ISPs to SEC and FCC: Broadband Investment Has Declined

As the FCC has done for all proceedings since Chairman Ajit Pai took over in January 2017, the FCC released the Fact Sheet and Draft Order in the Restoring Internet Freedom proceeding three weeks in advance of its December 14 vote. In response to the release, Commissioner Mignon Clyburn published her own Fact Sheet and Glossary about the harms she believes the Order will create.

Here is her definition for “cost-benefit analysis:”

Cost-benefit analysis – Despite insufficient data and data to the contrary, the Chairman's Order draws conclusions by only accepting self-serving statements made by large broadband providers. It makes no effort to verify these claims against the statements these very same companies have made in filings before the Securities and Exchange Commission (SEC).

However, in the Draft Order, the FCC concluded that broadband investment declined by 5.6% since the adoption of the Title II Order. This figure, compiled by Hal Singer, uses data that comes directly from broadband ISP’s 10-Q and 10-K forms, which are required by the SEC. Even my blog estimating a $5.6 billion decline in broadband investment since the Title II Order, which also was cited in the Draft Order, uses data collected directly from these filings required by the SEC. Broadband ISPs are reporting figures to the SEC that are consistent with what they also are telling the FCC; broadband investment has declined since the Title II Order was adopted.

For a more accurate assessment of the FCC’s proposal to conduct a cost-benefit analysis, see this July 2017 Perspectives from FSF Scholars by FSF Senior Fellow Ted Bolema. 

AT&T/Time Warner Merger: Parties Are Far Apart in Requests for Trial Date

The Department of Justice and the merging parties, AT&T and Time Warner, are proposing different dates for their upcoming trial that are far apart. AT&T and Time Warner proposes that the trial begin on February 20, 2018, while DOJ is seeking to delay the trial until May 7, 2018. The difference is important because the merger agreement is scheduled to expire on April 22, 2018. The merger was first announced in October of 2016, so DOJ has already had more than a year to review the merger and prepare for trial. 

Free State Foundation President Randolph May and I provided an analysis of DOJ’s challenge to the merger in a recent column in The Hill.

A Comment on the FCC Net Neutrality Comments

This comment regarding the FCC’s comment process in the agency’s Restoring Internet Freedom proceeding is not about the merits of the proceeding. Rather it’s about administrative law and, more specifically, the proper conduct of rulemaking proceedings at the FCC and the agency’s institutional integrity.

It’s no secret that, on the merits, I favor the repeal of current Internet service provider regulations adopted by the FCC in 2015. But I write now based on my experience and expertise as a former FCC Associate General Counsel, a former Chair of the American Bar Association’s Section of Administrative Law and Regulatory Practice, a former Public Member and current Senior Fellow of the Administrative Conference of the United States, and a Fellow of the National Academy of Public Administration. In other words, I write from an administrative law and public administration perspective.

Perhaps it is not surprising that in conjunction with the FCC’s release of the draft of its Restoring Internet Freedom order on November 22 proposing to repeal the current Internet regulations that the pro-regulatory forces would renew their attacks on the FCC’s rulemaking process. Not surprising, but disappointing nevertheless.

Witness the November 24 article by the Washington Post’s Brian Fung which begins this way: “[A] mounting backlash from agency critics is zeroing in on what they say are thousands of fake or automated comments submitted to the FCC that unfairly skewed the policymaking process.” The article reports that New York Attorney General Eric Schneiderman alleges that the process “has been corrupted by the fraudulent use of Americans’ identities.” I wouldn’t be at all surprised if General Schneiderman calls for Special Counsel Robert Mueller to investigate.

But let’s get real – and be frank – for the sake of a proper understanding the FCC’s rulemaking process and the agency’s institutional integrity.

