FSF’s Deborah Tate Joined Cong. Blackburn at Main Street Growth and Opportunity Coalition Dinner

Deborah Taylor Tate, Distinguished Adjunct Senior Fellow at the Free State Foundation and former FCC Commissioner, joined Congressman Marsha Blackburn and their spouses at a Main Street Growth and Opportunity Coalition dinner last evening. 

Cong. Blackburn spoke at the event, which focused on the need for tax reform, trade expansion, and fiscal responsibility. Commissioner Tate serves on the Tennessee Main Street Growth and Opportunity Coalition's steering committee. The Main Street Growth & Opportunity Coalition is an alliance of businesses, local trade associations, and concerned individuals committed to supporting a common-sense, pro-growth agenda for America.

“The Expendables 3” Hurt By Pre-Release Piracy

Free State Foundation President Randolph May released a blog earlier in the month about a massive pre-release piracy of the movie, “The Expendables 3.”  At least 2.2 million people had watched the movie before it had even hit theaters. But now that the movie has been out for over a week, let’s see how it did.

Not that well.

According to a New York Post article, “The Expendable 3,” which cost $100 million to produce, has made only $16 million. Because of the leaked version, Lions Gate Entertainment, the movie’s production company, likely lost “tens of millions of dollars” it otherwise would have garnered. It is now suing the websites that posted an illegal version.

While it cannot be predicted how much money the movie would have made but for the pre-release leak onto the Internet, there is clearly still a piracy problem that can severely hurt production companies and artists.

A company like Rightscorp is a good example of how some aspects of the piracy problem possibly can be addressed without government intervention (see the website for more information). Some copyright violators simply do not know that what they are streaming or downloading happens to be an illegal pirated version of a song or video. “The Expendables 3” might have been more obvious than usual because the movie had not been released yet. There is certainly an educational aspect to video and music piracy that should continue to be addressed. For example, maybe part of the answer is teaching students about piracy in computer classes.

Given the amount of money companies and artists are losing from piracy, there seems to be a valuable opportunity for more innovative ideas that can continue to educate Internet users about the harm caused by theft of intellectual property.

Why Would a Drunk Politician Rather Drive than Share a Ride?

In a recently released a paper about the “sharing economy,” Free State Foundation President, Randolph May, and myself discussed the positive impact many new sharing companies have had on consumers. Yet, despite the innovative ideas and entrepreneurial activity generated by companies like Airbnb and Uber, some states and municipalities have attempted to restrict or ban their services. Often, these attempts are instigated by lobbying from hotel and taxicab companies which have lost profit to these new entrants.

The latest news comes from California, where a bill was recently voted on that would profoundly limit ridesharing services provided by companies like Uber, Lyft and Sidecar. One State Senator voted in favor of the bill only to be arrested for drunk driving several hours later. While there is no serious data that shows that these new ridesharing services have caused a reduction in DUIs, a Washington Post story suggests that in areas where the service is legal, there is a negative correlation between ridesharing and DUIs. In other words, as ridesharing increases, DUI arrests decrease. It seems intuitive that allowing for more competition in the transportation market would lower prices and encourage potentially intoxicated individuals to share rides instead of driving.

It is ironic that a politician who enjoys a few drinks would vote to restrict ridesharing services that could clearly benefit him. 

Commissioner's Staffer Makes Persuasive Case Against Muni Broadband Preemption

Matthew Berry’s August 20 remarks to the National Conference of State Legislators hit all the high points about the problems posed by the FCC attempting to preempt state restrictions on muni broadband networks.

Berry serves as Chief of Staff to FCC Commissioner Ajit Pai. In his remarks, Berry succinctly explained to the state legislators gathered at NCSL’s 2014 Legislative Summit why FCC lacks the power under Section 706 of the Communications Act to preempt state laws restricting or banning their local governments from going into the broadband Internet business. 

Stated Berry:

[T]he text of Section 706 doesn’t even mention preemption, let alone preemption of state laws that regulate municipalities. Instead, Section 706 embraces other means, like “price cap regulation” and “regulatory forbearance,” to accomplish its goals. And when it comes to the objectives set forth in Section 706(b)—removing barriers to infrastructure investment and promoting competition in the telecommunications market—the Tenth Circuit recently concluded that the provision gave the FCC authority to provide universal service support for broadband networks. In sum, Section 706 does not condone preemption of state laws either explicitly or implicitly, and so it hardly offers up the clear statement one would expect if Congress intended the FCC to “interpos[e] federal authority between a State and its municipal subdivisions.”

