Competition, Innovation, and Regulatory Paradigms

The net neutrality, open access, mandatory unbundling proponents argue that regulation of broadband providers is needed to promote innovation, especially at what they call the networks’ “edge,” the realm of application and devices. Having in mind today’s competitive environment, I say just the opposite. A Carterfone regime may have been fine for 1968. AT&T had a monopoly, or a near one, then. It is not fine for 40 years later when competition is now the norm, not the exception.

In their zeal to enforce absolute non-discrimination rules, the net neutrality proponents ignore —and are willing on behalf of consumers in whose name they purport to speak— to sacrifice any cost-saving efficiencies and innovation that might result from unfettered integration of networks, applications, and devices. They close their eyes to how competition in an unregulated marketplace leads to innovation.

I am struck by an October 4, 2007 article, “Apple Raises Bar on Smart Phone,” in the New York Post. The lead: “Pushed by the successful launch of the iPhone, mobile device makers are scrambling to come up with innovative gadgets that geeks will want in the Christmas stocking.”

The article says that the iPhone’s introduction “has triggered a lot of innovation and experimentation and new design approaches on the part of competitors.” According to the piece, Verizon Wireless will begin selling more “up-market” phones, including one made by LG Electronics that incorporates touch screen technology. Microsoft is upgrading its Zune digital music player. And Noika is undertaking a marketing blitz touting the fact that iPhone users must use AT&T’s wireless network. Not surprisingly, all manner of different competitive marketplace responses.

Please understand that the innovative iPhone was introduced in an environment yet to be governed by net neutrality, although the FCC, wrongly, took an unwise step in that direction in its 700 MHz decision this summer. Indeed, had the government had in place neutrality rules that would have prohibited the non-neutral (read: discriminatory) relationship between AT&T and Apple, we quite likely would not have the iPhone, at least not now. Why? Because almost certainly it was the ability of the two companies to structure a negotiated business arrangement that they thought made economic sense that led to the decision to go forward. (Note: This is not the same thing as saying that the deal they struck, in fact, makes good economic sense for either or both. The vagaries of the marketplace will make that determination.)

I was quoted last week in the press as saying the current FCC and its cohort of commissioners had “bounced around a bit” and needed to establish a firm free market policy orientation. True to my nature, I was being a bit kind. The current FCC cohort has bounced around too much, not just a bit. The three Republicans, the commissioners who by all rights, and by their own professions, ought to be most sympathetic to eliminating and relaxing existing regulations and not imposing new ones, have been inconsistent and unsteady in their adherence to market-oriented principles.

We live in an era of increasing competition among service providers that, like Myamar, were formerly known by different names (“telephone companies,” “cable companies,” “cellphone companies,” and “satellite companies”) tied to their twentieth century identities). Despite marketplace convergence, services often still go by names tied to particular technologies and functionalities (“cable television,” “telephone,” “special access,” “Frame Relay,” “Ethernet,” “FiOS,” “DSL,” “U-Verse,” “BPL,” “wireless” and so on and so forth). In reality, most of the companies known by their former names and many of the services still known by their particular technological handles, either do now, or will soon, compete in the marketplace against each other in one way or another to some extent. In the current dynamic environment characterized by technological innovation and marketplace competition, an FCC majority has yet to emerge that demonstrates, consistently, that it is anchored in a principled way by a free market policy orientation.

If such a market-oriented majority existed, there would not be talk of the FCC mandating the unbundling of cable and satellite channels in a competitive audio and video marketplace. There would not be an existing FCC decision to impose net neutrality mandates on the wireless broadband sector, a competitive market segment.

There would not talk of re-regulating the “special access” services of the companies formerly known as “telephone companies” in markets the FCC already has determined to be served by competitors offering high-capacity services, albeit under different names and with different technologies. There would be an understanding that it is not appropriate to judge the competitiveness of the special access marketplace on such a narrow frame of reference as a building-by-building basis, or even a wire center-by-wire center basis, because the nature of communications facilities and networks is that they can be extended to meet customer demand where such demand exists based on payment of a market price. There would be an understanding that once new entrants have demonstrated that it is possible for them to enter a market by actually entering the market and promoting their services, re-imposing government price controls on the companies still known as the incumbents almost certainly will make it more difficult for the new facilities-based entrants to expand their businesses or for still other new competitors to enter.

In short, there would be an understanding by an FCC majority that in order to promote innovation, encourage investment, and advance consumer welfare, that it must choose, and consistently so, a principled free market-oriented, deregulatory approach over the legacy managed competition paradigm that has so dominated communications policymaking in the past.

Video News Releases and Constitution Day at the FCC

On September 17, in honor of the day that marks our Constitution's adoption, I published an essay entitled, "Constitution Day at the FCC." The basic point of the piece is that the FCC's communications policies would be more sound if the agency would pay more heed to certain constitutional values particularly relevant to communications policymaking.

My piece was called to mind this morning when I read an item in Broadcasting & Cable's online edition about the fines that the FCC proposes to impose on Comcast for what the agency considers to be a violation of its sponsorship identification rules. Comcast's fining offense: One of its afffilated cable networks, CN8, aired "video news releases" that, in the Commission's judgment, contained too much focus on a product or brand name in the programming material without identifying a sponsor.

You can read the B&C article, "Free, Noncontroversial VNRs Can Still Trigger Fines" or one of the actual FCC notices proposing the fines to get the gist of the matter.

The FCC's action regarding these video news releases ("VNRs") appears overzealous. First, normally the sponsorship identification rules are invoked when someone pays a broadcaster to air programming. Indeed, the relevant statutory provision from which the FCC's authority derives seems to require sponsor ID only when programming is aired by a broadcaster in exchange for "money, service, or other valuable consideration." In the case of Comcast's airing of the subject video news releases, there doesn't seem to be any dispute that Comcast was not compensated in any way beyond the provision of the news releases.

The second point, which is fundamental, also relates to the statute from which in this instance the agency derives its authority. On its face, Section 317 of the Communications Act applies only to "matter broadcast by any radio station," not matter aired by cable television operators. Throughout Section 317, the provision speaks only of broadcasting and station licensees. There is no intimation that Congress intended the provision to be applicable to cable operators. It is true that the FCC long ago adopted a rule applying its broadcast licensee sponsor identification rules to cable television operators. And it even may be true (although I do not know) that the cable operators that existed at the time did not object to adoption of the rule. Nevertheless, this does seem, on its face, an instance of agency-stretching of statutory authority. There are many instances, of course, where the Communications Act was amended specifically to address regulations applicable to cable operators.

The last point, in my view, is the most fundamental, and brings me back to "Constitution Day at the FCC." Even as applied to broadcasters, the FCC's newly-instituted foray into regulation of video news releases raises serious First Amendment issues. In a letter dated October 5, 2006, the Radio-Television News Directors Association (“RTNDA”) called the FCC's recent inquiries to broadcast stations concerning their own airing of VNRs "an unprecedented regulatory intrusion into newsroom operations." On behalf of the broadcast news directors, RTNDA concluded, "[t]he government would not dream of inserting itself into a print newsroom to dictate or otherwise oversee how newspaper editors utilize press releases."

While not minimizing the legitimate First Amendment concerns of broadcasters, free speech concerns are even more serious when the Commission intrudes into the programming operations of cable operators. Even under the Supreme Court's oft-muddled First Amendment jurisprudence, there is no doubt that free speech claims of cable operators are considerably stronger than those of broadcasters. Although for First Amendment purposes it ought to make little difference, in the Comcast case for which the FCC now proposes fines, the cable operator did not just take the proffered VNRs and air them as presented. Before airing, they were edited in an exercise of the operator's programming judgment. In other words, the cable operator exercised editorial discretion.

Before proceeding further down the road of intruding into the editorial judgments of cable operators regarding video news releases (or other programming decisions for that matter), each Commissioner ought to consider carefully how his or her actions comport with the oath each took to protect and defend the Constitution. I submit that giving some thought to this question will lead to the conclusion that the agency's proposal to levy a fine against Comcast for airing the video news releases in question raises serious First Amendment questions.

