Independence Day 2016

At the close of the Constitutional Convention of 1787, anxious Philadelphians reportedly gathered outside Independence Hall after the proceedings ended in order to learn what had been produced behind closed doors. A Mrs. Powel asked Benjamin Franklin, “Well, Doctor, what have we got, a republic or a monarchy?” Without any hesitation, Franklin responded, “A Republic, if you can keep it.”

Perhaps the story is apocryphal, but nonetheless it is a good one to have in mind on Independence Day.

Without doubt, Americans have faced far more trying times than those we face today. No need to recount them here. But during this election year, there is no doubt as well that many Americans are dissatisfied with the direction in which our country is headed and fearful about its future prospects. And very many – myself included – are dissatisfied with the choices we likely will have this election day to fill the highest office in the land.

The rule of law, the fabric that binds together our constitutional Republic seems strained. Take but this one prominent yet striking example: In 2014, President Obama rejected entreaties, as he had done many times before, to essentially rewrite the substance of the nation’s immigration laws through executive action. In doing so, he declared: “I am President. I am not king. I can’t do these things just by myself. We have a system of government that requires the Congress to work with the executive branch to make it happen.” Then, less than a year later, President Obama asserted authority to take executive action to do exactly what he previously had expressly declared he lacked authority to do. Just like an ancient English king – “just by myself” –exercising the royal prerogative.

What are we to make of such political maneuvering that smacks so much of an “ends justify the means” modus operandi or mentality?

In this environment, the rule of law is undermined. You can hear the echoes of Franklin’s admonition: “A Republic if you can keep it.”

More than any other single person, James Madison was responsible for the Constitution’s drafting. So, on Independence Day, it’s worth considering what this foremost Founder might think about our current state of affairs in the context of the constitutional Republic created at the 1787 Convention. A good starting point is Federalist No. 51, where Madison asked: “But what is government itself but the greatest of all reflections on human nature?” Madison supplied one answer to this famous rhetorical question immediately after asking it:

“If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself.”

In Federalist No. 10, Madison wrote darkly of the “ambition” of men, their “mutual animosities” and “unfriendly passions,” and, indeed, their propensity “to vex and oppress each other.” He recognized that both individuals and interests – or “factions” as he put – naturally would seek to gain the upper hand by aggrandizing their power. And relevant to this election year, Madison warned against “unworthy candidates” who practice “the vicious arts by which elections are too often carried.”

So Madison set about to devise a government that would take into account this understanding of human nature. To counteract the effects of faction and preserve popular government, he conceived a system of separate and diffused powers, a federalist system in which “ambition” would counteract “ambition.” Or, as he put it in Federalist No. 51, a plan “of supplying by opposite and rival interests, the defect of better motives. . . .”

But Madison understood that even though he and his Constitution-making colleagues had framed a government designed to provide the best opportunity for free institutions to survive the machinations of ambitious men, and even unworthy candidates, democracy’s survival ultimately depends on something more than the structural design laid out in a paper document. It depends as much on a shared understanding between our leaders and citizens that there are lines in our politics that should not be crossed, or else people will lose respect for the rule of law that undergirds the institutions created by the paper document.

Given Madison’s understanding of the dark side of human nature, what basis is there to hope that prudential lines in our politics will not be crossed and the rule of law will be respected, especially in times when passions run high? Madison rested his hopes on what he perceived to be a duality in our natures, the existence of a noble side to rise above, if need be, the dark side.  Thus, shortly after he wrote about the unfriendly passions and unbridled ambitions that drive men, he wrote in The Federalist No. 55:

“[S]o there are other qualities in human nature which justify a certain portion of esteem and confidence. Republican government presupposes the existence of these qualities in a higher degree than any other form. Were the pictures which have been drawn by the political jealously of some among us faithful likenesses of the human character, the inference would be that there is not sufficient virtue among men for self-government. . . .”

Along with the diffusion of powers built into the Constitution’s structure, it was Madison’s trust in what is sometimes called “republican virtue” (note the small r) upon which he rested his hopes. Back home in Virginia urging ratification of the proposed Constitution, he again emphasized republican virtue:

“I go on this great republican principle: that the people will have virtue and intelligence to select men of virtue and intelligence. . . . No theoretical checks, no form of government, can render us secure. To suppose that any form of government will secure liberty or happiness without virtue in the people is a chimerical idea.”

On this Independence Day, it’s worth taking time to reflect on Benjamin Franklin’s admonition: “A Republic, if you can keep it.” To keep it, we must demand that our leaders act with honesty, prudence, responsibility, and respect for the rule of law – in other words, with republican virtue.