Over 22,000,000 “comments” have been filed since the Restoring Internet Freedom proceeding was initiated in May. The vast majority – surely 99% – of these are computer-generated short form conclusory comments, and there are literally many millions of them both favoring and opposing repeal of the current rules. Virtually none of these conclusory comments address the Commission’s legal authority, a central issue in the proceeding. All of this – that is, the “war of the comments” – follows the effort by then-Chairman Tom Wheeler, and his staff, to mount an all-out political-style campaign in 2015 to generate as many short form comments as possible favoring his pro-regulatory proposal. Naturally, the other side responded in kind.

These are indisputable facts.

And this too, as I put it in a July 2017 Washington Times op-ed, ought to be indisputable as a proper understanding of the law: “[T]he fundamental point – an important one relating to maintaining the Commission’s institutional integrity – is that the agency’s ultimate determination should be based primarily on the application of its expertise regarding the facts and the law, not on a campaign-style plebiscite.”

The correctness of this point is widely acknowledged. The Administrative Conference’s Recommendation 2013-5, adopted in December 2013, regarding the use of social media in conjunction with rulemaking, states: “Another concern is that the use of ranking or voting tools may mislead some to believe that rulemaking is a plebiscite…” In her article, “Should Mass Comments Count?”, administrative law scholar Nina Mendelson states: “All agree that public comments cannot serve as a plebiscite on the issue before the agency. But large volumes could, as I argued, trigger more thoughtful consideration and evaluation by the agency.”

I don’t disagree that a large volume of comments should serve as a “trigger.” Indeed, in my Washington Times op-ed, I acknowledged that “an extraordinary number of public comments submitted in a Commission proceeding is an indication of heightened interest that should cause the agency to take notice and pay extra special attention to the facts and the law that should inform its decision.”

Now, no one can read, even casually, the FCC’s 200-page draft order, with its 1318 footnotes, and contend that the agency has not seriously evaluated and given thoughtful consideration to all the issues. And perhaps more to the point here, no one can contend that the draft order does not seriously evaluate and pay special attention to the issues raised by those opposing repeal of the current public utility Internet regulatory regime. Indeed, the draft order cites the comments and responds to the points raised by the groups most notable for opposing the repeal many, many times throughout the draft: Public Knowledge 70 times; OTI America 55 times; and Free Press 54. These commenters, and other pro-regulatory entities, filed lengthy comments, which deserved to be considered seriously, and they were. No one can credibly argue otherwise.

As I said in the Washington Times piece back in July:

[I]n the case of the FCC’s current rulemaking, there are important economic and technological considerations, often involving complex cost-benefit calculations and tradeoffs, that should carry more weight than a count of comments. For example, there is empirical evidence showing that public utility-like regulation deters investment and that rigid prohibitions on “discrimination” deter innovation because ISPs are discouraged from differentiating their offerings. Highly technical network operations impact determinations as to whether practices, such as prioritization of certain kinds of traffic, constitute reasonable network management techniques or instead attempts to disadvantage competitors. And, finally, there are serious questions relating to the FCC’s legal authority to regulate ISPs as public utilities.

Under a proper understanding of the law, it is incontestable that the rulemaking process is not a plebiscite. If Attorney General Schneiderman and others want to continue to focus on the “count” of computer-generated comments that may be their prerogative. But I suggest that this diversionary tactic is quite telling – that is, telling us quite a lot about their lack of confidence in the substantive arguments opposing the restoral of Internet freedom.

Fixed Wireless Broadband Could Help Reach More Rural Consumers

Fixed wireless service is becoming a viable option for the provision of residential and even small business broadband, particularly in rural areas where consumers have few broadband choices. Recent studies predict rapid growth of fixed wireless broadband as a technology that has the potential to reach more areas that are not presently being reached by other modes of Internet access.

But that growth requires that more licensed spectrum be made available for fixed wireless use.  The FCC’s recent actions to allocate additional licensed spectrum will help fixed wireless providers expand deployment throughout rural America. But continued efforts by Congress and the FCC to allocate spectrum are necessary in order to meet FCC Chairman Ajit Pai’s goal of closing the rural-urban digital divide.

