Of Transformational Moments and Media Regulation

There is an interesting piece on the Broadcasting & Cable website in which John Eggerton, B&C's longtime, highly knowledgeable media reporter, interviews Steven Waldman, senior advisor to FCC Chairman Julius Genachowski. The interview gives me pause – and it may give you pause as well.

In the setup for the interview, which you should read in its entirety, B&C states: "Waldman is charged with coming up with a report to the commission on the state and fate of the media in the midst of radical change." In the interview, Waldman is careful to say that, with the project he leads, the FCC is not looking to save any particular company or industry because "that is not really our job." But what exactly is the job that the FCC is looking to do under Waldman's charge? Mr. Waldman says: "We are looking at it in terms of preserving certain functions, in which I do include accountability journalism."

Here's the rub. It is not really the FCC's job – or generally within its delegated jurisdiction – to preserve "accountability journalism," or even to define it. Indeed, despite Waldman's appropriate nods to First Amendment sensitivities, free speech concerns are necessarily implicated when the government categorizes different kinds of media content and worries about preserving some content and not other.

I prefer to assume the good intentions of Chairman Genachowski and Mr. Waldman, and others, when they bemoan what they perceive as the troubled state of the news media and when they pledge to focus government's efforts on what Mr. Waldman calls "the information needs of the community." But the truth of the matter, if we are to be candid, is that many of those in the "fix the media" camp just don't like particular programs, or networks, or what they might call the slants of particular media outlets. They often rail against the "24-hour cable news networks," and especially against one particular cable news network they say is not as "fair and balanced" as it advertises.

Perhaps what many of the "accountability journalism" proponents really long for are the days when television news was dominated by three major network news operations with a generally liberal tilt. When Walter Cronkite closed each evening's broadcast with the soothing, "And that's the way it is." Except when it wasn't. And recall the occasions when Cronkite's successor, Dan Rather, told us the way it was, but it wasn't. We only found out because of the bloggers, certain 24-hour cable news networks, and other non-mainstream media. Accountability journalism in action, perhaps – without government help.

Now here are some of Mr. Waldman's specific responses that particularly give me pause.

He says: "But the one premise is that the chairman and I believe we are at a transformational moment. The first thing we have to do is make sure the FCC meets that moment in a smart way." When government officials speak of "transformational moments" as justification for embarking on new missions, caution is in order. The Obama Administration, especially, has been keen to invoke transformational moments, for example, as justification for radical changes in health care and energy policy. The result, in my view, has been overreaching. I worry that invocation of the "transformational moment" could lead to overreaching as well with respect to media policy.

Mr. Waldman says: "Everything the FCC does affects the structure and organization of the media, and those often have very profound effects. Traditionally there has been a line between structural rules and ownership and micromanaging content, and I think that is a reasonable line in the sand." In one (theoretical) sense, this statement about a reasonable line in the sand is reasonable enough. But in another more practical sense it is not.

First, for many years (decades really), with Commissioner Copps and similar-minded commissioners leading the charge, the FCC has stood in the way of reforms that might have prevented or slowed the demise of journalistic endeavors whose demise they now purport to decry. I refer, of course, to their reflexive opposition to any relaxation of media ownership regulations, say, for example, that would have allowed combinations of local newspapers and broadcast outlets. Such combinations might have provided the necessary financial and other resources for supporting more of the "accountability journalism" that now is of such professed concern to these media regulators. I am confident that if you ask Commissioner Copps, he will tell you he has never been so concerned about "media concentration" as he is today. Not even when three television networks dominated the 30 minute nightly news shows, before the availability of new over-the-air networks, a multitude of cable networks, satellite radio outlets, the Internet, and so forth.

Second, while Mr. Waldman expressly eschews micro-managing content, I worry about the FCC macro-managing content. The line between micro and macro-managing content is not that clear. The natural inclination of government officials is the all-too-human tendency to want to enhance control of the media control in the interest of self-promotion or self-protection. This is why we have a First Amendment, by the way.

In this regard, in the context of the net neutrality debate, it has been shocking, if not surprising, to hear high government officials with responsibilities in the area of communications regulation, such as Andrew McLaughlin, a former top Google policy executive, speak as if they do not understand the difference between government censorship and private party choice as to what to information to convey or not.

Towards the end of the interview, Mr. Eggerton asks: "Can we establish that this initiative will not be a stealth takeover of the media by the government?"

Mr. Waldman responds: "Yes, we can absolutely, definitively say that we have no plans to take over the media, and we have no plans to reinstitute the fairness doctrine while I am at it."

I do not doubt that Mr. Waldman or Mr. Genachowski have no plans for the FCC "to take over the media." Or even to reinstitute the fairness doctrine, as least in the same form we knew it back when. Nevertheless, despite my presumption of their good intentions, I do doubt the wisdom of the FCC's endeavor to preserve and promote certain media functions, including "accountability journalism" and what is now fashionably called the "public media."

It is true that in order for our democracy to function well, we need a vigorous press with sufficient resources to investigate and shine a light on wrongdoing, especially government wrongdoing. So, yes, "accountability journalism" is desirable. But above all we need an independent press.

I am certain that our Founders – who gave us not only a real transformational moment but our First Amendment – would find it somewhat odd if we gave the government more power to regulate or interfere with the media, or to support "public media" with special preferences or subsidies, in order to promote government accountability. The Founders would understand the ultimate threat to democracy inherent in such a project.

I am sure they would prefer that those in positions of power in government, such as FCC commissioners, eliminate or reduce media regulations that constrain the actions and decisions of private media outlets, rather than using presumed transformational moments to enhance government involvement in, or control over, the media.

Take Net Neutrality Out Of Merger Review

At the U.S. House of Representatives hearing on the proposed Comcast-NBCU joint venture, more than one member of Congress brought up the idea of having a network neutrality requirement imposed on the parties as a condition for merger approval. Let's hope that kind of ad hoc regulation never comes to pass. Regardless of the merits of net neutrality regulation, responsible administration calls for equal treatment by across-the-board application of rules. Genuine anti-competitive harms should be the focus of any and all merger reviews, not extraneous policy initiatives.

Currently, the U.S. Department of Justice is vetting the Comcast-NBCU merger for any anti-competitive concerns. And the Federal Communications Commission will be undertaking a public interest examination of the merger as part of the its process for approving the transfer of broadcast, broadcast auxiliary, satellite earth station, and business radio licenses. Presumably, some members of Congress have in mind net neutrality condition to be put in place pursuant to the FCC's approval of those license transfers.

Net neutrality regulation of advanced broadband technologies in dynamic markets poses no small or insignificant number of problems. (Some of the Free State Foundation's own work detailing those concerns can be found here, here, and here.) But aside from the detailed difficulties and potential consequences posed by net neutrality regulation, the scope of the issue requires a more direct and comprehensive examination. In fact, the FCC is already taking a broader look at net neutrality regulation in its current Preserving the Open Internet proceeding. (Last month, FSF filed comments with the FCC opposing the adoption of net neutrality regulation.) However undesirable such regulation may be, imposition of some kind of net neutrality regulation is only appropriate for across-the-board rules that apply equally to broadband marketplace competitors, not for an ad hoc application to merging parties in a particular transaction. Subjecting merging parties to uniquely onerous regulatory burdens puts them at a disadvantage vis-a-vis their competitors and potentially scares away mergers that enhance consumer welfare or which are competitively benign.

