Remove Barriers, Reallocate Spectrum, and Benefit Consumers and the Economy

In his testimony during the October 28 hearing on “Breaking Down Barriers to Broadband Infrastructure Deployment,” before the House of Representatives’ Energy and Commerce Committee, Scott Bergmann, VP of Regulatory Affairs at CTIA – The Wireless Association, stated that “sound infrastructure policy is a necessary complement to good spectrum policy.” Since 1996, U.S. Internet Service Providers (ISPs) have invested $1.4 trillion in broadband infrastructure. With each passing year, ISPs will likely invest more and more, but there are barriers that constrain private investment. Of course, costly Internet regulations create investment barriers. But other rules at the federal, state, and local levels regarding approval and construction stifle broadband investment as well.

There are six pieces of draft legislation proposed in the House which would lower deployment costs and streamline some of the approval processes, including a “dig once” policy. But as Mr. Bergmann said at the hearing, infrastructure policy and spectrum policy are complements. Therefore, Congress must get it right on both ends for consumers to experience next-generation mobile broadband for years to come.

In 2012, the Congressional Budget Office (CBO) released a report regarding legislation that authorized the FCC to auction spectrum. The CBO estimated that the AWS-3 auction would either not happen or would not bring in any revenue. This turns out to be massively underestimated considering that the AWS-3 auction generated roughly $41 billion and the TV broadcasting auction scheduled for March 2016 is likely to generate another $30 to $40 billion. Currently, a new bill exists, the Federal Incentive Spectrum Act (FISA), which would allow federal agencies that relinquish spectrum to keep 1 percent of the proceeds from the sale. Hopefully, the CBO’s inaccurate 2012 report does not have a lasting effect on members of Congress as FISA moves forward, because reallocating spectrum is absolutely crucial for the economy.

Both spectrum policy and broadband infrastructure policy should be bipartisan issues. The current amount of spectrum allocated for private use will not be enough to keep up with mobile data traffic, which is projected to increase seven-fold from 2015-2019. Additionally, wireless broadband needs wireline infrastructure and many cell towers to deliver quality service. Therefore, Congress should focus on two policies in this space: 1) removing costly barriers so providers can install next-generation technologies throughout the country and 2) reallocating licensed spectrum for private use. Given the positive effect that mobile broadband has had on the economy as a whole and the benefits it brings to American consumers, both of these policies should receive bipartisan support from Congress.

As for the valuation of spectrum auctions, the CBO report was inaccurate. Not only did the CBO claim that the AWS-3 auction would not bring in any revenue, it also failed to realize that allocating more spectrum for commercial use would increase economic activity and create jobs. In a May 2015 Brattle Group and CTIA report entitled “Mobile Broadband Spectrum: A Vital Resource for the American Economy,” authors Coleman Bazelon and Giulia McHenry estimated that licensed spectrum has created $400 billion in economic activity, not including the value of mobile applications. Mr. Bazelon and Ms. McHenry also estimated that for every person employed in the wireless industry an additional 6.5 people will be employed in other sectors. (See my May 2015 blog for more on this.)

When economic activity and jobs are created, the tax base expands, thus creating more opportunities for the government to generate revenue. Therefore, in the long run, reallocating spectrum for private use is a win-win – a win for the economy and a win for taxpayers, because (all else equal) expanding the tax base marginally reduces the tax burden on each individual.

Mobile broadband is transforming day-to-day life in areas like medicine, education, and even policy decisions. For example, telemedicine allows patients to be monitored remotely and can send signals to doctors about possible health threats. Patients who require monitoring will need a mobile connection so doctors can monitor their status at any given time. The rapid growth of mobile data traffic increases the potential for network congestion. Patients who use telemedicine cannot afford to experience congestion or latency. Reallocating spectrum for private use and removing deployment barriers would increase the capacity of mobile networks, mitigate congestion, and potentially save lives.

Mobile technology has already changed the way teachers and students communicate, but with more spectrum and deployment, students will be able to utilize their time more efficiently. The 2010 National Broadband Plan set the goal of connecting all schools with high-speed Internet access, but the FCC has failed to accomplish the spectrum goals, a prerequisite for schools having access to 21^st century technology. According to the National Broadband Plan, the FCC should have reallocated 300 MHz of spectrum by 2015, but currently has only reallocated 149 MHz.

Additionally, it can take many years to get permission to build broadband infrastructure on federal property, which is often the only or best way to reach many rural schools. As state and local governments are attempting to fully equip schools with 21^st century technology, education curriculum is moving online and digital literacy is becoming a necessary skill. More spectrum and broadband deployment would allow professors to provide students with course work while traveling, teachers to enhance the learning experience of school field trips, and students to research in off-campus settings.

Importantly to members of Congress, constituents are using mobile broadband to engage themselves and others in the political process. Social media platforms, like Facebook and Twitter, are allowing people of all ages and demographics to have a greater voice in shaping policy.

The expansion of mobile broadband has positively impacted the economy, medicine, education, policymaking, and many other realms of American life. It is certainly time for Congress to act to remove barriers to further infrastructure deployment that, if not addressed, are likely to negatively impact the consumer experience in future years.

High Taxes and Surging Surcharges Weigh Down Wireless Subscribers

Wireless voice services are taxed too much, too often. Federal, state, and local taxes, fees, and charges make consumers' wireless bills longer with extra, expensive line items. And the bottom line is that consumers' wireless bills run higher as a result. Unfortunately, recent years have seen a trend in tax hikes and fee increases for wireless consumers – with federal universal service fund (USF) surcharges leading the way.