And we must demand as much of ourselves as well.

PS – Best wishes from the Free State Foundation family to you and yours for a safe and happy Independence Day!

PPS – My previous Independence Day messages are here: 2007, 2008, 2009, 2010, 2011, 2012, 2013,  2014, and 2015.  

TPP Is Beneficial for Consumers and Entrepreneurs around the Globe

The Cato Institute held an event today releasing an abstract of a forthcoming paper entitled “Should Free Traders Support the Trans-Pacific Partnership (TPP)?” Yes, free traders should support TPP and so should Congress!

TPP would expand global trade by eliminating roughly 18,000 tariffs that member countries have imposed on imports from the United States, lifting millions of people out of poverty around the world. By removing these trade barriers and others imposed by the United States, TPP would allow consumers and entrepreneurs in all member countries to enjoy more economic activity and lower prices than what the status quo offers.

From an intellectual property perspective, TPP would establish strong protections of IP rights in member countries, allowing artists and entrepreneurs around the globe to earn a return on their creative works and the labor that makes them possible. U.S leadership regarding strong IP rights protections will incentivize more investment, innovation, and economic growth at home and abroad.

See my July 2015 blog on how multilateral trade agreements create global IP protections.

Maryland Should Improve Its Fiscal Scorecard

On June 1, 2016, the Mercatus Center at George Mason University released its 2016 edition of “Ranking the States by Fiscal Condition,” which analyzes each U.S. state’s financial health based on short- and long-term debt and other key fiscal obligations, such as unfunded pen­sions and healthcare benefits.

Despite recent news that Maryland received positive bond ratings, the state nevertheless ranks 41^st (out of 51 including Puerto Rico) in overall fiscal solvency in the new Mercatus Center study, falling four spots from 37^th in 2015. In the study, fiscal solvency breaks down into five categories:

• Cash solvency. Does Maryland have enough cash on hand to cover its short-term bills? Compared to other states, Maryland is cash insolvent, ranking 43^rd out of 51 and falling four spots from 39^th in 2015.

• Budget solvency. Can Maryland cover its fiscal year spending with current revenues? No, Maryland revenues cover 98% of expenses. This ranks Maryland 46^th in the country as opposed to 44^th in 2015. 

• Long-run solvency. Can Maryland meet its long-term spending commitments and will there be enough money to cushion it from economic shocks or other long-term fiscal risks? No, Maryland’s net asset ratio is -0.19 and for the second year in a row Maryland ranks 43^rd in long-run solvency.

• Service-level solvency. How much “fiscal slack” does Maryland have to increase spending if citizens demand more services? Maryland ranks in the top half of U.S. states at 16. But this is not an improvement from 2015 when Maryland was ranked 11^th.

• Trust-fund solvency. How much debt does Maryland have and how large are its unfunded pension and healthcare liabilities? Fortunately, Maryland ranks 18^th, which is only a slight decrease from 2015 when it was ranked 17^th.

Notably, Maryland’s unfunded pension liability is below the national average and its funded ratio is 100%. This means the value of the state’s assets are greater than the value of the state’s pension obligations. In fact, commendably, Maryland is the only state with a funded ratio of 100%. The national average is 74%.

But when it comes to state spending more generally, Maryland’s total primary debt per capita is $2,880, while the national average is only $2,144. Maryland’s ratio of debt to state personal income is below the national average of 6.0% at 5.3%. In other words, Maryland does not have a revenue problem; it has a spending problem!

A short-term plan for fixing Maryland’s fiscal health should go hand-in-hand with Governor Hogan’s reformist goals when he first took office. By reducing tax and regulatory burdens, as FSF President Randolph May and I discussed in a January 2016 Perspectives from FSF Scholars, Maryland will attract more economic activity that has been migrating over state lines for years. Creating an economy of “permissionless innovation” will incentivize entrepreneurs to open up shop in Maryland. This is the path to improving Maryland’s fiscal scorecard.

Global Counterfeiting: Its Extent and Adverse Impact

On June 20, 2016, the Global IP Center (GIPC) released a new study entitled “Measuring the Magnitude of Global Counterfeiting.” The study analyzes the impact of counterfeiting of products on the 38 countries included in the 2016 GIPC International IP Index. See this February 2016 Free State Foundation blog explaining why the International Index is a useful tool for assessing the level of IP rights protections.

The study includes the following key findings:

• ·      China alone is estimated to be the source for more than 70% of global physical trade-related counterfeiting, amounting to more than $285 billion. Physical counterfeiting accounts for the equivalent of 12.5% of China’s exports of goods and over 1.5% of its GDP. China and Hong Kong together are estimated as the source for 86% of global physical counterfeiting, which translates into $396.5 billion worth of counterfeit goods each year.

