Memorial Day 2017

This Memorial Day message marks the eleventh consecutive one – the beginning of the second decade’s worth, I suppose. As important as I might like to think the Free State Foundation’s regular fare of work may be on any given day – and I don’t want to minimize its importance – I am never under any illusions about this: It is far, far more important that our citizens share a common appreciation of the true meaning of Memorial Day than of, say, the ins and outs of “net neutrality.”

The true meaning of Memorial Day is simple to declare – to honor those men and women in our armed services who paid the ultimate price defending our country and protecting our freedom. There are only so many ways to express this simple injunction. But Lincoln’s words, delivered at Gettysburg on hallowed ground, if not on the first Consecration (Memorial) Day, are difficult to improve upon as a remembrance of the fallen:

"It is rather for us to be here dedicated to the great task remaining before us – that from these honored dead we take increased devotion to that cause for which they gave the last full measure of devotion – that we here highly resolve that these dead shall not have died in vain – that this nation, under God, shall have a new birth of freedom, and that government of the people, by the people, for the people, shall not perish from the earth.”

This much we should “highly resolve” each Memorial Day.

In my Memorial Day 2009 message, I recounted an early morning stroll on the beach in Ocean City, New Jersey, on Memorial Day 2008. I was startled when Lee Greenwood's "God Bless the U.S.A." began blaring over a loudspeaker. And then I saw our flag rising on a boardwalk pole.

All the early morning “board-walkers and “beach-walkers,” stroller-pushers, bicyclists, and vendors came to an abrupt halt as they became aware of the flag-raising. Some put their hands over their hearts. Other simply stood still. Old men who once had been soldiers and young boys who one day would be. Grandmothers, mothers, mothers-to-be, and daughters.

As the flag unfurled and Lee Greenwood’s voice was carried by the summer morning breeze, nobody moved.

In fact, no one moved until "God Bless the U.S.A." ended.

I understand that the flag-raising in Ocean City that Memorial Day was not unique. Indeed, the scene was being reenacted all over America. Nevertheless, Lee Greenwood's anthem, also known as "Proud to Be an American," was especially poignant that morning when the boardwalk stood still.

You can listen to the song here, but this is part of the refrain:

"And I'm proud to be an American
Where at least I know I'm free
And I won't forget the men who died
Who gave that right to me…"
As we enjoy our beach outings or backyard barbeques – or maybe both! – this Memorial Day weekend, let’s be sure to pause to remember all those brave men and women who, as Lincoln put it, “gave the last full measure of devotion” to preserve the freedom we enjoy. And to remember and be grateful to those who are risking their lives to protect us even as we celebrate.

There will be time enough to debate the differences that divide us come Tuesday. Now is the time to focus on what, without doubt, should unite us – reverence and respect for those who paid the ultimate price so that we can still live in a land “Where at least I know I’m free.”

Very best wishes for a safe, happy, and meaningful Memorial Day!

PS – My past Memorial Day messages are here: 2016, 2015, 2014, 2013, 2012, 2011, 2010, 2009, 2008, 2007

PPS – Please remember also the victims of the horrific, evil terrorist attack in Manchester and their relatives. This Memorial Day Weekend, and always, if you “see something, say something.”

New Paper Shows Economic Consequences of Municipal Fiber Projects

Christopher Yoo, a member of FSF’s Board of Academic Advisers, and Timothy Pfenninger, both professors at University of Pennsylvania Law School, coauthored a recent paper entitled “Municipal Fiber in the United States: An Empirical Assessment of Financial Performance.” The paper analyzes the financial viability of twenty municipal fiber networks, finding that eleven of them are cash-flow negative. 

It also finds that five of the nine cash-flow positive projects are generating such small returns that it would take over 100 years to recover the projects’ costs. Additionally, two of the nine cash-flow positive projects have a recovery period of 61-65 years, which is beyond the expected useful life of a fiber network. Professor Yoo and Professor Pfenninger’s paper is an important piece of economic literature for understanding the negative consequences that often occur from implementing unnecessary municipal broadband projects.

FCC Closes Review of Stephen Colbert Comments

Broadcasting & Cable's John Eggerton (@eggerton) reports that the FCC has closed its review of the thousands of indecency complaints filed with the Commission after Stephen Colbert's "colorful criticisms" of President Trump. As Mr. Eggerton puts it, the agency's action closing the investigation was not surprising, "though the speed with which it reached that conclusion was noteworthy."

