The History of Our Future

According to a report in the March 13^thedition of Communications Daily, former FCC Chairman Tom Wheeler said something at a recent Brookings Institution event which caught my eye. Mr. Wheeler, now a Visiting Fellow in Governance Studies at Brookings, said: “The rules that have worked for industrial capitalism are no longer sufficient for internet capitalism.”

I take it Mr. Wheeler made the comment, at least in part, in the context of a discussion regarding the release of his new book, "From Gutenberg to Google: The History of Our Future." I like that catchy title. I've ordered the book, and I may well like more than the title when I have a chance to read the book – probably after the FSF Eleventh Annual Telecom Policy Conference on March 26! To be candid, though, while his book is billed as a "history of the future," about which I'm not so sure, based on Mr. Wheeler's history as FCC chairman, I suspect I'll find enough with which to disagree to report back later.

In the meantime, back to the notion that the "rules that have worked for industrial capitalism are no longer sufficient for internet capitalism." I get there is an uneasiness, warranted in my view, with actions and practices of what is often referred to as "Big Tech" or, if you prefer the stock market jargon, the "FAANGs". That would be Facebook, Apple, Amazon, Netflix, and Alphabet's Google. Indeed, at one extreme, Senator Elizabeth Warren has urged the "break up" of Facebook, Google, and Amazon.

At the Brookings event, Communications Daily reports that Mr. Wheeler declared Facebook isn't a neutral carrier of information but instead exercises editorial control over what users see. In other words, he is asserting Facebook is more than a "mere platform" as the company has long maintained. Mr. Wheeler suggests that Facebook should release the open application programing interfaces showing how it gathers and publishes content. To like effect, Senator Lindsey Graham, who happens to be the Chairman of the Senate Judiciary Committee, said just last week that the algorithms used by Facebook and Google should be released and scrutinized for bias.

So, I get the uneasiness that many feel regarding social media's dark side, and I understand the need for Congress and other appropriate public policymakers to address matters such as the privacy and data security practices of Internet providers.

But I get a sense of unease, too, when Mr. Wheeler apparently suggests a new set of doctrines by conjuring up the notion of "internet capitalism." Here's Merriam-Webster's dictionary definition of capitalism:

: an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market

I prefer to stick with accepted precepts and first principles. In my view, we are more likely to get the law and policy right for Internet providers and platforms if we don't abandon basic precepts and first principles. For me, capitalism based largely on private decision-making in free markets is a first principle. Therefore, whatever new restrictions and remedies, if any, that may be needed to deal with today's Internet maladies should be considered in the context of the capitalist framework that has been central to the American experience since the nation's Founding. There is no reason to resort to today's suddenly fashionable socialist frame or perhaps tomorrow's fashionable "internet capitalism."

Now, it is important to emphasize, although there should be no need to do so, that Webster says capitalism is an economic system characterized "mainly" by competition in a free market. I certainly agree. Thus, it is clear that proper regulation of private entities – say, for example, properly formulated privacy regulation and data protection mandates – is not inconsistent with a traditional understanding of capitalism as favoring "competition in a free market" as the default presumption.

For capitalism to function properly – indeed for America's larger experiment as a democratic Republic to thrive – adherence to the rule of law is essential. This leads me to mention one other matter that may cause unease. At the Brookings event, Mr. Wheeler bemoaned the fact that, in his view, the fast pace of technological change is short-circuiting democratic processes so "authoritarians" can offer "slogans instead of solutions." As examples, he held up "The Wall" and "Brexit." Mr. Wheeler is not alone, of course, in raising concerns about how speech is employed – some say "weaponized" – on the Internet. But I worry because some of his words and actions during his FCC tenure supported placing more power in the hands of the government to regulate the content of speech than was warranted.

I don't want to debate the merits of any such particular policies here. Rather, the point I wish to emphasize is that, in addressing any legitimate concerns, adherence to the rule of law means nothing if it does not mean adherence to the First Amendment's free speech guarantee. Just as capitalism doesn't mean there cannot be any regulation, the First Amendment doesn't mean that there cannot be any curtailment of speech whatever. But accepted First Amendment jurisprudence makes clear that any curtailment can only be allowed if the government demonstrates a compelling justification and employs the least restrictive means possible to achieve the asserted interest.

And, above all this, which sadly is often misunderstood: The First Amendment is intended to impose limits on government's power to curtail speech, not to empower government improperly to limit the speech of private parties – and, yes, that includes Internet providers and platforms. In a rule of law regime that protects liberty, there are lines in the Constitution that must not be crossed in the name of some claimed "higher purpose," whether such purpose be in the minds of this or that Congress, President, or particular government administrative agency official.

