New Study: 5G Will Help Close Digital Divide

A new study titled "Improving Rural Broadband Access: The Impact of Broadband Access and Proposed Investment in 5G Networks in South Dakota" finds that investment in 5G wireless infrastructure will be critical to advancing South Dakota's economic growth and promoting safety and quality of life in rural areas. This study was conducted by a research team from Old Dominion University and the University of South Dakota and underwritten by T-Mobile. 

As I stated in a March 2018 Perspectives from FSF Scholars titled "Reaching Rural America: Free Market Solutions for Promoting Broadband Deployment," 5G wireless technology will deliver speeds 10 to 100 times faster than 4G, making mobile broadband a viable option for a residential connection, particularly in rural areas where wireline deployment is not cost-efficient. That being said, the deployment of 5G technology will help close the gap of the digital divide by creating robust broadband access for rural Americans.

The 28 GHz Auction Closes Successfully

The FCC's 24 GHz auction closed today with bids that exceeded more than $700 million. There were winning bids on at least 96% of the 3,072 licenses.

I've never tried to predict the outcome of auctions beforehand or handicap the outcome, preferring to let the market "speak" for itself. That's what auctions do.

So, as the 28 GHz auction closes, I'll limit my reaction to a few words. There are always those who, no matter the result, wish to characterize the auction du jour as somehow disappointing or some sort of failure but that seems difficult to do in this instance.

Foremost, the auction will result in U.S. wireless providers gaining access to needed high-band spectrum. This high-band spectrum will be an important component of the deployment of 5G infrastructure, including often overlooked backhaul support. In this sense, without more, the 28 GHz auction has been successful.

Second, the auction du jour critics often choose to ignore, in offering up comparative figures from one previous auction or another, that the bidding results will reflect the technical characteristics of the particular spectrum bands at auction. In other words, high-band spectrum like the 28 GHz band almost certainly will lead to different results than low-band spectrum, say, the 600 MHz frequencies. For one thing, high-band frequencies do not allow transmissions to travel as far as low-band ones. Of course, factors like this affect the value of the spectrum.

Finally, for what it's worth, the revenues ultimately realized from the 28 GHz auction appear to be within the range of the pundits' pre-auction predictions regarding the likely results.

In sum, when the auctioneer's gavel brought the 28 GHz auction to a close, from where I sit it looked to be a success. Now it's time to prepare for the next one.  

Randolph May Calls for the FCC to Adopt Rebuttable Presumptions

On January 21, 2018, The Regulatory Review published Free State Foundation President Randolph May's opinion piece titled "Adopting Rebuttable Presumptions at the FCC."  

Given the increasingly competitive communications marketplace and ongoing technological dynamism facilitating development of new service offerings, Randolph May calls for the Federal Communications Commission to adopt rebuttable evidentiary presumptions that tilt towards the non-enforcement and repeal or modification of obsolete regulations. This fairly modest process reform would be consistent with Sections 10 and 11 of the Telecommunications Act of 1996.

Please see my essay, "Adopting Rebuttable Presumptions at the FCC," in @TheRegReview : https://t.co/9MZFLzBkep Thanks to @TheRegReview! @YaleJREG @StatePolicy @FedSoc @RegStudies @mikeofcc @AjitPaiFCC @BrendanCarrFCC @acusgov @ProfDanielLyons @GusHurwitz

— Free State Foundation (@FSFthinktank) January 21, 2019

Senator Rubio Introduced New Privacy Bill

On January 16, 2019, Senator Marco Rubio (R-FL) introduced the "American Data Dissemination (ADD) Act." This legislation would require the Federal Trade Commission (FTC) to submit recommendations for privacy requirements to Congress using the Privacy Act of 1974 as a framework. 

The bill also would require the FTC to submit to the appropriate committees of Congress proposed regulations to impose privacy rules on "covered providers," which include Internet service providers and edge providers. Within two years of the bill's passage, if Congress does not enact a law based on the FTC's recommendations, the legislation would give the FTC the authority to promulgate a final privacy rule.

In 2018, Free State Foundation scholars submitted two sets of privacy-related comments to federal agencies: 

• "The Intersection between Privacy, Big Data, and Competition," Submitted to the FTC, August 20, 2018.

• "Developing the Administration's Approach to Consumer Privacy," Submitted to NTIA, November 9, 2018.

T-Mobile Executives Repeatedly Stay at Trump International Hotel in DC

On January 16, 2019, the Washington Post published a story reporting that T-Mobile CEO John Legere and other eight company executives have repeatedly stayed at the Trump International Hotel in Washington, DC after T-Mobile announced its $26 billion merger with Sprint in April 2018. The story raises questions about if the hotel visits are an attempt to influence public policy considering that the merger requires approval from the Department of Justice and the Federal Communications Commission.

Free State Foundation President Randolph May tweeted his reaction to the story:

I've long argued that the "public interest" doctrine under which the @FCC reviews proposed mergers has been abused because of its vagueness. But I've never imagined it to be so indeterminate as to encompass @FCC considering which hotels applicants' CEOs stayed in! Wow! @b_fung pic.twitter.com/tbPPEn0vLT

— Free State Foundation (@FSFthinktank) January 17, 2019

FCC Report Spotlights States' Wrongful Use of 911 Taxes

Some $285 million in 911 taxes charged to voice service consumers were improperly diverted to non-911 purposes by states in 2017. That's nearly 10% of 911 taxes. Those findings were in the FCC's 10th Annual Report on State 911 Taxes. Diversions of state 911 taxes are contrary to law and undermine the integrity of 911 tax policy. Consumers are harmed by the dishonest, extra charges, and 911 services stand to lose needed funds. 

