Pricing Variation as an Answer to Rising Problems

FSF's lunch seminar, "If I Were the FCC Chairman..." featured a robust panel discussion about the future course of communications policy at the FCC.

Pricing variation or price discrimination was on key topic raised during the question and answer portion of the seminar. In particular, mention was made regarding certain statements apparently made by NCTA's CEO and President Michael Powell regarding broadband pricing and network congestion.

Rather than attempt to speak for Mr. Powell -- who was not present at the seminar -- consider what he said at FSF's Fifth Annual Conference. FSF recently released the transcript for the Conference panel titled "The Right Regulatory Approaches for Video Service Providers." To let Mr. Powell speak for himself, here is an excerpt from the transcript:

[T]here are three or four rising problems to which usage of variable pricing models may be beneficial. And I can emphasize "may be." 

First thing, this country has an adoption gap. We are persistently stuck with a hundred million Americans who have access to broadband but are not subscribing to it. We can have all kinds of healthy debates about why that is. One of the things that price discrimination often does well is it helps penetrate parts of the market that heretofore have been unwilling to come on the Net. The greatest threat to the United States is more than the silly debates about where we rank in the world. It's whether all of our citizens are online, have universal access to that capability. And if price discrimination can create tiers that are more affordable and more suited to the needs of that hundred million people and get them on the Net, that would be a major achievement. 

That's one thing. The second thing is, when the Internet started most of us probably did roughly the same kinds of things. What we're seeing happen as the Internet grows and matures is there's a wider variation coming on about the way people use the Internet. There are power users who use massive amounts of data and gigabytes. There are those who love to cut the cord and do NetFlix streaming, and there are still plenty, probably 80% of the mass market of users who do very low bandwidth things: e-mail, Facebook, Skype, Twitter. These things do not use substantial capacity. 

So as we get wider variety among the users, you do have a subsidization problem. You have people who are all paying the same price and getting different values of use. Frankly, the power elite user is enjoying the benefits of the subsidy that's being masked by an unlimited pricing model. That is not to say that model isn't simple and predictable, and you might like it for those reasons. But it does mask that cross-subsidization that in another context we worry about. 

The third thing, it's not a congestion argument. It's important to just jettison this, because we're really not being honest. We're not really talking about congestion. I'll say it over and over and over again. We've been saying it for a while, but it still gets cited as what we're doing. What we're doing is what any company does that has massive, fixed costs. 

We often hear our profitability talked about while people ignore completely the cost of building and maintaining the network. The network is a $200 billion expense over the last decade, and it takes $30 billion a year across all broadband providers to keep it going. That includes digging up the ground, laying wires, and keeping those wires current. You have to sink that money in the ground before you're paid one dime from a subscriber. 

The question is, when you go to recover those costs, what's the fairest way to allocate those costs among the people who buy your service? If you have people who use it a little, should they pay the same as the people who use it a lot? Or, should you have the people who use it a lot pay more than the people who use it a little? That's what we're really trying to figure out: the fairest way to allocate the cost of a high fixed cost network. 

And the last thing that I don't think is talked about enough is that bandwidth is not an infinite resource, whether it's wireless or wireline. You can get congestion. You can get overloading. What we have to do is make sure everybody has incentives to build for efficient broadband use. We have to do it as network engineers. But, right now, a lot of apps providers, service providers have absolutely no incentive to design their application or their services in a way that will use as little bandwidth as required. Why should they? 

They don't have any cost to really deeply internalize as a consequence of it. It's like when Windows used to write software code, it could be more and more bloated, and as long as Intel kept making faster processors, it didn't matter. But, I assure you, if we go to 100 GBs, or a trillion gigabytes, software can bloat to meet that demand if there are incentives for efficiency. And, if you want that NetFlix steam to continue at high capacity, they should also have to be concerned about efficient algorithmic design.

Willful Denial and First Amendment Jurisprudence

With the submission of briefs to the Supreme Court in FCC v. Fox Television Stations (a.k.a. "the FCC indecency case"), I have been thinking, as I often do, about the Federal Communications Commission and the First Amendment.

The issue in the Fox Television case is whether the FCC's determination that three different broadcasts violated the agency's indecency policy is consistent with the First Amendment. Two of the broadcasts concern the use of "fleeting" expletives, and the other, "fleeting" nudity. If you want more graphic details, you can go to the briefs, or to the original broadcasts.

For my purposes here it is unnecessary to dwell on the specifics of the broadcasts, or my sense as to whether or not the broadcasts comport with my own standards of decency. What I want to do instead is to use the occasion to once again call attention to the need for a new First Amendment jurisprudence that treats all media the same. By that, I mean a First Amendment jurisprudence that accords all media, including broadcasters and cable television and satellite operators, the same robust First Amendment protection accorded to the print media.

In the case now before the Supreme Court, the Court of Appeals for the Second Circuit held unconstitutional the FCC's new context-based indecency policy on the basis that it is impermissibly vague. "Void for vagueness," as the constitutional doctrine goes. It is quite possible, perhaps more likely than not, that the Supreme Court will decide the case on this vagueness point.

