The Media Cornucopia

My former colleague, Adam Thierer, has a new article in the City Journal entitled, "The Media Cornucopia." Adam is one of the most knowledgeable and articulate voices on issues relating to government regulation of media content and government media ownership rules.

Anyone interested in really understanding the law and public policy issues relating to the government's regulation of the media should not only read Adam's City Journal article, but his excellent book, Media Myths, as well. Adam supplies the facts and figures that separate myth from reality.

"Digital Distribution of Channels for Media to Explode"

According to Communications Daily [subscription required], Hewlett Packard CTO Shane Robison told the National Association of Broadcasters convention on Monday that the media industry will see an explosion of digital distribution channels this year. With respect to distribution channels, he is reported to have said: "We're at a crucial turning point right now where hype turns into reality...The tire-kicking phase is over...In the next year [the current handful of distribution channels is] going to explode to 10, 20, or more... "

How ironic that Mr. Robison was speaking to NAB convention attendees. While he is there, maybe he should kick some...tires! The NAB has been leading the charge trying to convince Congress, the Department of Justice, and the FCC that satellite radio constitutes its own separate product market on the basis that audio services delivered from the sky are uniquely different from audio services delivered over terrestrial or HD radios or iPods or the Internet or wireless devices and so forth. In an essay published yesterday on CNET, I suggested that, in today's digital environment, "there are a number of alternatives in the audio services marketplace that consumers may substitute for satellite radio, especially in the face of any price hike."

In the CNET essay, I urged: "What is most important now for sound communications policy is to move beyond classifying and regulating services based on the technology or slice of spectrum used for distributing the service. Whether evaluating the competitive impact of a particular merger or deciding whether to jettison archaic, unduly burdensome regulations devised during an earlier, generally monopolistic analog era, the important question should be: do consumers have reasonable alternative choices in the marketplace?"

I don't have the engineering and technology credentials of someone like a Shane Robison. But I have observed the changes in technology and communications markets for over thirty years now in various professional capacities, and I have a high degree of confidence in my CNET conclusion that, at this stage of the transformative digital revolution: "Increasing consumer choice depends on robust investment and innovation in new products and services. And robust investment and innovation ultimately depend on government officials appreciating that they should be wary of intervening in today's dynamic, increasingly competitive communications marketplace."

PS--There is a price to be paid, of course, whenever companies and trade associations look to the government to intervene in the marketplace to give them the proverbial "level playing field." And it is this: As quoted in a separate piece in today's Communication's Daily, NAB President David Rehr says the NAB hopes "to make sure that everything we do, everything we say, we say and do with an eye toward the Congress." Perhaps this statement was quoted out of context. But, if not, coming from the head of the association that represents the nation's broadcasters, it is more than a little chilling to think that the association, which ought to be mightily concerned with protecting the First Amendment free speech rights of its members against government interference, is rather more concerned with ensuring that everything that the broadcasters say and do is "with an eye toward Congress."

Maryland Misses Spending Transparency Opportunity

Here at the Free State Foundation, we were touting the notion of Maryland creating an easily searchable Internet website to track state spending even before Maryland legislators Warren Miller and Alex Mooney introduced a bill to do just that. You can see some of our early writing on the subject and Del. Miller's and Sen. Mooney's "Maryland Funding Accountability and Transparency Act" bill collected here. You would think that in the Internet age this would be pretty much of a no-brainer, unless the majority of our legislators don't want to make it easier to track state spending.

The Examiner newspaper has done a terrific job of covering and editorializing on this issue. In today's Examiner there is a column describing how other states are moving forward to put their spending information on the web. Too bad that Maryland's legislature thinks it is more important to spend time figuring out how to rework the Constitution's electoral college than enacting legislation that would give citizens an effective tool to better understand how their taxpayer dollars.

Well, there's always next year, as they say. And with the looming budget deficit, and talk of tax increases in the air, by all rights there ought to be increased pressure on the legislature, and Governor O'Malley too, to "show us the money"!

Thinking "Siriusly" About Satellite Radio Competition

If you harbor an unshakeable belief that satellite radio service constitutes a separate market for audio entertainment and information, you may also believe—and might try to convince me—that the eggs used in yesterday’s White House egg hunt were left by the Easter Bunny late Saturday night.

But I’m not going to be easily convinced. Indeed, if the National Association of Broadcasters and its terrestrial broadcaster allies are able to persuade the Department of Justice and the FCC to prevent the Sirius/XM merger on the basis that satellite radio constitutes a discrete product market, well then, maybe I’ll become a believer in the Easter Bunny too.

I’ve been reflecting on the proposed merger since it was announced. And at least at this point, the notion that satellite radio constitutes a discrete market for purposes of assessing the merger’s competitive impact seems problematical—and to defy common sense. As UBS put it in a February 20 investment research report: “The combination of an enhanced programming lineup with improved programming lineup with improved technology, distribution and financials will better position satellite radio to compete for consumers’ attention and entertainment dollars against a host of products and services in the highly competitive and rapidly evolving audio entertainment marketplace: including free “over the air” AM and FM radio, iPods, mobile phone streaming, HD Radio, Internet Radio, and next generation wireless technologies.”

Merrill Lynch had this to say on the same day: “The merged company could ultimately deliver greater content choice (more niche channels given greater bandwidth), offer improved technology (radio receivers and traffic/data products), realize cost synergies and help satellite radio remain competitive in the evolving audio entertainment landscape as it competes with terrestrial radio, Internet audio media, HD radio and portable music players.”

Each year the FCC issues a report examining the status of video competition. As the Commission stated in its 2006 report: “The market for the delivery of video programming services is served by a number of operators using a wide range of distribution technologies.” The agency included in its competitive examination cable operators, direct broadcast satellite operators, broadband service providers and other wireline video providers, wireless cable operators, Internet-based video services, and DVDs and videocassettes. It would be difficult to understand why, in assessing competition in the audio market, the full range of distribution technologies similarly would not be considered. More pointedly, the Commission doesn’t ignore DBS satellite television in assessing competition in the video market, and neither do courts reviewing FCC media ownership decisions. Nor should they.

For my own part, I am not sure that the appropriate product market with respect to assessing the competitive impact of the XM/Sirius merger is not somewhat broader than strictly audio entertainment and information. Consider that both cable and DBS “multichannel video programming distributors” offer many different channels of audio only programming. In today’s fast-changing technological and marketplace environment, perhaps the relevant market is the audio and video information and entertainment market.

With my free market-orientation, I confess to being a bit baffled by some of the comments I have read from those who often share my market-orientation. For example, my friend Scott Cleland has a blog entry in which he opposes the Sirius/XM merger as anti-competitive. Cutting through the heated rhetoric, at bottom his objection seems to be that XM and Sirius are operating on government-licensed spectrum. Scott claims “that spectrum grant alone makes satellite radio a separate and distinct market for antitrust purposes.”