To the FCC's credit, its report indicates states will face closer scrutiny in the future for diverting 911 taxes. Congress, the Commission, and state officials ought to consider new measures to combat states' misuse of 911 taxes and ensure compliance with the law.

The NET 911 Act of 2018 requires the FCC to annually report to Congress on state collection and distribution of 911 and enhanced 911 (E911) fees and charges. The Act was intended to "ensure efficiency, transparency, and accountability" when it comes to 911 taxes. It requires that the Commission's reports include findings on amounts of 911-related revenues spent by states for purposes other than 911-related services. To prepare its reports, the Commission sends the governors of each state questionnaires regarding 911 tax collections for each calendar year. The 10th Report observed: "All jurisdictions provided written responses to the questionnaire, but not all jurisdictions responded to every question and some jurisdictions provided incomplete responses to questions." 

In all, states collected over $2.9 billion in 911 taxes in 2017. Key findings on diversions of state 911 tax revenues are contained in the 10th Report's paragraph 27:

Based on the data we have received, we find that six states and the U.S. Virgin Islands diverted or transferred fees in calendar year 2017… Montana self-identified in its responses to the questionnaire that it used collected funds, at least in part, for non-911 related purposes. Five states [New Jersey, New York, Nevada, Rhode Island, West Virginia] and the U.S. Virgin Islands did not self-identify as diverting funds, but the Bureau has determined based on review of the information provided that these jurisdictions in fact diverted funds for non-911 related purposes within the meaning of the NET 911 Act. The jurisdictions… diverted an aggregate amount of $284,968,912.66, or 9.70% of all 911/E911 funds reported to have been collected by all responding states and jurisdictions in 2017. 

The report identified the amount of 911 taxes improperly diverted to non-911 purposes by each state. The three most notorious states were New York (over $170.8 million), New Jersey (nearly $94.2 million), and Rhode Island (almost  $11.4 million). A statement by Commissioner Michael O'Rielly rightly called out those three "repeat offenders." Moreover, the Commission's finding of nearly $285 million in diverted 911 taxes in 2017 was more than double its 2016 finding of $129 million in diverted tax dollars. 

Diversion of state 911 taxes poses a serious rule of law problem. As the 10th Report points out: "Section 6(f)(1) of the NET 911 Act requires that obligation or expenditure of 911/E911 fees or surcharges be 'in support of 9-1-1 and enhanced 9-1-1 services, or enhancements of such services.'" It goes without saying that when states impose taxes on consumers – on their citizens – for specified purposes, they should spend collected revenues only on those specified purposes. Indeed, voice service providers alleged to have improperly collected taxes from their subscribers have faced multi-state class-action lawsuits. Penalties for violating state consumer protection acts can include treble damage awards plus steep attorney fee awards. We should be no less tolerant of state governments improperly collecting taxes. States' diversions of 911 tax revenues may undermine public confidence in the integrity of 911 taxation, and in the integrity of tax laws generally. 

Additionally, unaccountable 911 taxation wrongfully hits consumers of voice services. According to the 10th Report, the average 911 fees in 2017 totaled $1.04 per line per month for wireline, $0.97 per line per month for wireless, and $0.99 per line per month for VoIP. Also: "the average prepaid wireless percentage of retail transaction 911 fee [was] 2.12%." As indicated above, 911 tax charges totaled over $2.9 billion in 2017. Voice consumers – including wireless consumers – are already subject to high taxes and fee charges by multiple governments. Such taxes include: state and local sales taxes, federal USF surcharges, state USF surcharges, industry-specific state taxes, and state 911 taxes. Indeed, a Tax Foundation estimate pegged total wireless consumer taxes at $16.1 billion for 2018, amounting to 19.1% of consumers' wireless bills. That estimate likely lowballs the amount of 911 taxes that consumers were actually charged in 2018. 

When it comes to affordability of voice and broadband services, wireless taxes hit lower-income consumers who are wireless-only especially hard. So it's especially important to curb excessive and improperly charged taxes on wireless services. FSF President Randolph May previously urged the FCC to act to prevent state 911 taxes from being assessed against low-income subscribers to no-charge Lifeline wireless service:

Putting aside the legal question, … it seems to me a matter of common sense – or sound policy, if you prefer – that the FCC should not allow states to impose taxes or fees on no-charge Lifeline service that the FCC has sanctioned by rule for the purpose of promoting access to communications services for those who otherwise cannot afford service.

In the past, a few states wrongly have either imposed 911 (and other) taxes on Lifeline services or considered doing so.

Similarly, it is sound policy for Congress, the FCC, and state officialsto ensure that 911 taxes are properly assessed and distributed. Otherwise, wireless consumers will be wrongly financially burdened and discouraged from accessing wireless communications services. And 911 services will be deprived of funds.   

The 10th Report indicated the Commission will more closely scrutinize future state responses to questionnaires on 911 taxes. Going forward, the Commission will presume revenues are being diverted to non-911 purposes unless states make more complete responses. The Commission also should follow through on report warnings that states diverting 911 tax revenues may be ineligible for upcoming matching federal grants awards from funds raised through spectrum auctions. Congress, the FCC, and state officials should consider further ways to spotlight 911 tax diversions and incentivize compliance with the Act. Certainly, governors and state legislators should direct relevant state and local government officials to provide complete and accurate answers to FCC questionnaires on 911 taxation.