• ·      Besides China and Hong Kong, the remaining countries in the sample account for 85% of world trade but account for 8.76% of global physical counterfeiting.

• ·      Although data published by customs authorities is lacking, the value of counterfeit goods seized and reported by customs authorities today from the sample of 38 countries ($5.2 billion) represents slightly less than 2.5% of the global measure of physical counterfeiting of $461 billion.

Counterfeiting of products poses direct health and safety threats to consumers and also decreases innovation and economic activity because entrepreneurs have little incentive to create and develop goods in countries with weak IP rights protections. In 2013, physical counterfeiting cost consumers and entrepreneurs $461 billion in economic activity.

It is important that countries with weak IP rights protections, such as China and India, quickly strengthen their IP rights protections to discourage this illegal activity. Together, GIPC’s counterfeiting study and International IP Index are useful tools in helping policymakers around the world understand how their nations’ IP systems can be improved.

Strong IP rights protections promote creativity, innovation, and investment by artists and entrepreneurs. Consumers, ultimately, are the beneficiaries such creativity, innovation, and investment. The GIPC's new study, "Measuring the Magnitude of Global Counterfeiting," is a valuable resource that reinforces the need to fight counterfeiting."

Online Video Is Driving Internet Traffic Growth

On June 6, 2016, Cisco released its annual Visual Network Index (VNI): Forecast and Methodology, 2015-2020. Consistent with Cisco’s latest Mobile Data Traffic Update, which I highlighted in a February 2016 blog, this new index projects the global growth of Internet traffic and devices on all broadband technologies as opposed to just mobile.

Here are some of the key findings:

• Global Internet traffic will increase nearly threefold over the next five years and will have increased nearly 100-fold from 2005 to 2020.

• Smartphone traffic will exceed PC traffic by 2020. In 2015, PCs accounted for 53 percent of total Internet traffic, but by 2020 PCs will account for only 29 percent of traffic. Smartphones will account for 30 percent of total Internet traffic in 2020, up from 8 percent in 2015.

• Traffic from wireless and mobile devices will comprise two-thirds of total Internet traffic by 2020.

• Global Internet traffic in 2020 will be equivalent to 95 times the volume of the entire global Internet in 2005.

• The number of devices connected to broadband networks will be three times as high as the global population in 2020. There will be 3.4 networked devices per capita by 2020, up from 2.2 networked devices per capita in 2015

The proliferation of video applications is by far the biggest driving force behind the increases in Internet traffic over the past several years and will continue to be for the next five years as connections increase and networks expand. On a global level, video traffic is projected to comprise 79 percent of Internet traffic in 2020. This is an increase of 16 percentage points from 2015 (63 percent).

While the United States certainly has been a leader in the amount of growth in connections and traffic, Cisco projects the rest of the world will have tremendous growth over the next five years. For the U.S. to continue to lead with respect to broadband deployment and innovation in broadband technologies, it is important that the FCC and state and local agencies remove unnecessary and burdensome regulatory barriers that stifle investment and innovation in broadband networks. Additionally, for continued growth in mobile broadband innovation, the FCC needs to allocate more licensed and unlicensed spectrum to meet the increasing consumer demand for advanced services and devices.

Another TAG Effort to Combat Online Piracy

On June 9, 2016, the Trustworthy Accountability Group (TAG) announced that advertising agencies Interpublic and Omnicom as well as Google, Go Daddy, and Bayer Consumer Health have joined its voluntary initiative that is aimed at preventing ad placement on websites which facilitate the distribution of pirated content and/or the illegal dissemination of counterfeit goods. (See this February 2015 blog for more on TAG.)

The addition of these companies and advertising agencies to TAG’s ongoing initiative should be helpful in reducing the $2.4 billion that legitimate content creators and entrepreneurs lose to pirated websites each year. In 2014, ad-supported piracy generated $204 million in aggregate revenue according the Digital Citizen’s Alliance. Without the use of Google’s search engine facilitating as much distribution of illegal content, piracy loss should be meaningfully reduced. Google’s support, if implemented properly, should mean YouTube users will not be able to generate ad-supported revenue from pirated content.

It is necessary to address, and diminish, piracy and content theft through voluntary initiatives like TAG's that help ensure that content creators, artists, innovators, and marketers can earn a return on their creative works!