According to a State Tax Notes report this month by Scott Mackey, "[w]ireless users now face a combined federal, state, and local tax and fee burden of 16.3 percent, a rate two times higher than the average retail sales tax rate and the highest wireless rate since 2005." Moreover, the recent increase in rates is mostly attributable to the rapid growth in the rate of the federal Universal Service Fund (USF) surcharge."

The federal USF system for subsidizing rural telephone companies, schools, libraries, and other institutions has been snowballing for years. As the FCC's recent notice for modernizing and streamlining the USF and intercarrier compensation systems states: "The component of the Fund that supports telecommunications in high-cost areas has grown from $2.6 billion in 2001 to $4.3 billion in 2010." USF is funded by a "contribution factor" that wireless and other telecommunications service providers pay into the system. Those companies recover their contribution costs through consumer surcharges that appear as a line item on consumers' bills.

Coinciding with the ballooning USF high-cost fund is a ballooning USF contribution factor that results in ballooning USF consumer surcharges. In 2001 the USF contribution factor was only in the 5 - 6 percent range. But since that time the USF contribution surcharge has made an uneven but nonetheless persistent march upwards. Prior posts on the FSF blog, for instance, have pointed to the first quarter 2010 contribution rate of 14.1 percent, and the second quarter 2010 contribution rate of 15.3 percent. For first quarter 2011, the surcharge runs even higher at 15.5 percent.

The chart below shows the steady climb of USF contribution rates over the past decade, which has resulted in the steady climb of USF surcharges.

(click image to enlarge)

Wireless broadband adoption is and will remain crucial to any public policy stressing increased consumer adoption of broadband technologies. But as Scott Mackey points out in the State Tax Notes report, "[c]onsumer demand for wireless services is price sensitive." Although the USF line item contained in consumers' bills is designated a surcharge, from a consumer perspective the USF surcharge is the functional equivalent of a tax. Therefore, high USF surcharges that make wireless service more costly to consumers deters wireless adoption, including wireless broadband adoption.

So despite the FCC's initiatives to expand broadband adoption, its own policies generating such a high USF surcharge remain a major barrier to achieving the National Broadband Plan's adoption goals. Therefore, the FCC's recently renewed efforts to comprehensively reform the USF and the intercarrier compensation regimes are desperately needed to reverse this surging surcharge trend.

Not to be forgotten is the fact that "[t]wenty-one states have a USF or similar type of mechanism that is funded by an imposition on wireless users." In those states that have their own USF programs, wireless consumers pay surcharges for both federal and state USFs. Therefore, states also bear responsibility for addressing the extent to which their own USF surcharges create further disincentives for wireless broadband adoption.

Aside from federal and state USF surcharges, state and local governments shouldn't be let off the hook. Going back to the State Tax Notes report, Mackey points out that since 2007, "[w]ith a few notable exceptions, state and local taxes, fees, and government charges remained high but were relatively stable." In fact, "local governments in a few states have been aggressive in levying new taxes on wireless users as the recession has stressed revenue collections from property and other broad-based taxes." Some of those "notable exceptions" regarding state and local taxes are worth a closer look.

Maryland is one of those states that most aggressively taxes wireless, particularly at the local level. According to the State Tax Notes report, Maryland consumers bear the eleventh highest wireless tax burden in the nation. While the state applies its regular six percent sales tax to wireless services, Maryland also grants its local governments authority to impose high tax rates on wireless. The City of Baltimore and Montgomery County recently increased their per-line tax from $3.50 per month to $4.00 and from $2.00 per month to $3.50, respectively. (Maryland does not, however, have a state USF program.)

Monthly wireless bills for consumers in Maryland also include state and county 911 fees, which amount to 0.52 and 1.56 percent, respectively. While those numbers sound small, 911 and "E911" rates can add up to big money. According to the FCC's Second Annual Report to Congress On State Collection and Distribution of 911 and Enhanced 911 Fees and Charges, state and local 911 fees collected in Maryland for 2009 total $55,556,616.37. Most would agree that emergency services are a worthwhile expenditure that merits such charges. To its credit, Maryland reported to the FCC that it does not use its 911 fees for non-911 purposes. "Thirteen states, however, report that collected funds are or may be used, at least in part, to support programs other than 911 and E911." The FCC's report indicates that 911 funds totaling over $100 million were devoted to non-911 purposes in 2009.

So what do federal USF surcharges, state USF surcharges, state sales taxes, state telecom taxes, local telecom taxes, state 911 fees, local 911 fees, and in some cases wireless fees totally unrelated to wireless service add up to? A lot of money. Exact numbers will vary by state, by county, and by city. But the taxes, fees, and charges set at the federal, state, and local levels are too high.

In all or almost all contexts, the economically sound and most efficient tax policy is a broad-based tax set at a low rate. This approach makes for easy compliance by businesses that collect and remit taxes to the relevant taxing authorities. It ensures that all kinds of businesses are taxed fairly, encouraging efficient economic activity in the market and ensuring that the tax system does become a mechanism for distorting or changing consumer buying choices. In the context of wireless and other telecom services, this approach means taxing such services at the same rate as any other kind of service and limiting any actual fees to any actual costs that the relevant services actually impose on the public.

Comprehensively reforming our telecom tax systems to approximate a streamlined, broad-based, low-rate approach remains a long-term project. But at the very least, policymakers who profess to appreciate the importance of wireless broadband adoption as a means of empowering citizens and expanding economic opportunity need to recognize the costs of the tax burdens they are putting on wireless consumers.

