Commissioner O'Rielly Asks eBay and Amazon to Remove Fraudulent TV Devices

On Friday May 25, 2018, FCC Commissioner Michael O'Rielly sent a letter to eBay CEO Devin Wenig and Amazon CEO Jeff Bezos to warn them about certain manufacturers of video television set-top boxes who fraudulently place the FCC's trusted logo onto devices that have not been approved by the Commission's equipment authorization process. Despite proactive steps by both eBay and Amazon to reduce theft of intellectual property (IP) from their websites, pirated goods, such as these fraudulent set-top boxes, are still sold on both online marketplaces, putting consumers at serious risk and legitimate manufacturers at an economic disadvantage.

Commissioner O'Rielly requests that eBay and Amazon continue to remove devices that fraudulently bear the FCC logo and to provide the FCC with any additional information that will help combat IP theft and consumer fraud.

Memorial Day 2018

This Memorial Day message marks my twelfth consecutive one. When I wrote the first message, back in 2006, I had no idea then that I necessarily would write one the next year, or that it would become a tradition. But I suppose as a conservative in the Burkean sense, traditions matter, at least rightful ones. So, this tradition continues to exert its pull on me as I think about the true meaning of Memorial Day.

And I hope this brief departure from the normal fare is not an entirely unwelcome intrusion, but perhaps rather a cause for a pause for a moment of reflection.

This year I want to let Oliver Wendell Holmes do most of the work of calling to mind the sacrifice of those we remember on Memorial Day and why remembering matters. On May 30, 1884, Holmes, himself a thrice-wounded Civil War veteran and later a distinguished Justice of the Supreme Court, delivered a remarkable Decoration Day address in Keane, New Hampshire. What then was called Decoration Day, a reference to the practice of decorating the graves of the fallen, is now commonly called Memorial Day.

Holmes’ address was titled, “In Our Youth Our Hearts Were Touched with Fire.” Here are its first words: “Not long ago I heard a young man ask why people still kept up Memorial Day, and it set me thinking of the answer.”

If you can spare the time, Holmes’ answer is worth reading in its entirety. But if not, here are the three concluding paragraphs:

[T]he generation that carried on the war has been set apart by its experience. Through our great good fortune, in our youth our hearts were touched with fire. It was given to us to learn at the outset that life is a profound and passionate thing. While we are permitted to scorn nothing but indifference, and do not pretend to undervalue the worldly rewards of ambition, we have seen with our own eyes, beyond and above the gold fields, the snowy heights of honor, and it is for us to bear the report to those who come after us. But, above all, we have learned that whether a man accepts from Fortune her spade, and will look downward and dig, or from Aspiration her axe and cord, and will scale the ice, the one and only success which it is his to command is to bring to his work a mighty heart.

Such hearts – ah me, how many! – were stilled twenty years ago; and to us who remain behind is left this day of memories. Every year – in the full tide of spring, at the height of the symphony of flowers and love and life – there comes a pause, and through the silence we hear the lonely pipe of death. Year after year lovers wandering under the apple trees and through the clover and deep grass are surprised with sudden tears as they see black veiled figures stealing through the morning to a soldier's grave. Year after year the comrades of the dead follow, with public honor, procession and commemorative flags and funeral march – honor and grief from us who stand almost alone, and have seen the best and noblest of our generation pass away.

But grief is not the end of all. I seem to hear the funeral march become a paean. I see beyond the forest the moving banners of a hidden column. Our dead brothers still live for us, and bid us think of life, not death – of life to which in their youth they lent the passion and joy of the spring.

Or, as Cicero put it simply: “The life of the dead is placed in the memory of the living.”

Or, finally, as John Adams, declared: “Our obligations to our country never cease but with our lives.”

Even today, as so often in our country’s history, our servicemen and women continue to give their lives and limbs in the service of our country. Whether by recalling the words of Holmes, Cicero, Adams, or any others, let us remember their sacrifices.