FCC Should Maintain Safeguards to Curtail Spending for Risky USF Experiments

Whenever the FCC proposes to spend Universal Service money, it is important to remember that the subsidies come out of consumers' pockets. In 2015 alone, USF spending totaled $8.35 billion dollars. The Commission has an obligation to consumers to ensure that USF money is spent wisely. Dollars collected from consumers should not be wasted or risked on untried bureaucratic pet projects.

FSF President Randolph May and I have previously raised concerns about the way the FCC's "rural broadband experiments" are run – including funding rural electric co-ops' and other entities' entry into the broadband business to the tune of $40 million dollars. It's not the FCC's job to artificially create and prop up new business competitors through subsidies. And capitalizing entities with no established operations or experience in the competitive broadband market risks wasting USF dollars collected from consumers.

At the very least, "Strong Safeguards of Scarce Funds Should Govern FCC Broadband Experiments." In a prior blog post, I urged the FCC to maintain its bank-issued letters of credit (LOC) requirements before distributing rural broadband experiment money. Requiring recipients to obtain LOCs from banks helps ensure that disbursed dollars will be returned if recipients fail to meet build-out and service obligations.

According to reports in Telecompetitor, some entities remain unable to obtain LOCs and therefore have not received rural broadband experiment money. This inability comes despite the fact that orders issued by the Commission this spring have loosened LOC requirements.

In other words, it looks like some proposed rural broadband experiments are delayed or won't happen because those would-be recipients of USF money still can't get banks to give them LOCs. But this shows the sensibility of requiring LOCs, not of relaxing the standards. If financial institutions in the business of lending money won't risk giving LOCs to entities participating in rural broadband experiments, why should we want money collected from consumers to be thrown at such risky ventures?

In and of themselves, these rural broadband experiments are problematic on FCC institutional and financial responsibility grounds. But the Commission may not be able to undo what's already been done.

Going forward, however, the Commission ought to retain its Letter of Credit protections. To loosen them further will risk dissipating funds collected from consumers to fund an already excessive USF tax.

The FCC's Privacy Proposal Would Harm and Confuse Consumers!

Privacy 3
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Congress Should Consider Blocking Internet Domain Name Transition

Today, Senator Ted Cruz and Representative Sean Duffy introduced the “Protecting Internet Freedom Act,” which would prevent the U.S. government from relinquishing oversight of the Internet domain name system without Congressional approval.

In 2014, the National Telecommunications and Information Administration (NTIA) announced that the Internet Corporation for Assigned Names and Numbers (ICANN), the organization responsible for the Internet domain name system, would transition from U.S. oversight to a global multi-stakeholder model. Many critics of the transition, including Senator Cruz, have stated that relinquishing oversight to a global multi-stakeholder model likely will allow repressive foreign governments to impose Internet censorship.

Not only could the global multi-stakeholder model violate First Amendment principles by giving control to repressive foreign governments with a history of Internet censorship, but the transition violates rule of law norms because it bypasses Congressional approval. As proposed, the “Protecting Internet Freedom Act” would prevent the NTIA from furthering this transition, and it would require Congressional approval for any future decisions regarding oversight of the Internet domain name system.

It is important that Congress consider legislation like that introduced by Senator Cruz and Representative Duffy as soon as possible!

Maryland Receives Positive Bond Ratings

I've often urged that Maryland Governor Larry Hogan and the state legislature take further measures to improve Maryland's fiscal situation by exercising more spending restraint, while reducing the tax burden. More needs to be done.

That said, I'm pleased to report that all three bond ratings agencies have retained Maryland's Triple-A bond rating in connection with an upcoming bond sale. For example, Fitch says, "the ratings outlook is stable." This is good news.

Here is the Fitch ratings report, along with the Standard & Poors' report.

The continued positive reports from the bond ratings firms show that Maryland has a sound basis for adopting further reports to further enhance its fiscal position.

Memorial Day 2016

I’ve written a Memorial Day message each year over the past decade – that is, each year since I founded The Free State Foundation. As regular readers know, in our day-to-day world, FSF focuses primarily on communications and Internet law and policy, high tech policy, and intellectual property issues.

As important as those law and policy issues may be, and as passionately as I may feel about advocating principled free market, property rights-protective, and rule of law-oriented positions regarding them, I am never under any illusions that they are more important than certain other transcendent ideas and ideals. Hence my annual Memorial Day messages – and almost always Independence Day and Thanksgiving Day ones too.

Of course, the meaning of Memorial Day may be proclaimed simply, but it is so profound that words hardly do it justice – to honor those men and women in our armed services who paid the ultimate price defending our country and protecting our freedom. In past years, I’ve tried in different ways, through various stories, historical anecdotes, biographies, and personal reflections, to impart meaning to Memorial Day. Or stated differently, I’ve tried to avoid repeating myself, even though the true meaning of Memorial Day is immutable.