The FCC displayed an awareness of general rulemaking vs. specific conditioning concerns late last year when it rejected calls for adopting a handset exclusivity ban as a condition for approving the AT&T-Centennial merger. As I discussed in a blog post last fall ("FCC Keeps its Hands Off of Handset Exclusivity, For Now…"), the license transfer approval in the AT&T-Centennial merger constituted a laudable example of the FCC refraining from imposing significant conditions that would only be appropriate, if at all, in a general rulemaking. The FCC expressly recognized that the handset exclusivity raised broad, industry-wide concerns rather than merger-specific harms.

A time-limited net neutrality condition did make it into the FCC's order approving license transfers in the AT&T-BellSouth merger. However, the AT&T-BellSouth merger remains an anomaly in this respect and it should not be followed. No merger passing through the FCC since then has included any net neutrality condition. The net neutrality condition contained in the AT&T-BellSouth merger also appears to be a dubious instance of FCC "regulation by condition." In such instances, the FCC lets its informal 180-day shot clock on license transfer approval lapse and thereby puts merging parties into a precarious position. As merging parties grow increasingly desperate due to FCC delay, they end up engaging the FCC in further rounds of private talks. Those talks lead to parties' "concessions" concerning matters that may have little or nothing to do with supposed anti-competitive harms raised by the merger.

In Comcast-NBCU, the merging parties have proposed a number of initial concessions in their application and public interest statement. But a net neutrality condition would be unnecessary and irrelevant to the license transfer that the FCC will be considering. DOJ examination and future public comment at the FCC may shed light on the possible existence or scope of any video and online content distribution issues raised by the merger. Issues pertaining to retransmission consent, program access, program carriage, localism, diversity, PEG, and the like will certainly be up for public discussion as the merger application is considered. To be sure, however, the merger certainly involves no threat to last-mile broadband marketplace competition, as NBCU is not in the high-speed broadband service provider business.

So will the FCC's approach to the Comcast-NBCU merger be more like its disciplined approach in AT&T-Centennial than its undisciplined approach in AT&T-BellSouth? It's too soon to say for certain, but not too soon to hope the agency will not allow the process to run amok.

Steps Toward A More Open Maryland Government

The sudden receptivity of the Maryland General Assembly to measures to increase transparency regarding the legislature's work is certainly welcome. A decision has already been made to put committee votes online for the first time. Because much of the real work of legislating is done in committee, this is an important step in providing citizens access to information that will help them hold their representatives accountable.

And as indicated in the Maryland Reporter, a bill has been introduced that would take other steps to make the Assembly's work more transparent and open. The Maryland Open Government Act, House Bill 344, would require all legislative hearings to be broadcast on the General Assembly's website. And it would allow witnesses at legislative hearings to sign up to testify on bills online, rather than in person two hours before a hearing as they now must do.

Moreover, committees also would have to publish the order in which bills will be heard one day in advance. As things stand now, there is no telling in what order bills will be brought up. The system of constantly shuffling bills, roulette-like, might work well for lawyers or others paid by the hour to sit in legislative hearings, but not for ordinary citizens taking time out from busy schedules to travel to Annapolis to put in their two cents worth.

I'm sure there will be plenty to criticize when the General Assembly gets down to legislating, especially if, per its "spending like there's no tomorrow" tradition, it fails to exercise any spending restraint -- even in face of the looming $1.5 billion plus deficit. But at least if steps are taken to increase the transparency of legislature's activities and ease citizen access to information, Maryland's taxpayers will be in a better position to know whom to blame – or praise.

 

FCC Commissioner Robert McDowell: "First Do No Harm"

At last Friday's Free State Foundation's Annual Winter Telecom Policy Conference, FCC Commissioner Robert McDowell gave a stirring keynote address that made the case for what, for some time, I have been calling regulatory modesty. Focusing on the FCC's upcoming national broadband plan and the agency's proposed net neutrality regulations, the title of Commissioner McDowell's address – "The Best Broadband Plan for America: First Do No Harm" – captures the essence of the approach that should guide the Commission.

With the date for adoption of the broadband plan drawing close, and proposed net neutrality regulations already on the table, there is a serious risk that this new Commission will go far off-course. Unless the agency demonstrates that it understands the high costs imposed by public utility-style regulation of broadband Internet services and that it appreciates the benefits consumers have realized from the existing generally deregulatory broadband environment, it will do so. It needs to exhibit a very healthy dose of regulatory modesty.

I will continue to have much more to say about these broadband matters in the coming weeks and months. It is unlikely, though, that you will find a more persuasive case for the exercise of the Hippocratic injunction – "First, Do No Harm" – than that set forth in Commissioner McDowell's keynote address. The entire address bears a close reading. But for those unable to do so at this time, here are some of the key excerpts:

***

"And keeping in the hands of consumers that power to choose among products and services in a fast-changing and competitive free market should be the FCC's prime directive when it comes to crafting our National Broadband Plan and examining proposed rules governing Internet management. The Commission's No. 1 goal should be to do no harm.
But first we must ask: How have we met with such success in the first place? With calls for more regulation, some are bending the light of history through a revisionist lens. Keep in mind that innovation and investment in broadband did not come about due to a government mandate. In fact, for over three decades now, it has been the bipartisan policy of the U.S. Government to keep information services lightly regulated. The innovation that consumers are enjoying today came about under a minimalist regulatory framework."

"While the FCC continued on the logical path of classifying broadband services as less regulated information services under Title I in 2002, 2005, 2006 and 2007, investment, innovation, competition and consumer choice were growing.
Let's allow the facts to speak for themselves. According to a Pew Internet & American Life Project study, in 2003 only about 15 percent of American adults had access to broadband at home.
Today that number is closer to two-thirds. Some form of wireline-based broadband is available to roughly 95 percent of Americans.
Cable broadband alone is available to 92 percent of the country. Once deployment of DOCSIS 3.0 is complete, those consumers could enjoy speeds of up to 100 mbps. That means 92 percent of the country could have access to far faster broadband services merely through an upgrade. This incredibly positive fact is overlooked too frequently in the debate over America's broadband future."

"In addition to acknowledging the fatter and faster pipes being delivered to consumers through coax and fiber, we should not forget the tremendous explosion of wireless broadband. In fact, wireless is the fastest growing sector of the broadband market. Wireless broadband was rarely mentioned in 2003, but by December of 2005, there were already 3.3 million wireless broadband subscribers. And, last November, that number had grown to 99.7 million wireless broadband subscribers. It should go without saying that as more and more spectrum bands are built out – for example, BRS/EBS, AWS-1 and 700 MHz – this trend will continue. But today, over 50 percent of American consumers have a choice of five wireless carriers, with 94 percent having a choice of four carriers."

"Investment, innovation, deployment and adoption have all been growing rapidly in the stability of the current regulatory environment. These are positive trends that should be nurtured and strengthened. As the FCC goes forward it should, at the very least, be careful to do no harm."