That being so, this is yet another example of an instance where having in mind fundamental constitutional values, such as the protection of free speech, will serve the Commission well.

Media Ownership Questions

The FCC just held another in a series of public hearings on media ownership, this time in Chicago. I am struck by the opening statements of Commissioner Michael Copps and Chairman Kevin Martin.

I expect Commissioner Copps to carry on his campaign declaiming the lack of diversity in our media. No surprise here in his statement. He says there are many critically important issues troubling America right now –“Iraq, finding and keeping good jobs, making sure families have health insurance, educating our kids, creating equal opportunity.” He says all of these issues “are increasingly being funneled through the filter of big media” and “might just benefit from a little more diversity and competition.”

Questions for Mr. Copps: Which of the issues you identified do you believe are not being addressed in the media today? Which specific issues do you believe are not being addressed in a way in which a diversity of views is being presented? Which ones do you believe are being presented in a way that suppresses what you call diversity of viewpoint? Iraq? Job? Health Insurance? What specific viewpoints on the issues you identified do you believe are not available because of what you claim is a lack of diversity? On the issues you identified, do you believe “liberal” viewpoints are not available? Or, are you troubled that “conservative” viewpoints are not available to the American people? Is it possible that in your zeal to regulate in ways that, in your view, ensure “fairness” in the media that you are “filtering” out the incredible diversity of views available to the American people through their national and local newspapers, magazines, radio and television broadcast stations, 300+ channel cable and satellite television services, satellite radio, the Internet, and so on?

I was disappointed to see the statement that Chairman Martin issued. He failed to use the hearing as an opportunity to educate concerning the way in which today’s media environment is incredibly –in the truest sense of the word– more diverse than it was 30, 20, even 10 years ago. He could have used the forum --should have used the forum-- to articulate why, in light of the technological and marketplace changes that have occurred creating the abundance and diversity of information available to the American people, the FCC’s current media ownership restrictions are sadly out of date. Instead, Chairman Martin used the occasion to argue for more media regulation.

Mr. Martin once again argued for cable a la carte regulation, this time in these terms:

"Eliminating tying and giving consumers more choice would be an important step toward leveling the playing field between independent programming voices – those not affiliated with the large broadcast, cable and satellite distributors – and competing channels that are owned by cable and satellite. Under the current system, many cable and satellite-owned networks are bundled into the offerings not necessarily because viewers are demanding them, but because the distributor has a financial interest in maximizing their distribution. Under a system in which viewers do the choosing, those channels that do not benefit from a corporate parent will be able to attract viewers on a more equal footing." (Emphasis added.)

Then Mr. Martin added:

"But you don’t have to take my word on it. In a joint letter to the U.S. Congress Consumers Union, Consumer Federation of America, Free Press and Communications Workers of America said it the best: 'Cable companies act as gatekeepers over the programming allowed into the expanded basic package, preventing independent content producers from reaching viewers. By allowing consumers to vote with their wallets rather than forcing them to buy channels they never watch, the marketplace will responding by providing more diverse and higher quality programming that consumers demand.'”

Take my word for it. There is a problem, one that runs deeper than just an irony, with a supposedly free market-oriented FCC Chairman relying on CU, CFA, and Free Press as authority on communications policy matters. Like Commissioner Copps, these groups have an entrenched pro-regulatory mindset and an unshakeable view that the current communications marketplace is dominated by old-fashioned monopoly “gatekeepers,” rather than characterized by an increasingly vigorous competitive dynamism.

It makes a difference, or ought to, as to which view of the marketplace you hold as to whether you even would consider, apart from First Amendment considerations, imposing a la carte mandates on cable and satellite operators. If cable or satellite operators could exercise monopoly power, there might be a legitimate concern about whether they were leveraging their market power as video distributors to deny consumers access to programming content produced by unaffiliated firms. But note that Chairman Martin does not rest his anti-bundling campaign on an assertion that the market for video programming distribution is not competitive. Even CU, CFA, and the Free Press, at least in the statement relied upon by Mr. Martin for authority, do not make that assertion. They simply say that “cable companies act as gatekeepers over the programming allowed into the expanded basic package.” No kidding. Just as the Washington Post and the New York Times act as gatekeepers over the material allowed into their newspapers and Time and Newsweek act as gatekeepers over the content allowed in their magazines and the Free Press and Consumers Union act as gatekeepers over the material allowed on their websites. The fact that cable operators act as “gatekeepers” over the product they offer for sale to the American public is true enough, but unremarkable and irrelevant.

When considering consumer choice, ignoring the competitive realities of the marketplace is a big mistake. True enough, in some theoretical sense, and at least for some transient period of time, if the government were to mandate that all cable channels must be offered on an a la carte basis, consumers might have more choice. (This assumes, of course, that the government controlled the price of individual channels to ensure that the choice is “meaningful” based on the government’s inevitable assessment of what consumers are willing and able to pay for whatever channels they would wish to choose individually. And I say “transient” because, unless the government is going to require cable operators to continue to carry channels that, because of low subscribership, are uneconomic to carry on a stand-alone basis, the number of individual channels now available to subscribers actually may diminish, substantially curtailing consumer choice.)

If the video programming marketplace is competitive, cable and satellite operative will have every incentive to satisfy consumer demands. They will do this with programming regardless whether it is independently-produced or produced by an affiliated entity. They will bundle programming in packages —or unbundle programming and make it available on some a la carte basis— in a way that gives them a competitive edge by satisfying consumer demand.

In 2006, in the FCC’s most recent in its series of annual Video Competition reports, the FCC stated: “The market for the delivery of video programming services is served by a number of operators using a wide range of distribution technologies.” Non-cable providers—the two satellite television providers, the telephone companies, and alternative broadband providers—now have approximately a third of the multichannel video market, considerably more than only a few years ago. And the share of the non-cable providers has been growing steadily. Moreover, the most recent Video Competition report indicates by 2005 only 22% of cable networks were owned by cable operators, whereas in 1992 48% of the national programming services were vertically integrated.

So, some questions for Mr. Martin: Even assuming for present purposes that the video services segment is separate from the broader broadband services marketplace, and despite the findings in the Commission’s own recent Video Competition reports, do you believe that the video marketplace is better characterized as competitive or monopolistic? If you believe the marketplace is better characterized as competitive, do you still believe the government can do a better job determining which business models satisfy consumer demand than the service providers? Like Mr. Copps, do you believe the American people suffer from a lack of diversity in the viewpoints available to them through the media?

Classless Class Action Against Cable

Broadcasting & Cable reports today that, in a wanna-be class action lawsuit, 14 cable subscribers have sued major cable operators and programmers seeking millions of dollars. The alleged offense: "unlawful unbundling" that has injured consumers. According to the lawsuit, subscribers have been "deprived of choice, have been required to purchase product they do not want and have paid inflated prices for cable television programming."

This almost certainly frivolous class-action would do Class Action King Bill Lerach proud but for the fact that he has just pleaded guilty to federal conspiracy charges in connection with his extortionist class action antics. And just yesterday, Melvyn Weiss, Lerach’s former partner, was indicted on federal charges of conspiracy, racketeering, obstruction of justice and making false statements to a grand jury for activities relating to his years of filing class actions suits.

The lawsuit against the cable industry makes no sense because there is no law—of any sort—that requires cable operators to offer programming on an a la carte basis and the broadband marketplace is sufficiently competitive that consumers will be able to get programming in the form they want it from one of the video providers or another, not to mention the Internet.. And apart from the reasons why such a law would constitute poor policy in today’s competitive broadband environment, as I have argued on CNET and elsewhere, government-mandated a la carte would violate the First Amendment rights of cable operators.

The lawsuit claims subscribers are deprived of “choice” to purchase product they don’t want. Funny thing. When I signed up for cable, not only did I understand what programming I was getting for what price, I don’t remember a gun being held to my head. I understood the First Amendment, but I didn’t imagine anyone would assert on my behalf that I had a fundamental right to dictate how the cable operators conduct their business.