This year’s message will be different still – and very personal. But, hopefully, in the end, it will be deemed consistent with the spirit of Memorial Day and those I wish to honor and respect.

Were you to peruse the past decade’s messages, you would see that, at various times, I have urged that, aside from honoring those who gave their lives, Memorial Day also should be a time for providing succor to servicemen and servicewomen who suffered the wounds of war, often grievous wounds. Indeed, in suggested remarks for this Memorial Day, the Disabled Veterans of America organization asks that care be provided for “the wounded brothers and sisters” of those not returning home.

As some, but not many, readers know, on April 24, my daughter, Brooke Taylor, suffered a grievous injury – a serious traumatic brain injury – in an auto accident. Brooke faces a long, arduous rehabilitation process, with many significant challenges ahead. But she is a strong and determined woman, a loving wife, mother, and daughter, with a huge heart. And she is now recovering bit by bit every day. For this, we are surely most grateful – and hopeful for an eventual full recovery.

But this is not about Brooke’s injury – except in this one singular respect. After spending a lot of time since April 24 in the hospital – Brooke was in the ICU for 18 long days and is now in the acute care wing – I am more sensitive than ever to the need for medical care that meets the highest standards, especially for those with grievous injuries, and especially for our servicemen and women. As a former U.S. Army Reserve medic, I think I was sensitive to this need before. But I have no shame in confessing that when the need is for someone as close as my daughter, then all sensitivity is heightened.

Like many others, I was troubled when I read the recent controversial statement by Department of Veterans Affairs Secretary Robert McDonald comparing wait times at VA hospitals and clinics to those at Disneyland. At best, what an inapt, and inept, way to try to explain away the continuing problems with the VA system! While not apologizing for his comment, Secretary McDonald did acknowledge that veterans are still waiting too long to receive care. And he said: “Nothing drives me crazy more than our inability to provide timely care for them.”

I don’t want to make this political and won’t. I’m not calling for Secretary McDonald’s resignation, or for any other action – other than this: The American people should demand that the VA system that serves our veterans with its hospitals and clinics be fixed.

Enough time has passed. No more comparing VA wait times with Disneyland wait lines. No more U.S. government officials compelled to say of our veterans: “Nothing drives me crazy more than our inability to provide timely care for them.”

So, of course, enjoy the hot dogs, the beach, the sales this holiday weekend. But please also don’t forget about the true meaning of Memorial Day – to honor those servicemen and servicewomen who paid the ultimate price and to provide succor and care to those wounded while serving our country.

PS – My past Memorial Day messages are here: 2015, 2014, 2013, 2012, 2011, 2010, 2009, 2008, 2007

Former FTC Chairman Leibowitz Opposes FCC Privacy Rules

Former FTC Chairman Jon Leibowitz submitted comments to the FCC on May 23, 2016 advising the Commission to reject new privacy rules for Internet service providers (ISPs). Mr. Leibowitz states:

The Privacy NPRM, if adopted as proposed, would result in a detailed set of burdensome data privacy rules with no precedent in the FTC or other U.S. privacy regimes, and is inconsistent with the privacy obligations applied to the rest of the economy. Moreover, the NPRM does not identify any harms that necessitate rules that are different from the FTC framework. This divergence merits additional study and consideration.

It is interesting to see two President Obama appointees, Jon Leibowitz and FCC Chairman Tom Wheeler, hold opposing views on this proposal. The FTC is the expert agency with regard to consumer privacy disputes. Mr. Leibowitz outlines in his comments how the FCC’s proposed rules would harm consumers by creating disparate regulations between ISPs and the rest of the Internet ecosystem.

CTIA Survey Shows Decline in Wireless Capital Investment

CTIA – The Wireless Association released its Annual Wireless Industry Survey on May 23, 2016. From the end of 2014 to the end of 2015, wireless data usage increased by 138 percent, the number of wireless subscribers increased by 6.3 percent, and wireless penetration increased by 5.7 percent. Also, wireless-only households slightly increased by 1.3 percent, which is consistent with findings from a recent NTIA study and a Pew Research report that consumers are substituting mobile broadband for fixed broadband.

Most importantly, CTIA’s annual survey finds that capital investment declined by 0.3 percent from the end of 2014 to the end of 2015. This is not a huge drop, but after a 3.0 percent decline over the previous year, it seems as if capital investment is trending in the wrong direction.