This “spectrum alone” contention simply can’t be right. While there may be certain aspects of the spectrum license grant and accompanying conditions that are relevant for assessing competitive impacts, the use of a certain block of frequencies alone cannot be determinative for purposes of defining a relevant product market. Terrestrial radio and television broadcasters use spectrum too. So do DBS operators and wireless cable operators. Even cable and other multichannel video operators often use spectrum, say, cable relay frequencies and satellite earth stations, as part of their network configurations to deliver their audio and video services. The use of different spectrum blocks does not mean that these various forms of media do not compete with each other.

From my free market perspective, what seems crucially important for communications policy is to move beyond classifying and regulating services based on the technology used, or, to the same effect, based on whether a particular slice of the spectrum is used. You can read my views on this point at greater length in my Federal Communications Law Journal article, “Why Stovepipe Regulation No Longer Works: An Essay on the Need for a New Market-Oriented Communications Policy.” What’s important, whether for purposes of assessing the competitive impact of a particular merger or, more often, for purposes of deciding whether it is time to jettison or relax outdated and unduly burdensome technology-based regulations--say, media ownership regulations--is whether consumers have alternatives in the marketplace for the service or application in question.

My interest in the Sirius/XM merger has little or nothing to do with concern about whether either one of the two money-losing companies, or the merged company if the merger is approved, will be around in five or ten years. The same goes for terrestrial broadcasters, Apple’s iPod, mobile streamers, a particular cable or telephone company, and so on. Frankly, the way technologies and consumer tastes evolve so rapidly in today's dynamic environment, I wouldn’t feel comfortable betting $10 on any one or the other of them surviving that long.

My main interest is that consumers continue to benefit from the array of information and entertainment choices that the digital revolution enables. Consumer welfare ultimately depends on continued long-run investment and innovation in the marketplace, with providers seeking competitive advantage by responding to consumer demands. And continued investment and innovation depend on regulators at DOJ and the FCC not taking such a constrained, static view of marketplace competition that they end up maintaining in place or adopting new regulations, or preventing market-driven mergers, which have such investment and innovation-stifling effects.

Maryland Lags on Spending Transparency

As a bastion of "liberal" thinking, Maryland's legislature--presumably with the support of the majority of Maryland's voter's--is certainly a liberal spender of the public's tax money. So much so that Maryland faces a structural budget deficit of over 6 billion dollars in the next five years. Too bad the Democrat-controlled legislature doesn't display such liberality in wanting to allow the taxpayers to easily determine how state funds are being spent.

The Internet, of course, provides a means which would allow such spending information to be made available to the public in an easily retrievable manner and at relatively little cost to the state. That's why it is so disappointing that the "Maryland Funding Accountability and Transparency Act" introduced by Delegate Warren Miller and Senator Alex Mooney and several Republican colleagues went nowhere this legislative session. The Accountability and Transparency bill would require Maryland to establish a "single, searchable website, accessible to the public at no cost," that allows Maryland citizens to easily track state funding of grants, loans, awards, and other forms of limited assistance.

There is an editorial in today's Examiner newspaper that explains why the new database established by OMB is a "giant step forward" in enabling the public to track the federal earmarks that did so much under Republican rule of the Congress to lead to bloated spending. As the Examiner editorial explains, "the OMB Earmarks Database offers details on 13,496 earmarks totaling more than $19 billion that were contained in fiscal year 2005 appropriations."

The Examiner deserves much credit for urging Maryland to adopt legislation along the lines of the Miller-Mooney bill and for spotlighting the legislators' position on this openess issue. See here and here.

If the Bush Administration can get the searchable OMB database up and running fairly quickly to provide some much-needed transparency regarding federal spending, you would think that Maryland's government could do the same. Unless the legislature and the governor really don't want to make it easy to "show me the money." Liberal spending should be accompanied by liberal disclosure.

Riding the Back of the Net Neutrality Tiger

There was a time when I knew JFK's 1960 Inaugural Address by heart. Well, most of it anyway. In reading the interview in the April 9 edition of Business Week with Goggle's CEO Eric Schmidt, I was reminded of one of JFK's many memorable lines: "In the past, those who foolishly sought power by riding the back of the tiger ended up inside."

President Kennedy was referring to countries, not Google. But Google's market cap of approximately $146 billion (give or take a few billion) now exceeds the annual Gross National Product of more than 70% of the world's countries. Small wonder that the BW article was entitled, "Is Google Too Powerful?"

The tiger I have in mind that Google is riding is net neutrality, of course. In the Eric Schmidt interview, curiously net neutrality didn't come up. But it was on my mind at a couple of points in the Q&A. Schmidt was asked: "As Google passes 50% and rising of search market share, will that dominance change the way Google operates?" Answer: "I'm not sure I agree with the word dominance. Dominance is defined not by majority market share but what you do with it." Now I know that Google preaches, as Schmidt said during the interview, that "we would never try to violate people's trust." But I am wondering why Google is so sure--sure enough, apparently, to seek new laws and regulations--that broadband providers will adopt practices that harm consumers, at the same time that it asks lawmakers, policymakers, and the rest of us to accept that it would never try to violate our trust. And if the important question in Google's mind in assessing market power is "what you do with it," surely broadband Internet consumers to date have not experienced demonstrable harms sounding in net neutrality justifying new, broad anticipatory laws and regulations.

Another Q: " Some people think that Google has not been as transparent as it should be in areas such as click fraud, use of data, and its intentions in various markets....[D]o you think that Google needs to be more open?" A: "There's a real tradeoff between the sort of secret sauce, the special knowledge that Google has, and our business policies. An example would be that a lot of people are very interested in how our data centers work. But we've decided not to talk about that, because we don't see any end-user benefit for knowing how the data centers work and it would simply change the competitive landscape if we did."

Well, it's nice to know that, at least when it comes to its own business policies, Google understands that there are real trade-offs between sharing the "secret sauce" and changing the competitive landscape. In other words, I think Schmidt is saying that if new laws or regulations mandated that Google must be "transparent" and "open," like it is lobbying to have the government mandate openness for broadband providers, its own competitive position might suffer. So Schmidt would prefer not have the government mandate such transparency for Google's data centers or otherwise.

Now, I happen to believe that even with Google's position as the dominant search engine, there is no present need for new government mandates to regulate its business practices at its data centers or otherwise. Trust me. This is not because Google says that ""we would never try to violate people's trust." It is because I think, especially in light of the technological dynamism in Google's market, and in light of the existing competition, and the potential competition, consumers will be protected adequately without the tangible and intangible costs imposed by new regulations that likely would chill innovation and investment. And I think the same is true in the broadband Internet market.

I just wish, in pursuing its net neutrality lobbying strategy, Google would remember JFK's admonition: "In the past, those who foolishly sought power by riding the back of the tiger ended up inside."

Markey's Timely Universal Service Reminder

The FCC recently announced that the surcharge on interstate communications services to support universal service programs has reached an all-time high of 11.7%. This additional tax on communications ain't peanuts, and, regardless of your views on smoking, taxing communications has very different economic and societal impacts than taxing cigarettes.

On April 2, Ed Markey, Chairman of the House Telecom Subcommittee sent a letter to FCC Chairman Kevin Martin asking a series of questions concerning universal service policy. To my mind, on the whole, Markey's questions are pertinent and important ones. You can read Chairman Markey's entire letter here.

