Cable Industry Lobbies FCC to Allow "Reasonable" Billing Practices

During a recent conversation with Commission staff, representatives from NCTA – The Internet & Television Association, Charter, and Comcast (collectively, the cable advocates) asked the agency to reconsider its rash proposals to prohibit traditional Multichannel Video Programming Distributors (MVPDs) – cable operators and Direct Broadcast Satellite (DBS) providers – from employing common billing practices that their larger and still-growing Internet-based competitors also use. At a minimum, they urged that "reasonable" Early Termination Fees (ETFs) be allowed.

As the Free State Foundation's recent comments in the State of the Communications Marketplace proceeding plainly point out, ascendant streaming services – Netflix, Hulu, YouTube, Amazon Prime, and the like – increasingly overshadow cable operators and DBS providers, which have been suffering significant subscriber losses for years.

However, the Commission's ability to regulate is limited by statute to traditional MVPDs, and – willfully ignoring clear competitive trends as well as its own complicit part in accelerating those trends – it has chosen to exercise that authority on numerous recent occasions.

For example, the FCC proposed late last year to ban traditional MVPDs – and traditional MVPDs alone – from (1) utilizing ETFs as a means of enforcing long-term, consumer-benefiting contracts, and (2) marketing their services in standard monthly increments.

As described in their ex parte letter, the cable advocates urged senior staff from Chairwoman Rosenworcel's office and the Media Bureau to reject outright the proposal to require that traditional MVPDs provide service in daily increments, a clear form of impermissible rate regulation. On the topic of ETFs, they similarly championed regulatory restraint – but suggested that, if the Commission is to intervene, it should limit its focus to "unjust or unreasonable" ETFs.

Of course, asking an administrative agency to determine what is and is not "reasonable" creates a separate set of subjective concerns. Accordingly, the cable advocates proposed a series of factual considerations upon which the FCC might base its decisions, including whether consumers:

• Have a choice between options with and without ETFs,
• Are informed clearly about the existence of ETFs before they sign up for service,
• Are afforded an initial window during which they may cancel service without having to pay an ETF,
• Are not subject to ETFs that are "excessive relative to the value received," and
• Face ETFs that decrease over the term of the contract.

In comments and reply comments, FSF President Randolph May and I strongly opposed any agency action in this proceeding. Specifically, we argued that ETFs and monthly billing increments are pro-consumer common practices that lead to lower costs and greater choice; that the Commission's misguided proposals clearly constitute impermissible rate regulation; and that new burdens exclusively targeting cable and DBS providers inappropriately would pick winners – unregulated streaming behemoths – and losers – struggling traditional MVPDs uniquely subject to FCC oversight.

Supreme Court Terminates Review of Early Termination Fees Case

Do early termination fees (ETFs) included in wireless service contracts fall under the category of wireless "rates" or under "other terms and conditions"? That's the question that was presented to the U.S. Supreme Court in Sprint v. Ayyad, a class-action lawsuit involving California customers charged ETFs for terminating their wireless service contracts. But the Supreme Court took a pass on answering that question, issuing an order denying certiorari on November 7.

The case was an appeal of a decision by the California Court of Appeals that held that, at least under the facts of the case, non-prorated ETFs charged by Sprint were not intended to be an element of the rates charged by the carrier for service but were instead intended as a liquidated damages clause to reduce churn. The California Appeals Court applied a presumption against preemption and found that, as a liquidated damages clause, the ETFs constituted "other terms and conditions" subject to California common-law remedies. As one may recall, in 1993 Congress amended the Communications Act by providing in Section 332(c)(3)(A) that states are preempted from regulating the entry of or rates charged by wireless carriers while states can continue to regulate other terms and conditions of wireless services.

The class action plaintiffs' attorneys were confident enough in their position in Sprint v. Ayyad that they waived their right to respond to Sprint's petition to the Supreme Court. However, there are weighty arguments to me made on both sides. Without addressing them in detail, it's worth recognizing that the handful of trial courts across the country that have considered the question of whether Section 332(c)(3)(A) have reached contrary conclusions. Even the California Court of Appeals acknowledged that:

It is certainly possible that elimination of ETF's may indirectly affect Sprint's rates to the extent that Sprint incurs costs in pursuing alternative remedies for contractual breach or that it would reserve for losses attributable to a potentially higher level of customer defaults. Sprint would presumably factor actual or projected lost revenue into its rate structure.

By declining to hear Sprint v. Ayyad, lower courts will likely continue to make contrary rulings as to whether or under what circumstances federal law preempts ETFs. And for its part, even the California Court of Appeals' decision left standing may offer lower courts little guidance due to the facts of that case. As a general matter, wireless carriers now universally include grace periods and prorated ETFs in their wireless services contracts.

The Supreme Court's order denying review might have been influenced by pending petitions seeking an FCC declaratory ruling that ETFs are "rates charged" under federal law. However, as the California Appeals Court noted in its ruling, "[i]t appears safe to say that any action by the FCC on this issue is not imminent."