FSF scholars have often stated that Internet regulation harms capital investment. This negative trend in broadband capital investment is consistent with the regulatory uncertainty surrounding the FCC’s Open Internet proceeding. The costly regulations levied on wireless providers and the regulatory uncertainty regarding the legality of the Order (because it is currently under appeal) likely has crowded out private investment leading to a decline over the past two years. Hopefully, the D.C. Circuit Court will overturn the FCC’s Open Internet Order, freeing up resources for broadband providers to invest and innovate and allowing consumers to enjoy more access and better connections.

New Paper in Federalist Society Review Calls for FCC Process Reform

Today, Free State Foundation President Randolph May and Senior Fellow Seth Cooper published a paper in the Federalist Society Review entitled “The FCC Threatens the Rule of Law: A Focus on Agency Enforcement and Merger Review Abuses.” Mr. May and Mr. Cooper discuss the FCC’s general conduct standard, established in the February 2015 Open Internet Order, and its inconsistency with due process and rule of law principles. They also question a few recent enforcement actions by the FCC and discuss why the regulated companies often are better off settling than going to court, even when it is not clear that the company violated FCC regulations.

The paper also criticizes the FCC’s merger review process and the Commission’s actions to “regulate by condition” in a way that imposes different regulatory mandates on similarly situated market participants. If the FCC does not reform its merger review process soon, Mr. May and Mr. Cooper suggest that Congress pass FCC reform legislation that includes merger review provisions.

“The FCC and the Rule of Law” was the theme of FSF’s Eighth Annual Telecom Policy Conference. The Rule of Law panel and transcript provide more insight into the need for process reform at the FCC.

Two New Perspectives from FSF Scholars!

This week, the Free State Foundation published two Perspectives from FSF Scholars. President Randolph May and Visiting Fellow Gregory Vogt coauthored a paper entitled "It’s Time for U.S. Leadership Regarding Zero-Rating and Similar Programs." This Perspectives discusses how zero-rated services can expand broadband access around the world and why a hands off approach from the FCC regarding zero-rated services could influence foreign governments to do the same.

In a different Perspectives from FSF Scholars entitled "Video Report Data Undermine the FCC’s Rationale for New Device Regulation," Senior Fellow Seth Cooper points out the inconsistencies between the FCC's Seventeenth Video Competition Report and its February 2016 proposed set-top box rulemaking. 

MPAA and Radix Agree to Combat Piracy

On May 13, 2016, the Motion Picture Association of America (MPAA) and domain name registry operator Radix announced an agreement to help ensure that websites using domains operated by Radix are not engaging in large-scale commercial piracy. Similar to MPAA’s recent agreement with Donuts, MPAA will act as a “Trusted Notifier” to inform Radix when a websites with domain extensions operated by Radix are engaging in large-scale piracy.

It is necessary to address and hopefully diminish piracy and content theft with voluntary initiatives to help ensure that content providers, artists, innovators, and marketers can earn a return on their creative works – thereby incentivizing more innovation, investment, and economic growth.

Zero-Rating Promotes Upward Mobility for Minority and Low-Income Consumers

The Multicultural Media, Telecom and Internet Council (MMTC) published a May 2016 white paper entitled “Understanding and Appreciating Zero-Rating: The Use and Impact of Free Data in the Mobile Broadband Sector.” The paper discusses how zero-rated services positively impact consumers, particularly minority and low-income individuals. The consumer benefits of zero-rated services deserve close attention. Regrettably for consumers, the FCC’s reclassification of broadband as a Title II service in its February 2015 Open Internet Order has created concerns that zero-rated services could be regulated out of existence.

Zero-rated services are also known as “free data” services. These pro-consumer services are mobile broadband offerings which allow consumers to access curated online content with an exemption from monthly data caps. Typically, that means consumers can access unlimited curated online content at no additional cost. MMTC’s paper explores five positive impacts of zero-rated services on the Internet ecosystem: lessening the digital divide, increasing the ability of smartphone-only consumers, driving innovative mobile broadband business models, spurring innovation within the entire mobile ecosystem, and empowering consumers.

The digital divide is characterized as the gap between individuals who are online and those who are not. For non-adopters who have little interest in a broadband connection, zero-rated programs can help bridge the gap by offering unlimited video or music content, for example. For non-adopters who believe mobile broadband is too expensive, free data services allow for more Internet usage at a lower cost than a traditional mobile broadband subscription.

As the white paper states:

Free data helps to address these barriers by enhancing the value proposition for non-adopters. The ability to stream as much video and music content as possible – activities that are among the most popular wireless uses across every user group – could become an enticing on-ramp for non-users: if they come to wireless broadband for unlimited Netflix streaming, they may very well stay online and use their connections for additional, more meaningful uses. For those who perceive broadband of any kind – wired or wireless – to be too expensive, the promise of free data could allow them to purchase more basic plans with lower data caps, which would deliver significant monthly cost-savings.