The aim of class actions of this sort, which have no basis in law, is to extort quick settlements which mostly enrich the lawyers. Reading about this one, Bill Lerach must be lamenting that his own game could not have continued on a bit longer.

As the Broadcasting & Cable article notes, cable operators have been under pressure from FCC Chairman Kevin Martin and some members of Congress such as Senator John McCain to “voluntarily” offer a la carte programming—under the veil of threats for a government-imposed mandate if they don’t. This unwarranted pressure from public policymakers, unfortunately, provides a backdrop which makes it easier to file a frivolous lawsuit like this one. The pressure should cease.

Another Communications Policy Inflection Point

In a marketplace changing as rapidly as the communications market, with the changes driven in large part by technological dynamism, it is not surprising that on a fairly frequent basis the FCC confronts important milestone regulatory decisions. This is especially so as the transition from an analog to digital world, and from a monopolistic to a competitive one, appropriately has led to changes away from the dominant “common carrier” regulatory paradigm that prevailed during most of the twentieth century.

I have been thinking of regulatory paradigms —and deregulatory milestones— in connection with two of the FCC’s current hot topics: Whether to continue on the course of broadband deregulation and resist those urging re-regulation of so-called telephone company-provided “special access” services that already have been granted pricing flexibility based on Commission findings that competitive alternatives exist. The decisions confronting the Commission in these two areas—broadband forbearance and special access—represent yet another important inflection point for communications policy, one that will say much about whether the FCC continues to move forward on a market-oriented course commensurate with the increasingly competitive marketplace environment. Or whether, instead, the agency falls backwards into a regime best characterized as managed competition.

In 1999, then FCC Chairman William Kennard, a Democrat, issued a strategic plan for the agency which he called, “A New Direction for the 21st Century.” The first two sentences of the plan read as follows: “In five years, we expect U.S. communications markets to be characterized predominately by vigorous competition that will greatly reduce the need for direct regulation. The advent of Internet-based and other new technology-driven communications services will continue to erode the traditional regulatory distinctions between different sectors of the communications industry.”

By no means did I agree with everything Chairman Kennard did on his watch. But he certainly was correct in 1999 in recognizing how quickly competition and convergence were taking hold to “greatly reduce the need for direct regulation.” He deserves credit for stating the proposition so clearly. And he deserves credit for, at least in some respects, leading the Commission to take important market-oriented actions.

After all, it was during Bill Kennard’s tenure that the Commission adopted the regime that led to the grant of special access pricing flexibility based upon findings of marketplace competition. This was a significant deregulatory step taken by a Democratic-led FCC. In a paper released this past June entitled, “Special Access and Sound Regulatory Principles: The Market-Oriented Case Against Going Backwards,” I rehearsed the history of the special access, from its creation as a regulatory classification for high-capacity business services right after the 1984 AT&T Divestiture to the present. The paper not only recites in considerable detail the regulatory trajectory that got us to where we are today, but it examines the fundamental regulatory principles that should lead the Commission to conclude that it would be a mistake to re-regulate. (More about the reasons for not re-regulating later.)

Another example worth recalling during Kennard’s tenure was his mostly consistent position that cable operators should not be saddled with traditional common carrier regulation under the guise of an open access regulation. He recognized that in a world of converging services and technologies cable operators were transforming themselves into multi-service broadband service providers. Hence, he stated memorably that he wanted to avoid picking up the “whole morass of regulation” from the telephone world and “dump[ing] it wholesale on the cable pipe.” A pretty good beginning for a deregulatory broadband policy.

In 2001, control of the FCC shifted to the Republicans. And in a generally commendable if not always absolutely consistent way, the Commission under the leadership of Chairmen Michael Powell and Kevin Martin since has adhered to the policy adopted in 2002 that broadband services should be subject to a “minimally regulated environment.” As multi-platform competition among broadband providers, such as the former “telephone” companies, former “cable” operators, “satellite” companies, and “wireless” companies has continued to grow, the wisdom of this deregulatory broadband policy has been borne out. That is why it was puzzling, and, frankly, so potentially harmful, when the Commission deviated from this deregulatory course for wireless broadband services in its recent 700 MHz decision by including an open access/net neutrality condition for a wireless spectrum block.

The year 2004 marked the date that Bill Kennard predicted “U.S. communications markets to be characterized predominately by vigorous competition.” That prediction proved correct. No, not in the sense that vigorous competition exists to the very same degree in every nook and cranny of the U.S., but certainly in the sense that the direction towards effective competition is clear. And the three years since 2004 have only brought more of the same.

So now the Commission confronts broadband deregulation and special access.

I’ve written in detail about both of these topics, often highlighting information about the latest competitive developments, such as the most recent FiberTower or FiberTower marketing announcements to compete with incumbent “special access” services in new markets. Or Sprint’s announcements that it plans to rapidly deploy its own wireless broadband network that will not only obviate its need for special access facilities, but serve the consumer market as well. Sprint has entered into a cooperative arrangement with Clearwire to provision its WiMax services, and Google is on board as a business partner. And, even as I write this, I read in a September 20 report in Information Week that Sprint says it expects to have WiMax service available in “30ish” markets covering more than 100 million people by next year. For more, see the special access paper and my FCC comments on special access updating some recent competitive developments. I am not going to repeat all that here.

What I want to do now is offer some observations that seem to me to be key as the agency confronts these issues.

· Once regulatory authorities have recognized that competition is emerging and, therefore, that traditional common carrier-type regulatory restrictions applicable to the incumbent providers should be removed completely or relaxed, absent demonstrable evidence of more than transient market failure, regulators should not backslide from a deregulatory course. The notion of “managing competition” always has an allure for certain regulators (after all, they are regulators). But it is virtually impossible to manage competition without suppressing the development of the additional competition that all sides proclaim as the shared goal. This is because, even assuming purely for the sake of argument that the incumbent’s prices for special access are “too high” as claimed by Congressman Chip Pickering and others, reducing prices by regulatory fiat makes it more difficult for existing competitors to expand or for new ones to emerge. Do you think that FiberTower, FiberTech, Clearwire, and other facilities-based service providers that compete against the telephone companies “special access” services want to see the FCC force down the incumbents’ prices?

· The Commission tried to create “competitors” by controlling incumbent prices in the ill-fated Unbundled Network Element (UNE) regime. All this managed competition regime managed to do was create a financial bubble based on an unsustainable regulatory constructs that ultimately resulted in hundreds of bankruptcies and millions of dollars lost by those who invested in a regulatory regime rather than in new facilities. We want policies that lead to investment in new facilities, not in regulatory constructs. The Commission should have learned from this experience that the way to foster sustainable, facilities-based competition is not through regulation. It is especially disturbing that policymakers who profess to be free market-oriented learned so little from the UNE experience. In his September 13 letter to the FCC, Representative Pickering, a strong supporter of the UNE platform to the end, still misguidedly talks about the FCC “creating” competition by ratcheting down the “incumbents’ unreasonably high prices.” Not surprisingly, he provides no basis for suggesting the prices are too high.

· Congressman Pickering asserts there is there is “no effective competition [for special access] in the vast majority of markets” What does he make of the FCC’s findings of competitive entry by the FCC in the markets in which the agency has granted regulatory flexibility? Does he think the FCC’s tedious information-gathering process was a sham? The FCC has used collocation arrangements purchased by competitors as triggers for granting pricing flexibility. Does Representative Pickering know that the competitors almost always refuse to provide any meaningful information concerning their customers, the prices they charge their customers, the types of services their customers purchase, and the like, claiming the information is commercially-sensitive proprietary information? This secretive conduct, in and of itself, is what you would anticipate in a market characterized by competition.

· As for the forbearance petitions, the Commission, of course, has a responsibility to look at the actual and potential competitive alternatives available for these packet-based business broadband services that include Frame Relay, ATM, Ethernet, and other technologies employed to deliver of high-speed, high-capacity services to major business users. But, if competitive alternatives exist, or if the Commission determines it is practically feasible for such alternatives to develop, the agency should forbear from applying the existing regulatory requirements. To do anything less would be a deviation from its declared policy that broadband services should exist in a “minimally regulated environment.”