(Hat tip: Washington Policy Center's Carl Gipson for an excellent blog post at TechLiberationFront.)

FCC's "AllVid" Regulation of Video Devices All Wrong

Nearly a month into the New Year, the FCC is now pursuing several more action items on its agenda for implementing the National Broadband Plan. Unfortunately, if the FCC's recent order imposing set-top box conditions on the Comcast-NBCU merger is any hint, one of those action items will be a broader set of regulatory controls on the design of video navigation devices. But leaving Comcast-NBCU's merger aside, the FCC should call off its "AllVid" plans for future regulation of video navigation devices. Continuing developments in the dynamic video market show that adherence to free market principles remains the surest way to promote continuing investment and innovation in video navigation devices for the benefit of consumers.

Media reports from this year's Consumer Electronics Show reveal the launch of a variety of new Internet-capable video devices. An increasing number of "smart TVs" being brought to market, for instance, are capable of downloading video content from the Internet. Cable companies and other multi-video programming distributors (MVPDs) are also pursuing new business arrangements with manufacturers of other innovative devices for delivering video content. Meanwhile, new broadband-enabled and video-capable tablet devices and smartphones are being brought to market — thereby giving video consumers mobility options.

What's more, remote control innovations are also changing how consumers can operate their video navigation devices. Apps are now created to allow smartphones to be used as remote control devices, and manufacturers are also experimenting with creating remote controls with one-push button options for streaming or downloading content from the Internet — such as a "Netflix button." Of course, future TVs and video navigation devices could also make remote controls less significant by incorporating voice activation and motion sensor capabilities like the new Xbox Kinect.

All of these innovations involve complex engineering design decisions that balance new technological capabilities — such as processing speeds, video resolution, search capability, storage capacity, and sound quality — with corresponding technological constraints — such as size, weight, and cost. Device designers must also balance features such as interoperability and openness with concerns over security and protection of third-party copyrights. In a free market, competing manufacturers make their own judgments about how to approach these types of device engineering trade-offs and what functions or features should be optimized to best meet divergent consumer demands.

Strangely enough, it's in the midst of this sea-change in video delivery technologies and device functionalities that the FCC has proposed to impose new regulatory requirements on certain MVPDs regarding video navigation devices. By invoking a provision from the Telecommunications Act of 1996, the FCC issued its "AllVid" proposal in 2010. Under the FCC's proposed technological standards mandate, MVPDs must install a "gateway device or equivalent functionality" in homes using video navigation devices. In particular, the FCC proposes to require placement of:

the network-specific functions such as conditional access, provisioning, reception, and decoding of the signal in one small, inexpensive operator-provided adapter, which could be either (i) a set-back device – which today could be as small as deck of cards – that attaches to the back of a consumer's television set or set-top box, or (ii) a home gateway device that routes MVPD content throughout a subscriber's home network. The adapter would act as a conduit to connect proprietary MVPD networks with navigation devices, TV sets, and a broad range of other equipment in the home. The AllVid adapter would communicate over open standards widely used in home communications protocols … enabling consumers to select and access content through navigation devices of their choosing purchased in a competitive retail market.

The FCC contends "AllVid" regulation will help realize the agency's view that "there is true promise in the basic concept of separating operator-specific communications functions into a device that can then communicate with individual retail devices or a network of retail devices throughout a subscriber's home." "AllVid" therefore implies that the FCC can make engineering and other technological design decisions better than the free market. Or at least it implies that the FCC can pull levers that will spur competitors to create a more innovative and competitive video device market than the one we now have today.

But when it comes advanced technologies in dynamic markets, the reality is FCC regulation is much more prone to restrict innovation than to unleash it. Revealingly, "AllVid" would prohibit MVPDs from including some of the so-called "adapter" functions in the video navigation devices they make available to their own subscribers. This means that consumers would be unable to lease a DVR or other type of advanced device with all functions integrated into that one device. Subscribers would instead need to get an "AllVid" adapter containing some of the functionalities to go with the leased DVR or other device in order to obtain full functionality. This proposed restriction on what MVPDs can make available to consumers mirrors the FCC's current "integration ban" for set-top box regulations.

As I pointed out in an earlier FSF Perspectives piece, "The FCC's Continuing, Costly Video Navigation Device Regulation," most consumers prefer to lease set-top boxes from their cable or other MVPD provider in order to avoid fronting extra money for the equipment, making separate trips to the store to purchase equipment, and being stuck with outdated equipment (such as non-HD DVRs). That is a major reason why the FCC's existing set-top box regulation — including its ban on set-top boxes integrating content and security functionalities — has created significant regulatory compliance costs and brought no discernable benefit to consumers.

More importantly, the FCC's regulatory approach attempts to artificially prop up the agency's idiosyncratic and narrow view of one particular market segment. The regulatory foundation for "AllVid" is an outdated picture of the video marketplace. For "All-Vid" is the latest iteration of a set-top box regulatory regime that was envisioned back in the mid-1990s when cable companies did not face the degree of competition they now face from direct broadcast satellite and telco video entrants.

Nor was online video distribution through broadband Internet a factor in 1996. Via broadband connections, consumers today can obtain video programming through services such as Amazon's Video on Demand, iTunes, and Netflix's subscription service. Hulu and a number of individual broadcast and cable TV programmer websites offer streaming content to consumers for free by using ad-supported models. Roku, Boxee, and Apple TV also offer content delivery services through their respective new devices. In addition, broadband-connected video game consoles such as Sony PlayStation 3 and Xbox 360 are becoming increasingly popular devices for obtaining TV and movie programming.