But apart from the individual questions, some of Chairman Markey's prefatory comments are particularly worth noting, and encouraging, if they can be fairly taken as an indication of an inclination for trying to achieve meaningful reform of the bloated--and still "bloating" as I write--univeral service regime. Referring to the 1996 Telecommunications Act, Markey said: "Congress anticipated that competition would promote consumer welfare, even in many high cost areas where universal service support was needed to keep rates affordable, by lowering the cost of universal service as providers competed for the universal service subsidy. Further, advances in technology were expected to make networks deliver supported services more efficiently, not in a more costly manner."

What is also especially noteworthy about Markey's letter is his citation to the 1996 Act's congressional reports as support for the above propositions. From House Report No. 104-204 (I): "Over time, [the Congressional Budget Office] expects the operating costs of telephone companies would tend to fall as a result of competitive pressures and the total amount of subsidies necessary would decline." From Senate Report No. 104-23: "[C]ompetition and new technologies will greatly reduce the actual cost of providing universal service over time, thus reducing or eliminating the need for universal service support mechanisms as actual costs drop to a level that is at or below the affordable rate for such service in an area." [The emphasis is all mine.]

Universal service subsidies have done nothing but balloon since the program's inception, leading to today's 11.7% USF tax. I am sure that Chairman Markey and I probably differ concerning how, how much, and how fast we would reform the program. But his USF letter indicates that he may be inclined to push for meaningful reform to reduce the size of the USF subsidies. If so, he should be commended. And by recalling the legislative history acompanying the 1996 Act, Markey has reminded us that Congress understood then that new competition and new technologies--which certainly rapidly proliferated since 1996--should have let to a decline in subsidies, not ever increasing ones.

Remember When Cellphones Were Just for Calling

The "unbundle everything" crowd has made the highly successful competitive wireless industry its latest target. Before anyone at the FCC joins in the unbundling chorus for wireless, they should read the Wall Street Journal's March 26 Special Technology Report, "What's New in Wireless." [subscription required].

Here are the just first few paragraphs from the WSJ report:

Remember when cellphones were just for calling?

Over the past few years, cellphones have evolved from simple communication devices into multimedia powerhouses. First came cameras, then Web surfing, then music players. Now, get ready for a host of new features.

In the next two to three years, consumers will be able to get TV broadcasts on their cellphones with better picture quality than current video offerings -- and a greater range of live programming from major networks like NBC, FOX, ABC and Comedy Central.

Users will also get sophisticated software applications for surfing the mobile Web, and more services to connect with friends, share videos and exchange photos. And they'll likely see mobile devices that can roam seamlessly across Wi-Fi hot spots, cellular networks and new high-speed data networks, bringing a much faster and smoother surfing experience.

Does this sound like a market that needs more government regulation in order to give consumers the services and applications they want? Can the unbundling crowd really say with a straight face that there has been a lack of innovation and investment by the industry in the absence of public utility regulation? Before long the "cellphone" will be able to do everything but put on your pajamas and put you to bed. And if there is demand for that...well, who knows?

Yesterday, I wrote in "Net Neutrality, the NOI, and Unbundling" about how Commissioner Copps, guided by his own strong pro-regulatory instincts, is right in tying together the unbundling issue that lies at the heart of the net neutrality debate with the unbundling issues that are at the core of other of today's most important communications policy issues. The unbundling crowd knows that "unbundling" and enforcement of "non-discrimination" mandates ultimately leads to common carrier regulation because it will always be necessary, in order to determine whether alleged discrimination has occurred, for the regulators to finely parse sometimes subtle differences in the price of various kinds of offerings.

If you haven't read it, you should read Bruce Owen's FSF paper, The Net Neutrality Debate: Twenty Five Years after United States v. AT&T and 120 Years after the Act to Regulate Commerce. Oliver Wendell Holmes said: "When I want to understand what's happening today, to decide what to do tommorrow, I look back." Professor Owen's paper examines a lot of history concerning regulatory failures over the last hundred years. His paper ought to be required reading for today's policymakers.

In the case of wireless, and broadband more generally, unless regulators can identify specific instances of non-transitory market failures causing demonstrable consumer harm, they should rely on marketplace competition to continue to deliver the types of innovative communications and information services and applications we witness everyday when we turn on our "cellphones."

Net Neutrality, the NOI, and Unbundling

So. The FCC has now initiated a “Notice of Inquiry” proceeding on net neutrality. When Jim Quello, the venerable former FCC Chairman and longest-serving FCC commissioner, reluctantly voted to have the FCC start inquiring into some matter or another he thought better left outside of the agency’s purview, I recall he was fond of saying, “Well, it‘s only an NOI.”

I understand that, on the one hand, the issuance of an information-gathering NOI rather than a Notice of Proposed Rulemaking is a step less likely to lead to regulation of broadband Internet providers—at least as soon as issuance of an NPRM might. And gathering information, of course, is generally not a bad thing. But on the other hand…as a long-time observer of the FCC, I know the other hand…NOIs sometimes have a way of leading to NPRMs much in the way that the adoption of non-binding net neutrality principles led to binding merger conditions. Certainly, if the political composition of the Commission changes after the next election giving the agency a more pro-regulatory philosophical and policy perspective in line with that of Commissioners Copps and Adelstein, the NOI may prove, as a procedural matter, to have put the Commission further along on the road to Internet regulation than the agency otherwise might have been.

But back to the first hand…I understand that Democratic Commissioners Copps and Adelstein would have preferred to issue an NPRM right now for the very reason that, in fact, an NPRM would put the Commission further along on the road to Internet regulation. So, in that sense, I can understand, and appreciate, what FCC Chairman Martin and his Republican colleagues have done. “It’s only an NOI” and it’s difficult to criticize on-the-record information-gathering. (To demonstrate the technological dynamism and fast-changing competitive environment of the broadband Internet marketplace, someone just needs to submit the last year’s worth of the business pages of the Wall Street Journal, New York Times, and Washington Post, or any one of them, for the NOI record. Case for new Internet regulation closed!)

I deliberately highlighted above the significance of the philosophical and policy perspective of Commissioner Copps to make a point. I don’t for one moment question his good faith or good intentions. But, at this point in time, with the very different competitive environment that exists today than, say, fifteen, ten, or even three years ago, he has much more faith in the government’s ability (in this instance his ability) to manage the communications and information marketplace to achieve what he conceives to be in “public interest” than I think is justified.

In his NOI statement, Copps says: “[W]e still haven’t addressed important questions about such things as privacy, disabilities access and the future of the Internet.” It’s one thing for the FCC to use whatever authority it has been granted to address somewhat discrete issues such as privacy or disabilities access. But it worries me a lot when, at this point in time, with the very different competitive environment that exists today than, say, fifteen, ten, or even three years ago, FCC commissioners have in mind that they can devise a grand regulatory strategy to manage “the future of the Internet.” I prefer to trust the Internet’s future to the free marketplace.