There is a national trend among consumers of all income levels of substituting mobile broadband for fixed broadband. This trend is especially pronounced among minority and low-income consumers. Free data services allow smartphone-only consumers to accomplish more on the Internet without exceeding their monthly data caps. Because streaming video does not count towards data caps under zero-rated services like T-Mobile’s “Binge On,” smartphone-only consumers can allocate data for other uses, such as finding directions, reading a news article, or taking a political survey.

Zero-rated programs are innovative business models designed to benefit the individual consumer. A recent CTIA survey says that 65 percent of American adults are likely to sign-up with a new wireless provider offering free data, so providers are using these services to compete with each other. The MMTC white paper says that consumers find the personalization of zero-rated programs attractive:

These programs have been voluntary from the start – depending on the service provider, subscribers are free to either opt in or opt out at any time. This builds on the modularity inherent in the modern wireless sector, where users have significant freedom to customize their user experience by, for example, picking and choosing which apps to install, which handset to purchase, which network to use, and which service option best matches their data needs.

As the number of mobile devices and connections increases and as mobile networks upgrade to 5G over the next several years, innovation in zero-rated services could lay the groundwork for other personal data consumption. Although zero-rated services are used primarily for entertainment purposes, these offerings likely will expand into new (and arguably more important) spaces within the mobile ecosystem. Health, energy, and dietary monitoring are becoming popular tools among mobile broadband consumers. MMTC says that zero-rated programs could offer critical, time-sensitive, and life-enhancing services:

For example, zero-rating certain health-related mobile tools could prove enormously beneficial for African Americans, who, as a group, are more likely to develop chronic diseases such as diabetes and heart disease. Left unaddressed, these kinds of ailments incur significant healthcare costs. But when treated in a preventative and real-time manner, there is evidence to suggest that health outcomes in these communities improve while also helping to realize cost-savings for patients and healthcare providers alike. These benefits inure not just to communities of color but to everyone.

Zero-rated services provide enhanced value and choice, especially to low-income consumers. Because providers are offering free data services in competition with each other and because those services allow consumers to opt in/opt out at any time, consumers have the freedom to choose which offerings benefit them the most. MMTC states that “this overall trend toward greater consumer empowerment, of which free data is the most recent example, benefits all consumers in many ways – but for communities of color and low-income households, these benefits are especially impactful given their above-average use of mobile broadband.”

The FCC has scrutinized zero-rated services because many critics say they violate network neutrality principles. However, in the Open Internet Order, zero-rated services do not expressly fall under the definition of a “broadband Internet access service,” and therefore are not subject to Title II regulations. (At least that is the way it was presented during the D.C. Circuit Oral Argument in December 2015, but we are still waiting on a decision.)

During a “Fireside Chat” at Free State Foundation’s Eighth Annual Telecom Policy Conference, Commissioner Mignon Clyburn called it a “good thing” that zero-rated services were not discussed in the Open Internet Order. Commissioner Clyburn also acknowledged the pro-consumer aspects of zero-rated services. Commissioner Clyburn explained:

One of the reasons I was honestly very vocal inside of our house about not abandoning or not eliminating outright the other possibility for sponsored data or zero-rated plans was because when it comes to product differentiation and the like, it could be a good thing. It could be a worrisome thing too when it’s used in a way which we did not envision. And that's why we said we will look at these things on a case-by-case basis.

Commissioner Clyburn’s observations surely cut against simplistic claims of critics that zero-rated services categorically violate principles set out in the Open Internet Order. Even so, agency scrutiny of zero-rated services – whether based on a vague “general conduct” standard or some other unknown standard – results in a state of regulatory uncertainty. Innovative and pro-consumer service offerings are stymied when market providers cannot discern or predict what the agency's rules are and whether their new offering will be permitted.

MMTC Vice President and Chief Research and Policy Officer Nicol Turner-Lee stated during the Hot-Topic Communications Issues Panel at FSF’s conference that the FCC consistently fails to take into account minority groups and diversity within the communications industry. As this white paper clearly outlines, free data services are innovative business models that benefit diverse groups across the United States, particularly minority and low-income consumers. Any intervention from the FCC to regulate or prohibit such offerings would show little consideration for diversity within the communications space and would hinder upward mobility for low-income consumers.

FSF scholars have written frequently about the positive economic impacts of zero-rated services and the scrutiny they have received from the FCC and foreign government agencies. See the following selection below:    

• Michael Horney, “Indian Regulators Ban Zero-Rated Services,” FSF Blog (February 8, 2016).