Berry also touched on the structural federalism principles that stand behind this legal conclusion about the limits of federal preemption of states’ control over their local governments:

Sovereignty does not rest with American cities, towns, or counties. Rather, the Supreme Court has stated that local subdivisions merely “are created as convenient agencies for exercising such of the governmental powers of the State as may be entrusted to them in their absolute discretion.” In short, under our constitutional framework, states are free to grant or take away powers from municipalities as they see fit. So the basic concept is this: City governments are appendages of state government, but state governments most definitely are not appendages of the national government.

As Berry observes, NCSL has gone on record opposing preemption by the FCC. NCLS even stated it will pursue legal action against the FCC should it pursue preemption of state restrictions on muni broadband networks. Likewise, the American Legislative Exchange Council (ALEC), has voiced strong opposition to FCC preemption on policy, statutory, and constitutional grounds.

Free State Foundation scholars have been on top of this issue since Chairman Wheeler first announced his intention to preempt states that restrict muni broadband networks. I first set out the principal legal and constitutional defects in the Chairman’s proposal in my Perspectives from FSF Scholars Essay, “FCC Preemption of State Bans on Municipal Broadband Networks is Most Likely Unlawful.” More recently, FSF President Randolph May has written in The Hill why “The FCC Shouldn’t Go Down the Primrose (Preemption) Path.” Expect further analysis from FSF Scholars on Chairman Wheeler’s problematic preemption plans in the time ahead.

Mr. Plouffe Rides the New 'Sharing Economy'

David Plouffe, a former senior advisor to President Obama, is joining Uber, the ride-sharing service, as head of the company's public policy shop. Not surprisingly Plouffe's hiring by Uber has made headlines because it is seen as validating the future of a key upstart in the expanding sharing economy - and as a recognition that Uber will confront many public policy challenges in the years ahead as entrenched taxicab interests and various regulatory authorities fight its market entry.

In today's Wall Street Journal editorial, "Plouffe for Free Markets," Mr. Plouffe is quoted as saying: ""Uber has the chance to be a once in a decade if not a once in a generation company. Of course, that poses a threat to some, and I've watched as the taxi industry cartel has tried to stand in the way of technology and big change. Ultimately, that approach is unwinnable."

Mr. Plouffe is right that incumbent competitors will seek to use laws and regulations either to keep new entrants out of the market, or barring that, to handicap their market participation. This is not to say that there are not legitimate health and safety concerns that might apply to Uber as well as the incumbents.

In a recently released Perspectives from FSF Scholars entitled, "The Sharing Economy: A Positive Shared Vision for the Future," FSF Research Associate Michael Horney and I discussed the rise of the "sharing economy" and the economic and societal benefits created by leading edge companies like Uber and Airbnb, which enables the sharing of rooms much like Uber enables the sharing of rides.it promises. While acknowledging that companies like Uber and Airbnb properly may be subject to some narrowly tailored generally applicable health and safety regulations, we emphasized:  

"These new business models, which utilize online applications, are delivering innovation, economic growth, and consumer satisfaction. Nevertheless, some governments see them as disruptions to existing marketplaces and want to take preventive action against them. In order for the new sharing economy business models to succeed in enhancing overall consumer welfare and our nation’s economy, a market-oriented and deregulatory perspective must become a shared vision."

Hopefully, Mr. Plouffe, who presumably knows a lot about government regulation from his service in the Obama Administration as a political advisor, will be able to help articulate the need for "a market-oriented and deregulatory perspective" so companies like Airbnb, Uber, and their sharing economy competitors (of which there are an increasing number) will not be shackled by unnecessary regulation.

Before Mr. Plouffe begins work in early September, perhaps he may want to read our "sharing economy" paper. 

Here We Go Again: Don’t Eliminate the “Incentive” from the Incentive Auction

By Gregory J. Vogt, Visiting Fellow

This past June the FCC published the Incentive Auction Order, in conjunction with the Mobile Spectrum Holdings Order. Together, their intent is for broadcasters to volunteer spectrum in the “reverse” auction, to be then repurposed for mobile broadband use in the “forward” auction. The aim of the two-sided incentive auction is to achieve a significant win-win-win for consumers, government, and industry. But the forward auction design adopted in June, in my estimation, entails novel, risky, and complex elements that gives preferences to all bidders other than AT&T and Verizon, including to multi-billion dollar industry participants.