"[S]hadowing the Broadband Plan is the FCC's Open Internet proceeding. It proposes to dramatically change the existing regulatory environment for broadband – the same environment that has allowed for the development of the robust and dynamic market I have just described. Before embarking on any regulatory journey, it is pragmatic for the government to ask, 'What exactly is broken that only the government can fix?'"

"Both NTIA and the Department of Justice (DOJ) filed comments in our proceeding. Not surprisingly, neither provided evidence of a failed Internet marketplace. In fact, DOJ's comments were downright optimistic about the competitive and dynamic future of the broadband market."

"First, modern day "information services" have never been regulated as common carriage. Second, starting with cable modem services in 2002, the Commission examined the early 21^st Century broadband market and determined that it was far different from the early 20^th Century "plain old telephone service" market that inspired the 1934 Act. As the result of these significant differences, the Commission determined that broadband should be classified as less regulated information services under Title I.
Don't forget that the aim of the 1996 Act was to deregulate this space as competition grew, and the broadband classification orders were drafted with such Congressional intent in mind."

"But let's ask a bigger question: Exactly what kind of companies might get tangled up into this regulatory Rubik's Cube? Any Internet company that offers a voice
application? What about an app developer that makes an app closely "ancillary" to a voice application? With this newfound authority, why stop at voice apps? Isn't voice just another type of data app?
As the distinction between network operators and application providers continues to blur at an eye-popping rate, how will the government be able to keep up?"

"And these Commission actions would not create extreme litigation risk and regulatory uncertainty? Would this new regime create the environment needed to attract up to $350 billion in private risk capital to build out America's broadband infrastructure, as the Commission analysts drafting the National Broadband Plan have estimated?"

"Some who advocate for new rules are also arguing against pricing freedom. They should be careful what they wish for. Direct or indirect economic regulation of Internet access could very well increase prices for all consumers. Under a new nondiscrimination construct, if every consumer is to be treated the same regardless of usage, then all prices must rise to compensate for the costs imposed by heavy users. This is especially true for shared networks such as wireless and cable where consumers share bandwidth with their neighbors, whether they know it or not. In short, under one scenario, the majority of broadband consumers would pay a higher rate to compensate for a minority of users who consume more bandwidth."

"One can't speak at a Free State Foundation event without mentioning the Constitution. I'll start with the First Amendment, because it's first. The Supreme Court just reaffirmed last week in its Citizens United decision that corporations have a protected right to speak under the First Amendment.
Additionally, the Commission bears the burden of justifying any speech regulation it imposes on corporate entities, just as it does with individual citizens. Some commenters contend that new rules could impermissibly burden speech in several different ways, including by imposing capacity restraints on network providers' own services in order to accommodate the speech of others. Others contend that the act of routing data is conduct and not speech.
Nonetheless, if new rules are enacted, the courts are sure to be presented with a First Amendment challenge during the inevitable appeals. The level of constitutional scrutiny applicable to a net neutrality "nondiscrimination" mandate is a key question to be resolved…. In short, under any standard, court precedent requires the Commission to conduct a serious analysis proving that the harm is real before the agency adopts rules that restrict speech. Thus far, the record in this proceeding does not meet that burden of proof."

"I truly hope that the Commission will seriously consider a different course – a course that does not carry with it the unforeseen liabilities that new regulations are sure to bring. It is my hope that we all could agree on a middle ground idea, such as this one. In lieu of new rules, which will be tied up in court for years anyway, the FCC could forge a new partnership with the appropriate non-governmental collaborative Internet governance bodies that have worked flawlessly on these issues for years. Working together, we could collectively shine a bright light on allegations of anticompetitive conduct and work directly with the established Internet governance community to resolve controversies. This approach, coupled with strict enforcement of our antitrust laws, could very well provide the benefits sought by proponents of new rules without incurring the unexpected costs of a new regulatory regime. After all, this way of doing business has worked quite well thus far."

The Slow Winding Road to Intercarrier Compensation Reform

The intercarrier compensation system is outdated, complex, and in need of reform. But due to political pressures, analysis paralysis, or whatever other reasons, the Federal Communications Commission has persistently resisted real reform for a decade or more. Occasional regulatory patches to the intercarrier compensation system only nibble at the edge of hoped-for comprehensive reform. This month brings yet another reminder of the need for the newly constituted FCC to unify the intercarrier compensation system.

The U.S. Court of Appeals for the District of Columbia Circuit upheld the rate cap system for calls from an originating local exchange carrier (LEC) to an Internet Service Provider's (ISP) LEC. Originally established by a 1999 order by the FCC, the rate cap system for inter-LEC ISP-bound traffic has undergone a repeated back-and-forth between the D.C. Circuit and the FCC. Core Communications v. FCC is the latest and probably last round in the bounce-back mini-saga. The D.C. Circuit rejected claims that the FCC's 2008 order rearticulating the statutory basis for the rate cap system was "arbitrary and capricious."

The FCC's 2008 order relied primarily on Section 201 of the Communications Act for authority to regulate inter-LEC ISP-bound traffic. That section prohibits carriers engaged in delivering interstate communications from charging rates that are not "just and reasonable," and it gives the FCC authority to adopt implementing regulations. The D.C. Circuit concluded the FCC provided a solid foundation for treating inter-LEC ISP-bound traffic (i.e., under the rate cap system) differently than it generally treats inter-LEC compensation (i.e., reciprocal compensation through private negotiation and arbitration by state regulators). As Senior Judge Stephen Williams described the rationale of the FCC's order:

In the context to which reciprocal compensation is ordinarily applied, it noted, outgoing calls are generally balanced by incoming ones, so that it matters relatively little how accurately rates reflect costs….Such balance is utterly absent from ISP-bound traffic. Moreover, it found that in fact the rates for such traffic were so distorted that CLECs were in effect paying ISPs to become their customers…To the extent that ILECs simply passed the costs on to their customers generally (rather than having a separate charge for those making ISP-bound calls), they would force their non-internet customers to subsidize those making ISP-bound calls, and the system would send inaccurate price signals to those using their facilities for internet access (in effect the ISPs and their customers) and to those not doing so…the Commission believed that its "failure to act …would led to higher rates for Internet access, as ILECs seek to recover their reciprocal compensation liability from their customers to call ISPs,"…presumably meaning rates "higher" than cost, correctly computed. Thus the continued application of the reciprocal compensation regime to ISP-bound traffic would "undermine[] the operation of competitive markets."

The result of the D.C. Circuit's ruling was hardly surprising given the deferential "arbitrary and capricious" standard being applied. This result was also foreshadowed by last month's ruling by the D.C. Circuit in Rural Cellular Association v. FCC, upholding the "interim, emergency" rate cap system for the high-cost universal service fund (USF) for non-rural telecommunications carriers. (I blogged about the earlier case and related USF issues last month's post: "Reform USF Now: Two New Data Points").

The D.C. Circuit ultimately found persuasive the FCC's concern for arbitrage opportunities that inter-LEC ISP-bound traffic creates under the general reciprocal compensation system. Professor Gerald W. Brock, a member of the FSF Board of Academic Advisors, likewise acknowledged the incentives for such behavior in "Unifying Intercarrier Compensation," an essay published in New Directions in Communications Policy. Writes Brock:

In the late 1990s, the favorable treatment of interconnection among [LECs] created a form of arbitrage in which companies attempted to transform themselves from customers into LECs...If a dial-up ISP could create a CLEC "front" so that the traffic coming to it was treated as incoming reciprocal compensation traffic, then the ILEC would make net payments to the ISP instead of the ISP paying the ILEC.