And that brings me to another statement by Copps in his NOI concurrence: “[A]s the Commission already has recognized in a host of areas—such as Carterfone’s discussion of the PSTN, our 2005 Policy Statement’s discussion of the Internet, and our rules on cable set-top boxes—consumers generally benefit when they can select from among a range of network attachments, including devices not chosen for them by their service providers.” This really gets to the heart of the philosophical divide that permeates much of communications policymaking today: At this point in time, with the very different competitive environment that exists today than, say, fifteen, ten, or even three years ago, whether regulators or the marketplace should determine whether communications and information services and equipment must be offered on an “unbundled” basis. And it matters little whether the providers are labeled, in twentieth century fashion, “telephone”, “cable”, “satellite”, or “wireless” operators.

The forced imposition of unbundling mandates remains the central issue in communications policy today. Commissioner Copps rightly recognizes there is a common thread that runs through the issues of net neutrality, cable set-top box unbundling, a la carte programming mandates, multicast must carry mandates, wireless service and equipment unbundling, and so on. Sure, there are variations in the characteristics of each market segment that appropriately should be considered by policymakers. But, increasingly, in today’s fast-changing and converging digital broadband environment, these unbundling issues are of the same piece. In each instance, the relevant question is: At this point in time, with the very different competitive environment that exists today than, say, fifteen, ten, or even three years ago, will consumers be better off if we trust the marketplace, rather than the regulators, to decide how much bundling or not will occur. In my view, absent compelling evidence of anti-competitive abuses in particular situations, the balance now tilts clearly in favor of marketplace reliance to make that determination.

So. That brings me back to the NOI. Although presumably the FCC has been ready and willing to receive “net neutrality” complaints, the NOI will provide a new forum with a new docket number for gathering information on any alleged abuses. Fine. Who knows? Maybe we will discover that a lot of people are dissatisfied with Google’s search engine practices and demand to have a strict, common carrier non-discrimination mandate put in place for dominant search engines.

At bottom, when all the data is gathered and all is said and done—Oops! In today’s fast-changing digital environment, all the data will never be gathered and all will never be said and done—there is a certain point at which it is gut check time for the FCC commissioners, and, for that matter, legislators and other policymakers too: At this point in time, with the very different competitive environment that exists today than, say, fifteen, ten, or even three years ago, is it your philosophical and policy predilection to trust regulation to determine the extent to which there will be mandatory unbundling of services and equipment, or do you trust the marketplace to respond to consumers with the various bundles (or not) they prefer?

Commissioner Copps is right in seeing forced unbundling as today’s central communications policy issue. And he is right in seeing the common thread that links net neutrality, set-top box unbundling mandates, and the other so-called “Carterfone” issues. I just think his pro-regulatory philosophical and policy predilections lead him to the wrong outcomes.
It should not be too much to hope that at least Chairman Martin and his Republican colleagues, as proclaimed adherents to free market principles, also will understand there is a common philosophical thread running through all the issues in which unbundling mandates are sought, lately under the newly-unfurled Carterfone banner. While the 1968 Carterfone decision justifiably has a place of honor among the monopolistic narrowband age’s most significant decisions, invoking Carterfone as a talisman in the cause of mandatory unbundling in today’s vastly different, competitive broadband world is wrong. It will only tarnish Carterfone’s good name.

Net Neutrality Tidbits

Two net neutrality items worthy of note:

Public Knowledge's Art Brodsky here bemoans the demise of the Maryland net neutrality bill. I testified in Annapolis against adoption of the bill, so I am obviously pleased the legislation will not be moving forward. My testimony is here and my Washington Times op-ed opposing the bill is here.

Brodsky is upset that the bill's opponents paid any attention at all to the first provision that said broadband providers "should not" (rather than "shall not") degrade or prioritize any content. He maintains that the entire import of the bill related to the second provision establishing regular reporting requirements for broadband providers concerning deployment, speed and types of service, and the like.

First, anyone that knows anything about American jurisprudence understands that it is not a stretch to imagine a court interpreting what may seem to be a hortatory legislative "suggestion" or "recommendation", as Brodsky characterizes the first provision, into a binding mandate. And, apart from that, once "principles" get embodied in legislation, it is much easier, and more likely, for these principles to be imported as mandates in administrative decisions. See the conditions imposed on AT&T in the FCC's merger approval order.

If legislators want to make suggestions or recommendations to broadband providers--or, for that matter, other regulated entities--a far better way is to simply write a letter, pen an op-ed, or give a speech. This form of making suggestions is far less likely to cause unintended mischief, if the intent is truly not to cause mischief.

And, speaking of problems caused by net neutrality regulation, the Free State Foundation released a paper yesterday by Bruce Owen, one of the nation's leading regulatory economists. Based on his long study of the history of communications regulation since its inception--and the regulation of the railroads back to adoption of the Interstate Commerce Act in 1887-- Professor Owen's concludes: "Net neutrality policies could only be implemented through detailed price regulation, an approach that generally has failed, in the past, to improve consumer welfare relative to what might have been expected under a regulated monopoly."

Of course, in today's competitive broadband environment, we are a long, long way from the "regulated monopoly" communications environment that prevailed during a good part of the twentieth century. That surely counsels against adoption of net neutrality regulation.

Google, Microsoft, and Yahoo Win Right To Discriminate

Did you see the item in the February 28 edition of the WSJ headlined "Search Engines Can Decline Ads"? [Subscription required]. If you are interested in the so-called net neutrality debate, you won't want to miss it, and it might leave you shaking your head.

According to the WSJ story, a federal judge in Wilmington, Delaware ruled that Google, Microsoft and Yahoo may refuse ads submitted by Stephen Langdon, a Florida resident, "who operates Web sites that purport to expose fraud by North Carolina government officials and alleged atrocities committed by the Chinese government."

The court ruled that the three search engines are not bound by the First Amendment to take the ads. Well, I agree with that. Not only should the First Amendment not require these dominant search engines to accept Mr. Langdon's ads, the First Amendment should protect them from government mandates that would purport to require them to do so.

In their zeal for advocating net neutrality mandates that would turn the broadband providers into common carriers, Google, MS, and Yahoo don't seem much concerned about the First Amendment rights of the providers. Putting aside their commitment, or lack thereof, to fundamental constitutional rights, what about their own commitment to net neutrality?

Here is what the WSJ reported about why the dominant search engines refused to run Mr. Langdon's ads: "Google declined to run Mr. Langdon's ads, telling him that it was a matter of policy. The company says it doesn't run ads advocating against groups or individuals. Microsoft's MSN ignored his ad request, and Yahoo refused because Mr. Langdon's sites weren't part of its ad network." A policy against ads that advocate against groups or individuals? Ignoring a request for access? Not part of an ad network? It all begins to sound a lot like discrimination and prioritization--indeed, outright suppression of speech--to me. With respect to Google, it certainly sounds like the discrimination is based on content. If MS doesn't even respond to the ad request, it's hard to know the basis of its choice to discriminate.

Anyway, if I were a "net neutrality" supporter, I'd be downright worried about the policies of the dominant search engines that are keeping Mr. Langdon's ads off their popular sites. If, better yet, I owned the three search engines, I might be worried about how my policies relating to picking and choosing content squared with my endorsement and promotion of net neutrality laws. Since I am not either one of the above, but rather a believer that the First Amendment generally would prevent the government from dictating how the search engines choose to display content, discriminatory or not, I'm going to go on worrying about other things right now.