Well, those are some thoughts provoked by my reading about the Brookings event and about Tom Wheeler's new book, "From Gutenberg to Google: The History of Our Future." Even though I may disagree with parts of it, I bet the book will be a worthwhile read. Mr. Wheeler is a long-standing amateur historian, and whether looking back in history, or forward into the future, it is important to discuss, in a civil fashion, and across all kinds of aisles, the ideas he addresses.

Oh, and finally, speaking of discussing important ideas – that's exactly what we will be doing at the Free State Foundation's Eleventh Annual Telecom Policy Conference on Tuesday, March 26, at the National Press Club. I hope you will join us. We are nearing capacity, though, so please register now if you wish to attend. You may register here, and a flyer listing the speakers is here.  

Regarding FCC Internet Regulation, "Watch What We Do"!

For those of you too young to recall, John Mitchell, Richard Nixon’s infamous Attorney General, famously advised the press: “Watch what we do, not what we say!” 

This turned out to be good advice back then. 

In a similar vein, it is wise to watch what the Federal Communications Commission and Tom Wheeler, its Chairman, do with regard to the regulation of rates for broadband Internet services in the wake of the FCC’s February 2015 decision subjecting Internet service providers to so-called “Title II” regulation. This, of course, is regulation akin to the public utility regulatory regime applied to the railroads in 1887 and the Ma Bell monopoly in 1934. 

On February 4, 2015, shortly before the FCC adopted its Title II regulation order, Chairman Wheeler stated in a piece he wrote for Wired: “[T]here will be no rate regulation, no tariffs, no last-mile unbundling.” 

In his official statement accompanying the Title II regulation order adopted on February 26, 2015, Chairman Wheeler declared: “That means no rate regulation, no filing of tariffs, no network unbundling.” 

According to an Ars Technica piece published on March 3, 2015, referring to the Title II regulation order, Mr. Wheeler stated: “This is not regulating the Internet. Regulating the Internet is rate regulation, which we don’t do….” 

If you like, you can find other statements to similar effect. 

I said at the time the FCC adopted the Title II regulation order – and many, many times since –that the FCC’s action would lead to “rate regulation” of Internet services, regardless of whatever the FCC called its actions. I explained that subjecting interconnection arrangements to Commission intervention would lead to regulating interconnection rates. That banning paid prioritization is rate regulation. That prohibiting, or even curtailing, so-called zero-rating and sponsored data is rate regulation because the FCC will be dictating the structure of the usage tiers and rate caps in subscribers’ service plans. 

Perhaps the meaning of “rate regulation” is like the meaning of “is.” It all depends. (Again, for those of you too young to recall, Bill Clinton famously said, by way of attempting to explain his way out of a hot spot, that, “It depends on what the meaning of ‘is’ is.”) 

Regarding the FCC’s Title II regulation order, I was pleased to see that, this week, in opposing a legislative provision intended to prohibit broadband rate regulation by the Commission, Mr. Wheeler provided a bit more clarity – or perhaps I should say “reality” – as to the meaning of his earlier “no rate regulation” pledges. According to a report in the April 6 edition of Communications Daily [subscription required], Mr. Wheeler said this at a congressional hearing: 

“Because at the heart of everything is rates. So paid prioritization is a rate issue. Throttling is a rate issue. Blocking is a rate issue. Interconnection is a rate issue.” 

This is true. This is reality – at the heart of all the actions that Mr. Wheeler identifies, and others, “is rates.” And, of course, so are any actions that curtail or alter the various zero-rating plans now under Commission examination, if not formal investigation, or that impact usage tier charges. 

I’m pleased, in a way, that, in trying to fend off “no rate regulation” legislation, Mr. Wheeler at least is now acknowledging that much of what the Commission majority did in adopting the Title II regulation order either presently amounts to rate regulation or likely will lead to rate regulation. I just wish he had been more forthright about the matter at the time of the FCC’s February 2015 action. 

Going forward, with regard to the FCC’s actions regulating the Internet, it will pay to heed of John Mitchell’s advice: “Watch what we do, not what we say.”

The FCC's Previous Failures Regulating Video Devices Show Folly of New Rules

The FCC is planning vast new regulatory controls regarding how video devices are designed and function. To date, the agency has not identified any market power problem justifying new controls. As recently as the Fifteenth Video Competition Report (2013), the Commission even admitted the video device market "is more dynamic than it has ever been." Yet FCC Chairman Tom Wheeler is working on a regulatory proposal that he seems confident will develop new ways to access video content.