Thus, the rate cap system makes sense given the broken intercarrier compensation system we have. But even this small "fix" points to the pressing need for comprehensive reform to create a unified intercarrier compensation system that FSF President Randolph May has urged in several blog posts.

As Brock writes in New Directions, "Now, access charges should be abolished and subsidies for universal service should be separated from intercarrier compensation." A meaningful overhaul toward a unified intercarrier compensation system should lean more heavily on private negotiation between parties, with arbitration as a backdrop. An FCC-established framework of presumptions and default arrangements could guide negotiating parties and reduce transaction costs. And expert arbitrators can take stock of regulation-induced arbitragers. Essentially, this kind of reform means a qualified expansion of the reciprocal compensation system, and a clear separation of any subsidies from intercarrier arrangements.

Of course, on the intercarrier compensation side, the FCC has dragged its heels to bring about a unified system since at least 2001. But even though the rate cap system just upheld by the D.C. Circuit hardly constitutes the straight path to badly needed comprehensive reforms, the very resolution of the litigation over inter-LEC ISP-bound traffic now leaves the FCC with one less excuse for delaying those reforms. Little more could be said for the FCC's progress on the comprehensive USF reform side. However, the FCC has been taking public comments on a petition for rulemaking by the National Cable & Telecommunications Association (NCTA) that seeks to reduce universal service subsidies in geographic areas experiencing facilities-based competition that is not subsidized. Now is the time for the FCC to take positive steps forward on intercarrier compensation reform and USF reform.

The Massachusetts Vote and Internet Regulation

In my recent essay opposing net neutrality regulation, entitled "Overregulating the Internet," which ran in the National Review and also on CBS.com, I began this way:

"While health-care reform may be the foremost example of President Obama's overreaching domestic-policy agenda, communications policy deserves attention as well. In October, the Obama administration's Federal Communications Commission unleashed a proposal to regulate a large swath of the Internet under a "net neutrality" regime. If adopted, this policy would likely discourage investment and innovation in broadband Internet networks, a particularly unwelcome development with the nation just emerging from a severe economic slump."

And ended this way:

"The Obama administration's proposals for addressing health care are much too interventionist for my taste. But at least there is widespread agreement that in health care, there are market failures that ought to be addressed in one way or another. Not so with respect to the Internet marketplace. Rather than jeopardizing continued progress, the FCC should jettison its proposal to impose new Internet regulation. It should concentrate instead on producing a plan that will help bring broadband to the remaining 5 percent of American households that are unserved."

In between the beginning and the end, I hope I explained with some persuasiveness why the FCC, in the absence of any demonstrated market failure or consumer abuse, ought not to move forward with its proposal to adopt net neutrality regulation.

I do not want to suggest -– and I am not suggesting -- that FCC decisions should be dictated, or even overly influenced, by messages sent by the Massachusetts electorate regarding concerns about the Obama Administration's health care reform proposals. But I do want to suggest that when, back in a September 21 blog post, I called Chairman Julius Genachowski's proposal for new Internet regulation "an immodest proposal," I was expressing some of the same concern about regulatory overreaching and a certain bureaucratic immodesty that a large body of Americans obviously now feel regarding the pending health care reform proposals. Shortly after my September 21 blog post, in a September 28 editorial entitled "The FCC's Heavy Hand," the Washington Post agreed with me that the FCC's net neutrality regulatory proposal is "immodest." The editorial's subtitle perfectly captured the piece's sentiment: "Federal regulators should not be telling Internet service providers how to run their businesses."

On January 14, FSF submitted lengthy comments to the FCC urging the agency to jettison its proposals for new Internet regulation. On the other hand, the comments supported the notion of adoption of a transparency and disclosure rule, if reasonably drawn. This would be an appropriately modest way of proceeding at this point that would accommodate the agency's desire to act, while doing so in a constructive way that facilitates consumer choice.

A final note on net neutrality: For some time (going back to 2006 here, and especially in this 2007 law review article) I have argued that net neutrality regulation likely would violate the First Amendment. I was gratified to see that eminent constitutional lawyers Laurence Tribe and Thomas Goldstein have raised essentially the same First Amendment free speech concerns in a paper attached to the comments submitted by Time Warner Cable in the net neutrality proceeding. These two have a pretty good track record before the Supreme Court when it comes to constitutional law questions, so I commend their analysis to you. While not heretofore at the forefront of the concerns expressed regarding the FCC's proposal, I submit that, at least in part, some of the palpable unease concerning the FCC's proposed course is attributable to a sense – even amongst those much less schooled in constitutional law that Messrs. Tribe and Goldstein – that net neutrality regulation compromises fundamental free speech rights.

Now, a really final note: If you haven't already registered for the Free State Foundation's January 29 Annual Winter Telecom Policy Conference, you may want to do so now, as spaces are filling up fast. The conference agenda, which will have a significant focus on the FCC's broadband plan and proposed net neutrality regulation, is here. RSVP to Susan Reichbart at: sreichbart@freestatefoundation.org

Clearing the Air on Wireless Text Messaging

The U.S. Department of Justice (DOJ) has finished its inquiry into wireless carriers' text-messaging rates and intends to take no further action. So reports the Wall Street Journal ("Justice Ends Probe of Texting Rates"). Apparently, DOJ could find no evidence sufficient to support claims raised by the U.S Senate Antitrust Subcommittee Chairman that wireless carriers were engaged in illegal collusive price-fixing conduct to keep text messaging prices up. As I pointed out in a blog post from last month ("Getting the Message on Text Messaging Prices"), a federal trial court recently dismissed a nationwide class-action lawsuit against the major wireless carriers based on similar, factual flimsy collusion claims. Skyrocketing numbers of text messages being sent and received by consumers—with 1 trillion sent last year alone—suggest strong consumer demand, not consumer harm. And many text messaging price complaints myopically focused on per-message prices rather than bundled package prices that offer consumers far more economical choices.

Fortunately, the Federal Communications Commission's (FCC) current net neutrality/net neutering rulemaking—i.e., the Preserving the Open Internet proceeding—will likely refrain from imposing any kind of direct regulation on text messaging. But this outcome was not always so likely. Back in late September, FCC Chairman Julius Genachowski's speech at Brookings announcing his plans to impose net neutrality/net neutering regulation asserted "[w]e have even seen at least one service provider deny users access to political content." This line was an apparent reference to Verizon Wireless' employees' initial rejection of a NARAL application for a common short code (CSC)—a text messaging service. (The matter was resolved within 48 hours, with the CSC application granted, all without FCC intervention.)

The Chairman's September speech thus raised the likelihood of FCC regulation of text messaging in the forthcoming proceeding. However, the FCC Notice issued in October says otherwise. Although the FCC proposes to extend net neutrality/net neutering regulation to wireless broadband networks, paragraph 156 of the FCC's Notice states that it will not subject text messaging to any such rules:

Because of the rapid growth and increasing use of mobile wireless as a platform for broadband Internet access, we will examine in greater detail in the following parts the application of the principles to mobile broadband Internet access. We note as a threshold matter that wireless providers may offer a range of services—including traditional voice, short message service (SMS), and media messaging service (MMS)—that are not broadband Internet access services and thus are not included in the scope of the draft rules discussed above.