If states are going to charge consumers a dollar per line each month for 911, then every tax dollar collected should go to 911-related services. It's unlawful and unfair to consumers if 911 taxes are diverted to anything else. And 911 services stand to suffer.

Additionally, low income recipients should not be assessed 911 taxes on Lifeline service. That's counterproductive and inconsistent with Lifeline's purpose. 

Representative Eshoo's New Bill Would Slow 5G Deployment

On January 15, 2019, Representative Anna Eshoo (D-CA) introduced the "Accelerating Wireless Broadband Development by Empowering Local Communities Act of 2019" (H.R. 530), which would overturn FCC rules that preempt local government regulations on the deployment of 5G infrastructure.

As I illustrated in a September 2018 infographic, the FCC's Wireless Infrastructure Order facilitated 5G deployment by reducing unnecessary regulatory barriers and limiting unjustified fees imposed by local governments. One study by CMA Strategy found that the FCC’s Order will increase broadband infrastructure investment by $2.4 billion and deploy next-generation access to an additional 1.8 million homes and business, of which 97% will be concentrated in rural and suburban areas.

By overturning the FCC's Order, Representative Eshoo's bill would enable local governments to levy excessive fees and lengthy regulatory processes on broadband providers, slowing the deployment of 5G technology and delaying the creation of 5G’s massive economic benefits.

Maryland Should Reduce Regulations and Fees That Inhibit Broadband Deployment

On January 2, 2018, I published a blog suggesting that Maryland Governor Larry Hogan should reestablish the Regulatory Reform Commission and should specify as one of its tasks identifying unnecessary taxes and fees. More specifically, the Commission and the Maryland General Assembly, which convenes this week for its 2019 legislative session, should focus on reducing regulatory and tax burdens that stifle broadband deployment and slow the delivery of next-generation wireless services. According to two recent reports, Maryland has one of the most burdensome regulatory processes with regard to broadband deployment and some of the highest wireless tax rates in the country.

A new report by the R Street Institute ranks Maryland 45^th out of 50 in terms of how conducive its laws are to broadband deployment. Importantly, Maryland presently does not require localities to adopt "shot clocks" to ensure timeliness for the processing of applications or to employ hard caps on fees pertaining to accessing public rights-of-ways, acquiring construction permits, or installing pole or collocation attachments. For example, the fees localities charge for public rights-of-way access are not required to be non-discriminatory or based on an estimation of costs, meaning local governments can charge whatever they want and can charge different prices to different providers despite granting the same level of access. Whether a wireless or wireline provider of broadband access, building and upgrading a network requires a significant number of permits from the local government. Without shot clocks and without hard caps on fees, the regulatory costs imposed by impediments associated with the local government approval process slows broadband deployment.

Deploying communications networks includes heavy capital investments from broadband providers. If fees are excessively high, it will discourage competition from small providers who cannot afford access. Also, if the regulatory costs differ significantly among jurisdictions, it could discourage providers from upgrading networks in certain localities. Although there is high demand in a relatively densely-populated, wealthy state like Maryland, the margin between profit and loss is very small in the dynamically competitive broadband market.

In May 2015, Governor Hogan signed House Bill 541, which required the Public Service Commission to convene a workgroup to study attachments to utility poles in Maryland. The workgroup found in a January 2016 study that the “terms and conditions for pole attachments are adequate” and the “rates charged to pole attachers are reasonable.” But with the emergence of the 5G revolution, small cell deployment in a populated locality will require hundreds if not thousands more pole attachments than 4G, meaning the existing terms and conditions likely are outdated. With 5G deployment, wireless providers will deploy small cells on already existing buildings or utility poles, a practice called “collocation.” Without shot clocks for the review of collocation applications and without hard caps on the fees localities can charge, the regulatory uncertainty will slow 5G investment in Maryland. In 2018, Maryland policymakers introduced small cell legislation to minimize these regulatory barriers and streamline 5G deployment, but the Senate and House bills failed to pass.

If Maryland wants to continue to be considered a prime location for innovative businesses, it should adopt rules that give guidance to local governments regarding streamlining the application and approval processes and charging cost-based fees that properly compensate the local governments without slowing 5G deployment.

Moreover, according to a recent report by the Tax Foundation, Maryland, at an average rate of 13.89%, has the 15^th highest combined state and local wireless tax rate in the United States. This means its wireless tax rate is 2.31 times the size of its general sales tax of 6%, which is the 9^th highest disparity multiple in the U.S.

Of course, some localities impose higher tax rates than others. In Baltimore, residents pay an effective tax rate of about 25% for wireless services. At the end of 2017, over 68% of all poor adults had wireless-only voice service and nearly 24% of Baltimore’s population falls below the poverty level. Additionally, more and more consumers are substituting mobile wireless broadband for fixed broadband. And while this trend is occurring across all demographics, it is particularly prevalent among low-income and minority consumers. About 31% of U.S. adults making less than $30,000 a year are wireless-only with regard to broadband service. And 35% of Hispanic adults and 24% of black adults also are wireless-only. Maryland’s relatively high wireless tax rates unnecessarily raise the price of wireless services and harm all consumers, but they disproportionately harm low-income and minority consumers.

