Thinking Things Through VII: Let the Public Comment

There is no reasonable doubt that the FCC’s controversial proposal to adopt new regulations governing video navigation devices has undergone significant changes since the Notice of Proposed Rulemaking was put out for public comment in February 2016. Indeed, based on what FCC Chairman Tom Wheeler and his two Democrat colleagues said last week when they pulled the item from the agenda at a public Sunshine meeting, the proposal is undergoing further changes even as I write this.

Even though we know, based on leaks and an agency-released “fact sheet,” that the Commission’s current thinking is now considerably different than that depicted in the original rulemaking notice, we don’t know key details regarding the changes now being negotiated among the agency’s three Democrats.

That’s the problem, of course. That’s why, if and when the three Democrats reach an agreement on a new proposal, the agency should put it out for public comment in a Further Notice of Proposed Rulemaking, even if the comment period is shorter than usual.

If the Commission fails to follow this course, it is unknowable at this point whether such failure would lead to a violation of the Administrative Procedure Act’s notice and comment requirements. It well might.

But this much is knowable. As a matter of sound public administration, and regardless of the survival prospects of any appeal from a final order, the Commission should put its latest proposal out for public comment. From the very beginning, Chairman Wheeler’s proposal has been one of the most controversial rulemakings in recent agency history. This is not surprising because, at a time when competitive forces in the video marketplace are responding to consumer demands in a fast-changing environment, the Commission’s regulatory intrusion has major implications in a number of areas.

One way or another, the proposal means that the government, either directly or as ultimate arbiter, will establish a new technological mandate governing the design of features and functions for navigation devices or apps. This government intrusion, in and of itself, warrants the most careful scrutiny. And the proposal necessarily has major implications regarding the protection of consumers’ privacy under government-imposed open standard licenses, as well as the protection of copyrights under such standardized licenses.

In sum, the Commission should put out its revised proposal, if and when there is one, for public comment. This level of transparency and public input may well lead to a less harmful regulation at the end of the day if a majority of commissioners continue to believe (as I don’t) that any new regulation is needed at all. At a minimum, following this course will increase the public’s confidence in the integrity of the agency’s process.

The FCC's Attempt to Make Choices for Consumers Will End up Harming Them

In February 2016, the Federal Communications Commission (FCC) adopted a Notice of Proposed Rulemaking (NPRM) purporting to “unlock the box,” mandating requirements for video navigation devices. Including the time the FCC spent writing the NPRM, this proceeding has lasted roughly ten months. After heavy criticism from inside and outside the FCC, the Commission is now apparently proposing an entirely new set of regulations which would require pay-TV providers to deliver video service through an application (as opposed to a set-top box) that can be used on “widely deployed platforms.” The draft Report and Order (unseen by the public) is scheduled to be voted on during an Open Meeting on September 29, 2016.  
If the technological innovation of the video marketplace has changed so much in the last ten months that the Commission has revised its proposal, what makes the FCC so sure that “apps” will be the technology consumers want in the future? And shouldn’t the FCC let the public comment on such a dramatic revision before the Commission casts its votes?

In FSF’s recent comments to the FCC regarding the status of competition in the video market, FSF scholars explained that consumers have more choices for video access than ever before. Our comments also discussed how the FCC’s original and new proposals would violate copyright terms, disincentivizing creators from producing additional content. (In addition to our comments, see my August 2016 blog and Senior Fellow Seth Cooper’s February 2016 blog for more on the copyright violations that the FCC’s proposal would enable.) Regardless of these very important issues, the FCC has misunderstood what should be a pretty simple concept: consumers like having choices in the video market. The fundamental mistake the FCC made in its original proposal was not the type of technological mandate; it was the mandate itself!

The video market has experienced tremendous innovation in the last five to ten years as online video distributors (Netflix, Amazon, Hulu) have emerged to become competitors with facilities-based pay-TV providers (Comcast, Verizon, Time Warner Cable). In fact, Netflix, Amazon, and Hulu combined have more than twice as many subscribers as all cable providers combined. The video market has been transitioning from set-top boxes to applications, so this mandate simply creates unnecessary uncertainty and removes the traditional options for consumers who are less likely to adopt to the latest market trends. (See here, here, and here for examples of the innovative transition that is occurring in the video market.)

If adopted, the mandate proposed by the FCC will raise costs for pay-TV providers. In fact, the FCC’s fact sheet acknowledges this because the proposal exempts providers with fewer than 400,000 subscribers in an attempt to “limit burdens on smaller providers.” Ultimately, consumers will end up paying for this technological mandate with an increase in the price of their pay-TV service.