Overconfident is more like it, considering past FCC efforts. When it comes regulating video devices, the Commission has a track record of failure. Tremendous advances in video devices have resulted from entrepreneurial investment and innovation. But prior Commission attempts to redesign video devices through regulation have been thwarted by technological and economic realities. These realities have made video devices more costly to manufacture and therefore more costly for consumers to use.

Three pronounced FCC policy failures in regulating video devices demonstrate the empty promises and pitfalls of regulation in this fast-changing, technologically dynamic area. Taken together, they offer concrete evidence for why the Commission should avoid any new foray into regulating the design and operation of video devices.

The FCC's Failed FireWire Mandate. In 2003, the FCC adopted regulations to require all cable operators include a FireWire data port in all HD set-top boxes they distributed to customers. Also known as an IEEE-1394 interface, FireWire is an external data connection for audio and video transfers. But the Commission's video device design preferences were rejected by the marketplace. HDMI ports were far more widely adopted in HD TVs than FCC-mandated FireWire ports. The Commission finally relented and removed its FireWire requirement in 2010. Industry estimated $400 million in costs to comply with the Commission's failed FireWire mandate.

The FCC's Failed Integration Ban. Beginning in 1998, the Commission prohibited cable operators from offering subscribers video devices that performed both program content access and security functions. The Commission even conceded in a 2010 order that "[t]he integration ban raises the cost of set-top boxes for cable operators, which discourages operators from transitioning their systems to all-digital." The Commission’s ban on integrating access and security in a single video device even prohibited access-enabling devices from downloading security functions from the Internet. Despite the obvious problematic nature of the integration ban, the FCC clung to it stubbornly. The Commission took a permission-by-waiver approach, requiring video device providers to file for exemptions from the integration ban. Congress finally stepped in. The STELA Reauthorization Act of 2014 repealed the integration ban entirely.

The FCC's Failed CableCARD Mandate. A manifestation of the integration ban was the Commission's CableCARD regulations. CableCARDs are small PC cards that are inserted into cable set-top boxes or independently manufactured devices. They perform decryption to allow subscribers access to video programming. In 2003, the Commission imposed regulations that made CableCARD compatibility the official means for cable operators to comply with the integration ban. Cable operators were required to make their cable systems compatible with CableCARD-enabled devices made by independent manufacturers. What's more, cable operators were also required to rely on CableCARDs to provide security functions for the set-top boxes they lease to their subscribers. This "common reliance" mandate resulted in unnecessarily complex and costly cable set-top box devices. Indeed, the cable industry has estimated that CableCARD-related costs to consumers have exceeded $1 billion. By another reported estimate CableCARD adds $56 to the cost of each set-top box.

However, the FCC order imposing CableCARD mandates contained serious legal defects. The D.C. Circuit threw that order out in Echostar v FCC (2013). Legal problems aside, consumers were largely uninterested in purchasing independently manufactured set-top boxes. As the Commission conceded in its Fourteenth Video Competition Report (2012), "[c]onsumer adoption of retail CableCARD-compatible devices has not matched the Commission’s expectations." According to a January 2016 industry report, the nine largest cable operators have deployed 55 million set-top boxes with CableCARDs. Only 621,000 CableCARDs have been deployed for retail devices. Overwhelmingly, consumers have preferred to lease video devices from cable providers. This allows consumers to avoid extra trips to the store. It also allows them to avoid owning a video device that technological advances render outdated, such as standard definition digital video recorders (DVRs).

Those three recent failures in FCC video device policy are concrete reminders of the limits of bureaucratic regulation. It's easy enough to write rules and make promises that they will bring about imagined improvements in sophisticated technological devices. But when government mandates run into real-world technical difficulties, manufacturers are subjected to hundreds of millions of dollars in extra costs and consumers end up footing the bills. Real innovation requires investment-backed risk-taking by market participants who must actually create and sell products and services. This is especially the case in dynamic markets, such as the market for video devices.

At all times it should be remembered that today's video market advancements have taken place outside the scope of FCC regulation. Hi-definition video – and increasingly ultra HD – has replaced one-way analog cable video technology. Cable, direct broadcast satellite (DBS), and telco video consumers now use Internet-enabled HD DVRs with video-on-demand, whole homing options, and a variety of other video applications. Video content, including through TV Everywhere, is widely available to subscribers on gaming consoles, PCs, or tablet devices. CableCARD-compatible video devices manufactured by third parties are also still available, although consumers overwhelmingly prefer to lease devices from providers.

Meanwhile, online video distributor (OVD) subscriptions using streaming media devices offer consumers another alternative platform for video viewing. OVDs like Netflix and Amazon Prime have more than 100 million subscriptions. That number equals or exceeds total cable, DBS, and telco video subscriptions. Market research indicates almost 20% of U.S. broadband households have a streaming media device – such as the Roku 3 or Amazon Fire TV. And 8% of households have streaming stick device for TVs or PCs, like the Amazon Fire TV Stick. Ownership of streaming media devices is projected to rise significantly in the immediate future.