The Regulatory Reform Commission’s December 2015 report recommended streamlining application review processes, reducing fees and payment frequency, and expanding minority and disadvantaged business opportunities. These recommendations have not been implemented yet with regard to the taxation and regulation of broadband and wireless communication services.

As stated in last week's blog, Governor Hogan’s regulatory reform efforts have improved Maryland’s business climate and its overall fiscal condition. To continue this progress, Governor Hogan should reestablish the Regulatory Reform Commission and task it with identifying more regulations, taxes, and fees that discourage economic activity. The communications and broadband marketplace would be a good place to start.

Copyright Industries Contributed Significantly to the U.S. Economy in 2017

U.S. Copyright Industries
Infogram

Governor Hogan Should Reestablish the Regulatory Reform Commission

At the beginning of each year, for the past three years, Free State Foundation President Randolph May and I have published a Perspectives from FSF Scholars addressing the meaningful progress made by Governor Larry Hogan’s Regulatory Reform Commission (RRC). In December 2017, the RRC published its final report identifying 844 outdated or unnecessary regulations over its three-year term, which Governor Hogan ultimately eliminated or altered in some way. Now that Governor Hogan has been reelected for a second term, he should reestablish the Commission with the goal of achieving further regulatory reform over the next four years.

In January 2016, Randolph May and I commended Governor Hogan for creating the RRC, and we suggested ways Maryland could reform its regulatory process. Specifically, we proposed that Maryland consolidate its twenty departments into just eight. We also suggested creating a “sunset” date for all new regulations. This would require that regulations expire after a certain period of time if they are not affirmatively readopted by the sunset date.

In January 2017, we applauded the RRC for identifying 187 regulations that it found “redundant, unreasonable, unnecessary, unduly burdensome or obsolete.” We also recommended that Maryland adopt a central office within the executive branch to review regulations before they are promulgated to determine whether the projected benefits outweigh the costs – similar to the Office of the Information and Regulatory Affairs (OIRA) at the federal level. The office certainly doesn't need to be large, but it should be led by an economist with expertise in cost-benefit analysis.

In January 2018, we highlighted the RRC’s final report, which recommended 657 changes to outdated or unnecessary regulations that Governor Hogan ultimately accepted. And we took the opportunity to repeat some of our earlier proposals for process reform in Maryland.

Governor Hogan made a worthy effort during his first term to eliminate unnecessary or outdated regulations as part of his effort to stimulate Maryland's economy and improve its business climate. As I noted in an October 2018 blog, Governor Hogan’s tax and regulatory reform had a positive impact on Maryland’s overall fiscal condition. And according to some studies, Maryland’s business climate has improved over the past several years relative to other states. (See here and here.)

Although the Regulatory Reform Commission did a good job identifying nearly 850 regulations that were outdated or unnecessary and Governor Hogan wisely accepted the Commission’s recommendations, there certainly are areas where Maryland can further improve, like reducing occupational licensing requirements. Now that Governor Hogan will be returning to Maryland’s gubernatorial seat for another four years, he should reestablish the Regulatory Reform Commission and direct the Commission to continue its work searching for unnecessary and costly regulations to eliminate or modify.

The RRC also should be tasked with identifying unnecessary taxes and fees that stifle competitive entry and artificially raise prices for consumers. Given the positive impact that broadband and wireless services have on Maryland’s economy, the RRC particularly should focus on eliminating or reducing excessively high taxes and fees that slow broadband deployment and harm consumers.

In a forthcoming blog, I will discuss how Maryland’s burdensome regulations and fees stifle broadband deployment and how its exorbitantly high wireless tax rates negatively impact consumers.

T-Mobile-Sprint Merger Would Benefit Resellers and Hybrid Services

In the Free State Foundation’s comments submitted to the FCC regarding the proposed merger between T-Mobile and Sprint, FSF rebutted claims that the potential merger would harm resellers, or mobile virtual network operators (MVNOs). FSF scholars showed that a combined T-Mobile and Sprint would accelerate 5G deployment, giving MVNOs a third nationwide option for 5G access in addition to Verizon and AT&T. Tracfone, the nation’s largest MVNO, made similar sentiments in its comments, stating that a merged T-Mobile and Sprint would increase mobile broadband access in rural areas, where competition from a third provider is lacking.

In their comments, FSF scholars examined T-Mobile and Sprint’s spectrum holdings, capital investments, and financial obligations and determined that the two companies, alone, would not be able to compete with Verizon and AT&T with regard to timely deployment of 5G networks:  

It appears unlikely that T-Mobile and Sprint separately would have the capital resources necessary to invest in and timely deploy nationwide 5G networks that could compete effectively with AT&T and Verizon. Furthermore, build-out and operation of a next-generation mobile wireless network involves significant costs in migrating subscribers onto the new network and closing down older-generation networks. Such migration would be particularly challenging to T-Mobile and Sprint separately given their relatively smaller pool of financial and spectrum resources.

In other words, the T-Mobile-Sprint merger would accelerate small cell deployment and increase the likelihood of consumer access to three or more nationwide 5G providers. But MVNOs, which purchase network capacity from mobile network operators (MNOs), like Verizon and AT&T, and resell the service rather than building out their own facilities, also would benefit from having access to an additional nationwide 5G network.