But, as they say, someone ought to "worry this one through."

Maryland's Attorney General Says No To Net Neutrality

Yesterday I attended a hearing before the Economic Matters Committee of the Maryland House of Delegates to testify against a proposed Maryland state net neutrality law. The bill has two parts: First, it provides, a la the AT&T/BellSouth merger condition that AT&T and BellSouth were forced to agree to in order to get the FCC's Democrats to act on their merger, that broadband providers "should" not degrade or prioritize "any packet source over that company's broadband Internet access service based on its source, ownership, or destination." Second, the bill requires broadband providers to provide the Maryland PSC with quarterly reports detailing certain information concerning the number of subscribers served, the locations served, and the speed and price of various service offerings. (Note that the FCC already collects much of this information, such as the information that 92% of Maryland's zip codes have present three or more broadband providers.)

My testimony opposing the bill is here. But the most significant news concerning the bill probably came out of Baltimore, where the Maryland Attorney General's office is located, rather than in the Annapolis hearing room where I passed the afternoon. For the Maryland AG issued an opinion that the part of the net neutrality law purporting to prevent discrimination, if enacted, likely would be preempted by federal law. As the AG's opinion summarized, "the general conflict with the stated policies of Congress and of the FCC would also likely to lead to a decision by the FCC to preempt any attempt on the part of a State to impose the type of requirements discussed in the first portion of the bill." (The opinion stated that the AG's office lacks the knowledge of the industry to say if the information reporting requirements would be preempted as well.)

Make no mistake. The AG's opinion is very significant because its analysis applies with the same force to any proposed state net neutrality law purporting to regulate broadband Internet access. State AGs are not known to hastily conclude that state laws are likely to be preempted by federal law and policy. In fact, precisely the opposite. Before seeing the AG's opinion, I testified to the same effect. It was particularly gratifying to see that the AG's opinion followed closely along the lines set forth in Jim Speta's paper, Net Neutrality is a Federal Issue, that was released by FSF last week. Anyone --especially any state legislators considering introducing net neut bills--who hasn't read Professor Speta's excellent legal analysis concluding that state neutrality laws almost certainly would be preempted because they conflict with federal law and policy should do so, along with the excellent Maryland AG's opinion to the same effect.

The Qwest for Forbearance

On February 20, the FCC granted in part a petition filed by Qwest asking the FCC to "forbear" from applying certain statutory and regulatory requirements relating to the company's provision of "long distance" services. For this modest step in granting regulatory relief, the agency is to be commended. By not applying certain outdated "separate subsidiary" regulations, the Commission's action will allow to Qwest to achieve efficiencies and cost savings from integrating operations that should benefit its customers.

Two observations:

First, doesn't the notion of having a plethora of regulatory requirements based on a distinction between "long distance" and "local" services seem outdated in an era when people increasingly buy buckets of minutes priced irrespective of distance? Not only do the cellular, cable, and VoIP providers sell plans with buckets of "anywhere" minutes, so do the telephone companies. Most people under thirty don't even know what you mean if you say, "I'm going to make a long distance call."

Second, and more fundamentally, the FCC's use of its forbearance authority in this and other instances is welcome. Going forward, it should avail itself of this authority more often. Recall that at the time the 1996 Telecom Act was passed, new Section 10 granting forbearance authority was hailed as one of the most important provisions of the new act. It was thought to be a new important tool for the agency to have as it adapted its decades-old encrusted public utility regulatory regime to the increasingly competitive environment the 1996 Act envisioned. Also recall that the act says the Commission "shall" forbear from applying statutory or regulatory requirements when the statutory requisites relating to consumer welfare and the public interest are met. The duty to forbear is not discretionary.

In other words, in today's rapidly changing and much more competitive marketplace, the Commission should not forbear from doing much more forbearing. I'm confident that is what the Congress that passed the 1996 Act intended, and probably what President Clinton had in mind as well when, signing the bill, he said: "With a stroke of the pen our laws will catch up with the future. We will help create an open marketplace where competition and innovation can move as quick as light."

Wireless Information Services

In its just-released semi-annual report, the FCC reports that the number of broadband lines in service continues to increase at a healthy pace. You can view the entire report here. This robust growth is good news for our country, and especially its economy and its productivity.

Particularly noteworthy is the uptick in mobile wireless broadband subscribership--from 380,000 high-speed lines in June 2005 to 11 million in June 2006. Obviously, change is afoot. (There is a reporting lag of approximately six months; with all the new wireless offerings, including new feature-rich interactive content, I suspect the growth curve was even steeper in the second half of 2006.)

Communications Daily [subscription required] reports in yesterday's edition that FCC Chairman Kevin Martin is proposing on his own initiative to classify wireless broadband as "information services." The regulatory classifications in the current Communications Act--"telecommunications," "information services," "broadcasting," and "cable"--make no sense in today's marketplace and technological environment characterized by competition and convergence. I've written a lot about this. For an early essay on why the Communications Act's service classifications turn on what are essentially meaningless metaphysical techno-functional constructs, see my "The Metaphysics of VoIP." And for a more extended law review treatment in the Federal Communications Law Journal, see "Why Stovepipe Regulation No Longer Works: An Essay on the Need for a New Market-Oriented Communications Policy."

A major overhaul of the Communications Act that gets rid of these outmoded service distinctions for most regulatory purposes is all but inevitable. But for now we must work with the Communications Act we have. Chairman Martin's initiative to formally classify wireless broadband services as information services makes good sense. As wireless services become more important as an alternative broadband platform, they should be subject to the same deregulatory regime that applies to the others, whether telco, cable, broadband-over-powerline ("BPL"), or other. While none but the most rabid pro-regulatory advocates suggest that wireless broadband should be subject to common carrier-like rate and nondiscrimination obligations, reclassification now would be helpful to make clear that wireless broadband providers will not be regulated more stringently than other broadband providers. Like broadband services provided over other platforms, wireless broadband typically includes Internet access and other interactive features involving changes in form or content that are the hallmarks of information services.

After the Supreme Court's Brand X decision the Commission moved quickly to reclassify the telco's broadband service and it has also already classified BPL as an information service. Since the rates for wireless services were deregulated at the federal and state levels over a decade ago, the growth in subscribership has been remarkable. There are now over 220 million wireless subscribers, roughly 50 million more than the number of landlines in service. It is wireless' turn to be designated an information service.

Back to 1968? No Way!

Kevin Maney, USA Today’s technology columnist, has a piece this week headlined “FCC Ruling Changed Phone Industry in 1968” suggesting that the FCC needs “another Carterfone,” referring to the famous 1968 decision in which the Commission ruled that Tom Carter’s acoustic coupler could be attached to the Bell System’s public switched network. This allowed mobile phones of the day to communicate with the landline network. The decision was an important step in the development of the FCC’s policies that led to the unbundling of customer premises equipment (for example, telephone handsets) from network transmission services. Part 68 of the Commision’s rules, which established interconnection rights and standards for telephone equipment, followed soon thereafter.