Consumers likely will be able to see the increase in their provider’s costs on their monthly bills, but there will also be hidden costs. The FCC’s mandate could disable pay-TV providers from differentiating their application’s interface and usability. This would discourage providers from developing new ways to deliver their service. Such a requirement could force video distribution, which recently has been at the forefront of innovation, onto the back burner of technological development. Consumers would enjoy less innovation in the video market than they otherwise would, absent the FCC’s proposed regulations.

On September 16, 2016, Jason Furman, Chairman of the Council of Economic Advisers for President Obama, praised FCC Chairman Tom Wheeler for his efforts to “improve the proposal.” But neither President Obama and his closest advisers nor Chairman Wheeler and his FCC colleagues are knowledgeable enough to predict the future and mandate efficient outcomes in the video marketplace. Consumers, collectively, are the only group of people who can dictate what technologies provide value and which do not. While applications (as opposed to set-top boxes) might be closer to where the video market is moving right now, technology changes so rapidly that it may be only be a matter of weeks or months before the mandated technology is out-of-date.

Over the period of ten months, the FCC changed its mind about what technology to mandate for pay-TV providers and consumers. Who is to say that the FCC will not mandate a new technology a year or so down the road? The FCC should shut down this proceeding and allow consumers in the competitive marketplace to choose the technologies and platforms they prefer when accessing video content. If not, at the very least, the FCC should issue a new NPRM, instead of a Report and Order, so the public can comment on its quick switch from set-top boxes to applications. 

Copyright Problems Put FCC’s Set-top Box Proposal Beyond Repair

In January 2016 the FCC adopted a Notice of Proposed Rulemaking (NPRM) purporting to “unlock the box.” But in actuality, the FCC’s NPRM would unlock copyright protections by mandating third-party video device maker access to valuable content and subscriber information. This access mandate would result in widespread violations of licensing agreements negotiated between copyright owners and video service providers. The truth is that the NPRM’s strictures would stifle the video market’s innovative transition from set-top boxes to applications.

Concerns over the unintended consequences of the proposed rules have been raised by a majority of the Commission. Two of the FCC Commissioners – Ajit Pai and Michael O’Rielly – voted   against the NPRM. They have cited increases in the costs of video innovation and violations of intellectual property rights that would result from the NPRM’s adoption. Commissioner Jessica Rosenworcel – who voted for the adoption of the NPRM – has also publicly acknowledged her concerns with the proposal. In June, Commissioner Rosenworcel, said: “Kudos to the Chairman for kicking off this conversation but it has become clear the original proposal has real flaws and, as I have suggested before, is too complicated. We need to find another way forward.”

The current proposal is irretrievably flawed. As FSF Senior Fellow Seth Cooper discussed in a February 2016 blog, the FCC’s proposal would undermine negotiated contractual rights to transmit copyrighted video to subscribers. This is because video service providers would be forced to make licensed video content available to third-party device makers who never contracted with copyright owners. Copyright owners would have no ability to enforce their negotiated licensing terms against third-party devices makers they never contracted with. Nor would the FCC have legal authority to police NPRM-enabled copyright violations by third-party device makers. Significantly, on August 3, 2016, the Copyright Office sent a letter to members of Congress describing in detail the copyright law problems posed by the FCC’s NPRM.

Although this by-product of the FCC’s proposal has not received as much attention as others, copyright violations that inevitably would result from the NPRM almost certainly will harm minority and diverse content creators. In a March 2016 letter to the FCC, a number of organizations representing minority consumers and diverse ethnicities, including the Multicultural Media, Telecom and Internet (MMTC), League of United Latin American Citizens (LULAC), and the National Association for the Advancement of Colored People (NAACP), asked the Commission to study the effects the proposal would have on “diversity and inclusion.” In April, MMTC submitted comments to the FCC stating: “[T]he unintended consequences of the FCC’s choice would harm diverse programmers and content creators by violating their copyright and licensing agreements and existing distribution arrangements with MVPDs, the lifeblood of their very existence.” Indeed, Commissioner Rosenworcel has publicly recognized the threat of harm that NPRM-induced copyright violations would pose to minority and diverse content creators.

To be sure, all content creators would be harmed by this proposal because it will enable third-party device makers to repackage content and rearrange channel lineups and tier placements. Copyright owners’ reduced control over the use of their video content will correspond with reduced financial returns. The NPRM will also cause harm by enabling third-party device makers to sell targeted advertisements to consumers based on their viewing habits. Ad revenues reaped by third-party device makers would be appropriated from the owners of copyrighted video content. However, minority and diverse content creators could be harmed disproportionately because they often sell their content and corresponding ads to specific audiences that are smaller in size. This loss in ad revenues will have the effect of discouraging innovation and creativity among minorities and other smaller, diverse audiences.

