T-Mobile/Sprint Merger Bolstered by 5G Benefits and Price Commitments

Today and tomorrow, the House Communications and Technology Subcommittee and the House Judiciary Committee will hold separate hearings on the proposed T-Mobile/Sprint merger. It is appropriate, of course, for members of Congress to hold hearings on the proposed mergers, and, undoubtedly, they will reach their own conclusions about the proposed merger's merits. As they do so, I want to point out that Free State Foundation scholars submitted detailed comments and reply comments to the FCC which concluded that, all things considered, a combined "New T-Mobile" likely would benefit the public, including by furthering rapid deployment of a competitive nationwide 5G network. And we concluded that it is unlikely the merger would result in significant harms. 

As Free State Foundation scholars have indicated in other publications and posts, our view has not changed since our comments and reply comments were filed with the FCC. Indeed, as stated in my recent February 5 blog post, the likelihood of any harm is further reduced by T-Mobile's and Sprint's offer of 3-year "rate stability" for consumers. Presumably, this commitment would become an enforceable condition upon approval of the merger by the FCC.

House committee members ought to have a forward-looking perspective to the wireless market generally and to the proposed T-Mobile/Sprint merger specifically. Next-generation 5G networks will be essential for supplying future wireless demand. By combining spectrum resources, New T-Mobile projects its merger-enabled nationwide 5G network's monthly capacity would reach 6.8 exabytes in 2021 and 20.3 exabytes by 2024. The 5G network would have 30 times more capacity than T-Mobile's existing network, with peak speeds up to 100 times faster. It also would enable advanced "smart city" capabilities and Internet-of-Things connectivity.
If the merger is approved, New T-Mobile likely will be a stronger competitor to Verizon and AT&T, the current wireless market leaders. As we explained in our comments and reply comments submitted to the FCC, in today's dynamic communications marketplace, it is wrong to suggest, simplistically, that effective competition will suffer as a result of a "four-to-three" merger of the leading wireless broadband providers. Indeed, today, wireless and wireline broadband services are more properly viewed as part of an overall broadband communications market – a broader broadband market, if you will.  

Absent the merger, T-Mobile's 5G network likely will be less capacious and its rollout decidedly slower. Also, evidence regarding Sprint's substantial debt and analysts' projections indicate a standalone Sprint likely would be far less competitive – and perhaps not a viable 5G competitor at all going forward.  

As pointed out in the Free State Foundation's comments, FCC merger precedents recognize the public interest benefits of accelerated 5G deployment. For instance, the Verizon/XO Order (2016) characterized "the rollout of 5G technology" as an "important Commission policy priority for the general benefit of all consumers." The Verizon/Straight Path Order (2018) credited "the expeditious use of [] spectrum for the potential introduction of innovative 5G services to the benefit of American consumers." Further, the AT&T/DIRECTV Order (2015) recognized that merger-enabled benefits such as new technologies and services may outweigh the loss of a competitor. Moreover, House subcommittee members should recognize that recent wireless market entry by Comcast and Charter provides consumers with additional choices and provides a check against anticompetitive conduct. At the end of 2018, Xfinity Mobile already had 1.2 million subscribers and the entry into the market by cable providers bodes well for consumers.  

On February 4, T-Mobile and Sprint made the following pledge in a filing to the FCC: "New T-Mobile will make available the same or better rate plans as those offered by T-Mobile or Sprint as of today’s date for three years following the merger." Those legacy rate plans will continue "for three years after the merger or until better plans that offer a lower price or more data are made available, whichever occurs first," subject to increases in taxes, surcharges, as well as third-party partner service changes beyond New T-Mobile's control. In connection with this pledge I wrote: "[O]n the whole the price stability commitment should be reassuring to consumers -- and to the regulators and antitrust authorities reviewing the proposed merger." This commitment ought to increase the likelihood that the proposed merger's public benefits would outweigh the likelihood of significant public harms.  

In short, the proposed T-Mobile/Sprint merger likely will bring public benefits by enabling rapid 5G deployment and fostering a wireless marketplace that, on a long-term basis, is even more competitive than today's marketplace. The recent price commitments by the parties bolster the pro-consumer case for merger approval.

Washington (DC) Should Follow Washington (State)

For well more than a decade now the jurisdictional line between interstate and intrastate communications has become increasingly blurred. As communications have moved from narrowband to broadband networks, and from analog to digital platforms, with transmissions circumnavigating the globe in little more than nanoseconds, at times it can become impractical, if not impossible, to determine whether a transmission is properly classified as an interstate or intrastate communication. In any event, implementing such jurisdictional separations can be costly. 

Accordingly, for many years I have expressed concerns regarding the ability of the states, through the exercise of their jurisdiction over intrastate communications, to impede the development of modern telecom networks through overzealous regulation. Because intrastate and interstate communications travel over the same networks, the FCC and the states share jurisdiction over the same physical plant. So an unnecessarily burdensome, unduly costly regulatory regime in one jurisdiction may affect the delivery of telecom services in the other by impacting incentives to invest in upgrading and building-out networks.

This is truer in today's increasingly "IP world" than ever before, as more and more traffic transitions from legacy analog telecom networks to Internet Protocol-based platforms, regardless of the specific technology employed.

Certainly there are a litany of state actions over the years that might be cited as cases in which the states' exercise of their jurisdictional claims have failed to take into account the changing telecom environment and technological advancements.