NYT's Rash Call for Wireless Over-Regulation

If you want an upside-down view of wireless competition, look no further than the New York Times' October 25 editorial. In the space of one short editorial, the NYT board manages to dismiss the dramatic innovation and choices that consumers now enjoy in the wireless market, call for bill shock regulation, demand extra regulatory conditions on future spectrum auctions, and even urge imposition of a Title II common carrier regime over wireless. Scott Cleland picks the editorial apart in a blog post titled "NYT's Uninformed War on Competition Policy."

GAO Report Sees Wireless Competition But Mulls Regulation

The Government Accountability Office recently released a report to Congress, the title of which contained the GAO's own recommendation: Enhanced Data Collection Could Help FCC Better Monitor Competition in the Wireless Industry. The GAO report confirms the tremendous innovation in wireless services, particularly smartphones. And it acknowledges that in recent years wireless consumers continue to benefit from more choices and lower prices. Even so, the report tries to kick up enough dust about wireless competition to somehow justify calls for more extensive data collection requirements that seem premised on need for imposing new regulations on wireless.

The GAO report acknowledges that more consumers are benefitting from "generally lower prices, which are approximately 50 percent less than 1999 prices, and better coverage." Particularly in light of wireless innovation—faster speeds, the arrival of a variety of advanced handsets, and a growing abundance of smartphone applications—better prices for consumers should be the touchstone of any consumer-focused approach to wireless services.

However, the GAO report reduces this undisputed fact about lower prices to one consideration among many, balancing it against a handful of anecdotal opinions expressed to the GAO by "stakeholders." The report's overview of innovative and competitive trends in the wireless industry is combined with short summaries of opinions from different quarters—such as "consumer groups" and "some small carriers"—clamoring for new regulation of wireless. For instance, the report says that "[o]fficials with whom we spoke in Iowa noted that consumers are now facing higher than ever ETFs, which 'take people out of the market' by locking them in to specific carriers." And "[a]ccording to some small carriers and other stakeholders, exclusive handset deals are largely the result of the largest carriers' ability to exploit their market power in the mobile wireless market by requiring that device manufacturers enter into exclusive arrangements." The report also touches on prospective special access rate regulation or re-regulation, spectrum use and auction conditions, and even hints at "bill shock" regulation. (For more on "bill shock" see the FSF blog post "No Need for 'EU-Style' Wireless Mandates.")

Moreover, many of the supposed "stakeholder" grievances aired in the GAO report are premised on competitor welfare concerns, not consumer welfare concerns. The report's discussion about wireless competitive trends plays up concerns over "industry consolidation" as detrimental to certain small or regional wireless carriers. The "consolidation" theme is persistent in the report, despite being undercut by the report's own acknowledgment that recent wireless mergers that have been reviewed and approved by the FCC have resulted in larger numbers of consumers having access to multiple, competing national carriers, led to the proliferation of unlimited calling plans, and have reduced the percentage of roaming minutes used by consumers.

A consumer welfare approach recognizes that regulation designed to prop up certain "stakeholders" in a market can actually stifle innovation and competition, reducing choice and leading to higher prices for consumer "bagholders." For instance, contrary to the claims that ETFs "take people out of the market" echoed in the report, smartphones subsidized by carriers and offered to consumers with ETF contracts are what draw adopting consumers into the market. And now that wireless carriers are prorating ETF contracts, consumers now incur lower costs for breaking ETF contracts. (For more on this, see the FSF Perspectives piece "Let Competition and Choice Check Wireless ETFs" and the blog post "Fairly Disclosing ETFs vs. Price Regulating ETFs.")

In key respects the GAO dittos the FCC's recent wireless competition report (that was discussed in the FSF Perspectives piece "FCC Won't Face Up to Wireless Competition"). Both reports recount positive trends in wireless innovation and competition, resulting in a wider variety of consumer choice and decreasing prices. But, unfortunately, both reports also employ competitor-welfare and static market assumptions to raise doubts about just how competitive the wireless "ecosystem" really is and whether government interventionism will result in wireless competition "stimulus." In these respects, the light-touch regulatory environment in which wireless has so flourished has once again been called into question by a government report, and once again on dubious grounds.

Playing the observed trends in wireless innovation and competition against "stakeholder" calls for more regulation, the GAO report calls for the FCC to consider "expanding its original data collection of wireless industry inputs and outputs—such as prices, special access rates, capital expenditures, and equipment costs." At first glance, this might seem like an easy way of reconciling wireless innovation and competition with perceived consolidation and competitor concerns. As a general matter, data collection requirements are less burdensome than regulations of prices and service terms. But compliance with extensive data collection mandates can become costly. And here the additional data collection urged by the GAO appears premised on market concentration and competitor-welfare concerns. The FCC would presumably analyze the data with an eye toward regulating wireless prices and service terms to address the "stakeholder" concerns voiced in the report. This makes the GAO's recommendations appear less justifiable after all.

Ultimately, the reasonableness of any possible expanded wireless data collection by the FCC will depend on whether such an expanded collection is mandated or voluntary and on how much more expansive or expensive that data collection would be. And given the growth in wireless innovation and competition that the GAO report readily admits, reasonableness here is on the side of continuing a light-touch regulatory treatment for wireless.