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

PS – My past Memorial Day messages are here: 2017, 2016, 2015, 2014, 2013, 2012, 2011, 2010, 2009, 2008, 2007

Panelist at FSF Conference Highlights Demand-Side Problem with Municipal Broadband

Professor Christopher Yoo of the University of Pennsylvania, a member of FSF’s Board of Academic Advisers, spoke at the Free State Foundation Tenth Annual Telecom Policy Conference on March 27. The conference’s final panel featured Professor Yoo, Professor Michelle Connolly of Duke University, and Professor Daniel Lyons of Boston College Law School and was entitled “Final Thoughts and Looking Ahead: Perspectives from Three of FSF’s Academic All-Stars.”

Professor Yoo recently noted from his experience examining municipal broadband system a problem that is often not recognized by proponents of municipal broadband. He points out that proposals for new municipal broadband systems tend to focus on the costs being manageable, while paying too little attention to the demand side. In other words, these systems tend to be built on the assumption that “if we build it, they will come.” But the demand side is the part that municipalities are the most ill-equipped to address, especially in cities that already have established private broadband providers. As Professor Yoo explains: 

I'll tell you right now, the problem is not generally on the cost side. . . It's on the revenue side because as anyone who's been in this business knows, especially if you're in an overbuilt situation, you're marketing the heck out of these things. You got to come up with a new advertising campaign all the time to chisel someone off who's already got service. Guess what? Elected officials were not born to do that. They're not trained to do that. It's just not what's in their blood. But they think about operating a network. That's the easy part of being in this business, and they don't realize that. And they also assume that the incumbent won't drop its price. Well, guess what? If a monopolist faces duopoly competition, any economist will tell you prices are going to go down. They don't take that into account. A lot of models are oversold. Some of them are not even pro forma financials; they're pure marketing pitch. And they're put into the bond instruments, and simply put, some of them really have no chance of succeeding at all. 

Professor Yoo also pointed out that some municipalities are finding more creative solutions for making Internet access available to their residents, such as fixed wireless service, that don’t involve building risky municipal broadband networks: 

And in fact, there are a lot of areas of the U.S. that are underserved, and we're not just talking about Indian reservations, but counties. And we're studying western Massachusetts, counties in Arkansas. There are a lot of places that have real challenges. The two things that struck me about it is how the deployments that are working in a lot of these places that have some problems are very unorthodox. They looked very different than the ones before. Many of them are fixed wireless deployments, sometimes WISPs [wireless Internet services providers] where they're using unlicensed spectrum. 

To view the panelists’ discussions on those points and on other issues such as Internet freedom and net neutrality regulation, please watch the C-SPAN video of the conference here. The transcript for the panel on “Final Thoughts and Looking Ahead: Perspectives from Three of FSF’s Academic All-Stars,” featuring Christopher Yoo, is available at: http://www.freestatefoundation.org/images/March_27_2018_Tenth_Annual_Conf_Academic_Panel_Transcript_051718.pdf.

[Note: The quotations by the panel speaker included in this post were taken from the C-SPAN transcription of the Conference, with minor edits made for purposes of correcting obvious syntax, grammar, and punctuation errors. None of the meaning was changed.]

Increasing Rural Broadband Access Will Advance Rural Telemedicine Access

On May 21, 2018, the current FCC Chairman Ajit Pai and former FCC Chairman under President John F. Kennedy, Newton Minow, coauthored an article in The Boston Globe titled “In rural America, digital divide slows a vital path for telemedicine.” Many rural Americans have limited access to local health care services, but telemedicine - the delivery of health care services using communications technology - helps bring those services into rural areas. The problem is that many rural Americans also lack sufficient broadband access.

As I stated in a March 2018 Perspectives from FSF Scholars titled “Reaching Rural America: Free Market Solutions for Promoting Broadband Deployment,” the FCC's ongoing initiatives to reduce regulatory barriers and allocate and assign more licensed spectrum will encourage broadband providers to deploy next-generation access in rural and unserved areas. Moreover, the increasing capabilities of wireless broadband technologies, like satellite, fixed wireless, and mobile wireless, will continue to advance the speeds and quality of rural broadband connections, thereby closing the digital divide and increasing access to telemedicine for rural Americans.