But, consistent with Louis Brandeis' observation that the states may serve as "a laboratory" for experimentation, there are other instances when states, by their example, have led the way. In some sense, especially in the last couple of years, this is happening in the communications arena where many states have adopted deregulatory policies. Indeed, some of the states are ahead of the FCC in adjusting their regulatory regimes to account for technological advances and today's competitive marketplace realities.

For instance, more than half the states have adopted legislation or otherwise acted to restrict state regulation of VoIP services. This is consistent with the recognition that there is no public interest reason to subject these IP services to legacy telecom regulation.

And on July 22, the Washington Utilities and Transportation Commission issued an Order remarkable for the clarity with which the agency explained its determination to deregulate legacy wireline services. The order addresses a petition for regulatory relief filed by Frontier Communications earlier this year. The state commission determined that:

Frontier faces strong competition for the majority of [its] services throughout most of that geographic area….[T]his docket affords the Commission the opportunity to acknowledge the realities of the 21^st Century marketplace by reducing unnecessary regulation and bolstering the ability of Frontier and its competitors to provide effective competitive telecommunications services to the ultimate benefit of this state’s consumers. [Page 2] 

I commend the entire decision to you. But for those short on time, here are a few key excerpts that demonstrate the extent to which the Washington commission, historically not known for its deregulatory tendencies, is attuned to the changing communications marketplace.

Wireless, VoIP, and bundled service options to basic single-line service place competitive pressures on providers of such basic service. Even if Frontier were the only provider of single line basic service, should Frontier seek to raise its rates for such service customers could opt for one of these other service options – in fact, that is what has been happening. While we understand Staff and Public Counsel’s strong desire to define services narrowly to protect the interests of those consumers with the fewest competitive alternatives, we do not believe the legislature intended the Commission to adopt such a rigorously constricted approach in assessing competitive conditions. Indeed, the narrow market definition Staff and Public Counsel propose would undermine legislative intent by virtually ensuring that Frontier could never demonstrate the existence of effective competition for these services. [Page 19]

To the extent possible, consumers, not the Commission, should determine whether other providers’ services are viable alternatives to the incumbent telephone company’s services. The record evidence overwhelmingly demonstrates that most consumers consider wireless, VoIP, and CLEC services, individually and in bundles, to be alternatives to Frontier’s basic residential or small business services….We would be ignoring reality if we were to accept Staff and Public Counsel’s definition of the relevant market as limited to stand-alone, single landline residential and small business services provided at Frontier’s tariff rates. [Pages 19 - 20]

And, finally, in its Conclusion, the Washington commission summed up this way:

Our assessment of the merits of Frontier’s Petition for relief from traditional regulation is guided by the remarkable transformation in the telecommunications industry that continues to occur…. If alternative providers of telecommunications services exist and the Company no longer serves a significant captive customer base, we will substantially reduce historic regulation, particularly economic regulation, in favor of the disciplines of an effectively competitive marketplace. In the world as it exists today, our traditional role must devolve to one increasingly focused on preserving and promoting conditions for competition. [Page 26]

As I said, in years past the state commissions often have adopted regulatory postures that had the effect, whether intended or not, of deterring innovation and investment. Not so with regard to the states that recently have acted to preclude regulation of VoIP services. And not so with respect to last week's Washington UTC decision. 

And now for the moral of the story: The FCC commissioners and staff could benefit much from an open-minded reading of the Washington state commission decision. Put bluntly, the FCC has been too slow to provide regulatory relief in the face of what the Washington commission called "the remarkable transformation in the telecommunications industry that continues to occur." The FCC has been too slow to "substantially reduce historic regulation, particularly economic regulation, in favor of the disciplines of an effectively competitive marketplace."

Many examples of the FCC's reticence to "reduce historic regulation" could be given. Here I will simply point out that, in rejecting several forbearance requests for regulatory relief, the FCC has continued its failure to account properly for the obvious competitive impact of wireless and VoIP services. And, based on its actions thus far, it appears unlikely the agency will consider in a timely fashion the competitive impact of over-the-top Internet video services on traditional cable and satellite video services still shackled by outdated legacy regulations.

So, again, if anyone at the FCC needs a copy of the Washington state commission's decision for inspiration, please just click here. 

Every Movie Ever Made

There is a piece in today's Communications Daily [subscription required] concerning whether public policy is causing EU countries to fall behind in fiber deployment. I may have more to say about this in the future.

But I was really struck by this statement in the article: "Cisco forecasts that global Internet traffic will grow by 30 percent per year to 1.36 zettabytes by 2016, [DotEcon economist Christian] Koboldt said. That means that the gigabyte equivalent of every movie ever made will cross the Internet every three seconds, he said."

It is hard for the average person -- or at least an average Joe like me -- to even comprehend what a "zettabyte" means. But I do have a sense what it means to talk about the bandwidth required to handle every movie ever made crossing the Internet every three seconds.

And I have a good sense that it will be important to have in place public policies that provide sufficient incentives for broadband providers to invest sufficient capital to continue to build out high-capacity networks.

Propelling the Internet Backwards in Time

New York Times columnist Eduardo Porter's piece, "Keeping the Internet Neutral," just as easily could have been – should have been -- titled "Propelling the Internet Backwards in Time."

At bottom, Mr. Porter's piece is an argument for public utility-type regulation of private broadband Internet providers. Such regulation would be imposed in the name of protecting network neutrality to ensure all content is required "to travel through the Internet on equal terms."

This may sound appealing, at least superficially. But, in fact, the regime that Mr. Porter prefers likely would suppress investment and innovation in the Internet ecosystem.