1968 was certainly a year of turmoil and change. Amidst it all, Carterfone may have been one of the more positive things to happen that memorable year. Indeed, many are still nostalgic about all things ’68.

Nostalgia is not altogether bad. But being nostalgic about Carterfone, and thinking that it is a “neat historical analogy” that should guide communications policy today are two very different things. Kevin Maney is wrong to suggest the FCC ought to follow Carterfone and “bust open the cellphone industry.” By busting open the cellphone industry, he means mandating cellphones and service must be unbundled so all cellphones will be compatible with the networks of all the various network operators, Cingular, Verizon Wireless, Sprint, T-Mobile, and the like. Maney also urges the FCC not to postpone its rule that will require, in July of this year, the unbundling of security and navigation functions in set-top TV boxes.

To be blunt, the communications environment has changed so much since the 1960s and 1970s when the Bell System exercised monopolistic power in both the communications transmission and equipment markets that the Carterfone analogy just doesn’t make sense. Carterfone was an important decision on the road to introducing competition in the communications marketplace; it is not a religious dictate. I wrote about this very subject a couple of weeks ago in a piece called “Integration Bans Then and Now” and in another in this week’s edition of Broadcasting & Cable magazine entitled “FCC Should Let Bygones Be Bygones.”

Without repeating all that here, I want to make a few explicit general points:

In his column, Maney completely ignores the difference that the existence of competition makes in determining whether the costs of mandating unbundling outweigh the consumer benefits. In a competitive market, network operators have an incentive to satisfy consumer demand, or consumers will simply switch providers. The wireless market is very competitive, and what we sometimes still call the “cable” market is competitive as well, with satellite operators garnering over a 25% market share, and with the "telephone" companies now beginning to compete vigorously too. In reality, for most purposes of competition analysis, we’re close to having just a “POBS” market (“plain ‘ol broadband service”), in which providers compete to offer voice, video, data, and Internet services over different POBS technology platforms. (No, by “plain” I don’t in any sense mean that the new razzle-dazzle applications, with all their incredible bells and whistles, that broadband makes possible are really plain. Anything but. I am just suggesting that POBS, with bandwidth available that enables high-speed, feature-rich applications, is rapidly replacing POTS (“plain ‘ol telephone service”) as the prevalent service).

Maney completely ignores the economic efficiencies that often result from integration (or “bundling”). He does not acknowledge that innovation and new investment depend on allowing innovators and those who risk capital to capture efficiencies that may give a service provider a competitive edge in the marketplace. Maney says that "bundling arrangements are an unnatural levee set up to hold back market forces.” He’s got it just backwards: Once a market is competitive, like the wireless and video markets are, market forces drive service providers to determine whether consumers prefer service and equipment to be offered on a bundled or unbundled basis, and under what varying circumstances. Service providers will be responsive to consumer demands.

To be more specific, consider these differences between the communications environment during the Carterfone era and now:

· The Bell System was a monopoly then. The operators providing mobile and video services definitely are not.

· The Bell System included an affiliated equipment manufacturer, Western Electric, with all the incentives to extend market power that accompany such corporate affiliation. Video and mobile services providers do not have corporate-affiliated equipment manufacturers.

· The Bell System’s ubiquitous telephone network was mostly standardized across the country and, in 1968, had been essentially stable for decades. In today’s dynamic technological environment, the networks of mobile and video service operators change rapidly, and the technologies employed in the various networks differ from one operator to the next.

· In the analog era dominated by the Bell System, each phone line generally was dedicated to one customer (except for the 50s-ish party lines I fondly recalled in the Integration Bans piece). The facilities and frequencies used by video and mobile providers generally are shared by multiple users. They employ complex protocols and digital technologies that make operating these shared networks much more challenging than operating a network that features subscribers using dedicated channels.

· Phone lines typically carried one service—recall “POTS”, or “plain ‘ol telephone service.” The facilities of cable and mobile operators typically carry voice, video, and Internet service applications on an integrated basis.

· In the common carrier era, phone lines carried only the subscribers’ own content, and there was little reason to worry about theft-of-service. Video service providers carry proprietary content—often developed at great expense—that must be protected against theft-of-service. And now mobile services are carrying high value proprietary content as well.

I can be as nostalgic about Carterfone as the next guy. But a decision that made sense in 1968 should not be misused in a way that fosters poor communications policy 40 years later. That does a disservice to Carterfone's legacy. In today’s radically changed marketplace environment, with all its technological dynamism, it is important to distinguish between nostalgia and common sense.

Sparrows Point and Sensible Energy Policy

In a piece two days ago in this space entitled “Maryland PSC Chief Resigns-The Way Forward on Energy Policy,” I used the occasion of Maryland Public Service Commission Chairman Kenneth Schisler’s resignation to set forth some general principles that should guide Maryland’s role in establishing sensible energy policy. While the federal government has—and should have--the leading role in establishing and promoting an energy policy that will move the nation towards the goal of achieving energy security, I explained that states and local governments have a significant role to play as well.

Indeed, in this regard I stated: “Consistent with the above principle concerning the need to think long-term, the PSC and other parts of the state government--and, for that matter, local governments--have an important role to play in facilitating and promoting an increase in energy supplies. While certainly environmental and other legitimate local concerns need to be addressed, too often worthy projects, whether they will increase electricity or natural gas generation or distribution are stymied by state and local officials who are simply responding to a "NIMBY" (Not-in-my-backyrard") attitude by a small group of citizens. Again, legitimate environmental and other concerns should be addressed. But state and local officials have an important role to play in not obstructing the plans of utilities that are willing to invest capital in new plants and other necessary infrastructure, such as natural gas storage facilities or new power lines, to bring on new supplies of energy. Absent the ability to bring on new supply, there will be increased pressure to increase rates for the more limited supply of energy that does exist.”

Lo and behold, shortly after finishing that piece, I learned, as the lawyers say, of a case on point. A federal court in Baltimore held that the Natural Gas Act preempted a local Baltimore zoning ordinance that had the effect of denying an application by AES Sparrows Point LNG to construct a liquefied natural gas terminal at Sparrows Point. The link to the full decision is here. The court examined the text, legislative history, and context of the 2005 amendments to the Natural Gas Act (“NGA”) and concluded that all “clearly reflect the intent of the United States Congress to preempt local governments with respect to the siting of liquefied natural gas facilities.” While the NGA reserves to the states rights and obligations under certain environmental statutes, as the court explained, the act “now governs virtually every step of an LNG facility’s siting, construction, and operation.” In light of the need to increase energy supply consistent with national policy, Congress obviously wanted to give the Federal Energy Regulatory Commission (“FERC”) principal authority to make determinations concerning LNG terminal facilities.