Given nascent wireless broadband technological limitations, wireless broadband innovation and quality-of-service stands to take a hit from new regulation. (The Free State Foundation just submitted its comments to the FCC in the proceeding.) But at least text messaging will probably come away unscathed in the FCC's proceeding. When it comes to the messaging, the FCC's Notice appears intended to preserve the status quo.

Nonetheless, the status quo for text messaging leaves room for FCC deregulatory reform. As it now stands, text messaging in a kind of regulatory netherworld. It isn't subject to rigorous regulation, but neither is it protected by a deregulatory classification. The FCC's 2007 Wireless Broadband Order classified wireless broadband Internet access service as an information service (subject to less regulation) while it classified the transmission component of wireless broadband Internet access service as a "telecommunications service” (subject to common carrier obligations). The 2007 Order also concluded that the offering of the telecommunications transmission component as part of a functionally integrated Internet access service offering is not "telecommunications service." Although the 2007 Order's description of wireless broadband Internet access services and technologies referred to text messaging as a "mobile data application," the Order did not expressly declare it an information service.

The Commission now has opportunity to clarify that text messaging and related mobile data services are, in fact, "information services." Both the 2007 Wireless Broadband Order and the alleged CSC censorship incident mentioned in Chairman Genachowski's speech set the backdrop to a petition to the FCC by Public Knowledge, Free Press, and others seeking a declaratory ruling that text messaging—including CSCs—are subject to common carrier obligations. To date, the FCC has issued no ruling on the petition. But the FCC can provide deregulatory certainty by declaring text messaging an "information service," thereby rejecting the petitioners' arguments for imposing common carrier regulation.

A New Year, Same Old POTS

It's a new year, but Free Press and other so-called public interest organizations didn't waste any time making it clear that they will be singing the same old tired tune this year as last. They are asking the government to investigate the new TV Everywhere service that is being launched by multichannel video program distributors (MVPDs) such as Time Warner Cable, Comcast, and Cox. In effect, Free Press and company are again urging that the regulatory model that was applied to regulation of POTS, or Plain Old Telephone Service, in the last century when POTS was a monopolistic offering, be applied to today's dynamic broadband Internet environment.

The concept of TV Everywhere is that a subscriber to a multichannel video distributor – without any additional charge – can watch TV programs online. It is likely that one effect of TV Everywhere is that more quality video program will be available over the Internet. And this, in turn, is likely to drive increased broadband adoption, a widely agreed-upon policy objective.

But Free Press and its allies, claiming to be representing consumers, contend the plan of the MVPDs to make television programs available on the Internet to subscribers without charge is actually anti-consumer. Of course, normally consumers are pleased when they are given additional options to make use of a product at no additional charge. And, as a matter of fact, I am not aware of any material opposition to the plan by actual consumers.

Nevertheless, Free Press and company have written to the Department of Justice, the Federal Trade Commission, and legislators to complain that TV Everywhere is "problematic" because it may "upset the emerging market of online video." According to Free Press, "the TV Everywhere model requires consumers who wish to watch popular video content on the Internet to first subscribe" to a MVPD. This is the alleged harm.

I do not have any idea whether the TV Everywhere model ultimately will succeed in the marketplace. In fact, I don't have any idea whether any business model devised by "cable" companies or "telephone" companies or "broadcasters" or "online tvtubes of various stripes" will succeed, or whether the companies that Free Press calls the "incumbents" will even exist in a few years. I know I am not as smart as the prognosticators at these same consumer organizations who predicted that if the AOL-Time Warner merger were allowed to be consummated without stringent "public interest" conditions the merged company surely would dominate both the online and cable market segments. But the communications and media marketplace is simply too dynamic and changing too fast for me to have any confidence at all in making predictions.

Although I am not smart enough to predict the future of markets and successful business models, here's what I do know. Free Press and company exhibit a profound, dogmatic anti-market bias. The only model they believe is appropriate for any communications company that distributes any content is a public utility-model under which regulators determine the prices, and the terms and conditions, under which the product is made available to consumers. This is the regulatory model that was applied to regulation of Plain Old Telephone Service when POTS was a monopolistic analog telephone offering. The only match for Free Press and company's profound anti-market dogmatism is a profound faith in the ability of politicians and regulators to manage communications and media markets "in the public interest," no matter how much more dynamic and competitive the markets have become.

This strong anti-market bias is evidenced in this instance in the same respects that characterize much of Free Press and company's advocacy and which, if accepted, will lead to unsound policies that harm consumers.

• Free Press's modus operandi is always to urge regulation before any material market failure or consumer problem is demonstrated to exist. Here Free Press says TV Everywhere is "problematic" because it might upset the "emerging" online video market. Rather than waiting for the market to develop further to see whether any real problems materialize, rather than hypothesized ones, Free Press hastens to call out the regulators first. The M.O. is the same with regard to net neutrality: Regulate first; don't wait for any real marketplace abuses to be demonstrated.
  

 

• Free Press invariably urges that all communications and media offerings be unbundled under regulatory supervision at its core, even though this unbundling mania runs counter to the way most products are offered in the marketplace.
  

 

• Free Press always ignores the fact that there are costs associated with creating and producing goods and services, whether video programming or other content on the one hand, or broadband networks on the other. Absent government ownership and control, which may be Free Press's true preference, these costs must be recovered. And absent demonstrable market failures, the entities that create and produce the goods and those entities that distribute them to the public ought to be free to negotiate mutually satisfactory business arrangements that, in their view, give them the best opportunity to recover their respective costs. Otherwise, the incentive to create and produce goods (here programming) and modes of distribution (here broadband networks) will be diminished or eliminated. As for TV Everywhere, program producers are under no compulsion to sell programming to MVPDs, but they certainly may view the prospect of doing so at a market price as an opportunity, not a problem. Just as Free Press's net neutrality proposals would foreclose more broadly any future opportunity for the development of two-sided markets between broadband providers and content and applications providers, opposition to TV Everywhere has the same market-foreclosing effect with respect to video programming.
  

I generally prefer the cautious use of antitrust law by antitrust authorities to regulation under the vague public interest theories applied by the FCC. And I have no problem with antitrust authorities investigating and remedying instances of real marketplace abuses attributable to demonstrated market failures as long as the antitrust authorities act consistently with rigorous economic analysis standards. I do have a problem, however, with premature calls for investigations in the technologically dynamic, competitive communications and media markets at a time when new business models are emerging and then evolving as market participants test consumer response and demand.

When Free Press and company acknowledge the online video market is "emerging," they ought to hold fire, at least for a while, to see what actually emerges before asking that the marketplace evolution be stopped in its tracks. If they won't hold fire – which I don't expect them to do – the antitrust authorities, lawmakers, and policymakers should have the good sense to do so.

New Year's 2010

We are all familiar with that snippet from Charles Dickens' A Tale of Two Cities that "it was the best of times, it was the worst of times." But we may forget the entire sentence which so beautifully captures the duality that many of us probably feel as we ring out this year and usher in the new decade:

"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only."