Fixed wireless providers, sometimes referred to as wireless Internet service providers, deliver broadband access to consumers at fixed locations through wireless transmitters on towers interconnected by unlicensed or licensed spectrum. Like mobile wireless, these towers are connected to fiber backhaul networks. Consumers generally receive access at their locations through a Wi-Fi router, creating a fixed connection with download speeds up to 100 Mbps.

A recent report by the Carmel Group titled “Ready for Takeoff: Broadband Wireless Access Providers Prepare to Soar with Fixed Wireless” forecasts robust growth for the U.S. fixed wireless broadband market. The number of subscribers is projected to increase from just over 4 million in 2016 to 8 million by 2021. Additionally, market revenue is projected to increase from $2.3 billion in 2016 to $5.2 billion in 2021. The Carmel report also suggests that fixed wireless services are the most cost-effective solution for deploying broadband in rural areas.

One advantage of deploying fixed wireless over other broadband technologies is its relatively low fixed costs. Fiber and cable networks require a lot of capital for deployment in residential areas. For residents in areas with low population densities, these capital costs may be sufficiently high to deter deployment, which is why these areas often have limited choices for wireline broadband access. But for many of these rural residents, fixed wireless broadband may be a sufficient low-cost solution to a high-cost problem. Compared to other broadband technologies, fixed wireless providers pay back their investments more than twice as fast and they spend the least amount of capital per subscriber, while still offering download speeds competitive with other modes of broadband.

One important disadvantage of fixed wireless is that its use of unlicensed spectrum can make connections unreliable due to congestion. In order for fixed wireless providers to market themselves as reliable residential or business broadband providers, they will need to acquire more licensed spectrum.

The implementation of 5G wireless technology will advance the capabilities of fixed wireless networks. An August 2017 report from SNS Research entitled “5G for FWA (Fixed Wireless Access): 2017 – 2030 – Opportunities, Challenges, Strategies & Forecasts” predicted early commercial rollouts from AT&T and Verizon would drive fixed wireless 5G revenue to $1 billion by the end of 2019. SNS Research indicated the fixed wireless 5G market will grow at a compound annual growth rate of 84% from 2019 to 2025, with service revenue increasing to more than $40 billion by the end of 2025. But before the marketplace can take off, the federal government must continue to allocate spectrum to facilitate broadband deployment.

To their credit, the current FCC and the 115^th Congress have introduced a number of bills and proposals which would implement pro-consumer spectrum initiatives. In a September 2017 Perspectives from FSF Scholars, FSF Visiting Fellow Gregory Vogt discussed these initiatives in detail. The Senate’s bipartisan passage of the MOBILE NOW Act is a step towards advancing the reallocation and assignment of licensed spectrum for wireless (fixed and mobile) broadband use. Moreover, the Senate’s introduction of the AIRWAVES Act would identify specific mid- and high-band spectrum and establish deadlines for reallocations and auctioning of these spectrum bands.

Also, the FCC recently adopted a Notice of Proposed Rulemaking to promote investment in the 3.5 GHz band, which is one of the more common frequency bands used by fixed broadband providers. If adopted, this proposal would create longer license terms, license renewability, and larger geographic license areas – all of which would help accelerate the deployment of fixed wireless. In November 2017, the Commission adopted a Second Report and Order to allocate an additional 1700 megahertz of high band spectrum for flexible wireless use. Specifically, the Order preserves the 70 and 80 GHz bands for traditional and innovative fixed wireless uses, which will be explored in an upcoming proceeding.

As technology continues to improve, fixed wireless is becoming a viable option for residential or small business broadband access. For many rural Americans, fixed wireless is already more than sufficient. As 5G becomes the new norm for wireless services, additional licensed spectrum could enable fixed wireless to become even more competitive as a next-generation broadband alternative, while helping to close the rural-urban digital divide.