The Baltimore Sun editorialized in “A Clear Message” that “it is hard to argue with the [court’s] legal reasoning.” Nevertheless, it urged local Baltimore officials to continue to try to stop the proposed LNG terminal from being built at Sparrows Point by invoking an environmental statue that is excepted from FERC’s exclusive decisionmaking authority. I don’t know enough about the specific situation at Sparrows Point to know whether such a course by local officials has any merit at all. What I do know is that the court’s decision sends a clear message regarding federal primacy regarding siting LNG terminals that should not be disregarded lightly. There is a more than a bit of a NIMBY tone to the editorial’s conclusion that the proposed LNG terminal “needs a more sensible location.”

There is another proposal involving a new LNG facility presently being held up by local officials apparently succumbing to a NIMBY mindset. Washington Gas wants to increase its natural gas storage capacity at a site it owns in Chillum, Maryland, by constructing a new LNG storage tank. Even though the new gas storage tank would be considerably smaller than two separate gas storage tanks previously located at the very same location until they were decommissioned several years ago, the proposal has run into opposition from close-by citizens expressing concerns about the safety of the facility. Local authorities thus far have stymied the project.

Washington Gas says the new storage tank is needed so that the utility will be less dependent on transporting gas through long-distance third party pipelines, and that by locating the facility close to WG’s pipes that already are in the ground, it will be able to avoid expensive pipeline construction projects that are disruptive to public roadways. And the company maintains that construction of the new storage facility will allow it to buy natural gas when demand and prices are lower and pass the cost savings, as well as the savings in transportation costs, on to consumers. Finally, and importantly, in the highly unlikely event a spill were to occur at the proposed Chillum facility, the project design incorporates numerous safety features that protect the safety of the community as well as the environment.

Because Washington Gas is proposing to construct an LNG storage tank rather than an LNG terminal, the provisions of the Natural Gas Act that were the basis of the court’s finding of federal preemption may not apply to the Chillum proposal in the same way they do with respect to AES’s Sparrows Point proposal. But putting aside the legalities, there is an underlying commonality of principle that is crucial, and that goes back to what I said two days ago: State and local officials have an important role to play in facilitating —not obstructing—projects that will increase the ability of utilities to meet consumers’ needs for energy in a safe, reliable, and environmentally-sound manner. Certainly, as a nation, we will never meet our goal of achieving greater energy independence if state and local officials simply respond to proposals for needed new facilities with a NIMBY mindset.

Maryland PSC Chief Resigns-The Way Forward on Energy Policy

Under intense pressure from new Maryland governor Martin O'Malley, Kenneth Schisler resigned yesterday as Chairman of the Maryland Public Service Commission. In its story headlined "PSC Chief Resigns at O'Malley's Demand," the Washington Post reports that the resignation will give the governor "the opportunity to make good on a campaign promise to create a more consumer-oriented agency." Rick Abbruzzese is quoted to this effect: "There is no time to waste getting professional regulators back on the job--to protect consumers and restore stability for business."

Last year the General Assembly passed a bill which gave the legislature the ability to replace--lock, stock, and barrel--all five members of the PSC, including Chairman Schisler. I criticized this ill-advised bill on the grounds that it was at odds with separation of powers principles that are key to sound governance. These principles prevent a concentration of power in the hands of one branch of government at the expense of a co-equal branch. Specifically, last year's bill represented legislative infringement on the governor's appointment and removal powers regarding agency officials.

The bill also constituted poor policy. It would have set a terrible precedent. The notion that the legislature may just fire all of the PSC commissioners because it disagrees with a rate decision or decisions would certainly not foster the stable regulatory environment that businesses need to make long-term decisions to invest in new infrastructure necessary to secure overall consumer welfare. You can read a few of my pieces from last year on the PSC situation here and here and here. Fortunately, a court agreed with the separation of powers arguments I was making and held the legislature's bill unconstitutional.

Under Maryland law, the PSC is an "independent unit in the Executive Branch of State government" and Chairman Schisler could be fired by the governor before the expiration of his fixed term only for "incompetence or misconduct." But a governor who wants to make life difficult for the head of any agency certainly can, so Chairman Schisler resigned, rather than prolong a nasty fight. His resignation statement on the PSC's website declares: "During my tenure at the Commission I have endeavored to implement the policies enacted by the General Assembly in a fair, impartial and effective manner. My resignation will facilitate the ability of the Public Service Commission to move forward in the important work it must accomplish."

To a large extent, Schisler was simply made a scapegoat for the heated reaction to last year's large proposed BG&E rate increases. The proposed rate increases came after more than a decade of rate stability. After the long-term rate freeze, they were consistent with the plan adopted by Maryland's General Assembly in 1999. That's what Schisler means when he refers to "the policies enacted by the General Assembly." But he is probably correct--hopefully correct--that his resignation will allow the PSC to move forward.

And make no mistake, with energy policy front and center on the national stage--as yet another declaration of the goal of "energy indepedence" is made by yet another president in yet another State of the Union message--it's way past time to approach energy policy with the seriousness it deserves. Obviously, the federal government has an important role to play in establishing sensible energy policy, but so do the state public utility commissions like the Maryland PSC. Over the next several months, the Free State Foundation will be addressing in a forward-looking way, and in more detail, the role the Maryalnd PSC and other units of Maryland government should play in establishing sound energy policy consistent with the national goal of securing our nation's energy indepedence.

But, for now, I just want to highlight the following points:

--Surely one of the important duties of the Maryland PSC is to protect consumers from unreasonable rate increases when marketplace competition does not exist to provide such protection. And, competition does not exist, for example, in all facets of the market for providing electricity to residential and business consumers. But, as a result of the law enacted in 1999 by the General Assembly, which the PSC implemented, the marketplace is working, albeit not as quickly as originally envisioned due to a spike in wholesle energy prices over the past few years, to bring consumers more choice regarding their energy supplier.

--Consumers are not benefited when regulators--or legislators--do not allow utilities to earn a reasonable return on their investment. No business will invest in new plant and spend money to develop innovative new ways to deliver services if it is denied the right to earn a reasonable return. In last year's brouhaha concerning BG&E's proposed 72% rate increase, it was often little-noted that there had been rate stability for over a decade. Sound regulatory policy depends on much more than focusing on one rate increase, however large, in one year. If consumers are educated, rather than used as political footballs, they will understand and appreciate that legislators and utility regulators must take a long-term view of consumer welfare. This is especially true with respect to market segments, such as utilities, that require heavy capital investment to build and maintain infrastructure.

--Consistent with the above principle concerning the need to think long-term, the PSC and other parts of the state government--and, for that matter, local governments--have an important role to play in facilitating and promoting an increase in energy supplies. While certainly environmental and other legitimate local concerns need to be addressed, too often worthy projects, whether they will increase electricity or natural gas generation or distribution are stymied by state and local officials who are simply responding to a "NIMBY" (Not-in-my-backyrard") attitude by a small group of citizens. Again, legitimate environmental and other concerns should be addressed. But state and local officials have an important role to play in not obstructing the plans of utilities that are willing to invest capital in new plants and other necessary infrastructure, such as natural gas storage facilities or new power lines, to bring on new supplies of energy. Absent the ability to bring on new supply, there will be increased pressure to increase rates for the more limited supply of energy that does exist.