But Fox and other broadcasters explicitly are asking the Court more broadly "to overrule Pacifica and recognize that broadcasters have the same First Amendment protections as other media." To the same effect, a distinguished group of former FCC commissioners and staff officials filed a brief declaring:

In today’s media environment, the distinctions drawn by Pacifica between broadcast and other electronic media are unsustainable. Viewers can access the same content across broadcast, cable, satellite, and the internet or can subvert the Commission’s enforcement efforts by simply switching channels or turning on a computer. This reality makes plain that the Commission’s efforts to impose a separate standard on broadcasters is woefully under-inclusive. The First Amendment cannot tolerate discrimination against one of several like speakers. It is time for this Court to declare that the same First Amendment principles apply to all media.

And I have long argued the same point. In a 2009 law review article published in the Charleston Law Review, I ended this way:

Hopefully sooner rather than later, the Court will revisit Red Lion, Pacifica, and Turner in order to establish a new First Amendment paradigm for the electronic media, one that is much more in keeping with the founders’ First Amendment vision. It may even move in this direction this Term upon its Fox Television decision. Perhaps it was predictable, maybe even likely, that the First Amendment’s protections would be limited substantially during the twentieth century’s Analog Age that tended towards a monopolistic or oligopolistic communications marketplace. But now, in the face of proliferating competitive alternatives attributable to profound marketplace and technological changes, it ought to be considered predictable and yes, even likely, for the Court to establish a new First Amendment jurisprudence befitting the media abundance of the twenty-first century’s Digital Age.

Of course, on the first trip up to the Supreme Court for the FCC's indecency decisions now on review, the Court did not confront the constitutional issues now before it. Instead, in Fox Television Stations, Inc. v. FCC (2009), it remanded the case to the appeals court, sustaining the FCC's actions on administrative law grounds, thereby avoiding a decision on the broadcasters' First Amendment claims. Notably, Justice Thomas, in a concurring opinion citing my Charleston Law Review article, invited reconsideration of Red Lion and Pacifica, the two principal cases that provide the foundational sanction for according broadcasters less First Amendment protection than other media. Justice Thomas stated: "The extant facts that drove this Court to subject broadcasters to unique disfavor under the First Amendment simply do not exist today."

Many, if not most, of the readers of this space are familiar with the posture of the Fox Television Stations II case now before the Court and with the First Amendment jurisprudence to which I have alluded. But many may not be familiar with one of the more eloquent calls ever for a new First Amendment jurisprudence, certainly one of the most eloquent delivered by an FCC commissioner. An FCC commissioner who suggested the FCC ought to relinquish, as a matter of constitutional duty, authority to regulate broadcast content. I have in mind then-commissioner Michael Powell's June 1998 address entitled, "Willful Denial and First Amendment Jurisprudence."

At the time I first read it, I found Mr. Powell's address a stirring, prescient declaration of free speech principles, with which I was in full sympathy. I pull out the speech from a ragged old folder to re-read from time to time. As the Supreme Court prepares to hear argument on, and decide, Fox Television Stations II this term, I suggest you too may find the address by Mr. Powell, now President and CEO of NCTA, worth reading, or re-reading.

Here are a few excerpts to whet your appetite:

This leads me to the heart of my remarks today. Though I consider the constitutionality of proposed broadcast regulation last when I work through such issues under the public interest standard, at least I do work through it. I have observed that while changes in technology, the law, markets and consumer preferences often ignite discussion about the impact of changed circumstances on broadcaster's public interest obligations, such changes rarely initiate an equally serious examination of their constitutional protections. I believe that any attempt to consider how changes in technology and the regulatory environment affect public interest obligations, necessarily must include a review of the underpinnings of current First Amendment jurisprudence. There is a symbiotic relationship between the scope and content of public interest duties and the Constitution. The greater the protection afforded by the latter the less intrusive the government can be with respect to the former.

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I submit that the time has come to reexamine First Amendment jurisprudence as it has been applied to broadcast media and bring it into line with the realities of today's communications marketplace. As far back as 1984, the Supreme Court indicated in the League of Women Voter's case, that it would await "some signal from Congress or the FCC that technological developments have advanced so far that some revision of the system of broadcast regulation may be required." I believe we should be getting those signal fires ready.

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With scarcity and the uniqueness of broadcasting such demonstrably faulty premises for broadcast regulation, one is left with the undeniable conclusion that the government has been engaged for too long in willful denial in order to subvert the Constitution so that it can impose its speech preferences on the public -- exactly the sort of infringement of individual freedom the Constitution was masterfully designed to prevent.

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In sum, I submit that it is time to reexamine the defensibility of maintaining a separate First Amendment jurisprudence. We must take the truth about scarcity for broadcast media out of the closet. Rather than continuing to engage in willful denial of reality, the time has come to move toward a single standard of First Amendment analysis that recognizes the reality of the media marketplace and respects the intelligence of American consumers.

Recall that these excerpts are from a speech delivered in 1998, more than twelve years ago. Surely, it is time for the "willful denial" of First Amendment rights, of which the then-FCC commissioner Michael Powell so eloquently spoke, to end. It is time, as I said in my 2009 Charleston Law Review article, for the Supreme Court "to establish a new First Amendment jurisprudence befitting the media abundance of the twenty-first century’s Digital Age." This means a jurisprudence that willfully provides full First Amendment protection to broadcasters, cable and satellite operators, Internet service providers, print purveyors, and other media alike.