Trade Negotiations Should Focus on IP Protections, Not Retaliation

The ongoing controversies regarding international trade, including the current negotiations over the North American Free Trade Agreement (NAFTA) that are coming to a head one way or the other, have increased attention on the economic importance of international trade. With the intense focus on the United States’ position in the current NAFTA talks and other negotiations, it is important to understand that economists across the political spectrum overwhelmingly favor free trade policies. At the same time, advocating for improved international protections for intellectual property rights is entirely consistent with promoting free trade.

The consensus among economists is that free trade policies are superior to tariffs and other protectionist measures in promoting economic growth and higher wages. Free trade can also lead to increasing returns to scale from larger markets, the exchange of ideas through communications and travel, and the spread of technology by exposure to new goods and production methods. Economists find that any localized economic benefits from protectionism tend to be short-lived, and in any event are greatly outweighed by the tremendous benefits spread throughout the rest of the economy.

Nonetheless, free trade policies are not nearly so popular among non-economists, on both the left and the right ends of the political spectrum. Opponents typically claim that free trade leads to fewer jobs, lower wages, and harm to domestic industries. Economists respond that if a country follows protectionist policies, it harms itself more than its trading partners, which can be seen in recent sharply negative reactions in financial markets to threats of trade wars. While it is possible that threats of retaliation can lead countries to back off from protectionist policies, such threats are risky because the country threatening retaliation will usually harm itself more than its trading partners if the threat is carried out.

Trade policies create unusual political alliances. Most Republican leaders in recent years have generally favored free trade policies. This view is shared by prominent Democrats like President Bill Clinton and many liberal economists like Paul Krugman. But President Trump campaigned against certain U.S. trade agreements, and in one of his first acts as President, he withdrew the United States from the Trans-Pacific Partnership (TPP). Fareed Zakaria, usually a harsh critic of the President from the left, recently expressed support for the current administration’s approach, stating: “Previous administrations exerted pressure privately, worked within the system and tried to get allies on board, with limited results. Getting tough on China is a case where I am willing to give Trump’s unconventional methods a try. Nothing else has worked.”

It should be noted that President Trump claims he is actually a supporter of free trade. In his 2017 State of the Union Address, President Trump said: “I believe strongly in free trade, but it also has to be fair trade.” If so, President Trump’s actions could be seen as seeking better deals from trading partners. Indeed, President Trump has indicated that he may be willing to reconsider the United States rejoining the TPP, which is a positive development.

None of this is to say that existing trade agreements, such as TPP and NAFTA, cannot be improved. This is certainly true, for example, with regard to the failure to protect intellectual property. Theft of intellectual property is rampant. A 2017 Organization for Economic Cooperation and Development report found that the global value of international and domestic trade in counterfeit and pirated goods in 2013 was between $710 billion and $917 billion, and the global loss in value of digital piracy in movies, music and software in 2015 was $213 billion.

But these opportunities to improve trade agreements do not undermine the benefits of policies favoring free trade. Strengthening measures to prevent such theft, rather than retaliation, should be the focus in negotiating multilateral or bilateral trade agreements. This certainly includes the ongoing NAFTA negotiations in which the Trump Administration thus far has not made strengthening IP protections the priority it should be. Well-defined and stronger protections in trade agreements for copyrights, patents, trademarks and trade secrets would help stimulate growth in IP-intensive industries, increase U.S. exports, and improve economic competitiveness without the economic harms that result from protectionism.

The modernization of NAFTA creates an opportunity to encourage cross-border free trade, while, at the same time, strengthening international intellectual property protections to make sure innovation and creativity are rewarded.

Senate Should Advance Consensus Bill to Modernize Music Copyright

On Tuesday, May 15, the Senate Judiciary Committee will hold a hearing on “Protecting and Promoting Music Creation for the 21st Century.” The hearing is timely because major aspects of music copyright law are outdated, unfairly depriving some copyright owners of financial rewards for their creative efforts.

The Senate Judiciary Committee should seize the opportunity to update music copyright law and finally provide protections that have long been missing. It should adopt legislation just like the Music Modernization Act (H.R.5447) that passed unanimously in the U.S. House of Representatives last month. H.R.5447 would improve the ability of recording artists, producers, and songwriters to exercise their rights in copyrighted music. For copyright owners of older sound recordings, the bill would also recognize their right to receive royalties when their recordings are publicly performed via digital audio transmission. 