Why does Mr. Porter insist all Internet traffic should be treated equally? Primarily, it seems, to protect the preferred business model of Netflix, which Mr. Porter describes as an "online video powerhouse." As Scott Cleland recently pointed out, Netflix's annual revenues are $3.36 billion, with gross profits of $1.16 billion.

I understand why Netflix is conducting what Mr. Porter describes as a "budding lobbying effort" trying to ensure that Internet service providers, like Verizon, Comcast, AT&T, and Time Warner Cable, must continue to carry Netflix's video streaming traffic -- which amounts to approximately 33% of all peak hour Internet traffic -- on the most favorable terms possible. For now, Netflix is protected by the FCC's recently adopted net neutrality regulations from having to pay any charges for delivering its videos over the Internet service providers' last-mile facilities. Instead, Netflix simply rides free "on top of" the broadband networks that Internet providers have constructed over the past decade by investing over $350 billion of private capital.

Constructed with no government funding, government guarantees, or government bail-outs.

It’s clear why Netflix is lobbying to continue paying as little as possible for using the Internet providers' facilities. But I fail to understand why the Times’ Mr. Porter doesn't appreciate why Netflix's effort should not succeed, or to put the matter more broadly, why net neutrality regulation is not sound public policy.

In essence, Mr. Porter wants is to regulate today's Internet providers in the same way that Ma Bell was regulated as a monopoly before its pre-1984 breakup. Subject to public utility-like regulation, Ma Bell was not allowed to discriminate among users of its network facilities, and its rates were regulated.

Of course, the marketplace environment in which Internet providers operate today is much different. Granted, the market is not as competitive as the proverbial wheat market – never will be in light of the high fixed costs of building and maintaining multi-billion networks. But it is workably competitive. Cable and satellite operators, and wireless and wireline companies, compete to provide broadband services, including video services that are the focus of Mr. Porter's piece. These services may not be perfect substitutes for one another. They have different capabilities, features, and costs characteristics, which, by the way, are by no means static. They are constantly evolving in response to technological developments, changing consumer demands, and experimentation with different business models.

In the name of ensuring neutrality, Mr. Porter's vision likely will lead to stasis, or worse, even backwardness. This is because, by design, neutrality mandates inhibit market dynamism, which depends upon the freedom to experiment with new business models that differentiate among consumers with distinct demands and needs. And it is this market dynamism that leads to more innovation in products and services and more investment in new facilities.

In his January 2011 Wall Street Journal op-ed, "Towards a 21^st Century Regulatory System," President Obama at least acknowledged that, when regulations get out of balance, they place "unreasonable burdens on business – burdens that have stifled innovation and which have had a chilling effect on growth and jobs." In contrast, Mr. Porter doesn't even nod in the direction of accepting that net neutrality regulation imposes costs that should be considered.

Instead, he retreats into a backwards-looking time warp.

For example, Mr. Porter says, "[i]n the era of the dial-up Internet, [government regulation] ensured that phone companies allowed rival Internet service providers to reach their customers." I'm surprised he didn't go on to repeat the old canard that during the dial-up era there were 6000 Internet service providers! Of course, if ever there were 6000 – or 4000 or 2000 -- dial-up ISPs, everyone knows these resellers offered "plain vanilla" services. These so-called "Internet in a Box" providers existed only at the sufferance of government-enforced “open access” mandates requiring facilities-based providers to share their networks at regulated rates.

Here's the most fundamental point Mr. Porter fails to appreciate: It was not until the FCC abandoned the "open access" sharing mandates after the turn of the century that major Internet service providers began to invest billions dollars to build out today's high-capacity, high-speed broadband networks. Once the facilities-sharing mandates were repealed, almost all of the 6000 resellers disappeared, while actual investment spurted.

Does Mr. Porter really think Americans want to return to last century's dial-up era for the sake of artificially propping up so-called "rivals"?  I don't think so.

Immediately following his wistful invocation of the dial-up era, Mr. Porter says, "Congress might remember that government regulation was crucial for the development of the Internet we know today." It is true that it was the government – not Al Gore – that "invented" the Internet and got it up and running. But by the 90s, there was widespread agreement the Internet should be privatized, and the Clinton Administration played a central role in implementing this privatization policy. The Clinton Administration's "Framework for Global Electronic Commerce," issued in 1997, stated:

Though government played a role in financing the initial development of the Internet, its expansion has been driven primarily by the private sector. For electronic commerce to flourish, the private sector must continue to lead. Innovation, expanded services, broader participation, and lower prices will arise in a market-driven arena, not in an environment that operates as a regulated industry. Accordingly, governments should encourage industry self-regulation wherever appropriate and support the efforts of private sector organizations to develop mechanisms to facilitate the successful operation of the Internet.

When advocates implored the FCC in the late '90s to impose on cable companies the same "open access" mandates Mr. Porter now advocates, Clinton Administration FCC Chairman William Kennard stated he refused "to go to the telephone world, a world that we are trying to deregulate and just pick up this whole morass of regulation and dump it wholesale on the cable pipe. That is not good for America."

As long as there are opportunities for companies like Netflix to lobby in the name of "open access" or "neutrality" or "unbundled networks" or "equal access" – superficially appealing slogans all -- they will do so. They will fight to preserve special regulatory protections that allow them to ride on top of the networks of others under favored financial terms.

But they should not prevail arguing for such a backwards-looking approach. The net neutrality regime adopted by the FCC in 2010 is harmful enough without introducing further regulatory micro-management.

Mr. Porter may wish to propel the Internet backwards to the dial-up era, but we must hope the nation's policymakers don’t agree. If they do, to steal a line from former FCC Chairman William Kennard: "That is not good for America."