Senate Tax Bill Will Stimulate Maryland’s Economy

Earlier this month, the Tax Foundation published a study on the Senate’s version of the Tax Cuts and Jobs Act, finding that the plan would grow the economy while simplifying the tax code and reducing marginal tax rates.  Using the Tax Foundation’s Taxes and Growth macroeconomic model, the study finds that the proposed tax plan will create 925,000 new full-time equivalent jobs and will increase GDP by 3.7% over the next decade. Accounting for the increase in GDP, after-tax incomes will rise by 4.4%.

The Tax Foundation also published a state-by-state impact analysis of the Senate’s proposed plan. In Maryland, the study projected 17,322 new full-time equivalent jobs over the next decade and an average increase in after-tax income for middle-income families of $3,245. Lower marginal tax rates will complement Governor Larry Hogan’s efforts to reform Maryland’s business climate. This will further stimulate Maryland’s economy and improve its long-term fiscal health.

Strong Property Rights Lead to Economic Prosperity

In July 2017, the Property Rights Alliance at Americans for Tax Reform published the 2017 International Property Rights Index (IPRI), ranking 127 countries around the world based on the strength of both physical and intellectual property rights. The 2017 edition comprises over 98% of global gross domestic product (GDP) and over 93% of the world’s population. Importantly, the IPRI finds that property rights are a defining factor impacting a country’s investment, entrepreneurship, and economic prosperity.

The International Property Rights Index includes three core components (legal and political environment, physical property rights, and intellectual property rights) and ten corresponding categories. The legal and political environment component includes judicial independence, rule of law, political stability, and control of corruption. The physical property rights component includes the protection of such rights, the ability to register property, and the ease of access to loans. The intellectual property rights component includes the protection and enforcement of such rights, strength of patent protections, and the level of copyright piracy. Using data from other international indices, the IPRI compiles these scores into a 0-10 scale for each of the 127 countries.

New Zealand ranks highest with a score of 8.63, followed by Finland and Sweden with scores of 8.62 and 8.61, respectively. The United States ranks 14^th with a score of 8.07, moving up from 15^th in 2016 when it scored a 7.74. On the other hand, the bottom three countries are Bangladesh, Venezuela, and Yemen, with scores of 3.12, 3.06, and 2.73, respectively.

Significantly, the Index provides insight into correlations between IPRI scores and many economic outcomes. Free State Foundation scholars often have stated that strong protection of property rights, specifically strong protections of intellectual property rights, will foster creativity, innovation, and economic growth. The strong positive correlations found in the IPRI are consistent with those statements. For example, IPRI scores have a correlation coefficient of 0.814 with GDP per capita, 0.764 with gross capital formation per capita, and 0.878 with global entrepreneurship. Other strong positive correlations include a 0.857 coefficient with networked readiness/connectivity, 0.801 with civic activism, and 0.768 with overall economic freedom.

With these robust positive correlations, it should not be a surprise that the top 20% of countries in the IPRI have an average GDP per capita of over $57,000, while the bottom 20% of countries have an average GDP per capita of just over $4,500.

The IPRI, in addition to the U.S. Chamber of Commerce’s Global Intellectual Property (IP) Center’s 2017 edition of the International IP Index, provide U.S. policymakers a useful tool for assessing how to improve our country’s physical and intellectual property rights systems. (See this February 2017 blog.) Providing strong protections to property rights is a principle embodied in the U.S. Constitution and improving such protections will enhance creativity and innovation and foster economic growth. (For much more concerning foundational principles supporting IP rights protections in the United States, please read “The Constitutional Foundations of Intellectual Property: A Natural Rights Perspective” by FSF President Randolph May and Senior Fellow Seth Cooper.)