Music copyright is grounded in the U.S. Constitution. The Article I, Section 8, Clause 8 “Copyright Clause” confers on Congress the power “to promote the Progress of Science and Useful arts, by securing, for limited Times, to Authors and Inventors, the exclusive Right to their respective Writings and Discoveries.” The Founding Fathers regarded copyright as a unique private property right, rooted in an author’s natural right to enjoy the fruits of his or her creative labor. Federal copyright protections in music help ensure that copyright holders, including music artists, enjoy exclusive rights to the potential proceeds from their creative labors.

Copyright protections provide critical economic incentive for the work and expense of creating new works, including music compositions and sound recordings. Indeed, sound recordings and musical compositions are extraordinary sources of value. Retail revenues from recorded music reportedly totaled $8.7 billion in 2017. According to a report by the Recording Industry Association of America: “Streaming music platforms accounted for almost 2/3rd of total U.S. music industry revenues in 2017, and contributed nearly all of the growth.” 

However, many copyright law provisions that touch on music compositions and sound recordings need to be brought up to speed with changes caused by digital technologies and the Internet. H.R.5447 would update music copyright law by: (1) establishing a streamlined process for producers, mixers, and sound engineers to directly receive royalty payments through an entity called SoundExchange; (2) enabling more timely and accurate payment of “mechanical license” royalties to songwriters when their compositions are publicly performed via digital audio transmission and also providing blanket licenses for digital streaming services; and (3) securing to copyright holders of sound recordings made before 1972 federal copyright protections for public performances of their recordings via digital audio transmission.

The need to secure copyright protections for pre-72 sound recordings deserves special emphasis. Without explanation, federal copyright law fails to secure public performance royalty rights in sound recordings made before February 15, 1972, in the same manner it secures such rights in later recordings. Digital music services, including Sirius XM and Pandora, have publicly performed pre-72 sound recordings – but without having to pay royalties to copyright holders like they routinely pay for post-72 sound recordings. 

There is no reason for denying public performance royalty rights to copyright owners of pre-72 sound recordings. The growing importance of digital streaming to copyright owners makes the loss of financial returns for pre-72 sound recordings all the more unjust.  

Recognizing federal copyright law’s unfair treatment of pre-72 recordings, a 2015 report by the U.S. Copyright Office concluded: “pre-1972 recordings should be brought under the protection of federal copyright law.” As the Copyright Office explained, federal recognition of public performance copyright protections in pre-72 sound recordings “would serve the interests of licensing parity by eliminating… market distortion.” 

If it becomes law, H.R.5447would finally provide equal protection for pre-72 sound recordings. Going forward, copyright owners of pre-72 sound recordings would receive royalties for public performances of sound recordings via digital audio transmissions. Those royalties would be based on negotiations with digital music services or – absent agreement – on rates established by the Copyright Royalty Board pursuant to its “willing buyer/willing seller” standard that seeks to approximate market prices.  

Further, H.R.5447 would clear up uncertainties tied to state copyright laws. Absence of federal protections for pre-72 sound recordings led to multiple lawsuits against digital music services based on state copyright laws. In short, the bill would preempt all state law claims against digital music service providers that pay royalties for all public performances of pre-72 sound recordings taking place during the last three years. 

On May 10, Senator Orin Hatch introduced the similarly-titled Music Modernization Act (S.2823). Reportedly, S.2823 mirrors the music copyright reform bill passed by the House. Consistent with the Constitution’s charge “to promote the Progress of Science and Useful arts” by securing the exclusive rights of authors – including music artists – the Senate Judiciary Committee should pass H.R.5447 or companion legislation like S.2823.

Broadband Capital Investment Increased Significantly from 2016 to 2017

Free State Foundation scholars have contended for years that heavy-handed regulations generally will depress investment in broadband infrastructure. After the FCC adopted Title II public utility-style regulations in the February 2015 Open Internet Order, I illustrated in a May 2017 blog and graph how broadband capital investment declined by $5.6 billion in the two years following that order.