· Importantly, the Commission should have in mind that, to date, it has consistently viewed the broadband market as national, not local, in scope. In the landmark 2002 decision establishing the policy of minimal regulation for broadband services, the Commission at the same time declared that it was creating an “appropriate national framework.” Quite properly, this commitment to a national framework has remained the agency’s position since then. It comports with Congress’ intent at the time of the adoption of the 1996 Telecommunications Act, when it said it was providing, at least with respect to advanced telecommunications and information technologies such as those at issue in the broadband petitions, “a pro-competitive, de-regulatory, national policy framework.”

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I don’t want to minimize the significance of many other decisions the Commission makes on a day-to-day basis. But it does seem to me that its forthcoming decisions in the broadband and special access matters are new inflection points, decisions that rightly will be viewed as important markers in determining whether or not the agency, as currently constituted, is free market-oriented.

At this stage, well-along in the transition from a communications marketplace characterized as generally monopolistic to one that is generally competitive, the FCC commissioners ought to come down firmly on the side of market-oriented rather than managed competition policies. I (hopefully) could be wrong, but I suspect the two Democratic commissioners are most likely to favor not granting meaningful broadband forbearance and re-regulating special access. They have a good-faith, but, in my view, mistaken belief, that the way to get more competition is through more regulation.

In the interest of not backtracking on established deregulatory policies that have been working for America’s consumers, it will be very important, this time around, for the three Republican commissioners, all of whom profess to adhere to free market principles, together to make that profession a marketplace reality.

The Metaphysics of Broadband

In what now seems eons ago, I published a piece on CNET called “The Metaphysics of VoIP.” Actually, the piece was published in January 2004 -- eons ago in telecom time, but short of four years by the Gregorian calendar.

The main point of the essay was to suggest that regulation of the then-emerging VoIP services likely would turn on regulatory classifications at once arcane and, yes, metaphysical, such as the difference between “telecommunications” and “information” services. Without going on and on here, metaphysics comes into play when the regulatory question turns, for example, on whether there has been, in the parlance of the telecommunications services definition, “a change in the form or content of the information sent or received.” Shortly thereafter, in October 2004, I advocated adoption of a new regulatory paradigm, one in which regulation is not tied to the “stovepipe” regime that is based on what I called “techno-functional” constructs. In “Calling for a Regulatory Overhaul, Bit by Bit,” I proposed a new market-oriented regulatory paradigm based on competitive analysis. A more extended treatment of communications metaphysics and techno-functional constructs was published in the Federal Communications Law Journal under the title, “Why Stovepipe Regulation No Longer Works: An Essay on the Need for a New Market-Oriented Communications Policy.”

Acting within the confines of the current Communications Act and under the leadership of Chairmen Michael Powell and Kevin Martin, the FCC deserves credit for adhering, for the most part, if not consistently, to what the agency calls a “minimal regulatory environment” for broadband. This generally deregulatory policy has worked well in stimulating new investment in broadband facilities. And new investment has fueled more facilities-based competition.

The musings above about metaphysical techno-functional constructs come to mind as I read reports of impending FCC actions relating to “broadband” services, possibly as early as September 11. The FCC is considering telephone company requests that various business-oriented packet-based broadband services be allowed to be offered free from common carrier regulation. According to the knowledgeable telecom analysts at Stifel Nicholaus, among the broadband services targeted for regulatory relief are “Frame Relay, Asynchronous Mode Transfer (AMT), Ethernet-based, and very-high- capacity optical networking, hubbing, and transmission level (“Ocn” level),…but not TDM (Time Division Multiplexing) services, including DS1-level (24 voice-grade equivalents) and DS3-level (672 voice grade equivalents) special access services.” According to the Stifel Nicholaus analysts, Sprint opposes the requested broadband relief on the basis that the TDM/non-TDM distinction would create a loophole that the telcos would exploit by reconfiguring their networks and rebranding their services as non-TDM. Sprint says that by seeking relief “from all but their TDM-based special access services, the [telcos] are effectively cutting off carriers from the IP-based network of the future.”

The main point I want to make is this: The distinctions among the above services—as indicated by their “Frame Relay”, “AMT”, “Ethernet”, and “TDM” monikers— really are based on techno-functional constructs having little to do with marketplace realities. The decision as to whether regulatory relief is granted should be based on whether customers have choices in the marketplace for comparable services, not on whether a service provider might possibly be able to technically reconfigure a network or rebrand a service, or might be discouraged from doing so for fear of regulatory consequences.

In my view, the “business broadband” services at issue in the telcos’ request for relief are generally subject to marketplace competition, with more competition on the way, and, for that reason, should be granted regulatory relief. Because the FCC now is considering “forbearance” petitions under Section 10 of the Communications Act, the agency does not have to overly concern itself with regulatory classifications based on techno-functional constructs, or marketing brands. Marketplace competition, not metaphysics, should be the focus.

Based on its experience thus far with a “minimal regulatory environment” for broadband Internet services, most notably the success in stimulating new network investment leading to more competition, the Commission should be receptive to requests to extend regulatory relief to the broadband services used principally by large businesses and carriers. The FCC should keep broadband policy moving in a deregulatory direction.

The FCC Takes A Positive Step for Consumers

On August 31, the FCC announced it was replacing what it termed “outmoded” rules governing the provision of long distance services with a new regime that allows AT&T and Verizon to more efficiently integrate their service offerings. As the Commission put it: “The old framework included requirements that the BOCs separate their local telephone and long distance operations, which is at odds with a market environment where local and long distance services increasingly are marketed and provided on a bundled basis.” No kidding.

While a long time in coming, the FCC deserves credit for its deregulatory action. Most of the rules requiring separate local and long distance operations were put in place immediately after the AT&T divestiture in 1984, and have remained in effect since. This despite the fact that the distinction between “long distance” and “local” calls has largely eroded as consumers choose any distance, anytime buckets of minutes.

In partially dissenting, Commissioners Copps and Adelstein strike an odd note. They worry that what they claim as “the significant consolidation” that has taken place in the marketplace will leave consumers with “a choice between two providers—a cable and a telephone company.” It is worth noting the vicious competition between the telcos and cable companies in areas where they are now battling head-to-head for customers. (I just wish I had the amount of money they spend each week mail promotional print materials on my block!)

But, more fundamentally, nowhere in their statement do Commissioners Copps and Adelstein account for the wireless providers and the gazillion “all distance” minutes they sell each week. No do they account for the independent VoIP providers, such as Skpe or Vonage, and their offerings of bundles of “all distance” minutes. This omission is curious, and significant, amidst all the talk of “duopoly.”

In any event, Chairman Martin and his colleagues deserve credit for getting rid of "separation" rules that only added to the costs and inefficiency of providing services that consumers increasing prefer to take on a bundled basis.

No Need to Commit Hara-Kiri

I am old enough to remember the so-called “Japanese miracle” of the 1980s, and the subsequent bust, with a decade of recession and then little or no economic growth. The articles concerning Japan’s boom and bust are legion, but the following quote by Asian expert David Asher from a 1996 article, “What Became of the Japanese ‘Miracle,’” captures the essence:

“What became of the Japanese economy that appeared so threatening that some Americans spoke of the need for cold war-style containment? Where today is the developmental state capable of turning depression to growth on the basis of smart industrial policies that deserved to be emulated throughout the world? Japan seems mired in a bog, weighed down by a series of financial crises unprecedented in the postwar era, a major wave of industrial hollowing-out, rising unemployment and corporate bankruptcy, and a growing divide between insider haves and outsider have-nots throughout the system.”

During the 80s—before the crash--it was all the rage to marvel at “keiretsu,” the interlinked networks of Japan’s big businesses. And to suggest that perhaps America was falling behind because that we lacked Japan’s “smart industrial policies,” featuring a lifetime guaranteed employment system and close collaboration between government and private enterprises.