Sprint and T-Mobile filed petitions for reconsideration on August 11. T-Mobile, unsatisfied with the advantages it already achieved, filed a petition seeking changes to certain aspects of the forward auction design. Adopting bidding preferences such as those contained in the two June Orders creates a serious risk of producing lowered revenues, as I reported from an analysis in the FSF blog based on past auction experience. Lowering revenues will risk decreasing the amount of volunteered spectrum – the “incentive” in an incentive auction – in the same way as T-Mobile’s now-discredited Dynamic Market Rule, and thus should not be entertained. T-Mobile’s proposed changes would exacerbate these already serious downsides to the two Orders. Sprint now seeks more changes to the spectrum screen to further advantage itself.

In these two Orders, the FCC developed an extremely complicated structure which I describe only at a high level here. The structure reserved a portion of the 600 MHz spectrum for nationwide-provider bidders that do not possess at least 45 MHz of spectrum below 1 GHz spectrum in each geographic market. The maximum size of the “reserve” varies with the amount of broadcast spectrum available in a particular geographic market at the initial stage, 30 MHz for 100 MHz markets declining to 10 MHz for 40 MHz markets. The auction design establishes a two-component “trigger” which must be met before the reserve spectrum becomes available: a price/proceeds component and an expense component (legislatively mandated administrative expenses such as compensating broadcasters and FirstNet funding). Until both components of the “trigger” are met, any bidder may bid on all spectrum in a market. 

In its petition, T-Mobile argues that the amount of “market based reserve spectrum” is set too low and requests that the reserve be at least half of available spectrum. It also contested the formulation of the price/proceeds benchmark component of reserve spectrum trigger as unnecessary and subject to gaming.

The most important aim of the incentive auction legislation is to maximize the amount of broadcast spectrum repurposed for mobile broadband use. Although the FCC originally agreed with this conclusion, that goal is all but absent in the final rule, apparently side-tracked in the FCC’s effort to “fairly” allocate spectrum, with the reserve tipped heavily in favor of everyone but the top two market players. Although a last minute compromise preserved the ability of all the providers to obtain some spectrum in the forward auction, it is unknown whether the FCC struck the right “balance.” We won’t know until we see how much spectrum broadcasters actually volunteer. The good news is that, at least at this point, there are no vocal defections from the auction process from either broadcasters or potential bidders.

But the forward auction design is a far cry from a free-market model characteristic of most spectrum auctions, which are routinely designed to maximize auction receipts. The forward auction picks winners and losers unrelated to a sound economically-based competition model like that normally attendant to an accepted competition analysis. Here, unless “smaller” carriers are capacity-constrained, which no one has alleged or proved, there simply is no significant anti-competitive situation that needs to be corrected. The necessity of adopting a first-ever minimum six-year holding period for awarded reserve spectrum only reinforces the conclusion that the forward auction design lacks market-driven incentives. Why would the government preclude T-Mobile from selling reserve spectrum unless it has doubts either that T-Mobile was unable to obtain needed spectrum in the first place or the mechanism will lead to lower-than-market prices? T-Mobile’s reconsideration plea for additional reserve spectrum merely seeks to exacerbate this government-made market.

The request should be rejected for four additional reasons. 

First, T-Mobile’s proposal risks further depressing auction receipts. Achieving receipts maximization is critical to producing the incentive for broadcasters to volunteer spectrum. The incentive is already at risk: the original estimate of up to 120 MHz of volunteered spectrum has declined to what government now admits will likely only achieve 85 MHz. The incentive should not be diminished further.

Second, T-Mobile’s requested modifications are anti-competitive. By increasing the amount of the reserve, and eliminating the price/proceeds component of the trigger, smaller bidders could be able to obtain spectrum without fully competing even with each other (let alone AT&T and Verizon) because there would be far more in the reserve than the 20 MHz block most competitors say they need. Thus, bid prices for reserve spectrum could be less than for unreserved spectrum, a result I note here actually occurred in Canada, because smaller carriers can make strategic bids based on the knowledge that high bidders may be excluded from competing for the reserve and there would be more than enough reserve spectrum to go around.  Reduced costs for spectrum in turn could create a competitive imbalance in the mobile broadband market due to unbalanced cost structures.

Third, T-Mobile’s claim that AT&T and Verizon might game the trigger is speculative at best because the combination of blind-bidding and delayed creation of the reserve until the final stage rule is achieved, completely undermine any incentive to manipulate the trigger. A low bid by one large provider to avoid invocation of the trigger could simply be a white flag that ends up handing spectrum over to the other major player.

Fourth, although I agree with T-Mobile that setting a complicated price/proceeds trigger is relatively arbitrary and creates other risks to the bidding process, eliminating that component of the trigger would exacerbate disincentives to participate, not improve them.