It is encouraging to see a majority of the FCC Commissioners raise concerns about the costs levied on minority programmers by the agency’s set-top box proposal. But the proposal is hopelessly beyond repair. FSF President Randolph May and Senior Fellow Seth Cooper rightly have called for the termination of what they denominated the “Enable Copyright Violations” proposal. (Also, see FSF’s comments and reply comments regarding this proceeding.)

Impairment of contracts for transmitting copyrighted video content lies at the core of the FCC’s set-top box proposal. No modest revisions can fix a rulemaking proposal that so clearly and fundamentally violates copyright protections. Hopefully, the Commissioners’ recognition of these copyright concerns will lead them to terminate the current set-top box proceeding. If the Commission wishes to explore whether any new regulations are necessary and desirable in light of the rapidly changing video marketplace, including almost weekly new developments relating to navigation devices, then it should issue a Notice of Inquiry to gather up-to-date information. 

FCC Regulations Are Pushing ISPs out of Broadband Infrastructure Market

Today, Hal Singer, a principal at Economists Incorporated, published an op-ed in Forbes discussing how Internet service providers (ISPs) are investing in capital outside of the broadband infrastructure market due to the FCC’s 2015 Open Internet Order. Mr. Singer shows that AT&T, Verizon, and Sprint have all decreased their capital expenditures by $1.9 billion, $1.2 billion, and $1.5 billion, respectively, from the first half of 2014 (before the FCC adopted the Open Internet Order) to the first half of 2016.

Mr. Singer also says that other FCC proposals are discouraging ISPs from investing broadband infrastructure. The proposal to pursue price controls for business data services would stifle the deployment of fiber. The FCC’s privacy NPRM would harm ISPs’ ability to sell targeted advertisements and offer “free” services to consumers. (See my Perspectives from FSF Scholars from earlier this month.) And the FCC’s set-top box NPRM would create barriers for ISPs to integrate themselves into the pay-TV market. Mr. Singer makes a convincing case that the FCC’s assault on broadband (he calls it “The Wheeler Tax”) is pushing ISPs out of the broadband infrastructure market and into the edge market. Do not be surprised if ISPs continue to purchase edge providers, like we have seen with Verizon’s recent purchases of Yahoo and AOL.

Terminate the FCC’s "Enable Copyright Violations" Proposal

By Randolph J. May and Seth L. Cooper

According to the U.S. Copyright Office’s August 3, 2016, letter to members of Congress, the Federal Communications Commission’s mislabeled “Unlock the Box” proposed regulation of video devices and apps conflicts with copyright law protections. It’s now clear the FCC’s proposal might more aptly be named the “Enable Copyright Violations” proposal.

Concerns that the FCC’s proposal would undermine the exclusive rights of video programmers to license and control the use of their copyrighted content have been widely known. Now, the Copyright Office has declared that the FCC’s proposed rules “appear to inappropriately restrict copyright owners’ exclusive right to authorize parties of their choosing to publicly perform, display, reproduce and distribute their works according to agreed conditions, and to seek remuneration for additional uses of their works.” The Copyright Office, with acknowledged copyright law expertise and charged by law with advising Congress concerning interpretation of the nation’s copyright laws, urged that “any revised approach to be taken by the FCC should be crafted to preserve copyright owners’ exclusive right under copyright law to authorize… the ways in which their works are made available in the marketplace.”

Predictably, some supporters of the FCC’s proposal have tried to put their own negative slant on the Copyright Office’s letter. For instance, the Copyright Office’s analysis was attacked with word-twisting and non-starter fair use arguments by Public Knowledge. In our view, the Copyright Office explained, in a careful and compelling fashion, why the FCC’s proposal would undermine the exclusive rights of copyright holders and why the proposal is contrary to federal copyright law.

The Copyright Office’s concerns about the FCC’s proposed improper curtailment of video programmers’ copyrights come from a straightforward reading of the law. The crucial provision concerning the rights of copyright holders to authorize reproduction, transmission, and public performance of their intellectual property is contained in Section 106 of the Copyright Act. As the Copyright Office put it: “The rights protected by the Copyright Act are ‘exclusive’ to the copyright owner, meaning that the copyright owner generally has full control as to whether or how to exploit his or her work, including by entering into licensing agreements.”