As broadband providers anticipated the repeal of the Open Internet Order and its Title II public utility-style regulations with the December 2017 Restoring Internet Freedom Order, broadband capital investment increased significantly from 2016 to 2017. Using data collected from annual reports of thirteen large broadband providers, I estimate that total annual broadband capital investment increased by nearly 14% from the end of 2016 to the end of 2017.

The FCC’s adoption of the Restoring Internet Freedom (RIF) Order reclassified broadband as a Title I information service, thereby restoring a light-touch regulatory framework for broadband providers. While only five months have passed since the RIF Order was adopted in an open meeting, the proposal was announced back in April 2017. When FCC Chairman Ajit Pai announced the proposal, he cited the Free State Foundation’s initial estimate on broadband investment, stating that the Open Internet Order "has already cost our country $5.1 billion in broadband capital investment.” Given the voting history of the new Republican majority at the Commission, it was fairly clear then that a significant portion of the heavy-handed Title II regulations would be overturned.

Although the RIF Order will not become fully effective until June 11, 2018, broadband Internet providers have now had a year since the proposal’s announcement to prepare for a more investment-friendly regulatory environment. So, even though broadband providers needed to abide by the Obama-era rules imposed by the Open Internet Order throughout 2017, the data shows that competition in this dynamic marketplace encouraged additional investment activity. My sample of thirteen large broadband providers found that capital investment increased by 13.95% from the end of 2016 to the end of 2017. In my view, this increase is likely due, at least in part, to the prospect of a return to light-touch regulation.

USTelecom reported in October 2017 that industry-wide aggregate broadband capital investment, which is comprised of capital expenditure data for wireline telecommunications, wireless telecommunications, and cable broadband providers, totaled $76 billion in 2016. Therefore, an increase of 13.95% would mean that broadband capital investment increased throughout the industry by $10.6 billion to $86.6 billion in 2017. That is likely a high estimate for just a one-year increase. However, given that broadband providers invested $5.6 billion less than they otherwise would have in 2015 and 2016, industry-wide broadband capital investment should increase dramatically especially now that the new rules will create a more investment-friendly environment.

In fact, from the end of 2011 to the end of 2014 my sample of annual broadband capital investment grew by 14%. However, from the end of 2014 to the end of 2017, my sample of broadband capital investment grew by only 6%. Similarly, USTelecom data show that aggregate broadband capital investment for the U.S. industry grew by over 15% from the end of 2011 to the end of 2014. If industry-wide broadband capital investment totaled $86.6 billion in 2017, that would equate to a 10.5% increase from the end of 2014 to the end of 2017.

In my sample of broadband providers, I have companies like Comcast and Charter, which comprise nearly half of all wireline broadband subscriptions. I also include Verizon, AT&T, T-Mobile, and Sprint, which comprise a large majority of all wireless subscriptions. I note that the $68.8 billion in investment by these 13 companies is 79.4% of the $86.6 billion in industry investment I estimated above, so these companies account for a very large share of total industry investment. So while my estimate of a 14% increase in capital investment should be considered a fairly rough estimate of industry-wide broadband investment, I am very confident that from 2016 to 2017 broadband providers significantly increased capital investment. In fact, any increase in broadband capital investment from 2016 to 2017 is worth noting because investment declined in both 2015 and 2016.

The graph below shows broadband capital investment from 2011 to 2017 by the 13 large broadband providers in my sample.

When regulatory costs increase, as they did with the imposition of the Open Internet Order, broadband providers will invest less than they otherwise would have absent such regulatory costs because the additional costs reduce the return on investment. Although the RIF Order does not take full effect until June 2018, the mere prospect of the FCC returning to a light-touch regulatory regime, along with strong competition among many broadband providers and technologies, appears to have played an important role in encouraging additional capital investment throughout 2017.

There is little doubt that broadband capital investment will continue to increase in 2018 so long as the RIF Order is not overturned by Congress. (See this recent blog by Randolph May.)

How a T-Mobile-Sprint Merger Would Affect Market Shares

Thinking Things Through – Maintain Privacy Protections in Place

Several weeks ago I started a series of blogs I called “Thinking Things Through.” The idea was –and remains – to focus on aspects of the ongoing net neutrality controversy that I consider fundamental, even foundational.