As to the modified spectrum screen, the FCC added mobile broadband spectrum to achieve a more complete product market definition in transaction analyses. Sprint, which holds significant spectrum added to the screen for the first time, seeks to blunt this reform by asking the FCC to weight differently low-, mid-, and high-band spectrum, effectively straight-jacketing the FCC when using the screen. Although unrelated in a direct sense to the spectrum auction, the request does represent another attempt by competitors to skew competitive analysis in their favor. The FCC has already announced it will take into account the potential competitive impact of certain types of spectrum, such as that below 1 GHz. Since that decision alone unjustifiably favors Sprint, it should just declare victory without seeking further undeserved advantages.

Although I do not support the Rube Goldberg contraption that the forward auction design entails, or the complications to the new spectrum screen already adopted, the FCC should reject further manipulations the parties now request. The FCC must preserve the incentive to volunteer a maximum amount of broadcaster spectrum if there is to be a chance of achieving the win-win-win situation the incentive auction was intended to produce. And it should reject strict formula-based reviews of transactions, relying instead on a fact-based competitive analysis.

The Ninth Annual Homeland Security Institute

Only rarely do I use the FSF Blog to recommend programs sponsored by other entities, but this is one of those rare cases that I want to call to your attention. For anyone with more than a passing interest in issues relating to homeland security, immigration, cybersecurity, and the like, the ABA Administrative Law Section event described below is a premier, must-attend conference.

The outgoing Chair of the Ad Law Section, Joe Whitley, is the chair of the Institute, and he and his Institute colleagues have once again put together an outstanding program with well-known leaders in their respective fields. Please take a look at the Program Brochure and consider attending.

ABA Section of Administrative Law & Regulatory Practice
9th Annual Homeland Security Law Institute

LAST CHANCE TO REGISTER! JOIN US NEXT THURSDAY & FRIDAY!

August 21-22, 2014

at the Walter E. Washington Convention Center, Washington, DC

Featuring:

• 20 panels addressing hot topics in immigration, transportation safety, privacy and cybersecurity, featuring 80 current and former Counsel, Administrators and Advisors at DHS, ICE, CBP, USCIS, NPPD, ODNI, FEMA, as well as The White House, The U.S. House of Representatives, and The Air Force Academy; academics at leading universities, and private practitioners well known in the field of homeland security

• 12 Hours of Continuing Legal Education (60 minute states) and 14.4 Hours (50 minute states), as well as the opportunity to engage the experts in lively discussion

• Recordings will be available after the program -- reserve your full set now!

Register Online: shop.americanbar.org/ebus/ABAEventsCalendar/EventDetails.aspx?productId=212789

View Updated Program Brochure: shop.americanbar.org/PersonifyImages/ProductFiles/212789/hsli_2014_brochure.pdf

Reserve your Program Recording & Materials: Choose the option for purchase of the audio recordings and materials on the registration form in the brochure.  The Recording does NOT include CLE credit.


Any difficulties, please contact Angela Petro at angela.petro@americanbar.org or 202-662-1582.

The Real Headline: Europe Lags US in Broadband

All too often in the past, those advocating for public utility-type regulation in the United States have suggested that the U.S. lags Europe in various measures of broadband progress. The suggestion is that the U.S. ought to adopt the common carrier-like model, with its mandatory access, non-discrimination, and rate regulation requirements, that has been favored in many European countries.

Indeed, now-former FCC commissioner Michael Copps has always been one of the most vocal leaders of what, back in 2007, I called the "Talking Broadband Down Crowd".  I explained then, and many times since, why the claims of Mr. Copps and his allies were not factually grounded -- but, in the service of advocating broadband regulation, the "talking broadband down crowd" persisted in downplaying U.S. broadband progress. Here is an March 2013 FSF blog entitled, "Europe Lags Behind U.S. in Broadband Speeds and Connectivity," with facts and figures refuting the "U.S. Lags Europe" storyline.

In the face of accumulating new data, I have the sense that former Commissioner Copps already may have begun to abandon the "talking broadband down" argument in favor of other (equally unpersuasive) arguments.

In any event, he should. Because now comes a newly-published study by Roslyn Layton, PhD Fellow for the Center for Communication, Media and Information Studies at Aalborg University, and Michael Horney, a Research Associate at the Free State Foundation. Their study, entitled, "Innovation, Investment, and Competition in Broadband and Impact on America's Digital Economy," is a must-read for anyone interested in broadband policy. This most certainly includes, of course, those interested in the FCC's net neutrality proceeding.

I commend the entire Mercatus study for your close attention. But in the meantime, here is a brief summary of their conclusions:

"How true are fears that the United States is falling behind the rest of the world when it comes to broadband? Are Americans paying more for lower-quality broadband than Europeans and South Koreans, and are US companies falling behind their global counterparts?