FSF’s comments said the following:

Based on observations that T-Mobile and Sprint are the largest wholesalers of mobile wireless network capacity to mobile virtual network operators (MVNOs) – or “resellers” – it has been claimed that the reduction of one wholesaler could raise wholesale prices for MVNOs and therefore harm consumers by causing their retail subscribers’ prices to rise. However, given the competitive conditions of the wireless market identified above – including the new T-Mobile’s likely enhanced ability to compete with wireless market leaders AT&T and Verizon – it is quite unlikely that wholesale prices would significantly increase post-merger. A rigorous economic analysis should be required to demonstrate that significant and non-transient price increases are likely to occur before the Commission should credit such an argument as a possible merger related concern. And even assuming such a demonstration were made, it is unlikely that concern would outweigh the 5G and other potential benefits of the proposed merger.

In September 2018, Tracfone, the largest MVNO in the U.S. with 22 million customers, announced that it supports the T-Mobile-Sprint merger for this exact reason. In comments submitted to the FCC, Tracfone said:

While today’s wholesale market for MVNOs is generally competitive, the existing four nationwide MNO’s from which TracFone can purchase network capacity are not equivalent alternatives in all markets. In rural areas, T-Mobile and Sprint historically have not offered sufficient coverage and/or speeds in these geographic pockets of the United States.

With the merger of T-Mobile and Sprint, and the resulting more rapid deployment of a nationwide 5G network with broader coverage, greater capacity, higher throughput and lower latency, the wholesale market place will be more competitive with three full service competitors, rather than two. The increase in competition should have the greatest effect in rural areas. The resulting excess capacity would be available for MVNOs in these areas as a third option that has not been available in the current marketplace.

Moreover, in a recent Perspectives from FSF Scholars, Randolph May and I discussed how cable providers are now offering mobile services as hybrid mobile network operators (HMNOs) that use a combination of their own facilities and leased networks. (Comcast’s “Xfinity Mobile” is one example.) Cable providers, too, would benefit from more options for nationwide 5G networks when offering their hybrid mobile services.

As HMNOs and MVNOs continue to use a facilitates-based MNO to deliver their own mobile services, the T-Mobile-Sprint merger would provide cable providers and MVNOs with a third option for a 5G network in addition to Verizon and AT&T.

Robert Crandall: Legislators and Regulators Must Exercise Humility

In August, Dr. Robert Crandall, a member of the Free State Foundation’s Board of Academic Advisors, authored a report titled “The Effects of Rapid Technological Change on Regulatory Policies in the Communications Sector.” Dr. Crandall discusses how regulation in industries characterized by rapid technological change often leads to counterproductive constraints on firms.

The report examines four cases studies of regulation in the communications sector:

• The artificial distinction between “local” and “long-distance” calling in telecommunications regulation

• The 1996 Telecommunications Act’s costly failure with regard to local network unbundling

• Deregulation, reregulation, and deregulation of cable television rates

• The AOL-Time Warner Merger

Dr. Crandall uses these examples to explain how well-intentioned regulation can lead to unintended consequences that have detrimental effects on consumers, like foregone investment in broadband infrastructure. He states:

In each of these examples of policymaking in the communications sector, technological change – and the associated market changes – helped to render a policy decision unnecessary or irrelevant. In each case, legislators and regulators could not predict the future changes in market conditions brought about by changing technologies and consumers’ adaptation to these changes, leading to serious policy errors with adverse effects on consumer welfare.

Dr. Crandall concludes that regulators should be careful not to impede investment in new technologies, like 5G, through regulatory interventions. And in the context of mergers, agencies generally should not impose regulatory conditions of approval because oftentimes technological innovation quickly renders the conditions outdated or irrelevant.

As I stated in a blog last week, U.S. mobile data traffic is projected to grow fivefold from 2017 to 2022 and the deployment of 5G technology is expected to create 3 million jobs, $275 billion in investment, and $500 billion in annual economic activity. In order for consumers to enjoy these projected economic benefits, as Dr. Crandall states, legislators and regulators must exercise humility when considering laws and regulations in the dynamic broadband marketplace.

FCC Proposal Keeps Text Messaging Free From Unnecessary Regulation and Spam

At its December 12 meeting, the FCC will vote on a sensible proposal to keep popular wireless messaging services free from public utility regulation. By declaring texting and other wireless messaging services are Title I "information services," the FCC will ensure messaging service providers have flexibility to protect consumers from spam and other unwanted messages. 

For several years, Free State Foundation President Randolph May and I have urged the Commission, in comments filed with the agency and in publications, to declare text messaging services to be lightly-regulated Title I information services. We applaud the Commission's proposal, finally, to provide deregulatory certainty for messaging services.

In today's competitive communications marketplace, wireless service providers routinely offer consumers messaging services bundled with voice and mobile broadband services. Text messaging or short messaging services (SMS) typically involve person-to-person transmission of texts up to 160 characters long. Multi-media messaging services (MMS) are person-to- person transmission of photos or video clips. The popularity of wireless messaging services is reflected in CTIA's estimate that, in 2017, American consumers sent a combined 1.77 billion SMS and MMS messages. 

As the Commission's draft proposal states: "The Communications Act, as amended, divides communications services into two mutually exclusive types: highly regulated 'telecommunications services' and lightly regulated 'information services.'" The Commission proposes to declare that SMS and MMS wireless messages meet the statutory definition of Title I information services because they involve the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications. 

For starters, when SMS and MMS messages are sent by users, they are routed through servers on mobile networks, stored on those networks, and forwarded to the recipients when their devices are able to receive them. Thus, the proposal finds: "This storage and retrieval capability is analogous to email service, which has been recognized under Commission precedent as an information service and similarly involves storage and retrieval functionality." 