The article in yesterday’s Washington Post, “Japan’s Warp Speed Ride to the Internet Future,” is all about how the U.S. trails Japan in broadband service. According to the article, “Japan has the world’s fastest Internet connections, delivering more data at lower cost than anywhere else.” This may well be true, and the United States should never be complacent about its technological prowess and economic progress, related as they are, of course.

But some words of caution are in order in the face of yet another “we are behind” broadband broadside. It was Japan that changed its economic system in the 90s to become more free market-oriented like ours. While I am not an expert on Japan’s telecom laws and policies, I am not convinced the U.S. should shift gears to emulate Japan’s communications policies.

There is much that already has been written comparing the U.S. broadband experience with other countries, and I don’t want to rehearse all that here. But here are the cautionary notes that occurred to me as I read the Washington Post piece:

· The article notes that Japan’s success in expanding broadband penetration and increasing bit rates “is partly a matter of geography and demographics: Japan is relatively small, highly urbanized and densely populated.” Even though the U.S. is not small, highly urbanized, and densely populated —all characteristics that make the dispersion of broadband a much less costly proposition— it is doing very well in getting broadband to consumers. Now, about 50% of U.S. homes have a broadband connection, and the penetration figure continues to grow. Among the homes that have an Internet connection at all—some people just don’t want one, even if they can afford one—fully 70% have high-speed service. (70% of Americans access broadband at home or at work.) This and a lot more data may be found in the most recent broadband report from the Pew Internet and American Life Project. In light of the fact that the United States is large and not densely populated in the same way as Japan and many European countries are, the U.S. is doing well by any reasonable standard that does not simply ignore such geographical and demographic differences. And that we are doing well is in no small measure attributable to the adoption several years ago of a policy by the FCC of a “minimally regulated environment” for broadband. Alas, since then, and even now, that deregulatory policy has been subject to never-ending, vigorous counterattack by those net neutrality, open access, and unbundling advocates who are convinced that the nation’s communications infrastructure should always be operated under a public utility-like common carrier regime—which brings me to next cautionary note.


· The Post article acknowledges that an important reason for Japan’s super-fast broadband speeds is that, on average, the country has shorter and newer copper loops than those used for telco-provided DSL service in the U.S. But it also credits “Japanese-style competition through regulation.” The essence of this “competition by regulation” approach seems akin to the UNE forced unbundling approach this country abandoned four years ago. It became increasingly evident that a policy directed towards supporting newly-created “competitors,” wholly dependent as they were on government-mandated and price-controlled access to the incumbents’ copper loops, was inhibiting investment in new broadband facilities by incumbents and new entrants alike. I don’t think keiretsu is the way to organize the American economy, and I don’t think “Japanese-style competition through regulation” constitutes sound regulatory policy in any sustainable sense, which brings me to the final cautionary note.


· At the end, the article says the growing speed addiction is having the ironic effect of “returning near-monopoly power in fiber to NTT, which owns and controls most new fiber lines to homes.” NTT is the incumbent former state-owned telephone company. A Japanese professor of telecommunications economics is quoted to the effect that, “NTT is becoming dominant again in the fiber broadband kingdom.” Aha! So it appears that at the end of the “competition through regulation” regime that “opened up” DSL lines to entrants, Japan may be left with a near-monopoly provider of the next-generation broadband facilities. I think America’s (thus far) deregulatory broadband regime which has served to stimulate investment by facilities-based broadband competitors will serve America’s consumers better in the long run than will “competition by regulation” policies that discourage investment. I don’t think Verizon would be investing $23 billion in building a new fiber-to-the-home network, or the cable companies already would have invested over $100 billion in upgrading their networks to handle digital broadband, if the U.S. had maintained a Japanese-style regulatory regime.

Even though our deregulatory posture is working to stimulate investment and promote competition by facilities-based competitors, America should not become complacent about our broadband standing. With our country’s continental expanse that includes large, little-populated area, there may be a justification, for example, for using narrowly targeted, time-limited tax incentives to exapnd broadband infrastructure in rural areas.

But that is far different than committing hara-kiri, or even keiretsu, or swooning over a Japanese-style “competition through regulation” regime that is pointing towards a monopolistic environment down the road.

The 700 MHz Decision: “Into the Morass of Regulation”

In the wake of the FCC’s 700 MHz decision mandating open access for the C block spectrum, I thought this comment from the analysts at Stifel Nicolaus was most telling: “We think it likely that much of the meaning of the open access rules will be determined by the 2009 election (which will determine the leadership of the FCC) and the courts.”

I assume the Stifel analysts mean the 2008 election. But in referring to 2009, they undoubtedly have in mind the time it takes for a new Administration to put in place its own FCC Chairman and its own team. For the same reason that much of the meaning of the FCC’s open access rules won’t be determined until 2009 or (more likely) thereafter, it follows that the revenues realized from the auction will be less than they would be in an unencumbered auction. This is because that veritable economic theorem that “people don’t want to buy a pig in a poke” holds true, even for the FCC.

Think about it: In how many auctions have you bid when the rules concerning what you can do with your winning bid won’t be known until several years later? As they say, it doesn’t take an Einstein to figure out that the looming uncertainty about the ultimate interpretation and enforcement of the new open access rules necessarily will drive down the bid price.

Regardless how it chooses to style its action, and regardless whether it calls it net neutrality, open access, or “no-lock, no-block,” the import is the same: The FCC is taking a step backwards to imposing common carrier regulation, a backwards step that imports public utility regulation into the broadband world. I still think former FCC Chairman William Kennard had it right in 1999 when he explained why he rejected arguments that the FCC should impose an “open access” requirement on cable:

But I also know that it is more than a notion to say that you are going to write regulations to open the cable pipe. It is easy to say that government should write a regulation, to say that as a broad statement of principle that a cable operator shall not discriminate against unaffiliated Internet service providers on the cable platform. It is quite another thing to write that rule, to make it real and then to enforce it. You have to define what discrimination means. You have to define the terms and conditions of access. You have issues of pricing that inevitably get drawn into these issues of nondiscrimination. You have to coalesce around a pricing model that makes sense so that you can ensure nondiscrimination. And then once you write all these rules, you have to have a means to enforce them in a meaningful way. I have been there. I have been there on the telephone side and it is more than a notion. So, if we have the hope of facilitating a market-based solution here, we should do it, because the alternative is to go to the telephone world, a world that we are trying to deregulate and just pick up this whole morass of regulation and dump it wholesale on the cable pipe. That is not good for America.

Curiously, the FCC, with the commendable exception of Commissioner Robert McDowell, seems to take pride in consigning broadband back to “the telephone world.” How else to explain the ritual incantation of Carterfone, a decision rendered in 1969 when the telephone world was indeed monopolistic? But this isn’t 1969, as Commissioner McDowell explained in his eloquent dissent. It is not even 1999, when Chairman Kennard rightly resisted picking up the “morass of regulation” and dumping it on the cable pipe.

No, this is 2007, when a Bush Administration FCC decided, despite the fact it recently concluded the wireless market is competitive, to reverse course and impose net neutrality/open access mandates on wireless broadband providers.

It is true that, as the Stifel Nicolaus analysts suggest, that the details of the “morass of regulation” won’t be entirely clear until 2009, if then. But what’s clear now, in 2007, is that the FCC has created a morass for no good reason.

Decoupling and Sound Energy Policy

In a little-noticed decision on July 20, 2007, the Maryland Public Service Commission took what appears to be an important step in improving our state’s energy policy. On the one hand, there is no doubt we need to remove unreasonable regulatory and legal disincentives to producing more energy. And we need to recognize that it is not only important to produce more energy, but also to be able to construct the facilities needed to transport the energy efficiently to those who need it.