No "Public Option" for the Internet

Whether or not there will be some new form of "public option" government-run or managed health provider as part of health care reform remains up in the air. But what ought not to be up in the air is the notion that the nation needs some new form of "public option" government-run or managed Internet. In a largely deregulatory competitive environment, the nation has made too much progress in the past several years in building out high-speed broadband Internet networks to now adopt an intrusive Internet regulatory regime that could threaten further advances.

The FCC is poised to consider initiating a new rulemaking this Thursday that, in one form or another, would impose new net neutrality mandates. I understand that any new regulations adopted, in theory, may be more or less intrusive. Indeed, I appreciate that FCC Chairman Julius Genachowski declared in his Brookings Institution speech that the FCC "will do as much as we need to do, and no more, to ensure that the Internet remains an unfettered platform for competition, creativity, and entrepreneurial activity."

With respect, this statement of professed regulatory modesty – to get the regulation "just right" on an ongoing basis – is inconsistent with normal bureaucratic imperatives at work once a prescriptive regulation is adopted. The notion that the Commission will get the Internet regulation just right on an ongoing basis indicates a regulatory immodesty inappropriate in such a technologically dynamic market segment.

Now, Chairman Genachowski may, in his own mind, lean toward a less intrusive public option for net neutrality regulation than other advocates. But the most rabid net neutrality supporters have no such leanings. They will continue to press, before and after the adoption of new regulations, for the most rigidly intrusive regime. Indeed, as I pointed out back in August, Robert McChesney, a founder and board member of the Free Press organization, the staunchest net neutrality proponent, recently said the following in an interview with "The Bullet," a publication of the Socialist Project: "What we want to have in the U.S. and in every society is an Internet that is not private property, but a public utility. We want an Internet where you don't have to have a password and that you don't pay a penny to use. It is your right to use the Internet."

Professor McChesney's extreme vision of the public option for the Internet hopefully is not shared by Chairman Genachowski or a Commission majority. But the real point is this: Once the FCC bans all form of "discrimination" by Internet providers, as it apparently proposes to do, it will have taken a significant step in the direction of converting the Internet into McChesney's public utility. The non-discrimination ban at the heart of net neutrality regulation is the same non-discrimination prohibition that is at the core of public utility regulation.

In the last week or so, there has developed a broad array of opposition to the adoption of net neutrality regulation. The opposition comes from unions (CWA and IBEW), the business community (the National Association of Manufacturers and the U.S. Chamber of Commerce), Internet equipment and services suppliers like Cisco, and members of Congress from both sides of the aisle (House Democrats and Republicans, and Senate Republicans).

A perusal of these letters will reveal, at bottom, this fundamental commonality:

· At present, there is little credible evidence that there is any "market failure" problem or existence of abusive consumer practices for which prescriptive government regulation is warranted. The three or four claimed examples of such potential abuses were all addressed absent prescriptive net neutrality regulations. Note that in the quote above, Chairman Genachowski says he wants "to ensure that the Internet remains an unfettered platform for competition." He doesn't say it is not now one.

· Absent a market failure and evidence of marketplace abuses that threaten consumer welfare, preemptive government regulation is likely to stifle incentives for continued investment in broadband networks and innovation in the entire Internet ecosystem.

· Unlike other segments of the economy, even in difficult economic times, just in the last two years the broadband providers have invested over $200 billion of private capital in building out and enhancing their broadband networks, without seeking government guarantees of bailouts.
As the newly-constituted FCC under Chairman Genachowski nears its rulemaking decision, it should adopt a considerably more modest mind-set, one that takes account of both the agency's own past history of regulatory over-reaching and an appreciation of the changing dynamics of today's digital environment.

What the FCC needs at this point, frankly, despite its oft-repeated mantra, echoed by industry, is not more and more data. Unless the agency is going to be making decisions, ordinarily reserved for the private sector, concerning the amount and timing of capital investment, the pace of new innovations and technological roll-outs, projected consumer demand for new services and applications, and the like, it already has more than enough data (which, by the way, becomes outdated very quickly in a dynamic market) to know that there is no need to adopt new Internet regulations.

Until there is a demonstrated market failure, the FCC would be well-served to have uppermost in mind certain regulatory principles and approaches -- cost-benefit analysis, the precautionary principle, the law of unintended consequences, and the laws of the bureaucratic imperative and the slippery slope – all of which should dictate a high degree of regulatory modesty.

Richard Epstein on Net Neutrality

Richard Epstein, a member of FSF's Board of Academic Advisors, is widely acknowledged to be one of the nation's foremost law and economics scholars. Among many other positions, he is Distinguished Service Professor of Law at the University of Chicago, where he has taught since 1972. His impressive bio is here. Please peruse it.

But more importantly for the moment, please consider carefully the last paragraph (reproduced below) from Professor Epstein's chapter in the Free State Foundation's new book, New Directions in Communications Policy, published by Carolina Academic Press. Richard's chapter is titled, "What Broadcast Licenses Tell Us About Net Neutrality: Cosmopolitan Broadcasting Corporation v FCC." In it, he shows -- brilliantly, as usual – what one piece of the FCC's history of broadcasting regulation teaches us about the perils of net neutrality regulation.