Additionally, the Commission rightly recognizes adoption of its proposed Title I classification determination "will empower wireless providers to continue their efforts to protect consumers from unwanted text messages." Pointing to an estimated 2.8% spam rate for SMS compared to an over 50% spam rate for email, the Commission draft concludes:

[C]ontinuing to empower wireless providers to protect consumers from spam and other unwanted messages is imperative in light of the fact that the growth and popularity of SMS and MMS wireless messaging services have made them an attractive target for bad actors and spammers.

A Title II declaration would make it more difficult to combat unwanted messages. As the proposal says: "[I]n the context of voice service, under Title II, the Commission has generally found call blocking by providers to be unlawful, and typically permits it only in specific, well-defined circumstances." Under a Title II regime, messaging service providers would be restricted in their ability to stop spam from reaching consumers, thereby flooding consumers with messages they don't want.   

Finally, no good reason exists for increased regulation. SMS and MMS services emerged from and thrive in a competitive, essentially unregulated environment. Consumers have choices among competing wireless providers offering messaging service. Data cited in the draft Communications Market Competition Reportindicates that at the end of 2017, 92% of the population had access to at least four 4G LTE providers. Also, over-the-top applications and email are other popular means of communication, providing further competitive market checks on service provider behavior. Meanwhile, messaging service providers are subject to the Federal Trade Commission's authority to take action against unfair and deceptive trade practices. Antitrust is another available resource for safeguarding competition in the market. 

The Commission should adopt its proposed declaratory ruling on text messaging in order to preserve a light-touch regulatory environment and to allow service providers to continue to prevent consumers from getting spammed. 

VoIP Services in Minnesota Surmount Another Hurdle

Back in October 2017, my Free State Foundation colleague Seth Cooper published the blog, "The Case for Keeping VoIP Free from Legacy Regulation." Indeed, FSF scholars have argued for a decade  or more that VoIP services are "information services" and should not be subject to common carrier regulation, either at the federal or state level.

After release of the FCC's Restoring Internet Freedom Order, Seth pointed out January 2018 blog that the case for non-regulation of VoIP services was bolstered.

Then, in September 2018, the Eighth Circuit affirmed a lower federal court opinion rejecting the Minnesota Public Utility Commission's claim that Charter Advanced Services' Spectrum Voice VoIP service should be subject to state regulation as a telecom common carrier.  See the opinion here in Charter Advanced Services v. Lange, where the Eighth Circuit holds that, pursuant to federal policy, Charter's VoIP service is an "information service," and that the FCC policy of non-regulation of information services precludes state regulation.

Now comes the news that on December 4th the Eighth Circuit issued an order denying the Minnesota petitions for rehearing and rehearing en banc.

This is good news because, as a matter of law, Charter's VoIP should be classified as an "information service" which, by virtue of such classification, preempts state telecom regulation. And, as a matter of policy, there certainly is sufficient competition in the market in which VoIP services compete to eschew public utility-type telecom regulation, whether by the FCC or states like Minnesota. (There are few other states that have tried to regulate VoIP services. Vermont is one presently asserting jurisdiction over Comcast's VoIP service. Vermont should take the hint and devote its resources, more productively, to other matters.)    

Indeed, more good news would be word that Minnesota and Vermont are abandoning their efforts to subject VoIP services to public utility regulation and, instead, devoting their attention to updating their state telecom laws to account for the technological advances and market-driven changes that have rendered these legacy laws outdated.

Video Data Is the Leading Contributor to Rapid Traffic Growth

On November 26, 2018, Cisco released its Visual Network Index (VNI): Forecast and Trends, 2017-2022. This annual report is useful to policymakers, entrepreneurs, and consumers because it projects growth of broadband devices and network technologies at the national, continental, and global level. Given the projections, the report should be particularly useful in getting policymakers to focus on the need to remove regulatory and other impediments to deploying broadband infrastructure. Cisco deserves credit for producing this valuable resource.

According to Cisco, the significant rise in Internet traffic experienced over the past decade or so is expected to continue for the next five years as connections increase and networks expand. The proliferation of video applications is by far the most significant driving force behind exponentially increasing Internet traffic. On a global level, video traffic comprised 75% of Internet data in 2017 and it will increase to 82% by 2022. In the United States, video traffic comprised 81% of all Internet traffic in 2017 and it will increase to 82% by 2022.

As the graph below shows, global Internet traffic will grow threefold from 2017 to 2022, at the same rate as Internet traffic growth in the United States.

Global Internet Traffic: Cisco Forecasts 396 Exabytes per Month by 2022

Overall, the amount of Internet traffic and the number of users and devices throughout the world is astounding. By 2022, there will be 4.8 billion Internet users (60% of the global population), up from 3.4 billion in 2017. And those users will connect to 28.5 billion networked devices, up from 18 billion in 2017. In the United States by 2022, there will be 317 million Internet users (94% of the population) connecting to 4.6 billion networked devices. That means there will be 13.6 networked devices per capita by 2022, up from 8.1 per capita in 2017.

The graph below shows the extraordinary global growth projected across all Internet-enabled devices.

Global Devices and Connections Growth, 2017 - 2022

While overall Internet traffic and devices are growing at a phenomenal rate, mobile traffic is growing twice as fast as fixed traffic. The United States has been a leader in the growth of mobile traffic, which is expected to increase fivefold from 2017 to 2022. Over that same span, global mobile traffic is expected to grow even faster than the U.S. mobile traffic.