Here is what the FCC said:

"The FCC received thousands of complaints about the May 1 broadcast of The Late Show With Stephen Colbert. Consistent with standard operating procedure, the FCC's Enforcement Bureau has reviewed the complaints and the material that was the subject of these complaints," said an FCC spokesperson. "The Bureau has concluded that there was nothing actionable under the FCC's rules."

It's good that the FCC acted to close the investigation without further delay. Mr. Colbert's remarks may have been tasteless -- at least they were for my taste -- but they were not obscene and did not violate the Commission's indecency rules. Given that the Commission under Ajit Pai's leadership is looking, justifiably, to reduce unnecessary regulation in other areas, it would not have made sense to let the complaints sit at the agency as some sort of sword of Damocles that might have the effect of chilling free speech.

Many of the FCC's existing program access, "must carry," media ownership, and like regulations are problematical under the First Amendment's free speech guarantee. No need for the agency to raise First Amendment questions by going down a rabbit hole chasing an indecency complaint that is not actionable. 

Rep. Blackburn Introduced a New Internet Privacy Bill

Last week, Rep. Marsha Blackburn introduced a bill that would create an equal set of privacy regulations for Internet service providers and edge providers, like Google and Facebook. The bill is called the "Balancing the Rights of Web Surfers Equally and Responsibly Act of 2017’’ or the ‘‘BROWSER Act of 2017." The proposed legislation would require Internet service providers and edge providers to receive opt-in approval for the use of consumers' sensitive information and opt-out approval for the use of consumers' non-sensitive information. 

Court Decision Supports FCC Proposal to Define Title I Internet Service

At its May 18 public meeting, the FCC voted to propose rolling back public utility regulation of broadband Internet access services. The FCC’s Restoring Internet Freedom proposal argues that broadband Internet access service fits within the statutory definition of a lightly-regulated Title I “information service.” A May 8 U.S. District Court decision in Charter Advanced Services v. Lange (2017) supports the legal rationale for the FCC to define Internet access service as an “information service.”

The most egregious aspect of the FCC’s Title II Order (2015) is that it imposed public utility regulation on Internet access service providers. It did this by force-fitting Internet access into the Telecommunications Act of 1996’s definition of a Title II “telecommunications service.” To achieve that strained result, the order excluded Internet access service from the 1996 Act’s definition of a Title I “information service.

By reclassifying broadband service under Title I, the Restoring Internet Freedom proposal would return to an accurate reading of the 1996 Act. Quoting Title I’s definition of an information service, the FCC’s proposal states:

We believe that Internet service providers offer the “capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications.” Whether posting on social media or drafting a blog, a broadband Internet user is able to generate and make available information online. Whether reading a newspaper’s website or browsing the results from a search engine, a broadband Internet user is able to acquire and retrieve information online. Whether it’s an address book or a grocery list, a broadband Internet user is able to store and utilize information online.  Whether uploading filtered photographs or translating text into a foreign language, a broadband Internet user is able to transform and process information online. In short, broadband Internet access service appears to offer its users the “capability” to perform each and every one of the functions listed in the definition—and accordingly appears to be an information service by definition. 

The Charter Advanced Services v. Lange decision is important because it supports the FCC’s reasoning that broadband Internet access service fits within the definition of a Title I information service in at least two key respects.

First, the U.S. District Court’s decision recognized that an offering’s performance of one function listed under Title I – transforming – sufficed to render it an “information service.” Judge Susan Richard Nelson of the U.S. District Court for the District of Minnesota ruled that Charter’s Spectrum Voice offering “engages in net protocol conversion, and that this feature renders it an ‘information service’ under applicable legal and administrative precedent.” According to Judge Nelson: “In this specific factual context, the touchstone of the information services inquiry is whether Spectrum Voice acts on the customer’s information – here a phone call – in such a way as to ‘transform’ that information… By altering the protocol in which that information is transmitted, Charter Advanced’s service clearly does so.”

The District Court’s decision thus supports the Restoring Internet Freedom proposal’s rationale insofar as “transforming” functionalities bring an offering within the scope of Title I’s information services definition. Of course, broadband Internet access service offerings transform the form or content of users’ information in many ways beyond voice offerings. As the Restoring Internet Freedom proposal observes, ISPs “routinely change the form or content of information sent over their networks – for example, by using firewalls to block harmful content or using protocol processing to interweave IPv4 and IPv6 networks.” Indeed, broadband services generate, acquire, store, transform, process, retrieve, utilize, and make information available to users in myriad ways beyond those briefly identified in the FCC’s proposal.