In his summary and conclusion, Professor Epstein explains that we ought to be able to distinguish between regulations that strengthen markets and those that undermine them, but that there is a long-standing pattern of government's failure to do so. The regulators' proclivities to overreach are often driven by a denigration of property rights and systems of voluntary exchange. So here is how he concludes his chapter:

"A similar pattern is at work in the modern debates over net neutrality. The defense of that position starts out as a plea to end discrimination. Yet there is little evidence that the new dose of regulation will produce any gains in the short run. In the long run, we can expect a repetition of the sorry performance of the FCC (or, for that matter, Congress) with respect to broadcast rights to work its way through the law of net neutrality. The sad truth is that the parties who seek to develop sophisticated and sensible schemes for state control quickly lose control over the administrative process to persons whose ambitions for state control are not bound by any fine-grained rationale. The dangers for this predictable drift usually suffice to err on the side of caution. Stated otherwise, the expected rate of depreciation of sound public norms that rely on administrative discretion is high. There are too many pressure points to keep the rascals at bay. So the recommendation here is to follow classical liberal principles that treat all state intervention as a mistake until it is shown to be a good. More practically, and much to the point of the current public policy debate: Keep private control over broadband pipes by abandoning the siren call for net neutrality."

Having in mind even a bit of regulatory history, it is difficult to put more concisely the case against net neutrality mandates that FCC Chairman Genachowski intends to have the FCC impose.

I wish those FCC commissioners considering new Internet regulation would stop for a moment and think about Professor Epstein's warning:

"The sad truth is that the parties who seek to develop sophisticated and sensible schemes for state control quickly lose control over the administrative process to persons whose ambitions for state control are not bound by any fine-grained rationale."

FSF Conference Video Posted

The video from the Free State Foundation's September 10 conference at the National Press Club is now available on the NextGenWeb site here.

The keynote addresses of FCC Commissioner Meredith Baker – her maiden FCC address – and Blair Levin, the Coordinator and Executive Director of the FCC Omnibus Broadband Initiative, deservedly, have garnered much press attention. It's worth emphasizing that the presentations of Professors James Speta, Christopher Yoo, and John Mayo not only were scholarly, as one might expect from these prominent scholars, but they were informative, interesting, and entertaining as well. Looking out into the audience while they were speaking, I was struck – nearly dumbstruck – that the berries, pods, and other assorted handheld devices, had all but disappeared.

Both Jim Speta and Christopher Yoo, in the context of addressing the FCC's decision last year in the Comcast file-sharing case now on review, discussed both procedural and substantive failings in the way the FCC handled the case. While their focus was principally on net neutrality and the agency's decisionmaking process, the cautionary note they sounded concerning the perils of regulatory overreach, and the potential consumer harms from such overreach, has more general applicability as the Commission considers other competition issues. Similarly, John Mayo's discussion of the urgent need for universal service reform, while cogently making that case, does double duty as a basic refresher, for those in need, of some fundamental economic principles.

In other words, the video contains much useful and thought-provoking information, and much for the new FCC to consider as it gets ready to tackle formulating the broadband plan and addressing other communications issues. So, as they invariably say in New York, when they bring your hot pastrami sandwich and pickle: "Enjoy!"

PS: As I said at the conference, there is 20% discount for Free State Foundation friends and family on FSF's new book, New Directions in Communications Policy, published by Carolina Academic Press. In addition to Professors Speta, Yoo, and Mayo, other contributors to the book are: Professors Gerald Brock, Diane Disney, Richard Epstein, Bruce Owen, Glen Robinson, Dennis Weisman, and Steven Wildman. They are all members of FSF's Board of Academic Advisors. The secret code for the discount is COMM20 – but don't spread it around too freely. You can order the book on CAP's website here, or call 800-489-7486.

The Fiction of Forced Access

Adam Thierer, my friend and former colleague, was kind enough to link to my piece, "When Friends Agree to Disagree: Data and Regulatory Philosophy," in a blog on the Technology Liberation site.

Adam has always contributed greatly to the fight against "forced access" regimes in the broadband world, and, as usual, his latest piece, "Fiction of Forced Acccess 'Competition' Revisited", is well worth reading.

When Friends Agree to Disagree:Data and Regulatory Philosophy

At last Thursday's Free State Foundation conference at the National Press Club, celebrating the release of FSF's new book, New Directions in Communications Policy, there was an exchange between me and Blair Levin concerning the respective roles of data and regulatory philosophy in the development of the broadband plan. As I said in my introduction before his opening keynote: "I am an admirer and respecter of Blair's communications law and policy expertise, his experience, and his dedication. And I consider Blair a good friend." Those of you who have heard me over the years introduce Blair, now the Coordinator of the FCC's national broadband plan efforts, know that when I call him a good friend and say I respect his expertise, I am not just making small talk.

I think Blair will agree – and indeed he said so in his remarks at the conference – that he considered our exchange, now carried on, and perhaps magnified a bit, in the press, valuable in helping to think about the development of a broadband plan that best serves consumers and the overall national interest. You can read the reports about the conference in Communications Daily [subscription required], Broadcasting & Cable, and TR Daily [subscription required] to get a flavor of the exchange.

As background, I had been quoted earlier in Communications Daily as saying that while I thought the broadband workshops had been useful, I would like to see, in addition to the Commission's ongoing emphasis on data-gathering, more focus on what regulatory philosophies or models work best. In my introduction of Blair on Thursday, I said:

"Certainly, the essays in the New Directions book contain considerable data concerning broadband subscription, the number of competitors, the growth in USF funds, and the like. I agree, of course, that it is important for our public policymakers to have good, reliable data as they make decisions – and I bet our opening keynoter, a very key player at the FCC, might make the point that the new Commission is going to be 'data-driven,' and that it needs good data to develop a broadband plan. True enough."