Fairly Disclosing ETFs vs. Price Regulating ETFs

The competitive free market is the best price-setting mechanism for wireless device and service contracts that include early termination fees (ETFs). So I maintained in my recent FSF Perspectives piece, “Let Competition and Choice Check Wireless ETFs.” In the dynamic wireless marketplace, the case for pricing freedom for wireless carriers and competitive choice for consumers is especially strong. Currently, all major wireless carriers make subsidized wireless device and service contract ETFs optional for consumers, with fee amounts pro-rated to some degree or other over the life of the contract. ETFs therefore present consumers with an added price option that makes wireless devices and services more affordable.

Arguments for marketplace regulation are often made in one or more of three circumstances. These include: (1) where transactions between producers and consumers impose external costs on third parties; (2) where monopolization or lack of existing or potential competition unduly limit consumer choices; and/or (3) where informational asymmetry exists between producers and consumers concerning technical or complex knowledge about a product or service.

To the best of my knowledge, no ETF-critics suggest that such fees impose any sort of spillover costs on non-parties to wireless device and service contracts that feature ETFs. And as I point to in my FSF Perspectives piece, several studies and analyses—including one by the FCC from earlier this year—reveal a dynamic wireless marketplace. Contrary to claims that wireless ETFs are anticompetitive (also addressed in my FSF Perspectives piece), existing marketplace competition tips overwhelmingly against regulation and in favor of pricing freedom and competitive choice.

It’s also a long shot to peg ETFs as presenting any kind of information asymmetries. By nature, ETFs are usually simple terms of service and not especially difficult to understand, they don’t (or shouldn’t) typically necessitate consumers to undertake any extraneous efforts to gather information about them in order to accurately appraise them. Nor must consumers necessarily possess prior or subsequent experience with ETFs in order to be able to make an informed choice about a wireless carrier’s ETF terms.

To date ETFs have primarily presented issues of fair disclosure and informed consent. Those issues have been raised in a string of class-action lawsuits against wireless carriers, many of which have resulted in large settlements. Contract law typically requires a meeting of the minds on terms of agreement for terms to be legally enforceable. And consumer protection laws prohibit unfair and deceptive trade practices. Accordingly, wireless carriers must make ETF options and terms clear and understandable to consumers, or face additional class-action suits and lose customers to marketplace rivals.

In late August, the FCC posed a number of questions about point-of-sale disclosures about ETFs in its Notice of Inquiry for Consumer Information and Disclosure and Truth-in-Billing and Billing Format & IP-Enabled Services. The key paragraph (#31) in the FCC’s NOI asks questions relating to the adequacy of point-of-sale disclosure, such as:

Do consumers receive sufficient information to understand, prior to subscribing to a service, the full range of potential costs and fees associated with that service? Are disclosures that are currently being provided useful and easy to understand? For example, are early termination fees being clearly disclosed including whether and how such fees are prorated? Do consumers understand how such fees will be prorated if they terminate service before the end of the contract? What point-of-sale disclosures are most important for wireless data plans, now growing in popularity with the use of smart phones and netbooks? Should wireless providers be required to disclose the cost of any “free” or “discounted” handset or other end-user device, such as a netbook that is recovered through monthly service payments made by the subscriber?

Now these NOI questions raise some threshold jurisdictional questions about whether the FCC rather than the Federal Trade Commission (FTC) should be inquiring about consumer protection and point-of-sale disclosures about smartphones and (especially) netbooks. Regardless, in its survey of the ETF landscape the FCC should take into account the role of existing consumer protection laws that have been on display in recent ETF class-action lawsuits. Existing statutes and case precedents arising under such statutes already provide a mechanism for creating customary common law of ETFs. Another factor to keep in mind is the disciplining effects of marketplace competition in keeping wireless carriers open and honest in their dealings with consumers.

Significantly, however, the FCC Wireless Bureau’s recent letter to Verizon Wireless about its recent ETF increase for one of its new smartphone offerings poses questions going beyond disclosure to consumers. The Wireless Bureau’s letter extends its inquiry to ETF rates and smartphone prices. In particular, the Wireless Bureau’s letter ask about the “rationale” for ETF increases, “cost differentials” for what advanced wireless devices cost the carrier “over what it charges its consumers,” and the dynamics or role of advanced wireless device wholesale prices charged by manufacturers.

As I relate in my FSF Perspectives piece, “[t]o the extent that an ETF might exceed the supposed value of the wireless device or service, at that point the ETF is simply a more expensive price option. ETFs are essentially a price component of cell phones and wireless devices.” Because consumer preferences differ and market supply and demand is in continuous flux, no absolute value for a product or service exists. In such circumstances—and especially in a dynamic marketplace devoid of monopoly—the marketplace itself should set the value and price. The wireless marketplace is characterized by such dynamism, giving consumers a lot of device and service choices. This makes the imposition of price controls through ETF regulations an unnecessary restriction. It would be disturbing – and ill-advised -- if the FCC’s price questioning is intended to foreshadow price regulating.