Certainly, there are reasons to be worried about America's future. They range from the ongoing serious threats posed by radical Islamic terrorism, which can't be wished away by politically correct changes in the use of the English language, to a rapidly escalating debt burden piled on future generations by politicians bent on expanding the size and scope of government programs. Of course, the growing measurable deficits are only the tangible manifestation of fiscal irresponsibility. The intangible manifestation is the immeasurable, but nevertheless real, sense of diminished individual responsibility and freedom that inevitably accompanies indiscriminate, overly profligate government handouts or entitlements. This is not to say the government has no role in helping those truly in need who cannot help themselves. But lines must be drawn that are consistent with proper ends the government legitimately ought to pursue as well as proper means of such pursuit.

Yet there are reasons to be hopeful too. Foremost, there is a certain indomitable spirit ingrained in the American people, writ large, that is enterprise-minded and law-respecting. This "can-do-minded" spirit impels an understanding and appreciation, intuited if not always articulated, that there are lines not to be crossed regarding the extent to which government seeks greater control over our lives, even when it does so in the name of sustaining us. These are the lines that have everything to do with proper ends and means.

Another reason to be hopeful is that America is fortunate –- blessed, really -– to have had a Founding generation, with all its manifest human foibles, possessed of sufficient wisdom and practical experience regarding human nature to bequeath a form of constitutional republican government that has endured for more than two hundred years. Our Constitution, which establishes a government of enumerated and limited powers, along with our Bill of Rights, is the foundation upon which our individual liberty ultimately rests.

As we enter 2010, I know that the Free State Foundation's mission to promote free market, limited government, and rule of law principles is as important, if not more important, than ever before. As I do each year at this time as I contemplate the road ahead for FSF, I have reflected again on the wisdom of our Founders -- they who lived, in Dickens' words, through the "winter of despair" and "spring of hope."

With a sense of renewal, I have in mind now what Alexander Hamilton wrote in Federalist No. 31: "In disquisitions of every kind there are certain primary truths, or first principles, upon which all subsequent reasoning must depend." In all of our work during the year ahead, I pledge the Free State Foundation will strive to keep the "primary truths" and the "first principles" uppermost in mind. For if they are not uppermost in mind, then all the "subsequent reasoning" is likely to be for naught in terms of formulating and advocating good policy for the American people.

On behalf of all of us at the Free State Foundation, I am grateful for your friendship and for your past support. I welcome your support going forward, and I wish you the very best for 2010.

Getting the Message on Text Messaging Prices

Text messaging is a booming wireless service. As the Federal Communications Commission's (FCC) reported earlier this year, "[t]he monthly volume of text messaging traffic grew to 48.1 billion messages during December 2008, up from 18.7 billion messages during December 2006, 9.8 billion messages during December 2005 and 4.7 billion messages during December 2006." CTIA's semi-annual survey from earlier this year indicates that text messaging traffic surged 1,200% from 2005-2008, with an astonishing 1 trillion text messages sent and received just in 2008. But just as text messaging has increasingly gained the interest of consumers, it has increasingly gained the attention of public officials and others eager to intervene in marketplace. In the last year, marketplace interventionists have set their sights on resetting text messaging prices.

In Re Text Messaging Antitrust Litigation should serve as a wake-up call for the text messaging marketplace interventionists. Just this month a federal trial judge tossed out this class-action lawsuit concerning text messaging prices, thankfully averting what otherwise could have become a momentous feat of regulation by litigation. The nationwide class-action suit was brought in federal court in Illinois on behalf of all consumers who purchased text messaging services on a fee-per-message basis from all four major U.S. wireless companies from the beginning of 2005 to the present. Plaintiffs' lawyers alleged that Sprint-Nextel, AT&T, Verizon Wireless & T-Mobile conspired to raise and fix text messaging prices for consumers who purchased text messaging services on a per-message basis. (Recent Congressional hearings have addressed the same kinds of claims.) The primary factual allegation of non-competitive behavior is their allegation of parallel pricing" by tacit agreement whereby one carrier would raise per-message prices followed by the other carriers also raising their respective prices several months later. Plaintiffs' lawyers even included in their complaint U.S. Senate Antitrust Subcommittee Chairman Herb Kohl's letter to the carriers in September of last year inquiring into their price increases for per-message purchases. (Sen. Kohl has also sent letters to the FCC and Antitrust Division of the Department of Justice, urging investigation of text messaging pricing.)

The case was dismissed for the failure of plaintiffs' lawyers to allege facts sufficient to state a claim under Section 1 of the Sherman Antitrust Act. Horizontal price-fixing is per se illegal under antitrust law, but here the judge found nothing but empty labels that never rose to the level of plausibility. What's more, the judge's ruling contains some commonsense wisdom that our public officials should keep in mind when it comes to prices for text messaging.

As Judge Matthew F. Kennelly's ruling recognized, consumers may purchase text messaging services either on a per-message basis or through a bundled plain. Bundled plans can include either set allotments of text messages or unlimited amounts. Moreover, since 2005, wireless carriers' "prices for other wireless services, such as voice calling and data transmission, decreased." (The FCC report mentioned earlier states that wireless revenue per minute "declined by one cent from $0.07 in 2006 to $0.06 in 2007, continuing the price trend since 1994.") But the plaintiffs’ lawyers' claims were directed solely at per-message prices for text messaging, not at bundled plan prices or at any of the other available wireless services. The judge's concluding words nicely sum up the situation:

In the wireless communications industry, price competition is fierce for voice calling, data services, and bundled plans. Most consumers purchase test messaging services on a bundled or unlimited basis. [Wireless carriers] charge consumers steep penalties for early termination of service contracts. Given these factors, parallel pricing in this single, relatively narrow part of the field in which they compete does not support a reasonable inference of an agreement not to compete.

In rejecting the price fixing claims, the judge pointed to the more likely explanation of events:

[A]s text messaging became more popular, [wireless carriers] sought to encourage consumers to purchase text messaging services as part of a bundled plan. ... By increasing the per-message price for text messages and encouraging subscribers to increase their usage of text messages through initiatives like the development of CSCs, providers could create an incentive for subscribers to purchase bundled plans to avoid the wildly varied (and sometimes wildly expensive) bills that could result from per-message pricing.

Businesses, non-profit organizations and advertisers use Common Short Codes (CSCs) as a tool for information campaigns and to keep their constituencies and customers up to date on any variety of subjects. But the number of messages sent to and received by wireless subscribers to CSCs becomes financially unfeasible when subscribers partake of per-message pricing. Since wireless carriers generate ad revenue from CSCs, they have every incentive to encourage customers to enroll in bundled text messaging plans.

Unfortunately, some critics of text messaging prices seem to ignore the fact that text messaging operates through advanced wireless networks that are expensive to build, maintain, upgrade, and expand. CTIA’s semi-annual survey, for instances, asserts that wireless capital expenditures totaled $217 billion from 1998-2008. Carriers reported an average combined investment of $22.8 billion per year from 2001-2008 to upgrade their networks. Just because the marginal cost of transmitting a text message through a wireless carriers' network may be a miniscule fraction of a $0.20 cent per-message price doesn't mean the wireless carriers aren't in need of recovering the cost of these extraordinary capital expenditures. Answering these same kinds of short-sighted complaints about text messaging prices, the judge wrote:

Even if the Court assumes, as plaintiffs allege, that [wireless carriers'] pricing for individual text messages resulted in revenues that were "several thousand times what it actually costs" to transmit a text message… plaintiffs have "done nothing more than assert that profits were extraordinary... not… that they were beyond those afforded by a competitive market."… Where, as here, the fixed costs associated with an industry are high… self-interested producers might attempt to charge higher than marginal cost prices for their products in order to recover some of their fixed costs.