All this to say that marketplace freedom has a superior track record advancing innovation and consumer choice for video devices. The Commission’s real-life track record of failed video device regulations adds weight to the case against new mandates. 

The FCC has made big promises about the benefits of video device regulations before. It did so with FireWire, the integration ban, and CableCARD. In the end, the Commission's promises led to aggravating technical difficulties and consumer bafflement. And, of course, to higher costs that were passed on to consumers.

Watch What We Do, Not What We Say

"Watch what we do, not what we say.” This was the advice President Richard Nixon’s first Attorney General, John Mitchell, gave the press early in Nixon’s presidency in 1969.

It turned out that it was worth watching what those in the Nixon Administration did as well as what they said.

The same is true with respect to FCC Chairman Tom Wheeler over at the Federal Communications Commission, especially with regard to the FCC’s recent decision to impose Title II public utility regulation on Internet providers. Watching what Chairman Wheeler has now done does not always square with what he previously said.

Here are a few examples:

• In 2011, Mr. Wheeler wrote in his blog that “the regulatory oversight of wireless carriers will continue to atrophy as the digital nature of the wireless business separates it from the legal nexus with traditional analog telecom regulation.” [The link is to a New York Times article quoting Mr. Wheeler’s blog posting, which has been removed.]

Under the FCC’s March 12, 2015 Internet Regulation order, instead of regulatory oversight atrophying, as it should given the competitive environment in the wireless marketplace, wireless broadband will be subject to much stricter regulation. Rather than acknowledging that the “legal nexus” does not exist to impose Title II regulation on wireless broadband providers, Mr. Wheeler resorts to a contorted legal analysis in an attempt to apply the “traditional analog telecom regulation” regime to wireless digital broadband services.

• In December 2013, The Verge reported that Mr. Wheeler said this:    "I think that we're seeing the market evolve in such a way that there will be variations in pricing, there will be variations in service…Netflix might say, 'I'll pay in order to make sure that my subscriber might receive the best possible transmission of this movie.'"

In the March 2015 order, Mr. Wheeler insisted on an absolute ban on so-called “paid prioritization,” preventing the evolution of Internet services in a way that might allow the development of – or even the experimentation with – two-sided market models involving “variations in pricing” and “variations in service.” This despite widespread agreement among economists that such two-sided market models might well benefit consumers by reducing end-user prices and improving service quality. As prominent regulatory economist Robert Crandall, a member of FSF’s Board of Academic Advisors, explained in his recent Perspectives: “Collecting fees from content providers for better, more reliable connections is likely to induce the ISPs to compete more aggressively for customers, thereby reducing consumer subscriber fees. As a result, it is difficult to demonstrate that ISPs would profit materially from collecting interconnection fees from content networks or that such a practice in two-sided markets is economically less efficient than having ISPs rely solely on subscriber fees for their revenues.”

• In May 2014, at the time the agency issued its rulemaking proposal, Mr. Wheeler assured the public that the Commission’s proposal did not cover interconnection arrangements between Internet transit networks and the Internet providers that provide Internet services to consumers. He said: “This is a different matter that is better addressed separately.”

In the March 2015 order, the FCC subjects interconnection arrangements to Sections 201 and 202 of the Communications Act, the core provisions of public utility regulation. Although the Commission doesn’t apply the full panoply of Title II rules, it invites complaints to be filed under Sections 201 and 202 which it will adjudicate on a case-by-case basis, almost certainly resulting in rate regulation (which the Commission simply will call by another name.)

My purpose here is not to make a legal argument concerning the sufficiency of the FCC’s May 2015 rulemaking notice under the Administrative Procedure Act requirements, although there are certainly several credible grounds for making such an argument. My purpose instead, to put it gently in terms that John Mitchell may have understood, is simply to show the extent to which it would be a mistake to rely on what Mr. Wheeler earlier said as opposed to what he ultimately did.

I think the foregoing also serves to demonstrate why it would not be wise for all those entities which comprise what we now often call the Internet ecosystem – in other words, including those “edge providers” and others thought not to be immediately subject to the FCC’s new mandates – not to put too much stock in whatever Mr. Wheeler or his fellow commissioners say at the moment about not regulating this or that business in this or that way.

And, of course, no one in the Internet ecosystem should put much stock in the notion that future commissioners will be bound by whatever present commissioners now say about their intentions.

We will surely need to watch what they do and not just what they say.