Second, the U.S. District Court’s decision emphasized that the information service definition is keyed to the provision of the “capability” of performing certain functions – regardless of whether those functions are actually performed in every instance. So, in Charter Advanced Services v. Lange, it was “the capability to convert calls” between Internet Protocol (IP) and Time Division Mutiplexing (TDM) that brought Charter Advanced within the meaning of Title I. As Judge Nelson explained:

[T]he mere fact that Spectrum Voice does not always involve protocol transformation does not render the service any less of an ‘offering’ of information services. At no point does the Telecommunications Act suggest or require that a customer use an information service’s transformative features all the time. Indeed, the very language of the definition of an ‘information service,’—which merely mandates that there be an ‘offering of a capability’ to, inter alia, transform information—belies such a conclusion.

Similarly, the Restoring Internet Freedom proposal emphasizes that “[t]he definition of “information service” speaks to the ‘capability’ to perform certain functions.” That is, an information service need not actually transform or perform other delineated Title I functions for broadband Internet access users in every instance. Rather, the proposal recognizes that “offering Internet access is precisely what makes the service capable of ‘generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information’ to consumers.”

The Restoring Internet Freedom proposal follows the FCC’s Cable Modem Order (2002), which “recognized that broadband Internet users often used services from third parties.” The Cable Modem Order – which declared cable modem service an information service “regardless of whether subscribers use all of the functions provided as part of a service” – was affirmed by the U.S. Supreme Court in NCTA v. Brand X (2005).

Conversely, the Restoring Internet Freedom proposal rejects the Title II Order’s effective disregard of functional “capability” as part of the definition of an “information service.” The Title II Order concluded that consumers use broadband service “primarily as a conduit” for accessing third-party content, applications, and services. This is not a conclusion on which there is anything like universal agreement. But, in any event, even if true, it is by virtue of being an Internet “conduit” that broadband Internet access service is capable of ‘generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information’ to consumers” – in an offering in which the conduit and information processing elements are inextricably linked.

The holding in Charter Advanced Services v. Lange is specific to IP-to-TDM voice offerings. Of course, the District Court’s decision does not alter the Title II Order or compel the FCC to make a Title I reclassification decision. Nonetheless, the court’s focus on the functional capabilities in the “information service” definition in the 1996 Act supports the argument for Title I classification of broadband Internet access service in the Restoring Internet Freedom proposal.

Classifying broadband Internet access service as an “information service” under Title I will restore a proper understanding of the statute and reflect its intent that Internet service providers be subject to light-touch regulatory treatment.

[*This post was updated to correct the case name of one of the Defendants 05/22/17 2:45pm EST]

Kangroos Are Faster Than Australia's Internet

All those advocates of either direct government ownership or control of the Internet, or simply more heavy-handed government intervention in dictating the operations of the Net, should read this New York Times piece, "How Australia Bungled Its $38 Billion High-Speed Internet Rollout."

For those who favor government ownership and control of the Internet, Australia has long been held up as a model to be emulated. Among the Australian network's ongoing troubles is its ranking of 51 among the world's countries with respect to Internet speed.

Some model to be emulated, huh?

PS - Don't hold your breath waiting for the New York Times to make the connection between the woes of Australia's Internet and the heavy-handed government intervention. You'll be dead first!

Broadband Investment Slowed by $5.6 Billion Since Open Internet Order

For years Free State Foundation scholars have declared that Internet regulation increases costs for broadband providers and ultimately crowds out resources that otherwise would be used for capital investments to build-out and modernize network infrastructure. They made this point very clear, especially with regard to Title II public utility regulation, in their initial comments and reply comments during the Federal Communications Commission’s (FCC) Open Internet proceeding in 2014.

Nevertheless, in February 2015, the FCC adopted the Open Internet Order, which reclassified broadband as a telecommunication service and imposed Title II public utility regulation on broadband providers. The FCC stated confidently in the Order that “[h]istory demonstrates that this careful approach to the use of Title II will not impede investment.” The Commission also asserted in the Order that “our rules will not disrupt capital markets or investment.” After adoption of the Open Internet Order, FSF scholars have observed multiple times that these unnecessary regulations have, in fact, chilled investment from Internet service providers (ISPs). (See here, here, and here.)