Here are some key findings regarding the growth of mobile broadband throughout the world:

• Average smartphone usage will grow from 5.1 GB per month in 2017 to 26.1 GB per month in 2022.

• Global mobile traffic will increase sevenfold between 2017 and 2022.

• Global mobile traffic will grow nearly twice as fast as fixed Internet traffic from 2017 to 2022.

• Video will comprise 79% of global mobile traffic by 2022, compared to just 59% in 2017.

• Global mobile traffic by 2022 will be equivalent to 38x the volume of the entire global Internet in 2005.

Here are some of the key findings regarding the growth of mobile broadband in the United States:

• The average mobile connection speed will grow threefold from 2017 to 2022, reaching 39 Mbps.

• U.S. mobile traffic will reach 5.7 exabytes per month by 2022, up from 1.2 exabytes per month in 2017.

• U.S. mobile traffic will grow fivefold from 2017 to 2022, a compound annual growth rate of 36%.

• U.S. mobile traffic will grow two times faster than fixed IP traffic from 2017 to 2022.

• U.S. mobile traffic by 2022 will be equivalent to 12x the volume of the entire U.S. Internet in 2005.

The United States has been a global leader in mobile device innovation and the deployment of mobile broadband networks. Advanced 4G networks offer exponentially superior reliability, capacity, speeds, and security for mobile traffic compared to previous mobile network technologies. Now, we are on the cusp of deploying 5G mobile network technology, which will deliver speeds at least 10 times faster than 4G and enable “smart cities” to more efficiently use local services such as energy, utilities, transportation, and public safety. Deployment of 5G technology is expected to create 3 million jobs and $500 billion in annual economic activity.

Since my February 2017 blog regarding Cisco’s most recent mobile traffic update, the FCC has adopted a number of items that should spur innovation and investment in U.S. broadband networks, both mobile and fixed. Adoption of the Restoring Internet Freedom Order, proposed in May 2017, repealed the public utility-style regulations imposed in the Title II Order. Internet service providers increased broadband investment in 2017 after a two-year decline. Moreover, the FCC has adopted a number of wireless and wireline infrastructure items that remove state and local regulatory barriers. These should accelerate 5G wireless deployment. (See here and here.) Lastly, the Commission has identified a number of spectrum bands for commercial assignment and allocation, which will be tremendously valuable as consumers continue to demand more mobile data. (See here and here.)

Again, Cisco’s report is an important tool. It should help U.S. policymakers understand that mobile and fixed data services require additional spectrum to match the forecasted growth and to make the social and economic benefits of 5G a reality. To promote 5G and the emergence of other broadband technologies, policymakers at the federal, state, and local levels must avoid imposing unnecessary new regulatory burdens and continue to remove existing ones. Also, Congress and the FCC should continue to remove, or at least minimize, impediments to infrastructure investments in order to ensure continued innovation and growth in the dynamically competitive market for broadband services.

Signing of USMCA Spotlights International Copyright Protections

On November 30, President Trump and leaders from Canada and Mexico officially signed the proposed United States-Mexico-Canada Agreement (USCMA). Completion of the trade agreement's negotiation was announced in October. If approved by Congress, USMCA will replace the North American Free Trade Agreement (NAFTA). 

USMCA contains several provisions to better secure Americans' copyright protections. FSF President Randolph J. May and I address many of those provisions in our Perspectives from FSF Scholars paper, "Modernizing International Copyright Agreements to Combat Copyright Infringement." Among its pro-copyright provisions, USMCA would help American owners of sound recordings the full scope of public performance rights. Additionally, USMCA provides for stepped up enforcement through increased civil and criminal penalties for infringing activities such as "stream-ripping" and "camcording." 

However, USMCA incorporates language similar to the Section 512 "notice-and-takedown" provision contained in current U.S. copyright law. Section 512 is outdated and ineffective in protecting digital music and video content from mass infringement on popular user-upload websites. Future trade agreements and treaties should avoid that language. Congress and the Trump Administration should work to reform and update the notice-and-takedown system. We discuss these aspects of Section 512 in further detail our Perspectives paper, "Modernizing Civil Copyright Enforcement for the Digital Age Economy: The Need for Notice-and-Takedown Reforms and Small Claims Relief."

EU Commission Approves T-Mobile-Tele2 Merger in the Netherlands

No doubt that in analyzing market impacts and competitive concerns, every proposed merger is different. The analysis is necessarily fact-intensive, or should be. Unfortunately, there are some who generally fall back on well-worn mantras, such as "big is bad," or in the case of the wireless market, "less than four facilities-based competitors" is unacceptable.

With this in mind, I find the EU Commission's approval of T-Mobile NL's acquisition of Tele2 NL very interesting. EU Commissioner Margrethe Vestager, cdertainly no slouch when it comes to antitrust enforcement, said: "Access to affordable and good quality mobile telecom services is essential in a modern society.  After thoroughly analysing the specific role of T-Mobile NL and the smaller Tele2 NL in the Dutch retail mobile market, our investigation found that the proposed acquisition would not significantly change the prices or quality of mobile services for Dutch consumers".

Key facts: The merger involved the third and fourth largest wireless operators in the Dutch retail market. After the merger, the combined company would have approximately a 25% market share. The EU Commission certainly didn't accept the notion, accepted in some quarters as almost religious dogma, that a national wireless market must have at least four facilities-based carriers in order to be effectively competitive.