By trying to insert itself further into today's dynamic video market through technological device design mandates, the FCC risks freezing into place rules geared more toward a monopolistic, static market. But as several video programmers reiterated to the Commission late last year:

[V]ideo distribution services are not static - programmers and content creators consistently invest in the creation of new services, features, and enhancements, such as 3D networks and program interactivity, made possible by advances in technology pioneered by program networks and their partners. Standardizing the output from MVPD networks would essentially freeze the status quo, thereby reducing the incentive to innovate and stifling the development of new features and services that consumers demand.

Imposing a single government-mandated standard for video navigation devices can also create stronger incentive for wrongdoers to attempt to compromise security. As the video programmers contend: "[c]ontent security issues are best left to multiple, private, and voluntary solutions which are inherently more flexible and able to deal with advances in technology more adroitly than government regulation."

Given the innovation and choice in the video market we see today, if there is any provision in the 1996 Telecom Act relating to set-top boxes that the FCC should be invoking it is the sunset provision. Congress placed into Section 629 a unique provision that calls upon the FCC to sunset regulation of set-top boxes when the market becomes effectively competitive. The FCC should now invoke the sunset provision, or at a minimum keep from expanding its regulation of video navigation devices.

Market innovations of the type demonstrated at CES and described here overwhelmingly show that consumers are offered abundant choices for video device delivery options in an effectively competitive market, not a static monopolistic market. And the fact that video market developments have taken forms that no regulator in 1996 possibly could have predicted is no reason for regulators in 2011 to look past them now. The FCC should respond to staggering innovation and vibrant competition with deregulation, not more regulation.

FCC Needs Fast-Track Fix to Stop Traffic Pumping

As 2010 draws to a close, among the important pieces of unfinished business at the FCC is the ongoing problem of "access stimulation" or "traffic pumping." The current intercarrier compensation system creates some unfortunate efficiency-killing arbitrage opportunities, and traffic pumping is one of them. Traffic pumping costs voice carriers millions of dollars each year. As long as rural voice services continue to be subsidized under the existing unreformed intercarrier compensation system, it is only sensible that the FCC immediately take narrow and targeted steps to prevent bad actors from taking advantage of the subsidy system it oversees.

Traffic pumping is a form of regulatory arbitrage arising out of the intercarrier compensation system's formula for assessing interstate access charges. To simplify, long-distance or interexchange carriers (IXCs) that originate interstate calls are required to make access charge payments to an end-user's local exchange carrier (LEC) that terminates such calls. Under the legacy intercarrier system, interstate access charges are particularly favorable to rural LECs. Rural competitive LECs, in particular, enjoy special exemptions that result in significant access charge revenues for those LECs. In other words, the current system subsidizes the cost of services provided by rural LECs through interstate access charges paid by IXCs that originate calls to LECs that terminate calls. The intercarrier compensation system is set up to transfer significant costs for voice services in rural areas onto voice services in urban areas--and thereby reduce the price of rural services for rural customers.

To simplify further, the current formula for assessing interstate access charges is premised on certain assumptions about the voice traffic history for rural LECs. Such rural LEC networks, it is assumed, have small customer bases and small associated amounts of per-minute interstate traffic that are terminated on their networks. But traffic pumping is a clever tactic for LECs to take advantage of interstate access charge regime, confounding the underlying assumptions of the system.

In recent years, some small LECs have entered into traffic pumping business arrangements with other entities to provide customers across the country a variety of "free" interstate and international conference call services or similar services that terminate on numbers in the LECs' networks. This results in surging amounts of interstate traffic being terminated on an LEC's network, despite the fact that no local customers are in any way associated with the terminating calls. LECs then bill IXCs for terminating the interstate calls they receive, reaping even larger above-cost interstate access charge revenues. And that means large interstate access costs incurred by IXCs. One recent study concluded that IXC losses due to traffic pumping amounted to some $2.3 billion.

The prevalence of traffic pumping practices eventually prompted the FCC to issue a Notice of Proposed Rulemaking to address the subject. As the FCC indicated in the NPRM,

We tentatively conclude that a rate-of-return carrier that shares revenue, or provides other compensation to an end user customer, or directly provides the stimulating activity, and bundles those costs with access is engaging in an unreasonable practice that violates section 201(b) and the prudent expenditure standard. On its face, the compensation paid by the exchange carrier to the entity stimulating the traffic is unrelated to the provision of exchange access.

That NPRM was issued in October 2008. Since then, however, the Commission has not acted on it. Instead, the Traffic Pumping NPRM docket has become a battlefield of ex parte filings. Meanwhile, traffic pumping practices continue, with numerous complaints filed by IXCs piling up at the FCC, at state public commissions, and at federal and state courts.

The National Broadband Plan sensibly acknowledges that "[m]ost ICC rates are above incremental cost, which creates opportunities for access stimulation, in which carriers artificially inflate the amount of minutes subject to ICC payments." As a prelude to long-term, comprehensive reforms of the intercarrier compensation system and universal service, the Plan recognizes the need for a quick fix to address regulatory arbitrage problems such as traffic pumping. Recommendation 8.7 in the Plan calls on the FCC to "adopt interim rules to reduce ICC arbitrage," which includes "rules to reduce access stimulation and to curtail business models that make a profit by artificially inflating the number of terminating minutes." In short, the Plan calls on the FCC, while it tackles intercarrier compensation reform more broadly, to make a band-aid fix for the problem it previously recognized in the Traffic Pumping NPRM.