And then I went on to say:

"But the development of sound policy truly does depend on what you do with the data, how you interpret it. Here's an example. Free Press says that prior to the abandonment of the FCC's sharing requirements for the incumbent telcos' lines there were 6000 ISP competitors in the country and now, as a result of deregulation, there are less than a dozen. Well, that is true only if you don't recognize as a matter of regulatory policy the important distinction between facilities-based competition and competition based on regulated resale, and if you don't think it makes any difference whether competition is facilities-based or resale-based. So if you take the 6000 figure at face value and run with it, you would be making a big mistake, in my view, in terms of developing sound policy. Indeed, the development of sound policy depends on having good data and having a good understanding of the economics of network industries and, in the case of communications policy, especially of the dynamic nature of technological change in the marketplace."

During his presentation, which is now posted on the FCC's Blogband website, Blair made several points responsive to my contention concerning the need for some focus on regulatory models and perspectives. I agree with much of what he said. For example, Blair said that if the FCC doesn't get data on who is unserved, where they are, and what it costs to build out a network to serve them, "you are going to get the wrong answer no matter how thoughtful your philosophy." Agreed. He also said it is not the staff's role to focus on regulatory policy, but rather the Commission's. I agree, of course, that it is the Commission's role, ultimately, to establish regulatory policy. But I think it is also the staff's role, with its expertise and the tools available to it, to facilitate the commissioners' understanding of how various regulatory policy and perspectives may impact their decisions. In my view, the broadband workshops would be one appropriate way of doing so, along with others. But I don't disagree with Blair's statement that the fact-finding comes first, during what he called "the early stages of a policy process." After all, he did state that we "will get to that point in the dialogue when philosophy does matter, where different views about the appropriate role of the public sector will be germane to the issues."

Thus, on this matter of the intertwined relationship between "data" and "regulatory philosophy," in reality our differences probably are not that large, especially as Blair agrees that there is a point in the process – before decisions are made – where "philosophy does matter," when the appropriate role of the public sector is germane. (There is a reason why FSF's masthead proclaims "Because Ideas Matter.")

Let me illustrate a couple of instances in which good data certainly matter, and an instance in which regulatory perspectives or philosophy matter, and why in this latter instance being "data driven" in and of itself is insufficient to lead to sound policy.

In my comments filed with FCC on the plan, I urged that the priority should be the targeting of federal support for the deployment of broadband facilities in presently unserved areas. If deploying broadband to unserved areas is a priority, and it should be, it is necessary to have good (which is not the same as perfect) data that indicates which areas presently lack service. Fortunately, through the now prevalent ongoing mapping exercises, to the extent that such data previously was unavailable, it is now quickly becoming ever more so.

With respect to increasing adoption, an objective I consider consistent with the development of a sound broadband plan, having good data is also important in many respects. For example, in my comments I suggested it may be appropriate for the government to subsidize the purchase of computers by low income persons as a means of promoting more widespread adoption. Whether this makes sense or not, or the extent to which it does, depends on having sound data concerning computer ownership by low income households, the number of persons affected, the cost of the computers and the like.

And regarding adoption, there is good data, especially from the Pew Internet and American Life Project, showing that, while there are many non-financial reasons for non-subscription to broadband, for some the principal reason is related to income. FSF Distinguished Adjunct Fellow Deborah Tate, who chaired the Federal-State Joint Board on Universal Service while serving as FCC Commissioner, recently advocated in a Baltimore Sun commentary that the Lifeline/Linkup program be changed to provide support to low income persons for broadband subscriptions. Again, having good data on the extent to which income level correlates with broadband subscription, and the extent to which a particular level of financial aid is likely to correlate with an increase in take rates, is useful in developing sound policy in this regard.

So, these are examples where good data points are necessary if policies designed to increase deployment and adoption are to be implemented in the most effective and efficient way.

Now, consider an instance in which regulatory perspective and philosophy matters a lot. As I said on Thursday, Free Press has suggested in its Dismantling Digital Deregulation paper that at one time there were 6000 Internet Service Providers in the country and that the average American consumer had access to more than a dozen ISPs. As a result of the FCC's abandonment of DSL line sharing and wholesale price regulation policies around 2003-2004, this story line goes, only a handful of the 6000 ISPs remain and consumers no longer, on average, have access to a dozen ISPs. Well, in deciding how to interpret this data, how to process it, here regulatory philosophy matters a lot.

Let's assume for the sake of argument that the 6000 figure for the number of independent ISPs is an indisputable fact. Nevertheless, I would not want the FCC's development of a broadband plan to be "data driven" (in the wrong way) by this particular data point. Rather, I would want commissioners to understand that the 6000 ISPs existed merely at the sufferance of an agency policy of "managed competition" through regulated common carrier resale, and that such a "managed competition" policy does not provide incentives either for the incumbent providers to upgrade their networks or for the so-called "competitors" actually to build out their own network facilities. And I would want them to understand that, in the long run, which is what matters, consumers benefit more from facilities-based competition that supports sustainable competition than from managed resale that does not support sustainable competition.

And here is the key point: In deciding whether to recommend returning to the common carrier/net neutrality/open access regulatory regime advocated by Free Press and others, or whether to adhere to the deregulatory broadband policies the Commission largely adopted five or so years ago, what matters in reaching the right decision is not only knowing the 6000 ISP data point. Rather what matters is having in mind a regulatory philosophy that enables one to understand why this particular data point should not be considered a reason for supporting a common carrier regulation in light of the difference in investment and innovation incentives created by facilities-based and non-facilities-based competition. This is what I mean when I say that, in developing the broadband plan, the commissioners should have in mind a regulatory philosophy.