Additionally, policymakers in the countries which rank towards the bottom, such as Venezuela or Yemen, should use these indices to their advantage. From the correlations cited above, it is clear that strong physical and intellectual property rights foster innovation and economic prosperity. As undeveloped and developing countries continue to improve their property rights protections, U.S. companies will be more inclined to expand international trade into those countries, creating economic opportunities in impoverished parts of the world. Robust property rights reduce poverty by incentivizing economic activity because entrepreneurs understand that their innovations and earnings will be protected.

Finally, the U.S. must continue to be a leader throughout the world by participating in trade agreements that contain effective provisions that support protection of property rights. As more countries adopt strong property rights through trade agreements, the global economy will grow substantially because mutual gains from international trade are much higher when participating countries adopt and enforce laws that protect physical and intellectual property rights.

Shutting Down the Bizarre Bazaar

For many years – you can make that almost two decades! – I have advocated that Congress reform the FCC’s transaction review process to constrain the agency’s discretion, to require it to act on proposals in a timelier fashion, and to reduce the current duplication of effort that exists between the FCC and the antitrust authorities. I have testified to this effect several times at congressional hearings. Here is my testimony before the House Communications and Technology Committee in July 2013.

But until Congress gets to work on a #CommActUpdate – which it should – it’s up to the FCC to exercise self-restraint so as to carry out its merger review responsibilities in a proper manner. The Commission’s recent action approving the CenturyLink - Level 3 merger presents an opportunity for comment to highlight briefly a salient point relating to past abuse of the review process.

It is common knowledge that, in the past, the Commission often has availed itself of the “opportunity” presented by the indeterminate nature of the “public interest” review standard to impose conditions unrelated to harms supposedly arising from the transaction. This usually has been accomplished by Commission officials engaging in an unseemly bargaining process in which parties to the transaction are advised to “volunteer” certain conditions if they wish to have the transaction approved. As I explained in a Legal Times column entitled, “Any Volunteers?”, published in 2000, the proffered conditions aren’t really “volunteered” in the sense in which the term normally is understood. Moreover, the resulting “regulation by condition” is bad policy because, among other reasons, similarly situated parties are treated in a disparate fashion.

Subsequently, in 2010, after observing more instances of “regulation by condition,” I called the process of extracting “volunteered” commitments, a “Bizarre Bazaar.”  I can think of worse names for it.

This past March, I returned to the subject once again in “A Proposal for Improving the FCC’s Merger Review Process.” There I urged the Commission to consider issuing a policy statement regarding transaction reviews to include at least these two fundamental elements:

·      A commitment to review proposed mergers in a timely fashion.

·       A commitment to refrain from imposing conditions on approvals of transactions unless they are narrowly tailored to address harms uniquely presented by the specific transaction.

This brings me back to the FCC’s approval of the CenturyLink – Level 3 transaction. As to timeliness, the FCC approved the transaction just a few days after the bell rang on the Commission’s 180-day shot. But unlike most timepieces, the shot clock stops and starts at the government’s discretion, so the reasons for the stops and starts are pertinent. Hopefully, in the dynamic, fast-changing communications marketplace, the Commission will strive to beat the shot clock substantially, not just run it out.

Regarding a commitment to refrain from imposing conditions unrelated to harms allegedly arising from the transaction, the Commission deserves credit for its handling of CenturyLink – Level 3. The Commission majority stated clearly that it would impose conditions only to address transaction-specific harms which are related to its responsibilities under the Communications Act and related statues. Given past history – the “Bizarre Bazaar” – this is important because it should offer some assurance to those who come before the agency in the future, or who are contemplating doing so, that they will not be subject to the vagaries of “regulation by condition.”

 After a careful and extensive economic analysis, the Commission did impose one transaction-specific condition to address potential competitive concerns in ten specific locations where it considered the merger might decrease competition and increase prices. Commissioner Mignon Clyburn dissented because she thought the Commission should not have credited potential competition to the extent that it did and, therefore, should have imposed substantially broader conditions. But, in essence, she was using the occasion to reargue her position that did not prevail in the Business Data Services proceeding.