The FCC should act fast to put an end to traffic pumping arbitrage activities. A clear problem exists. The Commission has already recognized the problem, and both the FCC and the National Broadband Plan have highlighted the need to address it. So what is the FCC waiting for? For starters, the FCC could set out some basic parameters defining the practice of traffic pumping and declare it impermissible for an LEC to apply its tariffed switched access rates to such conduct.

When it comes to traffic pumping, interim action by the FCC should be undeterred by any of the supposed complexities arising from the conceded necessary long-term, comprehensive reform of the intercarrier compensation system and universal service regime.

There is nothing that should be holding the FCC back from taking swift action against traffic pumping. Unfortunately, the FCC has been holding itself back and allowing arbitrage activity to continue. By 2011 it will be well past time for the FCC to have dealt with this problem. FCC efforts to tackle traffic pumping problems need not wait a day longer.

Government Shouldn't Design Devices in Dynamic Markets

Last week the National Association of Broadcasters (NAB) continued its push to have government require that FM receiver chips be embedded in wireless devices. Apparently, NAB seeks a forced-access technology mandate by which Congress would require one media delivery platform – FM broadcasting receivers – be fused into the physical devices of a competing media delivery platform – wireless devices. And this despite the fact that MP3 players, including iPods, typically carry FM receivers and that wireless innovation has led to the availability of smartphone applications that allow access to FM broadcasting. In other words: "There's an app for that."

NAB released a poll suggesting that consumers would be willing to pay a small amount in order to have FM receiving capability in their wireless devices. NAB's poll comes in the wake of summer lobbying efforts surrounding the Performance Rights Act (H.R. 848 and S.379). Reports indicate that NAB seeks an amendment to the pending legislation that would include an FM chipset mandate being imposed on wireless manufacturers.

Wireless devices designed with FM receiving capabilities may, in fact, have strong appeal with consumers. But that should be something for the market to decide. Designing commercial media technologies should not be the business of Congress or bureaucrats. This is especially so in dynamic markets where rapid innovation is a constant and government technical mandates can be quickly rendered obsolete by new market developments. Not to mention the fact that the politically driven design decisions made by government can easily thwart the market-driven design decisions made by private enterprise. Wireless manufacturers design devices with all kinds of functionality trade-offs in mind. Balancing complex technological and financial constraints requires freedom to experiment and innovate. Unfortunately, the idea of a wireless FM chipset mandate fits a too-familiar pattern of government technical mandates that artificially prop up a technology market segment to the exclusion of genuine, dynamic market supply and demand.

Consider another example of intrusive government technical mandates currently being imposed on the video marketplace. The FCC's ongoing efforts to expand regulation of video navigation devices fit this mold of government-imposed mandates for technological devices premised on a static view of the market rather than a dynamic view. As I point out in an April blog post "National Broadband Plan: A Setback On Set-Top Box Regulation," the FCC first set out its government reengineering and managed competition ambitions for video navigation devices in the National Broadband Plan. And over the course of the spring and summer, the FCC has begun its implementation.

First, the FCC issued a notice for public comment on a proposed new set of CableCARD regulations concerning cable set-top boxes. CableCARDs are small physical devices created as a result of prior rounds of FCC regulation-induced negotiations with the cable industry. Provided to consumers by cable operators, CableCARDs contain security functions that can be inserted into the video navigation devices of independent set-top box manufacturers so that those devices can be used to access cable programming. (Cable operators are also subject to an FCC-imposed "integration ban" that prohibits them from combining video navigation and security functions in their set-top boxes. They are instead required to make use of CableCARDs to provide security functions for the set-top boxes they lease to their customers.) Based on its notice, the FCC will eventually issue new interim rules that will govern CableCARDS until a promised new regulatory regime is put in place.

Second, the FCC issued a Notice of Inquiry seeking comment on specific requirements for an expanded video navigation device regulatory regime that will apply to all multichannel video programming distributors (MVPDs). The FCC intends to require that all MVDPs install a "gateway device or equivalent functionality" in all homes using video navigation devices by the end of 2012. By year's end the FCC will follow up with a Notice of Proposed Rulemaking that will distill the new technical mandates for video navigation devices with which all MVPDs must eventually comply.

The FCC has premised these new regulations largely on the argument that a competitive set-top box market has not emerged as was originally contemplated by the Telecommunications Act of 1996. But a serious problem with the FCC's policy is that it insists on giving consumers something that they may not want. Consumers often find it convenient, for instance, to lease cable set-top boxes from their cable operator as part of their overall cable package. This saves consumers a trip to the store to purchase a set-top box from an independent manufacturer. It also saves consumers the effort of buying a new set-top box should they decide to upgrade to a better product that includes high-definition picture or digital video recorder service.

In addition, set-top boxes may become much less prevalent or even largely irrelevant in the years ahead. Some cable operators, such as Cablevision, are looking to offer video programming services without set-top boxes by transferring functions to cable head ends. Overly aggressive regulation could potentially thwart those kinds of technological advancements.

Another problem with the FCC's policy is that it looks for competition in the wrong place. Late 2010's video marketplace is nothing like 1996's video marketplace. In addition to cable service, consumers now enjoy competition from two national direct broadcast satellite (DBS) providers. Telcom MVPD entrants also offer competitive service packages in many places. And some consumers are using video gaming devices or direct broadband connections through their PCs – or even through their wireless devices – to obtain video services and programming. The fact that the FCC now intends to expand regulation to DBS and telco MVPDs implies that it now sees a variety of device substitutes available to consumers.

