Network Freedom, Not Regulation, for Smartphone Apps

Last week, AT&T announced it will allow iPhone users to use Skype and other VoIP applications on AT&T's own 3G wireless network. iPhones users will soon have access to AT&T's competitors' Internet voice applications. What is important to keep in mind about this decision is who made it: the wireless carrier. Decisions about smartphone applications and their wireless network capabilities should be made in the marketplace, not at regulatory agencies.

Some recent studies have highlighted the competitive marketplace for wireless and for wireless smartphones. The FCC itself has recognized the dynamic nature of the wireless marketplace. Since Congress' 1993 deregulatory action, wireless innovation and competition have thrived in a marketplace subjected to only minimal regulatory barriers. There is a ready availability of competing handsets and carriers for consumers to choose from. (Apparently, RIM's BlackBerry Curve has moved past Apple's iPhone as the top-selling consumer smartphone.)

Absent a demonstration of anticompetitive practices by a producer with marker power, marketplace freedom should prevail over new regulatory restraints.

That said, AT&T's decision to allow iPhone users to access VoIP applications using 3G network capabilities hardly "proves" that network neutrality regulation needs to be imposed by the FCC on wireless networks. The competitive state of the wireless marketplace already favors continued marketplace freedom. Strictly speaking then, AT&T's turnabout on iPhone VoIP applications and its 3G network doesn't by itself make the case for marketplace freedom concerning smartphone apps and networks. Rather, AT&T's decision IS the free marketplace.

It was a decision made by a private, competing producer involving trade-off considerations and posing significant economic risks. Misguided calls to impose network neutrality regulations on wireless networks not only ignore the state of competition in wireless, they also ignore the complex technical and financially difficult judgment calls that businesses must routinely make.

A variety of conceivable factors can come into play when a competing marketplace producer makes decisions of this sort. For instance, satisfying iPhone user demand for access to VoIP applications using 3G network capabilities could increase AT&T’s good will, cementing its relationship with existing users and attracting increased numbers of new users. On the other hand, giving iPhone user access to VoIP applications using 3G network capabilities could have the overall effect of subsidizing its VoIP competitors, ultimately resulting in loss of significant business to those competitors. There is the possibility that business lost to VoIP competitors will result in a loss of revenue necessary to cover AT&T's high, up-front sunk costs for both building and maintaining its 3G network, which like all networks, has finite capacity. And loss of revenue makes it less likely that AT&T can subsidize iPhones so that consumers can purchase them for less than $200. Multi-factored business decisions of this kind should not be made by regulatory fiat.

Prior to AT&T's decision to allow iPhone users to access VoIP applications using 3G network capabilities, AT&T already allowed iPhone calls through VoIP applications when users relied on Wi-Fi Internet connections. At some future point, iPhones might also be made capable of tethering with laptops to give the latter devices Internet connectivity. Where the marketplace is as dynamic as the wireless broadband market, these kinds of product and service innovations will work themselves out.

Increased choice is an important element of consumer welfare, but so are incentives for producers to continue making investments to provide increasing choices to consumers in the future. However, the ability of carriers make those kinds of aggressive investments in infrastructure and applications, contingent on revenue recovery through exclusive, innovative new product and service offering arrangements, would be stifled by network neutrality regulations.

Google: Phone Giant or Internet Giant?

Those, like Google, who support net neutrality mandates are fond of referring to some of the broadband providers as "phone giants" or "cable giants." As if Google, with a market capitalization that is essentially the same as AT&T's, twice as large as Verizon's, and three times as large as Comcast's, is anything but an "Internet giant."

But now with the FCC having launched an investigation of Google Voice, we may find out whether Google is a "phone giant" as well as an "Internet giant." If I were Google's senior management, I'd be worried about where all Google's pro-regulatory advocacy is leading and whether, in the end (well, there often is no real "end" when the regulatory process gets started), Google might not have been better off negotiating in the marketplace rather than in the halls of the FCC.

Let's be perfectly candid. What Google principally has been trying to protect the last five years through its net neutering regulatory advocacy is its position, as a true Internet giant, of not paying any more than it currently pays for the use of ISPs' broadband capacity. Indeed, as I pointed out in a post last week, Google concedes, at least implicitly, that once the FCC fixes what it labels the "badly flawed" access charge/intercarrier compensation system it might well be called upon to pay more for its heavy broadband network usage.

Of course, Google has never made fixing the compensation system a top Washington priority because it benefits from the broken system. Instead it has devoted its regulatory resources to maintaining or re-imposing, as the case may be, legacy regulation in the form of "net neutrality."
The strategy Google has pursued calls to mind Sir Walter Scott's line: "Oh! What a tangled web we weave...."