Again, the purpose here was not to address specific rate proposals, plans for new facilities, or, more broadly, revisions to Maryland's own electricity and energy laws and PSC policies. There will be time enough for that. Rather, my purpose is simply to set forth certain fundamental principles that must be kept in mind as Maryland takes up the opportunity offered by Chairman Schisler's resignation to move forward to tackle the large energy challenges ahead. Maryland has an important role to play in promoting our nation's energy security, a goal that should be shared by all Maryland citizens.

Spending Education Dollars Wisely

It appears that new Maryland governor Martin O'Malley is proceeding cautiously in putting together his new $30 billion budget, and this includes education spending. According to a story in this morning's Washington Post, while still earmarking a record $400 million for school construction, O'Malley is proposing to defer spending $94.7 million in aid directed to large school districts such as Montgomery and Prince George's County under the state's Geographic Cost of Education Index formula.

The Post may not be correct that O'Malley's budget is "conservative" (as in the story's headline: "O'Malley 'Conservative' in '08 Budget Proposal"). Nevertheless, with a potential looming budget gap exceeding $1 billion only a year away, Governor O'Malley deserves credit for proceeding more cautiously than many expected, including many of his ardent supporters.

With respect to education, O'Malley and his advisors ought to give very serious consideration to proposing plans that require school districts to implement, or at least experiment with, plans that tie teacher pay to merit--in other words, that tie pay to results in the classroom. There is a piece in today's Wall Street Journal [subscription required] by Dan Henninger that reports on the marked improvement in test scores in some Little Rock, Arkansas schools that are experimenting with merit bonuses for teachers tied to classroom performance.

Governor O'Malley has first-hand knowledge concerning the low-achievement rates that plague Baltimore City and some of the state's other poorest school jurisdictions. The new governor is going to be forced to make tough choices as to how best to spend scarce education dollars. He should be bold and propose that Maryland move in the direction of tying teacher pay to performance rather than tenure. Unfortunately, the teachers union reflexively objects. But I suspect that there are many Maryland teachers--and would-be teachers-- who are confident enough in their own skills, who would be supportive of programs that provide incentives in the form of merit bonuses for them to boost classroom performance.

Massachusetts May Be Next to Embrace Video Franchise Reform

I recently published a piece on CNET commending the Michigan legislature for enacting a video franchise reform bill, and for doing so without attaching investment-stifling net neutrality mandates. I ended that commentary this way: "In 2007, more states should join Michigan and the other nine states that already have enacted video franchise reform laws. But it is important they do so without adopting net neutrality mandates that, in effect, regulate the Internet and stifle new broadband investment."

Two Massachusetts legislators have introduced video franchise reform legislation in that state. According to the Boston Globe report, the bill would allow new video entrants such as Verizon to bypass the current local franchising process and seek authority from the Massachusetts Department of Telecommunications and Energy (the state PUC) to start providing service. The state would have 15 days to review and act on such applications. The bills sponsors, state Senator Steven Panagiotakos and Representative James Vallee, stated that it can take 1-2 years for a new entrant such as Verizon to receive a franchise from a local community. According to the Globe, Senator Panagiotakos stated: "You're not going to get competition unless you streamline the process. Companies aren't going to spend money on infrastructure if they won't see a return for two or three years."

The two Massachusetts legislators should be commended for introducing the franchise reform bill. Passage will spur video competition, and more broadly, provide incentives for Verizon and other competitors in the broadband marketplace to invest in new digital network infrastructures. The Massachusetts legislature should pass this pro-competitive bill. And, it definitely should not allow the "net neutrality" issue to get in the way.

Integration Bans Then and Now

At this week’s Consumer Electronics Show, FCC Chairman Kevin Martin took a hard line against postponing implementation of the set-top box integration ban scheduled to take effect this July. The integration ban is the regulatory mandate that prevents cable operators and other multichannel video service providers such as Verizon from selling or leasing devices that integrate both security and non-security functions. I have argued there are many reasons why the costs of implementing the ban outweigh the consumer benefits. You can read my views here and here and weigh them for yourself.

But there is one oft-repeated canard, perhaps even superficially appealing at first blush, offered by integration ban supporters that needs to be put to rest. The canard goes like this: The FCC required telephone companies to separate their transmission service from customer premises equipment (CPE) and the result was a burgeoning, competitive CPE market. What was good for Ma Bell with regard to mandating separation of service and equipment will be good for today’s multichannel video providers and consumers.

Unfortunately, Kevin Martin picked up this refrain at the CES. He even quoted Consumers Union, which rarely has encountered any regulatory mandate that it doesn’t think should be made even more stringent, to the effect that in the days before the CPE unbundling mandate, “consumers had to pay a lot of money for any ugly black rotary phone that only did one thing.”

It’s easy to beat up on ugly black rotary phones. Having grown up with one, and a party line to boot, I’m tempted to do so myself sometimes. But having grown up with a black phone and a party line, I’m (unfortunately) old enough to know there is a world of difference between the telecom environment in the 1960s and 1970s when the CPE integration ban was promulgated and today’s environment. In short, it is the difference between a mostly monopolistic analog era and a digital era characterized by increasingly robust competition. It almost certainly made sense in Ma Bell’s heyday to require the separation of transmission service and CPE because Ma Bell possessed monopoly power in both markets. It had the incentive and ability to stifle the development of an independent CPE market.

That was then and this is now. The multichannel video market is fast becoming robustly competitive, especially with new entrants such as Verizon and AT&T challenging the incumbent cable and satellite operators. And truth be told, the multichannel video market is just one segment of the larger digital broadband market, a market in which consumers are being offered, and apparently demanding, a bundle of voice, video, and Internet services, and often equipment, as part of a package. Here is what the FCC said in early 2002 in its Wireline Broadband proceeding: “As we have noted in the past, broadband is evolving across multiple electronic platforms as traditional wireless, cable, satellite and wireline providers have expended substantial investments in broadband capable infrastructures.”

It cannot be seriously maintained, although Consumers Union might still try to do so, that in the five years since 2002 that the broadband market, of which video is just a part, has not become even more competitive with the continuing build-out of multiple digital platforms. In other words, today’s market resembles the market Ma Bell faced at the time of the CPE integration ban about as much as I resemble George Clooney, Patrick Dempsey, or Sean Penn. In other words, (unfortunately again) not at all.

What does this mean for telecom policy? It means that in the current competitive environment, all MVPD providers have incentives not only to allow, but to encourage, the use of whatever equipment will maximize the value of their service platform in the eyes of consumers. Having invested billions of dollars in upgrading their networks to provide an array of digital services, the broadband service providers cannot afford to do otherwise. They simply will not be able to foist on consumers equipment that consumers do not want.

So, don’t tell me about ugly black rotary phones from the original Beach Boys era. That was then and this is now.

On many broadband issues, and especially most recently in trying to resist new net neutrality mandates, FCC Chairman Kevin Martin deserves much credit for forcefully and effectively articulating a vision of allowing broadband to flourish in an environment unburdened by costly and unnecessary regulations. With that record in mind, and armed with the discretion Congress granted the Commission to waive or sunset the equipment regulations, I would urge rethinking the set-top box integration ban in the context of today’s competitive broadband environment.