However, the FCC seems to be making a liability out of an asset with its plans to apply video navigation device regulation to all MVPDs. As a general matter, the FCC mistakenly treats MVPD competition as grounds for new regulation for all video navigation devices rather than as the competitive basis for deregulation of cable set-top boxes. And, in particular, the FCC wrongly insists on expanded regulation to sustain a government-managed niche market for video navigation devices for cable, DBS and telco video services when the viability of that niche market has arguably been undermined by dynamic market changes.

Undoubtedly, those dynamic changes that have taken place in the video market since 1996 require a new and different policy approach to cable set-top boxes. But that policy approach should be deregulation as a means to further video innovation and competition between cable, DBS, telco MVPDs, and any other potential emerging competitors. Importantly, Section 629 of the 1996 Act, fairly uniquely, gives the Commission the power to sunset set-top box regulation when the MVPD and set-top box markets are fully competitive and when elimination of regulations would promote the public interest. Federal law puts it within the FCC's power to bring about device deregulation. The Commission should exercise this power that Congress has conferred.

Dynamic market developments and existing law support deregulation for cable set-top boxes and cable providers rather than the imposition of government-mandated and designed navigation devices. In the same vein, Congress should not adopt FM chipset mandates for wireless devices.

The lesson here is that Congress and the Commission should say no to mandating designs for advanced communications and information services devices in dynamic markets.

National Broadband Plan: A Setback On Set-Top Box Regulation

Although the FCC dubs its recently unveiled National Broadband Plan a "21st century roadmap," the Plan prescribes a very 20th century approach to the set-top box market. In fact, the Plan calls for more set-top box regulation than ever before. To kick off its implementation of the Plan the FCC will be considering the release of two notices involving set-top box regulation at its public meeting to be held later this week. Instead of piling on additional set-top box regulations under the National Broadband Plan, we need a Plan B that takes stock of both the growth of competition in the video marketplace and Congress's intent that such regulation eventually sunset.

The Telecommunications Act of 1996 directed the FCC to adopt regulations to assure the commercial availability of electronic equipment such as set-top boxes to ensure consumer access to multichannel video programming from independent manufacturers and retailers. FSF President Randolph May recounted the history behind the FCC's implementation of Section 629 in his FSF Perspectives paper from 2006, "Don't Inflict Analog Era Equipment Rules On The Digital Age." In 1998, "the FCC directed the cable industry to develop a physical device—now called a CableCARD—containing security functions that could be inserted in the equipment of independent manufacturers so that their boxes could be used with cable systems around the country." Moreover, "although not required by Congress to do so, the agency went further and imposed the integration ban" whereby since July 1, 2007, MVPDs were required to stop selling or leasing new devices that integrate both security and non-security functions, such as program menus and other channel navigation features. Direct broadcast satellite (DBS) providers were exempted from the integration ban.

Importantly, Section 629 included a sunset provision, under which regulations shall cease to apply when the FCC determines: (1) "the market for multichannel video distributors is fully competitive; (2) "the market for converter boxes, and interactive communications equipment, used in conjunction with that service is fully competitive"; and (3) "elimination of the regulations would promote the public interest."

Given that a law passed back in 1996 contemplated its own sunset, and that video competition has significantly increased since that time on account of DBS providers and telephone competitors, one might expect that the proper agency response would be deregulation, or at least stasis. Just last fall in Comcast v. FCC, the U.S. Court of Appeals for the District of Columbia Circuit concluded that, due to DBS and telephone competitors in video, the purported cable "bottleneck" justifying various regulations under the Cable Act of 1992 no longer exists. But the National Broadband Plan takes a different course, instead calling for even more regulation of set-top boxes.

The National Broadband Plan's section on devices maintains that "despite Congressional and FCC intentions, CableCARDs have failed to stimulate a competitive retail market for set-top boxes." The Plan states that Motorola and Cisco combine for a huge share of the market. By contrast, CableCARD-enabled retail devices comprise 1% of all set-top boxes deployed in cable homes. Finding all this unacceptable, the Plan's "Recommendation 4.12" calls for the FCC to "initiate a proceeding to ensure that all multichannel video programming distributors (MVPDs) install a gateway device or equivalent functionality in all new subscriber homes and in all homes requiring replacement set-top boxes, starting on or before Dec. 31, 2012." The Plan insists that this gateway device requirement "should apply to all MVPDs," not just cable providers. A development and deployment deadline set for the end of 2012 is urged in the Plan, with regulatory milestones called for track MVPD progress in meeting the mandate.

All of these pronouncements might have more heft if it were 1996 and not 2010. But today's dynamic video market context matters – or, in the interest of responsible regulation, ought to. It now makes far less sense for regulators to zero in on the set-top box market when considering the state of market competition for MVPD equipment. Since consumers increasingly enjoy the ability to choose between cable, DBS and telco MVPDs, equipment for using each respective service are ready substitutes for one another. Other emerging alternatives include downloadable video through online services such as iTunes or Hulu, or delivery to video game consoles such as the Xbox360. Consequently, the case for cable set-top box regulation has diminished, thanks to the growth in video competition.

New regulation also risks freezing into place a future retail set-top box market that will be of little benefit or interest to consumers. Consumers may already find it more convenient to obtain their set-top boxes directly through their cable provider than to undertake separate trips to retail outlets to search for boxes. Moreover, thanks to technological and market developments cable consumers may be able to obtain set-top box services without needing set-top boxes.