Commissioner Meredith Baker, who delivered the closing keynote at Thursday's conference, was most eloquent in speaking to the importance of having both good data, what she called "fact-based evidence," as well as a regulatory philosophy grounded in free market principles. In her speech, titled, "Incentives Matter: Decision Making at the FCC," Commissioner Baker said that having "good data is critical," especially with respect to what ought to be the highest priority in broadband policy, "to get broadband to all remaining unserved areas of the country." (As stated above, I fully agree this should be the top priority in the plan.)

As for regulatory principles, Commissioner Baker said she starts "with an assumption that markets work better than government intervention and that competition regulates market behavior more efficiently than regulators can." This is a simple but fundamental "first principle," but not one to which everyone subscribes, certainly not those parties urging the Commission to impose common carrier regulation on broadband ISPs. Commissioner Baker added: "[M]ost importantly, I believe incentives matter. Actions government takes –or doesn't take – affect market behavior and create incentives. I recognize that nearly any regulatory change the Commission makes will disturb the balance of the market—maybe for better, but possibly for worse. Therefore, our decisions must be fact based, fully considered, and reasoned. Good intentions are not enough."

Speaking more specifically about the analytical framework she proposes to use in reaching policy decisions, Commissioner Baker identified these elements: (1) identify objectives when launching proceedings; (2) look to the statute; (3) understand the context of the policy at issue; and (4) weigh the costs and benefits of any decision, including the potential unintended consequences. This last element is critical, because if the wrong balance is struck, "we risk imposing costs and other regulatory burdens on providers." That raises prices, reduces quality of service, and harms innovation, outcomes that "damage consumer welfare and endanger economic growth in the dynamic sector of the economy at a time when we can least afford it."

The upshot is this: The extent to which one starts with a basic assumption that markets work better than government intervention or the other way around is part and parcel of a regulatory philosophy. Whether one embraces cost-benefit analysis, or appreciates the law of unintended consequences, or the principle of "first, do no harm" is part and parcel of a regulatory philosophy. So is the extent to which one accepts, especially in regard to communications markets, the power of Schumpeterian dynamism to change markets, as opposed to embracing a static or snapshot market view. And while it is easy to hypothesize that regulators should "let go" of regulation at just the right time as competition becomes more robust, one's regulatory philosophy influences whether one believes the error costs of waiting too late generally exceed the error costs of deregulating too early. These are but some of the ways in which one's regulatory philosophy is brought to bear on analysis of available data.

In my view, as Commissioner Baker articulated so nicely, a regulatory philosophy grounded in an understanding of free market principles best serves consumers. As I said in my comments to the Commission back in June, the broadband plan should be grounded firmly in such principles.

I am grateful to Blair Levin for his thoughtful and thought-provoking remarks at Thursday's FSF conference. It is true we don't always agree, but we always learn something by listening to each other. As Blair said on Thursday: "One of the nice things about friendship is it does not require agreement." I agree.

And, finally, I am very grateful to Commissioner Baker for delivering her maiden address at the FSF conference, and for doing so after flying back all night from Brazil to do so. Her keynote will repay many times those who read it closely, as I have several times.

PS – I should add that, by all accounts, the presentations of the three scholars – Jim Speta, Christopher Yoo, and John Mayo – were extremely informative and useful. More about these terrific presentations when the transcript is released. In the meantime, you will be able to watch them on the video soon if you missed attending the conference.

Interesting, But Deeply, Deeply Flawed

The OECD's broadband rankings have been misused by those with an agenda to talk down the progress the U.S. has made during the last decade in making broadband available. Now over 90% of America's households have access to broadband, with a subscription rate of 60%. The agenda -- to drive policymakers towards exercising much more regulatory control over, and even government ownership of, Internet networks -- is not subtle or hidden.

At a June 5 Free State Foundation seminar, Ambassador David Gross, State Department's immediate past U.S. Coordinator for Communications and Information Policy, stated: "Almost everyone agrees that the OECD's broadband statistics are useful and certainly interesting. However, virtually everyone agrees that they are deeply, deeply flawed." And, true to his title, Ambassador Gross was probably speaking diplomatically. The transcript is here.

Now comes the OECD with a new report that purports to show that the prices paid by U.S. consumers for wireless services are higher than those paid by consumers in many OECD countries. Perhaps the report is interesting, but it also looks, like the broadband reports, to be "deeply, deeply flawed."

The fundamental problem is that the OECD assumes, for purposes of determining price values, hypothetical usage packages that do not reflect the reality of the extent to which U.S. consumers use their mobile devices each month. In short, the calling profile of the average U.S. consumer is nearly three times as much as the calling profile for the assumed "high use" OECD package and six times as much as the "medium" use package.

A report released in May 2009 by CTIA, the wireless industry trade association, indicates that Merrill Lynch's research shows the price per minute of service in the U.S. is the lowest of the 26 OECD countries and U.S. consumers have the highest minutes of use per month of the 26 OECD countries.

You can review both the OECD and CTIA reports, and you should do so. Aside from the pricing data, the CTIA report contains much data, fully consistent with other sources and not contested, which demonstrate the competitiveness of the U.S. wireless industry, and, concomitantly, the extent to which such competitiveness has led to a wide array of choices in applications and equipment for consumers.

Presumably, it is good that Americans, on average, use their wireless devices much more, on average, than do their counterparts in OECD countries. U.S. consumers must perceive value in doing so.

Before any policymakers begin to use the new OECD report as a pretext for regulating the highly successful U.S. wireless industry, they should understand, to borrow from Ambassador Gross, that the OECD report may be interesting, but "deeply, deeply flawed."