Skyrocketing volumes of text messaging traffic strongly suggests that the free marketplace is matching supply with demand. The 1 trillion text messages sent last year alone speak to the apparent success of wireless carriers finding price points that consumers find agreeable. Calls for investigations and regulations of text messaging prices are particularly shortsighted when text messaging is taken in isolation. Wireless voice and data services have decreased in recent years and there are benefits to bundled offerings of text messaging with other such services. Marketplace interventionists who dislike current text messaging prices and demand change have a heavy burden to explain why their conjectural price preferences are better than consumers' actual price preferences.

Fix Maryland's SAP ("Spending Affordability Process")

The Maryland General Assembly's "Spending Affordability Committee" has just issued its annual report that supposedly tells Maryland's legislators what the cap on the state's spending should be for the coming fiscal year. In this case, according to the Gazette's report, the SAC recommended zero growth for the state's operating growth for fiscal 2011. This uncharacteristic spending restraint is projected to cut in half a $2 billion budget deficit.

Of course, the projected budget deficit should impel Maryland's governor and legislators to find further spending reductions. And, before – wrongly -- getting giddy over the SAC's recommendation of seeming fiscal restraint, please have in mind that, as a Free State Foundation study put it last year: "The spending affordability process is broken and should be abandoned. Instead of ensuring fiscal responsibility, it facilitates fiscal irresponsibility."

The Free State Foundation paper, entitled, "Structural Solutions for Maryland's Structural Deficit: Pathways to Reform," explains many reasons why the spending affordability process is broken. Here is a pertinent excerpt:

"Another problematic aspect of spending affordability is that the spending

limit is an aggregate limit on general and some special funds. This combination

prevents legislators or citizens from comparing estimated State general fund

revenues to "affordable" general fund appropriations. If such a comparison could

be made, the imbalance between revenues and expenditures would be clear.

The spending affordability process is vague and malleable and, thus, easily

manipulated. The General Assembly reduces special fund appropriations but

authorizes an increase in the appropriation (and thus spending) during the fiscal

year through the use of budget amendments. The General Assembly also reduces

general funds and authorizes the use of special funds in lieu of the general funds

through budget amendments."

The FSF study not only explains why the "spending affordability process" is broken and facilitates fiscal irresponsibility. It contains nine recommendations for changes in Maryland's budget process that, if implemented, actually would help achieve fiscal responsibility. Read the entire study here.

Reform Universal Service Now: Two New Data Points

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

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

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

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

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

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

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

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

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

Secrecy in Annapolis

The Washington Post has a good editorial this morning urging Maryland legislators to post online how members voted in committee. Because this is not done now, it is often difficult to find out how your representative votes in committee. As the Post points out, while floor votes are available online, it is often in committee where the important, and legislatively determinative, work is done. While the Post reports House Speaker Michael E. Busch as saying he's not convinced a change is necessary, this should be a no-brainer. Putting public committee votes online can be done at very little incremental cost, and there is no reason not to implement this move towards greater transparency and accountability early in the next legislative session.

And for greater transparency and accountability, there is much more that could be done, especially in areas in which more fiscal discipline is likely to result from increased transparency. For example, see the Free State Foundation Perspectives paper, "Structural Solutions for Maryland's Structural Deficits," authored by former Maryland Secretary of the Office of Budget and Management, concerning the state's byzantine "spending affordability process." The paper contains several specific recommendations for making the spending affordability process, which, in theory, is intended to limit the growth in state spending, more transparent. Included among them are measures to put information concerning the annual spending affordably process on the Internet on a timely basis and to give sufficient advance public notice of the meetings of the spending affordability committee.

There is no excuse for not putting legislators' committee votes quickly online. And, in today's digital age, there is no reason not to take many more steps that would increase transparency – and, therefore, accountability – in Annapolis.

What 'Free Enterprise Fund' Means for the FCC

Whenever the U.S. Supreme Court takes up a case involving constitutional limits on the powers of an independent federal agency, the implications should logically extend to every independent federal agency. A number of independent federal agencies are built on the Federal Trade Commission model, whereby the agency is run by commissioners who are nominated by the President and confirmed by the Senate but who are not removable from office except “for-cause.” Both the Federal Communications Commission (FCC) and the Securities & Exchange Commission (SEC) fit this model.

A case about constitutional limits on independent federal agency power involving the SEC was argued before the Supreme Court this week. Throughout arguments in Free Enterprise Fund v. Public Company Accounting Oversight Board, the FCC was mentioned by name a few times by the Justices and lawyers. Could this case hold any near-term significance for the FCC? Although the ultimate answer depends on how the Supreme Court rules in the case next year, the case won’t likely have any direct impact on current FCC operations. However, to the extent the Supreme Court’s decision elaborates any constitutional rule about independent federal agencies and Presidential power, such a rule would constrain any future Congressional reorganization or reform of any and all independent federal agencies—including the FCC.

Free Enterprise Fund presents the Supreme Court with questions about the constitutionality of the Public Company Accounting Oversight Board (“PCAOB” or “the Board”). Created as part of the Sarbanes-Oxley Act of 2002, the Board’s powers include the collection of information of certain public financial accounting entities, the undertaking of investigations, and the assessments of fees. The Board’s members are appointed by the SEC but not removable by the SEC except for-cause. Since the SEC Commissioners themselves are independent of Presidential control and can be removed from office only for-cause, SarbOx creates a situation that Chief Justice John Roberts referred to this week as “for-cause squared”. That is, independent commissioners not removable from office except for-cause are empowered to appoint Board members who assume regulatory powers but who, in turn, cannot be removed office except for-cause. Free Enterprise Fund poses separation-of-powers questions about whether the makeup of the Board—including the “for-cause squared” barrier—unconstitutionally restricts Presidential authority over control and removal of executive officers.

A reading of the transcript of the arguments conducted at the Supreme Court this week leave the constitutional fate of the Board an open question. The back-and-forth between the lawyers and Justices on independent federal agencies, accountability, and Presidential power provide for a lengthy but intriguing discussion. Last spring’s ruling by the Supreme Court in FCC v. Fox Stations, Inc. (2009) included a spar between Justices Antonin Scalia and John Paul Stevens over the nature of the FCC in relation to the political branches, with Justice Scalia insisting that “[t]here is no reason to magnify the separation-of-powers dilemma posed by the Headless Fourth Branch.” If this week’s argument in Free Enterprise Fund is any indication, next spring’s ruling in the case could provide some kind of sequel installment to the Justices’ ongoing disputes concerning federal independent agencies and the separation-of-powers.