Cablevision, for instance, has plans for remote-storage digital video recorder (DVR) service to be made available to customers. Network intelligence and remote delivery from cable head ends might therefore become the most convenient and cost-effective way for cable companies to provide video programming and related services to consumers. Additional FCC regulation hardly seems appropriate in the face of market innovations of this kind. At worst, might new regulation of retail cable set-top boxes serve to artificially prop up a market segment trending toward obsolescence?

Whether or not Section 629's government-managed, forced-competition provision for set-top boxes was ever a sensible policy remains a valid question. To be sure, no agency has the rightful authority to rewrite a federal statute. And so the FCC has to make do with the law, whatever its own policy preferences. But the task is made more manageable through Section 629's sunset provision – a pretty uncommon occurrence in regulatory statues -- which allows the FCC flexibility to take into account of rapidly changed and still-changing technologies and markets.

Rather than redoubling set-top box regulation under the National Broadband Plan, here is a Plan B worthy of adoption: Reduce regulation by eliminating the "integration ban." Citing its own Video Competition Report and the D.C. Circuit's holding in Comcast v. FCC, the FCC should declare the MVPD market fully competitive. The FCC can hang on (at least for now) to its requirements that cable providers make CableCARDs available for use with independents' equipment to use with cable systems. The FCC can then acknowledge that its prior judgment --that an "integration ban" was the only way to guarantee competition -- was not an infallible policy pronouncement, but a judgment call that is now irrelevant to today's dynamic video market. Instead, the FCC can affirm the public interest is best served by: (1) intermodal competition between cable, DBS and telco MVPDs; (2) efficiencies created by equipment containing advanced proprietary features or by similar advanced services delivered without equipment; and (3) avoidance of costs to consumers imposed by government-mandated technical standards.

In the end, the National Broadband Plan's gateway device recommendations seek a reinvigorated government-managed competition regime pointing back to the end of the last century. A forward-looking approach that better respects the dynamic nature of the video marketplace would not expand the "integration ban" but eliminate it. Such an approach would emphasize intermodal competition and the benefits of continuing technological innovation free of government mandates.

Chairman Genachowski Needs a Sister Souljah Moment

As I pointed out in piece published last week on CBS.com called "Reject the Internet 'Public Option," groups like Public Knowledge and Free Press have mounted a vigorous campaign to have the FCC classify broadband Internet access services as "telecommunications" rather than "information" services. The import of such a decision would be that Internet access services provided by cable, wireline, wireless, and satellite firms would be regulated under Title II of the Communications Act as common carriage under the same public utility-type regime that applied to Ma Bell in the last century.

In my CBS piece I stated: "I don't think most consumers wish to retrogress to public utility-type regulation for broadband providers. They know, instinctively, that the same kind of regulation imposed on railroads in the 19th century and on Ma Bell last century is not suitable for 21st century high-speed Internet networks." I suggested the most strident net neutrality proponents are "seriously overreaching."

In his keynote address at the Free State Foundation's Annual Winter Telecom Policy Conference, FCC Commissioner Robert McDowell explained in a clear and detailed fashion why the notion of classifying Internet providers as common carriers under Title II has no merit. Why, in fact, common carrier classification would be counterproductive. In his address, which bears reading, and re-reading, Commissioner McDowell demonstrated the extent to which Title II regulation would require government micromanagement of the Internet service providers' businesses.

And now a group of wireline, cable, and wireless industry leaders have sent a 14-page letter to FCC Chairman Julius Genachowski vigorously opposing the proposal to regulate Internet providers under Title II. The industry leaders say to Chairman Genachowski that, "[i]t is difficult to imagine a proposal more at odds with the Commission’s historical commitment to keeping the Internet unregulated, to our national prospects for economic recovery, and to your own commitment to 'common sense' solutions and to 'private enterprise, the indispensable engine of economic growth.'"

I agree it is difficult to imagine a proposal more at odds with the FCC's historical commitment to keeping the Internet unregulated and with hopes for economic recovery and job creation. After all, the Internet access providers have invested over $200 billion of their own (read: non-government bailout) capital in just the last several years in continuing to build out high speed broadband networks. The FCC's broadband plan staff estimates it could cost up to another $350 billion to build out a high-speed network to every American. With the Internet providers apparently prepared to keep investing billions of dollars their own capital, given a reasonable regulatory environment, it's easy to understand the positive impact of their efforts on economic recovery and job creation.

What no one really knows at this point in his tenure is the extent to which Chairman Genachowski, when he says he is committed to private enterprise as the indispensable engine of economic growth, is prepared to act consistently with his words. Reversing the FCC's policy of not regulating Internet access providers as common carriers – after a long period of non-regulation during which broadband Internet availability and adoption have progressed nicely – would not be consistent with a commitment to such a private enterprise approach and would not be seen as such.

It is perfectly clear that the Title II'ers are not committed to a regime in which private sector firms respond to the demands of marketplace competition. Instead, they are committed to a regime in which Internet providers respond to the demands of government regulatory micromanagers. Indeed, as I pointed out several months ago here and as the industry letter reiterates, Robert McChesney, a founder and board member of the Free Press organization, which is the staunchest net neutrality proponent, 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."

As we say in the law: Res Ipsa Loquitur – "the thing speaks for itself."

Professor McChesney, Free Press, and Public Knowledge are certainly entitled to their views, however radical they may seem to me or others. In fairness, in some technical legal sense, a public utility's property may still be considered private property subject to the strictures of the Constitution's Takings Clause. But, the import of Professor McChesney's and his cohorts' vision for the Internet is clear: At a minimum, Internet networks would be highly regulated by the government, including the rates, terms and conditions of service. This is the essence of the authority conveyed to the FCC by Title II.