In a new study for the Mercatus Center at George Mason University, Roslyn Layton and Michael Horney survey broadband in America and compare broadband costs around the world. They find that the United States is a global leader in broadband, as measured by the level of broadband-enabled economic activity, the number of Internet-based companies, the level of digital exports, and the level of Internet-enabled employment.

.  . .

America’s broadband networks have allowed the United States to become a leading digital econ­omy. Building on a sound broadband foundation and leveraging the advantages of America’s inno­vation ecosystem have allowed American firms to export their digital goods and services to other countries, making the digital sector America’s third-largest category of exports after industrial supplies and capital goods. Policymakers should take the following steps to ensure that the United States continues to be the leader in global competitiveness:

• In order to maximize investment, avoid utility-style regulation. Instead, focus on market-based, technology-neutral approaches that encourage dynamic competition with different networks and technologies.
• Avoid subsidies for any particular technology: a variety of broadband technologies keep the market competitive. Government involvement in the broadband market may cause private firms to exit, stifling growth in the industry.
• Permit competition-enhancing consolidation of broadband companies because mergers lower overhead costs and make operations more efficient.
• Remove barriers to mobile infrastructure at the local level. Municipalities often hinder the deployment of infrastructure, which limits broadband competitors, particularly in rural areas.
• Focus on increasing Internet adoption rather than the deployment of network. More than 80 percent of Americans use the Internet, and those who do not cite lack of usability and relevance as their primary reasons rather than cost or lack of access."

Presently, there is far too much loose talk about imposing public utility regulation on U.S. broadband providers under Title II of the Communications Act -- the same form of regulation imposed on the railroads in the late nineteenth century and Ma Bell throughout much of the twentieth century. I understand that Mr. Copps and his acolytes are serious about wanting the FCC to adopt this draconian approach. But my sense, perhaps wrongly, is that many of those suggesting that the FCC should adopt public utility regulation of broadband really don't believe the FCC would take such a fateful step or they don't really appreciate the consequences.

In either event, those urging such a course should read and carefully consider the new study by Aalborg University's Roslyn Layton and the Free State Foundation's Michael Horney.

IP Rights Are Not Expendable!

This is the lead from today's WSJ's story [subscription required] on the pre-release piracy and posting of the "Expendables 3" movie:

"At least 2.2 million people have already watched "The Expendables 3." The problem for the movie's distributor, Lions Gate Entertainment Corp., is that its big-budget action movie doesn't open until Friday.

Just over two weeks ago, a complete and nearly pristine copy of "The Expendables 3," which features more than a dozen stars including Sylvester Stallone, Mel Gibson and Harrison Ford, leaked online. It is Hollywood's highest profile piracy leak since 2009, when an incomplete version of "X-Men Origins: Wolverine" found its way online before the superhero movie came out."

You don't need to have an economics degree from Harvard to appreciate that intellectual property piracy of this magnitude necessarily will impact the decision-making surrounding incentives to invest in future films and other creative endeavors. There are various dimensions to the problem of piracy as it relates to movies, sound recordings, and other intellectual property. But one important dimension that cannot be overlooked, or excused, is the public's all-too-often failure to understand that securing and protecting IP rights is a foundational constitutional principle.

There continues to be a real need to educate the public concerning the importance of respecting this constitutional principle no less than others. That's why at the Free State Foundation we're engaged in an ongoing effort to educate the public, especially including those who otherwise think of themselves as constitutionalists, concerning intellectual property rights.

Here are the first five papers in our ongoing series and there is another posted on our website:

Randolph J. May and Seth L. Cooper, "The Constitutional Foundations of Intellectual Property," Perspectives from FSF Scholars, Vol. 8, No. 13 (2013).

Randolph J. May and Seth L. Cooper, "Reasserting the Property Rights Source of IP," Perspectives from FSF Scholars, Vol. 8, No. 17 (2013).

Randolph J. May and Seth L. Cooper, "Literary Property: Copyright's Constitutional History and Its Meaning for Today," Perspectives from FSF Scholars, Vol. 8, No. 19 (2013).

Randolph J. May and Seth L. Cooper, "The Constitution's Approach to Copyright: Anti-Monopoly, Pro-Intellectual Property Rights," Perspectives from FSF Scholars, Vol. 8, No. 20 (2013).

Randolph J. May and Seth L. Cooper, "The 'Reason and Nature' of Intellectual Property: Copyright and Patent in The Federalist Papers," Perspectives from FSF Scholars, Vol. 9, No. 4 (2014).