Now, back in the states, T-Mobile's proposed merger with Sprint would combine the third and fourth largest carriers. After the merger, their combined share of the facilities-based wireless market would be approximately 30%, still trailing either of the two largest U.S. providers, Verizon and AT&T, in market share. 

Also, noteworthy, turning back complaints from mobile virtual network operators that they would be disadvantaged, the EU declared: "[T]he investigation showed that any potential change in conditions for virtual mobile network operators due to the proposed merger would not have a serious impact on the level of competition in the Dutch mobile telecoms market."

Again, I am not saying, of course, that the EU's decision should dictate the outcome of the FCC and the Department of Justice T-Mobile-Sprint transaction reviews. As I said at the outset, the analysis of each merger is fact-intensive.

I am just saying…that the EU Commission decision is worth considering.

P.S. For much more regarding the context in which the proposed T-Mobile/Sprint merger should be evaluated by the U. S. authorities, see the Free State Foundation's comments and reply comments filed in the FCC's transaction review proceeding.

Amazon Should Not Receive Government Handouts

Last week, Amazon announced that it will build its highly sought-after second "headquarters" (HQ2) in two separate locations, agreeing to move to Arlington, VA, and Queens, NY. Taxpayers in Maryland and Montgomery County should be pleased that they will not have to pay the $8.5 billion offered to Amazon to induce it to build HQ2 in Montgomery County.

Without having to pay a dime, Montgomery County, which like Arlington borders Washington, DC, still should experience positive spillover economic benefits.

Amazon likely will use HQ2’s close proximity to Washington, DC, in part, to continue lobbying the federal government for various regulatory changes – some good and some bad. As one of the two largest companies in the United States, with a market cap that exceeded $1 trillion in early September, Amazon does not need and should not receive government handouts or special regulatory advantages. Instead, governments at all levels should reduce tax and regulatory barriers that stifle competition and reduce investment and innovation.

After receiving bids from 238 cities across the United States and effectively creating a bidding war, Amazon decided last week that it would locate HQ2 in Arlington, VA, and Queens, NY, with more than 25,000 employees in each location. Maryland offered $6.5 billion in tax incentives and Montgomery County threw in an additional $2 billion. But had Amazon agreed to place HQ2 in Maryland, taxpayers in Maryland and particularly in Montgomery County would have paid for Amazon’s new headquarters.

While perhaps you can't fault the company for attempting to get as many government handouts as possible, Maryland’s government should do what is best for the residents, not what is best for Amazon.

The argument in favor of offering tax incentives to Amazon is that HQ2 would stimulate the local economy and create more than $8.5 billion in long-term economic benefits. Sage Policy Group performed an economic impact study which found that HQ2 would create more than $17 billion in annual economic activity in Maryland. At the time this study was performed, it was assumed that Amazon would deploy one HQ2 with 50,000 jobs, as opposed to two headquarters, each with 25,000 jobs. But even assuming HQ2 would have created 50,000 new jobs in Montgomery County, one of the touted benefits in the study is that Amazon would contribute $280 million in annual county taxes and $483 million in annual state taxes. If Amazon accepted the $8.5 billion handout, it would have taken Amazon more than seven years to create a net positive tax contribution to Montgomery County and more than thirteen years to create a net positive tax contribution to Maryland.

Of course, had Amazon accepted the deal, it would have been under no obligation to pay back the tax incentives. What would have stopped Amazon from moving HQ2 to a new location after a few years? Taxpayers would bear all the costs with little benefits, particularly Maryland taxpayers who live far from Montgomery County who would not experience any of the increased economic activity created by HQ2.

Montgomery County and Maryland officials now have a combined $8.5 billion that can be allocated to services that will directly impact the state and local residents. Whether this means more funding for schools, roads, or tax breaks for the current residents, Maryland is likely much better off using this money in other ways.

Importantly, because Arlington, VA, a suburb of Washington, DC, will become the location of one of Amazon’s second headquarters, Montgomery County’s local economy will experience spillover economic benefits. Amazon’s move to the DC area will bring 25,000 new jobs and those new employees will spend their money on housing, food, and entertainment throughout the area. Sage’s study states that an HQ2 located in Montgomery County would positively impact DC, and Northern Virginia, as well as Maryland’s Anne Arundel County, Baltimore City, Baltimore County, Frederick County, Howard County, and Prince George’s County. So under the same locale-related assumption, an Arlington-based HQ2 should positively impact Montgomery County and other Maryland jurisdictions. Spillover effects do not stop at state borders, so Maryland should experience some of the indirect economic benefits of Amazon moving to the DC area without having to spend $8.5 billion in taxpayer money. Moreover, additional companies may consider the Washington, DC, area as a good home for their headquarters, and Maryland can use this opportunity as a way to reinvent its sales pitch to prospective companies – by lowering tax rates and eliminating costly regulations that stifle entrepreneurial and economic activity.

Despite a whopping $8.5 billion left on the table, I am not claiming that Amazon chose Virginia over Maryland due to its tax and regulatory policies. I don't have evidence for that. But that does not mean that Maryland’s improving but still sub-par business climate does not deter other companies from setting up shop within the state. (See these blogs here, here and here.) Instead of attempting to persuade companies – including one of the world's largest firms – to move to Maryland with promises of government handouts, the state and localities should remove, or at least reduce, barriers to entry. This will induce businesses across many industries to locate their headquarters in Maryland.