Chairman Genachowski's launch of the Commission's net neutrality proceeding – right in the midst of the development of the national broadband plan – was in my view ill-advised and unnecessary. There is no reason at this point, however, to conclude that he agrees with the Title II'ers notion that Internet providers should be subject to common carrier regulation, much less that he subscribes to Robert McChesney's radical idea that Internet networks should not be private property.

Mr. Genachowski is undoubtedly a smart and capable person. He came to his job armed with a lot of knowledge about the communications, information services, and high tech marketplace, and also about communications policymaking. As chairman, he thus far has worked hard and deserves credit for taking actions to foster a sense of collegiality among the commissioners. My sense – perhaps it will turn out to be a misplaced hope – is that he must recognize that his entire policymaking agenda will be put at risk unless he puts an early stop to this talk about Title II Internet regulation or, indeed, any form of heavy-handed regulation..

In my view, what Mr. Genachowski needs right now is something roughly akin to a Sister Souljah moment, a forceful repudiation of the more extreme ideas urged by those who are seen by some as his natural allies and the allies of the president who installed him at the FCC. He ought to avail himself of such a Sister Souljah-like moment to make clear he understands that, in today's dynamic digital environment, debate about the need, or not, for regulatory intervention regarding the Internet should be circumscribed within certain essentially moderate parameters which necessarily exclude Title II common carrier regulation.

Reform Universal Service Now: Two New Data Points

Universal Service Fund (USF) reform has returned to the foreground in recent weeks. Among other things, the National Cable & Telecommunications Association filed a petition for rulemaking that seeks to reduce universal service subsidies in geographic areas experiencing facilities-based competition that is not subsidized. The Federal Communications Commission (FCC) staff's policy framework on the National Broadband Plan suggests USF reform will be a critical component of the Plan. The FCC also issued a Further Notice of Proposed Rulemaking on interim reforms for the High Cost Fund for non-rural telecommunications carriers. And the U.S. Court of Appeals for the District of Columbia Circuit upheld the FCC's "interim, emergency cap" on the High Cost Fund for competitive eligible telecommunications carriers.

All this activity should be understood in the context of two new USF "data points" – perhaps the most important data points for factoring into the FCC's data-driven gristmill. First, the telephone subscribership penetration rate in the U.S. reached 95.7 percent in July 2009. This amounted to a .3 percentage point increase from a year prior, and it’s the highest rate since such data collection begun some 26 years ago. Second, the FCC announced that the proposed universal service contribution factor for first quarter, 2010 will be 14.1 percent. This means that beginning in the first quarter of next year telecommunications providers will add a "universal service fee" line item of 14.1 percent to each interstate and international call made by their customers. This 14.1 percent tax on phone calls is an increase from the 12.3 percent that prevailed for the fourth quarter of 2009.

Taken together, these two data points present a USF paradox: On the one hand, overall telephone subscribership has reached its highest penetration level ever; but on the other hand, at the same time, the universal service tax has reached its highest level ever – and approaching triple the 5 percent USF tax that was in place in 2000. Or, one might instead call it internal incoherency. But however it might be characterized, the juxtaposition between an all-time high level of subscribership and an increasing contribution factor highlights the continuing need for USF reform.

Earlier this fall, at the Free State Foundation's book release event for New Directions in Communications Policy, Professor John W. Mayo of Georgetown University's McDonough School of Business pointed to the consistent mid-90s telephone subscriber rate and suggested we should declare victory on universal service and turn attention to broadband. Among the economic principles outlined Prof. Mayo's book chapter on USF reform in New Directions: "make subsidies explicit and transparent" and "target subsidies to those in need of subsidies." In particular, Prof. Mayo pointed to the low income programs of LifeLine and LinkUp as preferred explicit and targeted approaches toward universal broadband service.

Former FCC Commissioner and FSF Distinguished Adjunct Senior Fellow Deborah Taylor Tate was even more specific in advocating this approach in "FCC Must Make Broadband Access Universal", an FSF Perspectives piece from this summer:

[T]here are tools available to the FCC to increase broadband adoption which the FCC can utilize immediately, specifically the Lifeline and Linkup federal subsidy programs which provide discounts on initial home telephone installation fees as well as for monthly service charges. These discounts are available for qualified low-income subscribers who meet stringent income eligibility criteria. There are already strict audit controls in place.

The Lifeline/Linkup programs, which thus far have been somewhat underutilized, could be expanded to provide discounts for installation and monthly charges for today's broadband services just as they have for old-fashioned telephone services. In addition to helping the urban poor who can't afford broadband, this expansion would help low- income persons in remote areas.

Targeting subsidies in an explicit and focused manner to promote the universal broadband service objective would result in a much more economically efficient and cost-effective regime than the existing wasteful USF regime. And that's the point. Rather than superimpose the unsustainable USF regime designed for telephone onto broadband, the hoped-for universal service transition from telephone to broadband must take a different course. (FSF President Randolph May has detailed additional needed reforms in his prior Perspectives piece, "Put Universal Service Reform Near Top of FCC’s Agenda." And the NCTA petition's detailed analysis showing the extent of USF subsidies paid to carriers in areas where unsubsidized competition already exists represents a way forward.)

The FCC's recent FNPR on universal service support for non-rural carriers admittedly kicks the can down the road on comprehensive USF reform. But the two data points indicating an all-time highs in telephone subscribership and the USF tax speak to the need for meaningful reform, and soon. Perhaps the National Broadband Plan, coupled with the new data points, will be the breakpoint for reforming universal service.