preempt the 20 or so states that have adopted either an outright ban or some form of restrictions on municipal broadband systems.

By way of explanation for his possible support for preempting these state laws through FCC action, in line with previous statements, Mr. Wheeler simply offered this: “Being pro-competition means being pro-competition.”

Well, yes, but….

Of course, the matter is not all that simple. All so-called “competition” is not the same. For example, in the Free State Foundation’s submission to the House Commerce Committee, we focus on the importance of facilities-based, cross-platform competition as opposed to competition derived from government mandated facilities-sharing regulations. And, directly to the point here, for more than five years, we have examined some of the many failures of government-owned municipal broadband systems. Here are just some recent FSF pieces recounting the failure of many government-owned networks: Burlington Telecom’s February $10 million settlement with Citibank over loans to its ailing system, along with examples of municipal “broadband busts” including Mooresville and Davidson, North Carolina, Utah’s UTOPIA network, Provo, Utah, Lafayette, Louisiana, and the N.C. Eastern Municipal Power Agency.

I have never taken the position that, as a matter of policy, there may not be rare circumstances when construction and operation of municipal-owned telecom systems would be proper. If it is clear that private sector companies are unable or unwilling to offer service, then there may be a proper role for a municipal system. But these rare circumstances have little to do with proclaiming a “pro-competition” mantra or with the policy impetus behind the state laws that Mr. Wheeler now contemplates preempting.

As my FSF colleague Seth Cooper explained earlier this year in a Perspectives from FSF Scholars: “Such laws prevent local government conflicts of interest with the private sector marketplace competitors who invest tens of millions of dollars in localities to build out their broadband networks. They also protect local taxpayers from potentially devastating financial losses from poorly-run municipal broadband projects.”

In short, the tax and other documented financial advantages, along with other preferences such as permitting privileges and rights-of-way preferences, conferred upon government-owned communications networks means it is too simplistic to declare for “competition.” In order to have a serious discussion, Mr. Wheeler surely must grapple with the underlying fundamental distinction between government and non-government networks that are the impetus for the adoption of the state bans.

And aside from these policy questions, Mr. Wheeler must grapple with the legal questions, including serious constitutional questions, which arise in any discussion concerning preempting state laws restricting municipal networks. Here it suffices to refer to Seth Cooper’s excellent seminal piece on the subject, “FCC Preemption of State Bans on Municipal Broadband Networks Is Most Likely Unlawful.” In any proper conception of our federalist constitutional system, it can’t be enough to blithely suggest that the wishes of municipalities should prevail over the state sovereigns under which they are created.

After all, in our constitutional regime, we do not recognize, as a matter of legal status, “citizens” of Provo or Lafayette, but we do recognize citizens of Utah and Louisiana – and the Constitution confers upon these state citizens the authority to exert their will, through either their elected representatives or sometimes through referenda, to adopt laws that restrict municipal activities.

Well, it is another week, which I’m sure will be all too busy. But this is the way I was thinking, over the weekend, about last week. Hoping to spur, if not changes in latitudes, then perhaps some changes in attitudes.

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By the way, I’m sure that we’ll be discussing all these issues, and more, at the Free State Foundation’s seminar on June 25, at which Senator John Thune will deliver the opening keynote address. If you haven’t already registered, you may do so by clicking here.