So, in the first, “Thinking Things Through – Maintain That Line,” I contended, and I hope explained, why it is important to keep Digital Age Internet services from being regulated in a public utility-like fashion like telephone services were regulated throughout most of the twentieth century. 

In the second, “Thinking Things Through – Maintain That National Policy Line,” I contended that it is important that digital broadband services not be subject to a patchwork of state regulation inconsistent with the decades-old national policy favoring light touch regulation of information services. In other words, this second foundational proposition is essential to support the first.

And the third, “Thinking Things Through – Maintain a Stable Legal Framework,” asserted that, if businesses are to grow and prosper, and to invest and innovate, they need a stable legal framework which provides clear, predictable rules. In other words, without a stable legal framework that establishes “the rules of the road,” markets cannot operate effectively and efficiently, if at all.

So, to recap, the first three blogs contended that broadband Internet access services should not be subject to a public utility-style regulation like narrowband telephone services; that they should be subject to a national policy of light-touch regulation; and that they should operate within a stable legal framework.

As most readers know, some Members of Congress are advocating adoption of a Congressional Review Act (CRA) resolution to overturn the FCC’s December 2015 Restoring Internet Freedom Order, with a “Day of Action” planned by CRA supporters for May 9. That surely is their prerogative. Indeed, as a general proposition, and consistent with Congress’s proper role in our tripartite constitutional system with its separation of powers, I am not opposed to use of the Congressional Review Act.

Based on the foregoing, I am, of course, opposed to use of the CRA to overturn the Restoring Internet Freedom Order because the effect of such action would be to reimpose a regulatory regime at odds with the foundational principles I already have articulated.

But there would be another significant adverse effect – which heretofore has received little notice. Just at the same time that – courtesy of the Facebook controversy and other high-profile data breaches – there is significant interest in ensuring that there are sufficient privacy safeguards in place to protect consumers, the effect of adoption of the “net neutrality” CRA would be to leave consumers with less privacy protection than they now have.

Here’s why.

By reclassifying ISPs as Title II telecommunications service (common carrier) providers, the 2015 Open Internet Order (“Title II Order”) had the deleterious effect of eliminating the Federal Trade Commission’s jurisdiction over broadband ISP privacy practices. After the reclassification, in October 2016, the FCC adopted stringent privacy restrictions on ISPs, including opt-in requirements, which were not applicable to non-ISPs like web giants Google and Facebook, entities that collect far more personal data over the Internet than ISPs. Under the FTC’s privacy regime, these non-ISPs remained subject to considerably less stringent privacy protections than those applicable to ISPs.

In light of the resulting asymmetric and confusing privacy regulatory approach created by the FCC October 2016 action, Congress passed a Congressional Review Act resolution, signed by President Trump in April 2017, overturning the FCC’s October 2016 privacy regulation. Under the Congressional Review Act, the FCC is precluded from adopting a new privacy regulation applicable to ISPs that is “substantially the same” as the one overturned. Unsurprisingly, a primary argument against adoption of the privacy CRA, by many of those same persons now supporting the “net neutrality” CRA, was that its adoption would leave consumers unprotected. 

By again classifying Internet service providers as information service providers rather than telecommunications carriers, the FCC’s Restoring Internet Freedom Order had the salutary effect of restoring the FTC’s jurisdiction to regulate the privacy practices of both the edge providers like Facebook and Google and the ISPs – and to impose sanctions against both when appropriate. In other words, at present, there is a symmetrical privacy regulatory regime in place, with FTC enforcement authority, that protects consumers of both the edge providers and ISPs against privacy abuses. But if Congress were to adopt the “net neutrality” CRA, the FTC’s symmetrical privacy regulatory regime would be eliminated. Consumers would be left with less privacy protection.

It may well be, in light of the “Facebook hearings” and other considerations, that the current Congress will decide legislation is needed to clarify and/or strengthen existing privacy protections.  But, in the meantime, there ought to be little doubt that the privacy protections in place now should be maintained and enforced by the FTC.

That’s just one reason – but a very good one – why Congress should not adopt the “net neutrality” CRA overturning the Restoring Internet Freedom Order. If Members of Congress want to protect consumers, their time will be much better spent considering whether new privacy legislation is needed, rather than reducing the protection that currently exists.