More Evidence of Consumers Supporting a Deregulated Wireless Market

On May 12th, CTIA filed an ex parte with the FCC describing the "unparalleled value" that United States wireless customers currently enjoy due, in large part, to a very competitive wireless market. I have written about this before, but figures in the CTIA report really emphasize the immense benefits that consumers receive from the U.S. competitive model. Carriers are pressed to provide a wide variety of applications, low prices, and overall advanced capabilities in the mobile phones offered on their networks.

Some key facts contained in the CTIA ex parte:

• The United States still has the lowest cost per minute and the highest minutes of use of all 26 OECD ranked countries.
• Over 630 different handset are sold in the United States and consumers have access to over 40,000 applications sold through four newly created app stores. Three more stores and more than 20,000 additional applications are planned to launch this year.
• The United States has a higher percentage of consumers actively using mobile Internet capabilities than any other country measured. Additionally, more than half of all U.S. wireless consumers utilize a data plan on their phones and U.S. wireless web use accounts for 29.3% of all mobile web access worldwide.

These facts indicate that the U.S. wireless industry has already embraced a large measure of "openness," not because of regulatory mandates, but as a result of marketplace demand. Alterations to the current deregulatory wireless environment will only serve to harm America's wireless consumers and destroy or mitigate the U.S. leadership that has resulted from reliance on marketplace forces rather than mandated "open access" or other forms of neutrality mandates.

The "Common Carrier" Free Press

In the face of opposition led by Free Press, Time Warner Cable recently withdrew, for now, its announced plans to conduct a trial of consumption-based billing (CBB) in four cities. I explained in my April 16 piece, "The 'Free Lunch' Free Press," why the trial should have been welcomed. Ultimately, the investment in broadband facilities must be recovered from the body of the provider's subscribers. In other words, there is no free lunch.

You should read the entire piece, but the core point is this: For reasons of fairness and economic efficiency, "it is not necessarily best for consumers -- for overall consumer welfare in an economic sense -- for all subscribers to be charged the same flat rate for service, regardless of the amount of their own usage."

There is an additional point that should be made as I read some of the Free Press' post-withdrawal statements as the organization continues to press its case against consumption-based billing. Free Press risks becoming "The 'Common Carrier' Free Press" in addition to the "Free Lunch" Free Press. As I have said countless times during the past five years or so, all net neutrality-like mandates -- and, make no mistake, a prohibition on CBB is a net neutrality mandate -- in effect constitute common carrier-like regulation of broadband providers not dissimilar from the common carrier regime to which AT&T was subject in the twentieth century's monopolistic communications era.

The core elements of common carrier regulation are a non-discrimination mandate and/or some form of rate regulation. Of course, most net neutrality mandates proponents routinely claim that "prohibiting discrimination" is a chief aim. Less often do they say – at least openly – that they also advocate rate regulation. But rate regulation almost always lurks, is inherent really, in broadband restrictions sounding in net neutrality.

Free Press claims that its opposition to TWC's proposal was based on the notion that TWC's prices are too high. Thus, in its initial press release announcing it was organizing a nationwide protest, Free Press referred to TWC's allegedly "healthy broadband profit margins." In its April 16 press release issued celebrating its victory after TWC withdrew the planned trial, Free Press charged TWC with a "price gouging scheme" and "unfair price hikes."

Most recently, in an April 22, 2009 letter to Congress calling for an investigation of all CBB trials by any broadband provider, the rate regulation agenda of Free Press becomes even more apparent. Free Press first says that "no provider has disclosed useful cost information." You might think this would mean Free Press is poised to retract its days-earlier claims concerning healthy profit margins, unfair price hikes, and the like. But no. It is just an opportunity for Free Press to suggest that "the usage fees are well above the marginal cost of providing Internet service." And to suggest that the prices for Internet service "bear little or no relation to costs." And to suggest that the prices may be "arbitrarily above costs."

The point should be obvious, and you don't have to be a brain surgeon, or even a public utility lawyer or an economist, to get it: The only way we really would ever know whether a broadband provider's prices are above marginal or average costs (or any other variation of these two, and there are others), or whether rates are "fair" or "arbitrary," would be to conduct a full-blown rate case. But wait. If you have ever tried, or otherwise participated in any way in a public utility rate case, or even witnessed one, then you know that, ultimately, the determination and assignment of "costs", especially with respect to operators engaged in providing multiple products over the same network facilities, approaches the metaphysical.

Although I know the exponential growth of Internet traffic, spurred by video, poses non-frivolous network management challenges for broadband providers in light of capacity constraints, I am in no position to offer firm opinions on the "marginal" or "average" costs of TWC or other broadband providers. But I am strongly of the opinion it would be a serious mistake for policymakers or regulators to start down the road towards undertaking the nearly impossible task of trying to determine those costs, and, in effect, imposing a rate regulatory regime on broadband Internet providers. It is far preferable, given the extent of already-existing broadband competition, with the prospect of more to come, to rely on marketplace competition to protect consumers. As I said in my April 16 piece: "It would be foolish for TWC to adopt offerings, whether consumption-based pricing or otherwise, which do not meet consumers' marketplace expectations."

We don't need rate regulation of Internet broadband services, or anything roughly resembling rate regulation. What we need, instead, is for the "Free Lunch" Free Press and the "Common Carrier" Free Press to step back and consider whether all consumers won't be much better off if we don't impose a 20th Century common carrier regulatory regime on the competitive 21st Century broadband Internet marketplace.