So, I commend the current Commission for the emphasis placed on limiting the imposition of conditions to those directly related to transaction-specific harms. For shutting down the Bizarre Bazaar.

But here’s the final point: Congress needs to amend the Communications Act to embody that constraint in law so that it will be durable. And it should adopt other reforms such as requiring the Commission to render a final appealable order regarding proposed transactions within a definite time frame, absent a showing of good cause for exceeding the deadline. Then the conception of the agency’s proper role in reviewing proposed mergers will not be determined by what three of the five commissioners happen to think on any given day, or in any given administration.

*     *     *

Regarding Congress and the need to update the Communications Act, the new Free State Foundation book, #CommActUpdate - A Communications Act Fit for the Digital Age, Randolph May and Seth Cooper is now available on Amazon in paperback for $9.95 and on Kindle for $2.99! And it is available as an ebook for $2.99 from seven different bookstores here. Read more about the book here.

   

A Properly Run Lifeline Program Is Important

At its November 16 meeting, the FCC will consider changes to its Lifeline program that provides subsidized communications services to low income persons. As readers of this space know, for many years, even decades, I have been a supporter of a properly run, efficient Lifeline program. So, as the Commission considers certain rule changes, I offer these thoughts about what the Commission has proposed.

First, I am unabashedly free market-oriented. For as long as I have been a Lifeline supporter, at the same time, I also have been a forceful (I hope) advocate of eliminating or curtailing unnecessary, costly FCC regulations – of which there are too many.

Second, I do not consider my support for Lifeline to be inconsistent with my free market disposition because I consider Lifeline service a “safety net” for qualifying low income persons who otherwise might not have access to communications services. But I emphasize, as I did in Senate testimony in June 2015: “Lifeline should be a ‘safety net’ that operates within boundaries to aid those truly in need, not another federal entitlement program that is structured, or that evolves, in a way so that its subsidies inexorably expand to subsidize those further up the income scale who are not truly in need.”

Third, like other “safety net” programs, it is very important that Lifeline be run efficiently and that waste, fraud, and abuse of the program is absolutely minimized. To the discredit of the Commission, and especially of those who knowingly abused the program, this has not always been the case in the past. Yet, over the past few years, corrective measures have been initiated, and they have had some positive impact. It is imperative that the Commission continue these efforts, such as implementing the National Lifeline Eligibility Verifier, to enhance and maintain the program’s integrity. At a time when the USF fee (yes, a “tax”) paid by consumers on all interstate and international calls is nearly 20%, the public will not long support one of the Universal Service programs if waste and fraud is prevalent. Nor should they. So, the FCC must continue the efforts it has begun in this regard, especially by targeting “bad actors.”

Fourth, even though I have made clear on many occasions that policies incenting facilities-based providers should be favored over those that do not provide such incentives, the Commission’s proposal to eliminate non-facilities-based providers from Lifeline participation gives me substantial pause. Approximately 70% of current Lifeline subscribers are served by resellers, and a large proportion of those 70% are served by wireless providers. Moreover, surveys consistently show a significant proportion of low-income households are “wireless only.”

For whatever reason – and the reason may well be that Lifeline-eligible persons understandably are not as profitable to serve as those with higher incomes – the evidence appears to show, at least thus far, that facilities-based providers have not targeted this market segment. So, the Commission ought to be concerned about its proposal to eliminate resellers from participation in the program, at least at this time when they serve such a large proportion of eligible subscribers.

Of course, the Commission should continue to pursue policies, including reducing unnecessary regulations, to stimulate facilities investment in all areas of country, particularly underserved rural areas. FCC Chairman Ajit Pai deserves much credit for calling attention to the rural-urban “digital divide” and for proposing ways to address it. But the primary objective of the Lifeline program is to provide a “safety net” for those who demonstrate their eligibility. The Commission shouldn’t lose sight of that objective.