But energy conservation plays a role in establishing overall policy as well. And this is why the PSC’s July 20 action is significant. The Commission approved a “decoupling” mechanism that allows electric utilities to increase the distribution rates that recover the utilities' fixed costs for maintaining lines and poles if consumers conserve more electricity and demand drops. In other words, utilities’ revenues are, at least to some extent, “decoupled” from customer usage so the utilities do not have disincentives to encourage conservation. Absent decoupling, if utilities encourage conservation, they risk not covering costs that remain fixed regardless of the amount of usage.

The Maryland PSC’s action regarding decoupling applies to electric utilities operating in the state. But this ratemaking concept seems to make sense with regard to the regulation of other utilities as well, for example, natural gas providers, and in other jurisdictions.

Budgets, Taxes, and People

With Maryland’s looming $1.5 billion so-called structural deficit, there is much talk in the air about tax increases of various kinds. For example, yesterday’s Washington Post reports that Governor O’Malley and leading lawmakers are considering substantially increasing income taxes on higher bracket earners as one means of closing the budget gap.

Governor O’Malley recently announced some modest spending reductions for Fiscal ’08, which began on July 1. The Governor is reducing general fund expenditures by $213 million, including $68 million in “reversions.”

In his press release, the Governor says that as part of the budget cuts 147 state government positions will be “eliminated,” of which only 17 are currently filled. The Governor and the press have referred to the reductions in allowed positions as job “cuts.” But here is where language becomes important, and, if Marylanders are going to follow the budget battle, they will have to demand that the politicians speak ordinary English.

What the Governor really is proposing is to reduce the growth in the number of state positions in Fiscal ’08 from the ’07 level. The ’08 budget, passed by the legislature and signed by the Governor only a few months ago --when the looming deficit was known to all--increased the number of non-Higher Education state government positions by 662 over ‘07. See Exhibit G of the state FY 2008 Fiscal Digest and FY 2007 Fiscal Digest. Even if 147 positions are now eliminated as the Governor plans, there will still be a net increase of 515 positions for this budget year. (The state higher education jobs increase by 925 from ’07 to ‘08, but that is another story.)

Thus, talk about “cuts” in the number of state personnel and “elimination” of jobs is misleading, even if inadvertently so. Governor O’Malley is only proposing a reduction in growth of state government positions.

It is never easy to cut jobs. And no one should minimize the difficulty, and even stress, experienced by those who lose a job in either the private or public sector. Before talking about increasing taxes, in a state government with close to 54,000 non-higher ed jobs, it seems the Governor can do better than reduce the growth in state positions from 662 to 515 positions for this budget year.

James F. Byrnes, an FDR confidant, knew a thing or two about the workings of government. After all, almost incredibly, he served as a member of the U.S. House of Representatives, the U.S. Senate, the U.S. Supreme Court, as well as the U.S. Secretary of State. Not to mention Governor of South Carolina. Byrnes once said: “The nearest approach to immortality on earth is a government bureau.”

True enough. But with Maryland facing such a tight fiscal situation, Governor O’Malley and our other political leaders should look to make real spending cuts, including in the number of state positions, before seeking to raise taxes. And Marylanders following the budget debate should insist the politicians respect ordinary English usage by differentiating between actual budget cuts and reductions in expenditure growth.

Message to Google: Just Bid

In today's Communications Daily [subscription required], FCC Commissioner Jonathan Adelstein is quoted to the effect that we need to get a third channel to the home quickly. In my view, competitive forces in the broadband marketplace currently are quite strong, with cable and telephone companies battling for market share, and with existing and potential competitors, such as satellite, wireless and BPL operators, providing further market constraints. Nevertheless, more competition is better than less--if it is economically sustainable competition, not that sustained by regulatory mangament--so I agree it would be good if their were a third channel to the home.

But then, according to Communication Daily, Adelstein said the crucial question is how to get large companies to bid. According to Adelstein: “We do need to take very seriously what they say they need.” Now this is a problem--this taking seriously what supplicants "say they need"--that plagues regulatory agencies, including the FCC. The supplication syndrome is especially problematical when the agency is preparing to conduct an auction that, by definition, is intended to indicate which entities place the highest value on the spectrum. The whole idea of auctions is to avoid the supplication syndrome that plagues so much other FCC regulatory activity. The idea of an unrestricted auction is to avoid the temptation of regulators to think they can do a better job of managing competition than the marketplace.

I understand that Google is telling the FCC that it will not bid for the 700 MHz spectrum unless the FCC takes, in Commissioner Adelstein's words, "very seriously what they say they need." On its public policy blog Google says, after consulting with various game theorists and auction experts: "While we remain interested in the possibility of participating in the auction, it’s clear that the incumbent carriers have built-in advantages that will prove difficult to overcome (particularly the economic and operational barriers to entry for a company like ours, and the relatively greater value and usefulness that spectrum brings to existing carriers)." So, Google wants to change the rules to benefit itself.

I remain confused. Google has a market cap today of $173 billion dollars. What exactly are the economic barriers that prevent a company with a $173 billion market cap from participating in a clean auction? Obviously, an existing provider has certain advantages over a new entrant: a customer base, rights-of-way, a marketing team, a back office operation, and so forth. But for a company that tells the FCC in comments that its daunting "self-defined mission" is to "organize all of the world’s information," is it really too much to expect that Google can figure out how to address what it calls operational barriers? If necessary, some of those presently assigned to organizing the world's information can be temporarily detailed to getting a new service provider, Googlecom, with a great brand name and a loyal customer following, up and running.

I am not surprised that Commissioner Adelstein is sympathetic to jerry-rigging the auction rules by imposing net neutrality/open access/unbundling rules to give Google, Frontline, and others say they need to participate and win the auction. Frankly, I don't expect the Bush Administration-appointed FCC Chairman, Kevin Martin, or the two Republican commissioners, who ought to be free market-oriented, to succumb to the managed competition temptation.

It is striking that, also in today's Communications Daily, it is reported that John Kneuer, head of the Bush Administration's National Telecom and Information Administration, told state regulators at NARUC that the nation's relaxed broadband regulatory policy has started up "a broadband flywheel whose spinning is sustained by market forces." According to the report, Kneuer said broadband deregulation has led to investment that expanded access that fueled demand that encouraged still more investment in a cycle that shows no signs of stopping.
And this: "The United States has the world's most fertile environment for broadband innovation and competitiveness...Our role as regulators will pale before the power of the market
forces we've unleashed."

It took a overly long time before the Bush Administration developed any sort of communications policy, including a broadband policy. When it belatedly did so, at least the policy was free market-oriented with respect to broadband. John Kneuer's remarks quoted above seem to embody that market-oriented policy. There is a huge disconnect between what the Bush Administration now articulates as policy and what the FCC is proposing for the 700 MHz auction. For if net neutrality/open access/unbundling mandates are imposed in the wireless space, a market segment the FCC consistently has found to be competitive, on what principled basis is it to be argued they should not be imposed on wireline providers?

The FCC should not succumb to the supplicant's syndrome that leads to the managed competition temptation. It should send a clear message to Google: "Just bid!"

Googling the "FUC"

There are press reports that FCC Chairman Kevin Martin is going to propose that a sizeable chunk of the 700 MHz spectrum be set aside as a mandatory open access, net neutralized zone. According to a USA Today story, an FCC official is quoted as stating: “The Chairman has proposed that the winning bidder for that one large piece of spectrum must build a network that allows customers to attach any device or run any application they choose as long as it doesn’t interfere with network management.” In other words, if the press reports are true, it appears the Republican Chairman of the FCC is accepting the net neutrality arguments that Google and its allies have been making for several years now that the broadband marketplace is not sufficiently competitive to protect consumers. Instead, he wants to opt for long-term regulatory micro-management.

It is important to reiterate--as I have many times in the past--that net neutrality and open access proposals always involve an unbundling mandate. Open access and net neutrality necessarily imply unbundling because the regulators simply cannot enforce their openess and neutrality rules unless the broadband service provider separates [read: unbundles] transmission from content applications and equipment attachments. In Computer II parlance, the broadband provider must offer only pure or basic transmission service on an unbundled basis. Otherwise, how to prevent "discrimination" that is the opposite of neutrality?