Public Knowledge’s press release incorrectly insinuates that the Copyright Office misrepresented the FCC proposal’s mandates. The Copyright Office, Public Knowledge claims, believes the FCC would mandate that copyright owners give away outright their video programming “for free exploitation by third-party devices.” Obviously, such overheated rhetoric is meant to put the Copyright Office letter in the worst possible frame. But a fair reading of the letter shows the Copyright Office understands the distinction between the Commission’s stated intent behind “Unlock the Box” and the actual practical effect of its proposal. Acknowledging that “[t]he FCC has stated that the Proposed Rule is not intended to negate these private contractual arrangements,” the Copyright Office stated the obvious truth: “[I]t is not clear how the FCC would prevent such an outcome under the Proposed Rule, for it appears to obligate MVPDs to deliver licensed works to third parties that could then unfairly exploit the works in ways that would be contrary to the essential conditions upon which the works were originally licensed.”

While the FCC proposal may not affirmatively mandate repackaging of copyrighted video content by third parties who sign no licensing agreements and pay no royalties to the copyright holders, it does mandate that copyrighted video content be made available to third-party device makers – who are unbound by licensing terms. In such circumstances, as the Copyright Office sets forth in considerable detail, neither contract law nor Commission regulations will provide copyright owners a means for enforcing licensing terms of use. This means third-party device makers, among other things, could overlay ads, rearrange channel lineups, ignore “windowing” or “tiering” agreements, or insert new video content without consent and without compensation being paid to the copyright holders. This would be an unavoidable by-product of mandating access to copyrighted content by third-party devices while leaving copyright holders without legal recourse.

Public Knowledge’s press release also engages in plenty of misdirected rhetoric on fair use. It misleadingly claims that the Copyright Office wants video service providers and video programmers to disregard fair use rights. There is no reason to think this is so, and the criticism is hard to understand. The Copyright Office’s letter states that video service providers and video programmers avoid uncertainties regarding fair use by contracting around it through licensing agreements. This is hardly remarkable. Parties to commercial agreements contract away their rights all the time.

It goes without saying that licensing agreements between video service providers and video programmers don’t contract away fair use rights of video subscribers. To briefly illustrate from another context: Suppose a major publisher enters into an agreement with a bookseller for an exclusive promotion and sales effort for a blockbuster novel. The publisher and bookseller could contract around fair use, whereby the bookseller gives up any fair use claims it may have regarding what it might say about the novel in promotional materials or how it might display the novel. But the parties’ agreement would in no way waive the fair use rights of the novel’s subsequent readers and reviewers – and this is the point that Public Knowledge misunderstands or ignores.

In any case, the Copyright Office’s analysis is focused on licensing restrictions directly affecting the fair use rights of third-party devices – not the fair use rights of video subscribers. Discussing the Commission’s proposal, the Copyright Office acknowledged different fair use factors may be present with respect to video subscribers. Its letter even compared video subscribers to non-infringing private home users of VCR devices in Sony v. Universal City Studios (1984). So it’s silly to claim, as Public Knowledge’s press release does, that “[w]hat the Copyright Office advocates is encouraging distributors to negotiate away their consumers’ rights without those consumers’ consent.”

The copyright problems plaguing the FCC’s proposal were explained in an FSF blog post back in February. Public comments and reply comments filed by us in the FCC’s proceeding again explained that the proposal would undermine the exclusive rights of copyright holders in video programming. While we believe the FCC’s more aptly named “Enable Copyright Violations” proposal is misguided in a handful of respects, the proposal’s clash with federal copyright law is one of its most obvious flaws.

The Copyright Office, charged by law with advising Congress on copyright issues and interpretations of the nation’s copyright laws, has now articulated the copyright problems in a manner that the Commission should not ignore:

In its most basic form, the rule contemplated by the FCC would seem to take a valuable good—bundled video programming created through private effort and agreement under protections of the Copyright Act—and deliver it to third parties who are not in privity with the copyright owners, but who may nevertheless exploit the content for profit. Under the Proposed Rule, this would be accomplished without compensation to the creators or licensees of the copyrighted programming, and without requiring the third party to adhere to agreed-upon license terms. … As a result, it appears inevitable that many negotiated conditions upon which copyright owners license their works to MVPDs would not be honored under the Proposed Rule.

The FCC’s disregard of the exclusive rights of copyright owners is serious enough that the Commission should abandon its proposal. If it wishes to move forward with any new regulation at all – although in light of marketplace and technological developments, we submit none is needed – the Commission should explore ways of promoting competition in the video device market that do not enable violations of copyright law or undermine copyright licensing agreements.

Barring this, the Commission should be forthright enough to stop calling its proposal “Unlock the Box” and instead call it the “Enable Copyright Violations” proposal.