In his address on April 26, FCC Chairman Ajit Pai cited FSF research estimating that the Open Internet Order "has already cost our country $5.1 billion in broadband capital investment." Just two years after the FCC adopted the Open Internet Order, I estimate that broadband providers significantly slowed investment, despite the claims by the FCC that the opposite would occur. Taking into account the latest USTelecom investment data, I now estimate that foregone investment in 2015 and 2016 was about $5.6 billion, an amount providers likely would have invested in a business climate without Title II public utility regulation.

Here is how I calculated that figure.

USTelecom publishes data on broadband capital expenditures (capex) for each year dating back to 1996. Using this historical data, I collected figures on the previous twelve years before the Open Internet Order was adopted in February 2015. I picked 2003 as the first year because the market had just collapsed from the dot-com bubble and total broadband capex was at its lowest point since 1996. I established a trend line from 2003 to 2016, which created a linear pattern over the first 12 years before the Open Internet Order and estimated what we could have expected broadband capex to be in 2015 and 2016 without Title II public utility regulation.

I also collected broadband capex data on sixteen of the largest ISPs for years 2014, 2015, and 2016. My sample found a 2.46% decline from 2014 to 2015 and a 4.69% decline from 2015 to 2016, totaling an overall decline of 7.04% from 2014 to 2016. These figures are pretty close to economist Hal Singer’s finding that a sample of twelve ISPs declined broadband capex by5.6% from 2014 to 2016.

In 2014, according to a December 2016 research brief by USTelecom, broadband capex totaled $77.4 billion. Therefore, a 2.46% decline over the following year means that total broadband capex in 2015 was $75.5 billion. The same research brief finds that broadband capex totaled $76.3 billion in 2015, but it says that “investment figures are rounded [to the nearest billion] due to the inevitable estimation involved in producing them.” In other words, USTelecom’s standard practice is to round this figure to $76 billion in 2015, so my estimate of $75.5 billion seemed to be right on track, suggesting my estimate for 2016 should be reasonably reliable. Despite the fact that my 2015 capex estimate seemed reasonable, I wanted to be conservative so I used the unrounded USTelecom estimate of $76.3 billion for 2015, and applied an additional decline of 4.69% from 2015 to 2016. Therefore, broadband capex in 2016 was about $72.7 billion.

But the important question is: how do these figures compare to the trend of broadband investment during the twelve years before the Open Internet Order was adopted?

Based on the trend, we should have expected total broadband investment to be about $76.6 billion in 2015. Even without the imposition of the Open Internet Order, a small decline in investment from 2014 to 2015 was possible because of the extent to which investment had increased beyond the trend line in the two years prior. (The graph below shows this pattern.) The difference between what was expected ($76.6 billion) and what actually occurred ($76.3 billion) was $300 million in foregone investment.

For 2016, I estimated total broadband capex to be $72.7 billion, but the trend estimated that the market should have invested about $78 billion. That is a difference of $5.3 billion in foregone investment. Summing that with 2015, broadband providers invested $5.6 billion less than what we could have expected before the Open Internet Order. (See the trapezoid in the graph below.)

This is not a regression analysis, so I cannot say by how much the regulatory uncertainty and costs imposed in the Open Internet Order negatively impacted broadband investment. But I can say, unequivocally, that if the FCC was right about broadband capital investment not being suppressed by the Open Internet Order, we should have expected the market to continue along or above its trend of investment growth. However, based on the latest information available, in the two years since the Open Internet Order was adopted, I estimate that broadband providers decreased investment by about $5.6 billion. That is very significant.

In a September 2015 blog, Free State Foundation President Randolph May said: “[W]e told you so: Title II regulation harms investment.” His conclusion was based on economist Hal Singer’s findings that broadband investment had declined during the first two quarters following the Open Internet Order’s adoption. Now, I think we can say, definitively, that we told you so. Broadband investment has declined since the imposition of Title II public utility regulation.

U.S. Court of Appeals Denies Rehearing on Title II Reclassification

Today, the U.S. Court of Appeals denied a rehearing of the decision which upheld the Federal Communications Commission's reclassification of broadband as a Title II telecommunications service. The opinion states that a review would be unwarranted given that the FCC recently issued a Notice of Proposed Rulemaking that would reverse the Title II reclassification.