Indeed, “[t]his latest chapter involving the Public Company Accounting Oversight Board is the most important separation-of-powers case regarding the President’s appointment and removal powers to reach the courts in the last 20 years.” So wrote Judge Brett Kavanaugh of the U.S. Court of Appeals for the District of Columbia last year. A divided panel of the D.C. Circuit previously ruled in favor of the Board’s constitutionality, 2-1. But Judge Brett Kavanaugh’s thorough dissenting opinion explains why even a ruling by the Supreme Court that the Board’s structure is unconstitutional in Free Enterprise Fund would likely be limited in its direct impact:

[F]inding the PCAOB unconstitutional would not itself call into question the many other independent agencies that dot Washington, D.C. The heads of those agencies are appointed by and removable for cause by the President, the precise structure that Humphrey’s Executor upheld and that is conspicuously missing form the PCAOB statute. In other words, the PCAOB is uniquely structured, and a judicial holding invaliding it would be uniquely limited to the PCAOB.

The FCC doesn’t have anything like the Board at issue in Free Enterprise Fund. That is, the FCC has no equivalent Board of members who are appointed by FCC Commissioners to carry out regulatory functions but who are otherwise not removable by the Commissioners except for-cause. A ruling of unconstitutionality in Free Enterprise Fund would not have any direct application for the FCC, and therefore cause no institutional disruption at the FCC.

However, should the Supreme Court rule in Free Enterprise Fund that “for-cause squared” at the “Headless Fourth Branch” of the SEC is unconstitutional, it would mean that any future Congressional reorganization or reform of independent federal agencies such as the FCC would be constrained by the Court’s new precedent. For instance, should the Supreme Court issue such a ruling, it would prohibit future (and purely hypothetical) Congressional legislation creating an FCC-appointed Media Diversity Board or Network Neutrality Board of members who are given regulatory powers and removable only for-cause. Rather, under such a ruling the constitutionally permissible alternatives would most likely include: appointment of Board members by the President with advice and consent of the Senate or placement of such any such Board entirely within an existing federal independent agency and subjecting Board members to at-will removal by the agency.

In sum, regardless of which way the Supreme Court’s rules in Free Enterprise Fund, the ruling will be limited to the PCAOB and the FCC won’t be directly impacted by the Court’s decision. The Justices’ written opinions in the case might include some insightful exchanges on the constitutional relationship between independent federal agencies and the political branches. But any constitutional limit on independent federal agency power set by the Supreme Court in its ruling would constrain future attempts by Congress to establish or reform independent federal agencies such as the FCC.

Fairly Disclosing ETFs vs. Price Regulating ETFs

The competitive free market is the best price-setting mechanism for wireless device and service contracts that include early termination fees (ETFs). So I maintained in my recent FSF Perspectives piece, “Let Competition and Choice Check Wireless ETFs.” In the dynamic wireless marketplace, the case for pricing freedom for wireless carriers and competitive choice for consumers is especially strong. Currently, all major wireless carriers make subsidized wireless device and service contract ETFs optional for consumers, with fee amounts pro-rated to some degree or other over the life of the contract. ETFs therefore present consumers with an added price option that makes wireless devices and services more affordable.

Arguments for marketplace regulation are often made in one or more of three circumstances. These include: (1) where transactions between producers and consumers impose external costs on third parties; (2) where monopolization or lack of existing or potential competition unduly limit consumer choices; and/or (3) where informational asymmetry exists between producers and consumers concerning technical or complex knowledge about a product or service.

To the best of my knowledge, no ETF-critics suggest that such fees impose any sort of spillover costs on non-parties to wireless device and service contracts that feature ETFs. And as I point to in my FSF Perspectives piece, several studies and analyses—including one by the FCC from earlier this year—reveal a dynamic wireless marketplace. Contrary to claims that wireless ETFs are anticompetitive (also addressed in my FSF Perspectives piece), existing marketplace competition tips overwhelmingly against regulation and in favor of pricing freedom and competitive choice.

It’s also a long shot to peg ETFs as presenting any kind of information asymmetries. By nature, ETFs are usually simple terms of service and not especially difficult to understand, they don’t (or shouldn’t) typically necessitate consumers to undertake any extraneous efforts to gather information about them in order to accurately appraise them. Nor must consumers necessarily possess prior or subsequent experience with ETFs in order to be able to make an informed choice about a wireless carrier’s ETF terms.

To date ETFs have primarily presented issues of fair disclosure and informed consent. Those issues have been raised in a string of class-action lawsuits against wireless carriers, many of which have resulted in large settlements. Contract law typically requires a meeting of the minds on terms of agreement for terms to be legally enforceable. And consumer protection laws prohibit unfair and deceptive trade practices. Accordingly, wireless carriers must make ETF options and terms clear and understandable to consumers, or face additional class-action suits and lose customers to marketplace rivals.

In late August, the FCC posed a number of questions about point-of-sale disclosures about ETFs in its Notice of Inquiry for Consumer Information and Disclosure and Truth-in-Billing and Billing Format & IP-Enabled Services. The key paragraph (#31) in the FCC’s NOI asks questions relating to the adequacy of point-of-sale disclosure, such as:

Do consumers receive sufficient information to understand, prior to subscribing to a service, the full range of potential costs and fees associated with that service? Are disclosures that are currently being provided useful and easy to understand? For example, are early termination fees being clearly disclosed including whether and how such fees are prorated? Do consumers understand how such fees will be prorated if they terminate service before the end of the contract? What point-of-sale disclosures are most important for wireless data plans, now growing in popularity with the use of smart phones and netbooks? Should wireless providers be required to disclose the cost of any “free” or “discounted” handset or other end-user device, such as a netbook that is recovered through monthly service payments made by the subscriber?

Now these NOI questions raise some threshold jurisdictional questions about whether the FCC rather than the Federal Trade Commission (FTC) should be inquiring about consumer protection and point-of-sale disclosures about smartphones and (especially) netbooks. Regardless, in its survey of the ETF landscape the FCC should take into account the role of existing consumer protection laws that have been on display in recent ETF class-action lawsuits. Existing statutes and case precedents arising under such statutes already provide a mechanism for creating customary common law of ETFs. Another factor to keep in mind is the disciplining effects of marketplace competition in keeping wireless carriers open and honest in their dealings with consumers.

Significantly, however, the FCC Wireless Bureau’s recent letter to Verizon Wireless about its recent ETF increase for one of its new smartphone offerings poses questions going beyond disclosure to consumers. The Wireless Bureau’s letter extends its inquiry to ETF rates and smartphone prices. In particular, the Wireless Bureau’s letter ask about the “rationale” for ETF increases, “cost differentials” for what advanced wireless devices cost the carrier “over what it charges its consumers,” and the dynamics or role of advanced wireless device wholesale prices charged by manufacturers.

As I relate in my FSF Perspectives piece, “[t]o the extent that an ETF might exceed the supposed value of the wireless device or service, at that point the ETF is simply a more expensive price option. ETFs are essentially a price component of cell phones and wireless devices.” Because consumer preferences differ and market supply and demand is in continuous flux, no absolute value for a product or service exists. In such circumstances—and especially in a dynamic marketplace devoid of monopoly—the marketplace itself should set the value and price. The wireless marketplace is characterized by such dynamism, giving consumers a lot of device and service choices. This makes the imposition of price controls through ETF regulations an unnecessary restriction. It would be disturbing – and ill-advised -- if the FCC’s price questioning is intended to foreshadow price regulating.