The Chairman's open access proposal, if it materializes, would be very disappointing in any event. But it would not be totally surprising if it came from Commissioners Copps and Adelstein. It is surprising coming from a Republican Chairman in an Administration that ought to be free market-oriented.

A few weeks ago I wrote a piece to the effect that the FCC risks becoming the Federal Unbundling Commission. That essay focused most heavily on the FCC's wrong-headed proposal to consider mandating more unbundling of cable's OpenCable platform and to involve itself in the ongoing regulatory supervision that unbundling mandates necessarily entail. But it noted that the 700 MHz auction was also a target of regulatory opportunity for the open access/net neutrality/unbundling advocates.

Again, it is puzzling and disheartening that this Republican-led FCC is the one taking the FCC down the path towards becoming the FUC. There was a time during the 1960s Carterfone and 1980s Computer II eras when unbundling mandates may have been justified. For the reasons explained in the Federal Unbundling Commission piece that time has long passed.

The costs of imposing unbundling mandates in today's technologically dynamic, much more competitive environment far outweigh the benefits. Quite simply, investment and innovation are discouraged by regulations that, by design, prevent realization of the market-based returns that result from the efficient integration of operations.

It will be a sad day if as a result of Google's succcess on the regulatory playing field a google search of the FCC turns up the FUC.

Independence Day 2007

As we celebrate Independence Day 2007, I am reminded of Abraham Lincoln’s remarks eulogizing Henry Clay: “He loved his country partly because it was his own country, but mostly because it was a free country.” To my mind, no one before or since has matched Lincoln’s simple eloquence in articulating freedom as the core idea—and ideal-- of America.

At the outset of the Civil War, it is true that preserving the Union, not freeing the slaves, was Lincoln’s principal war aim. But by December 1862, it was clear to Lincoln that the Union could not be preserved without emancipation. In his Second Message to Congress Lincoln declared: “We —even we here— hold the power and bear the responsibility. In giving freedom to the slave, we assure freedom to the free —honorable alike in what we give, and what we preserve. We shall nobly save, or meanly lose, the last best hope on earth.”

Lincoln’s Gettysburg Address was not delivered on Independence Day, of course, but in November 1863, when the fate of the Union was still in doubt. It is difficult to imagine a more beautiful expression of the American idea:

But, in a larger sense, we can not dedicate—we can not consecrate—we can not hallow—this ground. The brave men, living and dead, who struggled here, have consecrated it, far above our poor power to add or detract. The world will little note, nor long remember what we say here, but it can never forget what they did here. It is for us the living, rather, to be dedicated here to the unfinished work which they who fought here have thus far so nobly advanced. It is rather for us to be here dedicated to the great task remaining before us — that from these honored dead we take increased devotion to that cause for which they gave the last full measure of devotion — that we here highly resolve that these dead shall not have died in vain — that this nation, under God, shall have a new birth of freedom — and that government of the people, by the people, for the people, shall not perish from the earth.

The world did take note of the words Lincoln uttered at Gettysburg. And they have been long remembered, and should be, especially in troubled times, when American soldiers are fighting and dying abroad.

Within the Free State Foundation’s masthead are the words “Because Ideas Matter.” They do. In my view, the core American idea is not tied to the ethnicity, race, religion, national origin, or language of its people, but rather to a common commitment to the idea of individual liberty and the rule of law.

There is the story, perhaps apocryphal, of a certain Mrs. Powell stopping Benjamin Franklin as he departed the Constitutional Convention in September 1787 to ask: “Well, doctor, what have we got, a republic or a monarchy?” Franklin’s reply: “A republic, if you can keep it.”

To echo Lincoln’s eulogy of Clay: We love America partly because it is our own country, but mostly because she is a free country. As long as we have a constitutional culture that has as its central idea—and ideal, even if not always perfectly realized-- respect for individual liberty and the rule of law, we will preserve our Republic. And Dr. Franklin can rest in peace.

Happy Independence Day!

Tribal Company

A few weeks ago, shortly after the FCC released its most recent report on TV violence, I wrote an essay arguing that any government-mandated a la carte regime imposed on cable and satellite operators as a means of addressing the violence issue almost certainly would violate the First Amendment. The piece, "The Constitution, A La Carte," was published on CNET on May 22.



On June 26 Harvard Law School professor Laurence Tribe testified at the Senate Commerce Committee's hearing on TV violence. Tribe, one of the country's foremost constitutional law scholars, retained in connection with his testimony by various media entities, concluded that all the proposals put forward by the FCC as a means of protecting children from exposure to violent programming --time channeling, a government-mandated ratings system, and mandatory a la carte unbundling--would contravene the First Amendment. You can find Professor Tribe's complete testimony here.



Having just written on the a la carte issue in my CNET essay, and given Professor Tribe's reputation, I was especially interested in his First Amendment analysis. Albeit at much greater length, and in more scholarly fashion, Professor's Tribe's constitutional analysis of the mandatory unbundling issue is fully consistent with my CNET piece. You can find the section on mandatory unbundling at pages 58-68. I was pleased --maybe, even relieved-- to find myself in good company.



Anyone interested in First Amendment jurisprudence, and especially its relationship to the TV violence issue, should read Tribe's entire paper. But here are a couple of salient quotes concerning the unconstitutionality of mandatory unbundling that mirror the views I expressed earlier:

• "It is tempting to think of any unbundling requirement as a purely economic restriction not based on speech, but that view is flatly incorrect. Any unbundling requirement would be a speech-based and even a content-based regulation subject to strict scrutiny. The Supreme Court has recognized that “[c]able programmers and cable operators engage in and transmit speech, and they are entitled to the protection of the speech and press provisions of the First Amendment.” Turner Broadcasting Sys., Inc. v. FCC, 512 U.S. 622, 636 (1994)."

• "[C]able/satellite providers are no different from other speakers. A decision to combine or package expressive materials is a speech act distinct from the decisions to distribute its individual components, separately considered."

• "Mandatory unbundling, however, raises distinct concerns because it directly intrudes on a cable operator's speech by precluding speech achievable only by combining channels. For example, a cable operator may wish to provide a public service by bundling C-SPAN or local public access channels with more popular fare such as ESPN. Similarly, a cable operator's decision to include adult channels--as much as another operator's decision to exclude those channels--is an exercise of core editorial discretion."

• "Proponents of mandatory unbundling have at times suggested that unbundling can avoid strict scrutiny so long as it is only focused on the compensation that cable/satellite operators hope to receive, rather than the content that they are empowered to convey....Such a proposal cannot escape strict scrutiny. The freedom to speak is inseparable from the freedom to decide what to charge for that speech, or, instead, to distribute it without financial remuneration."

Upholding the First Amendment's free speech principles does not, and need not, imply endorsement of "violent" --or for that matter, "indecent" or any other-- programming that appears on television. In my view, there is much programming aired that is inappropriate for viewing by children. But government-imposed mandates that do violence to free speech principles are not the answer. Much more parental responsibility is.

As I wrote here last week, and as Professor Tribe too emphasizes, easy-to-use filtering tools are now available that allow parents to take control of what their children watch. To be sure, these tools may not be absolutely perfect or fail-safe in every situation, even as they are constantly being improved. But in First Amendment parlance, there surely are a "less restrictive means" of achieving whatever legitimate interest the government has in protecting children than those means inconsistent with free speech values.

Parental Controls: Tools and Methods

With ever-present concerns about the exposure of children to indecent and violent television programming and online material, I have used this space before to tout the tools available to parents to filter material that they deem inappropriate for their children's consumption. Due to technological advances and industry efforts, these filtering and screening tools are getting easier and easier for parents to access and use, if only parents will spend a bit of time familiarizing themselves with them.

In that vein, I recently called attention to the cable industry's new "Point Smart. Click Safe" campaign. This is an effort by cable operators to further educate parents concerning the tools available to keep their children safe online. You can access information about the safety tools available directly from the National Cable & Telecommunications Association's special "Point Smart" website.