• Randolph J. May, “Internet Freedom That Isn’t: FCC Vows Not to Meddle with Innovation and Rates Ring Hollow,” Perspectives from FSF Scholars, Vol. 11, No. 6 (January 27, 2016).

• Randolph J. May Statement, “Verizon’s New FreeBee Plan,” FSF Blog (January 20, 2016).

• Daniel Lyons, “Usage-Based Pricing, Zero Rating, and the Future of Broadband Innovation,” Perspectives from FSF Scholars, Vol. 11, No. 1 (January 4, 2016).

• Randolph J. May, “Zero-Rating Is Not a Human Rights Violation,” FSF Blog (October 19, 2015).

• Michael Horney, “Zero-Rating Could Kick-Start Internet Connections for Low-Income Persons,” FSF Blog (March 5, 2015).

• Michael Horney, “Netflix’s new Deal with iiNet Violates Net Neutrality,” FSF Blog (March 3, 2015).

• Randolph J. May, “It’s the Consumer, Stupid! – Part III,” FSF Blog (January 13, 2015).

New Study: Light-Touch Regulatory Environment Encourages Investment

On May 5, 2016, the Internet Innovation Alliance released a study entitled “The Impact of Broadband and Related Information and Communications Technologies On the American Economy.” The study’s authors, Kevin Hassett and Robert Shapiro, argue that the broadband and information and communications technologies (ICT) sector has grown tremendously over the past decade under light-touch regulation. However, the authors note that unnecessary and costly regulations, such as those imposed by the FCC’s Title II reclassification of broadband in the Open Internet Order, could harm broadband and ICT sector investment.

Here are some of the study’s key findings:

• In 2014, the U.S. broadband/ICT sector produced $1.02 trillion in value added for the U.S. economy, which is about 2.9 percent of GDP.

• In 2014, companies within the broadband/ICT sector employed 4.9 million full-time equivalent (FTE) jobs or 4.2 percent of all U.S. private employment.

• Including the 2.8 million FTE jobs created by demands in goods and services by the broadband/ICT industry, the sector was responsible for 7.7 million FTE jobs or 6.4 percent of all U.S. private employment.

• In 2014, the average compensation for an FTE broadband/ICT employee was $104,390, which is 59.3 percent greater than the average compensation earned by other U.S. workers.

Mr. Hassatt and Mr. Shapiro state that “the large economic effects associated with the broadband/ICT sector have developed and grown in an environment of light federal regulation.”  Although this study does not estimate the direct impact of the Open Internet Order, the authors say that “rising regulatory costs in this sector will adversely affect its investments,” and “such adverse effects on investment would be felt not only by broadband/ICT companies, but also by companies in other industries that invest substantially in broadband/ICT goods and services.” Therefore, Mr. Hassatt and Mr. Shapiro “would expect that the negative effects of such regulation on investment, output and employment could all be substantial.”

For more on the adverse impact of Internet regulation on broadband investment, see my October 2015 blog.

Hulu Hopes To Grab Pay-TV Cord-Cutters

On May 1, 2016, Hulu announced a new service aimed at cord-cutters. The unnamed subscription service would stream feeds of popular broadcasts and pay-TV channels, making the company a competitor to traditional pay-TV providers. Walt Disney Co. and 21^st Century Fox, co-owners of Hulu, are working on agreements to license many of their channels for the platform. Comcast Corporation, another co-owner of Hulu, has yet to announce if it will participate in the service with its NBC programming.

Pay-TV providers are developing streaming services to increase their number of consumers. Dish Networks, Comcast, and AT&T-DIRECTV all offer curated streaming programs. Because one-in-seven Americans are “cord-cutters,” meaning they no longer have a traditional pay-TV subscription, online offerings allow pay-TV providers to gain back some of their former subscribers.

Hulu’s new service is not an attempt to regain former subscribers. Instead, it hopes to grab cord-cutters from the entire video marketplace. Hulu’s service could become the standard for streaming live television because it would not require a specific Internet service provider, and because it could pull programming from three of the biggest content companies - Disney, Fox, and NBC.

This transition from pay-TV to streaming services within the video marketplace is a response to the increasing number of cord-cutters. There is no doubt that the video market is moving online, but the FCC recently proposed to lock in old technology and add unnecessary regulations to set-top boxes. These regulations would not only create costs that could stifle this innovative transition, but they would allow 3^rd parties to reap the benefits of content creators’ intellectual property rights.

See our infographic on the FCC’s proposal and our comments submitted to the FCC regarding expanding consumers’ video navigation choices and commercial availability of navigation devices.