Now comes PFF's Adam Thierer's just-released new special report entitled "Parental Controls & Online Child Protection: A Survey of Tools and Methods." This report is a very broad--and parent-friendly--guide to all of the tools available today that can help parents manage media content in all its manifestations in today's multi-media environment. Adam covers broadcast television, cable and satellite TV, music devices, mobile phones, the Internet, video game consoles, and more. (Hmmmm....just reciting the list of the various types of media has to make you wonder about those who still chomp at the bit for more restrictive ownership regulations....another subject I have discussed many times that will have to await another day.)

In recommending Adam's new report, I readily acknowledge Adam is a friend of mine. More significantly, with the release of his new "Tools and Methods" report, Adam is a friend to all parents who are willing to invest a little time in protecting their children from exposure to material to which they would rather not have their children exposed. It's up to parents to take responsibility to use the tools.

Point Smart. Click Safe.

I have written a lot in this space, and others as well, about why it would be wrong as a matter of policy for the government to mandate an a la carte regime for cable operators as a means of protecting children from indecent or violent content, and why, if the government did so, a mandatory regime almost certainly would violate the First Amendment. I addressed the First Amendment argument most recently in "The Constitution, A La Carte."

The policy and constitutional arguments against a la carte have much to do with the fact that, for some time, parents have been able to block any channel that they wish to block. Cable operators already have spent much time and money educating parents concerning the blocking and other screening tools that are available on their cable systems.

Now, to its credit, the cable industry has just embarked on a new campaign to educate parents about online safety for children. A new website sponsored by the National Cable & Telecommunications called "Point Smart. Click Safe." contains much useful information regarding tips and tools for promoting safe Intenret usage for children. Check it out.

It is far better for the government to rely on ongoing voluntary educational efforts such as the new cable intitiative than to adopt new, constitutionally dubious regulations that infringe free speech rights.

Maine Resolves to Monitor

Earlier I had heard some reports that the Maine legislature was considering passing a state net neutrality law containing a nondiscrimination mandate. So I was pleased to learn--maybe relieved to learn puts it more accurately--that what ultimately was adopted yesterday by the legislature was a resolution directing the Public Advocate to monitor state and federal actions, including the FCC's notice of inquiry, regarding Internet regulatory developments. Presumably the Public Advocate would have undertaken such monitoring without the legislature having to resolve that he or she do so.

The truth is the pro-regulatory net neutrality crowd was pushing to have a bill adopted that would have established a strict net neutrality regulatory regime in Maine. A bill to this effect was introduced by Sen. Ethan Strimling and went nowhere. And the further truth is there was nowhere for the bill to go. Because any state law purporting to mandate net neutrality almost certainly will be preempted by federal law. Why this is so was explained in Jim Speta's Free State Foundation paper entitled "Net Neutrality Is A Federal Issue."

So, now, the legislature has resolved that Internet access regulatory developments should be monitored. While there seems to be little harm in this, who would have thought a resolution to this effect even would have been necessary. Happy monitoring, Maine!

Spending Transparency and Accountability

It's no secret that Maryland faces a looming $1.5 billion structural deficit that will require some tough decisions from Governor Martin O'Malley and our legislature. What is too often secretive, or at least not easily obtainable in a timely fashion, is basic information about how our tax dollars are being spent. That's why during the past legislative session the Free State Foundation championed the adoption by Maryland of a single Google-like Internet search engine that would enable citizens at no cost easily to track state spending.

You can find op-eds published in the Baltimore Sun and the Washington Examiner by Free State Foundation President Randolph May and Research Associate Trevor Bothwell here and here urging the legislature to enact a bill to establish such a single searchable spending website. To their credit, Delegate Warren Miller and Senator Alex Mooney introduced the "Maryland Funding Accountability and Transparency Act" to do just that. Unfortunately, the bill had no support from General Assembly Democrats, and it did not go anywhere in the past session.

Now comes word that Minnesota has just enacted a law like the one embodied in the Miller-Mooney proposal establishing a public website to track state spending. This follows on the heels of similar action earlier this year by Kansas. You can read about the Minnesota and Kansas laws at a special "Show Me the Spending" site dedicated to fostering transparency in state spending. In addition to containing much useful information, such as model legislation, the site tracks information concerning the status of efforts in the states to implement searchable spending websites.

This brings me back to Maryland's projected $1.5 billion deficit. While citizens should be able to easily track state spending in good times and bad--after all, that is simple matter of fostering good government through accountability--the need to be able to do so arguably is even greater in an environment in which there already are calls to raise taxes substantially to cover state spending.

There is some talk that the legislature will meet this fall to begin to deal with the deficit. If it does, one of the first orders of business ought to be adopting the "Maryland Funding Accountability and Transparency Act" introduced by Delegate Miller and Senator Mooney in the last session. The rallying cry should be: "Accountability and Transparency First!"

The Realities of Cable A La Carte

Forrester Research has released a new report entitled, "Cable A La Carte Pricing Creates More Problems Than It Solves." The entire report may be purchased here --on an a la carte basis--for a price of $279.

An excerpt from the report posted on NCTA's website, consistent with all the trade press reports I have read, is to the following effect:

In our research, we simply asked cable viewers to consider how much they would pay, if anything, to subscribe to any of 46 top cable channels, up to $10 a channel per month. Viewers chose a simulated bundle with an average of 26 channels, but were only willing to spend $24.08 a month, less than $1 a channel, half of what they pay now. Given the 8 hours of TV that US households watch daily, that’s about $0.10 per hour, compared with the $2.00 per hour we pay to rent a new release on DVD. In contrast, an hour of prime time costs advertisers $0.60 per head. At $0.10 per hour, à la carte pricing would never work: Producers and cable companies wouldn’t get paid enough to survive, and consumers would lose desired content.

I have not reviewed the entire Forrester report. But the research does seem to confirm what to me has seemed intuitive: Under an a la carte regime, subscriber's expectations about what they think they "ought" to pay or would "like" to pay for only their individual selections would not cover the costs of the programs and cable service. Thus, the significance of the last sentence above.

I do not know whether the producers and cable companies would, in fact, "survive" in the sense of not shuttering the windows ands closing the doors. Many surely would survive in one form or another. But there is little doubt that those cable companies that do survive under government-mandated a la carte will eliminate some networks or alter other programming within networks. This is the key to the argument I made in my recent piece, "The Constitution, A La Carte". Absent a compelling justification that cannot be met with less restrictive speech restrictions, a government mandate that causes a cable operator to eliminate or alter the programming almost certainly constitutes an infringement of the operators' free speech rights under the First Amendment.

Indeed, the likely constitutional infirmity of a la carte became even clearer only yesterday when a federal appeals court issued a decision vacating FCC orders imposing fines on Fox for allegedly indecent broadcast programming. Although the court did not base its decision on First Amendment grounds, it did say in a pointed aside: “Nevertheless, we would be remiss not to observe that it is increasingly difficult to describe the broadcast media as uniquely pervasive and uniquely accessible to children.” Of course, it is even more difficult to describe cable service as "uniquely pervasive" and "uniquely accessible to children." Not only do parents have to make an affirmative decision to subscribe to the service, they have to decide they don't want to use the readily available tools that allow blocking of any individual channel. It is not very likely that an a la carte mandate would find much in the way of support from the "uniquely pervasive rationale" in the 1970s Pacifica case involving an over-the-air radio broadcast.

The Executive Summary of the Forrester report concludes: "To satisfy the FCC and avoid legislation that would disorient consumers, cable operators should offer the benefits of a la carte pricing through smarter bundling of family, sports, or news programming in addition to the traditional tiered packages." I am not smart enough to know what, if any, degree of smarter bundling would satisfy the FCC and avoid legislation. But I do know that the video marketplace is sufficiently competitive that cable executives, who get paid big bucks to do their jobs, will do better at figuring out which business models meet consumers' needs than the folks at the FCC or on the Hill. And speaking of disorientation, I get disoriented just thinking about why the government would want to tread on such constitutionally suspect ground.