It may be that Google can successfully manage the regulatory process. But the web is certainly getting tangled in a way that ought to cause concern to those, like me, who would prefer to maintain an unregulated Internet ecosystem – one in which even Internet giants like Google remain unregulated. (Note I am not saying that Google or the broadband ISPs should not be subject to the antitrust laws, consumer protection laws, disclosure requirements, or even certain FCC interconnection requirements and the like. I am referring to regulation – aside from whatever poll-tested label is applied – that, like net neutrality, resembles traditional common carrier regulation.)


The entanglement – and confusion – is illustrated by this statement, as reported in the October 13th edition of Communications Daily, from Public Knowledge:

“The FCC’s Wireline Competition Bureau today asked some very legitimate questions about the nature of Google Voice,” Public Knowledge said. “We should be clear that the Commission’s inquiry has nothing to do with issues of an open, non-discriminatory Internet, as AT&T alleged when it brought the issue of Google Voice to the Commission’s attention last month. Neither does it have anything to do with denying service to rural customers, as others have said. It has to do with the clash between traditional telephone services and new technological realities.”

If Google is not a phone giant, but rather an Internet giant, of course the Commission's inquiry has to do with "an open, non-discriminatory Internet" because Google concedes that its voice offering is by invitation only and that it is not open to customers in certain rural areas.

And of course the inquiry has to do, as Google concedes, with denying service to rural customers.

So, these first two assertions by Public Knowledge only serve to obfuscate matters. But the inquiry also has to do, as Public Knowledge says, with the clash between traditional telephone services and new technological realities. Or, as the FCC's inquiry letter puts it: "How does Google believe its various Google Voice services fit within the statutory classifications in the Communications Act of 1934, as amended (the Act) and the Commission’s regulatory classifications (e.g., interconnected VoIP)?"

Or put another way: Under the existing regulatory paradigm – the one Google has been fighting so hard to preserve – is Google a phone giant rather than an Internet giant? If it is a phone giant, will it be regulated the same way AT&T is regulated, or differently? Exactly how differently? And under what rationale?

Here are some fundamental truths:

While Google, Public Knowledge, Free Press, and their allies have been intent on imposing on digital broadband Internet providers the Computer II separation regime developed in 1980 in the analog world, that regime simply doesn't make public policy sense anymore. In today's digital environment, the line between "information services" and "telecommunications" services is necessarily indistinct. And the costs imposed by regulators trying to keep separate the two will outweigh the benefits to consumers. Indeed, even apart from the costs imposed by the constant litigation and regulatory uncertainty created by separation requirements, consumers will be harmed by the loss of the efficiencies that might be gained by integration and by the innovation deterred.

For years I have written about the inevitable blurring of the distinction between information and telecommunications services, and why a regulatory regime based on metaphysical techno-functional constructs no longer makes sense. Here's an early 2004 piece, "The Metaphysics of VoIP," on the point, and here's a law review article. If you wish, you can google many other pieces using the Internet giant's dominant search engine. What is needed is a regime that gets away from reliance for regulatory purposes on techno-functional constructs (see the FCC's inquiry letter) and looks at competition in the marketplace. To some extent, to its credit, the FCC's letter does seek information concerning competitive realities in addition to information about the particular techno-functional constructs of Google's service.

It is true that it would take a rewriting of the Communications Act to move away completely from a regulatory paradigm tied to techno-functional constructs to one that is tied much more closely to competitive marketplace realities. Nevertheless, there is much the FCC, under its existing authority, including its forbearance authority, can and should do to move in that direction. (How about that for an FCC workshop idea?)

The FCC should abandon the notion of imposing net neutrality regulations because, in essence, the definitional problems the agency will confront in trying to distinguish between the "edge" services it wants to protect as unregulated and the "core" services it wants to regulate with a non-discrimination rule are akin to the ones it will now face in trying to figure out how to classify Google Voice. And the agency will face the same definitional difficulties trying to distinguish "reasonable network management" practices from "unreasonable" ones.

In his most recent post on the subject, Google's Rick Whitt again says: "This [dispute about Google voice] is about outdated carrier compensation rules that are fundamentally broken and in need of repair by the FCC." It is about compensation rules. But it is about more than that, of course, because the compensation rules about which Google complains are tied directly to the regulatory distinction between information and telecommunications services that Google steadfastly defends – and to the same distinctions upon which net neutrality regulations ultimately depend.

I am quite certain that Google understands all of this, and, for now, I prefer to remain optimistic that the FCC Chairman and his fellow commissioners will come to understand it as well, if they don't already. When Chairman Genachowski said in his Brookings speech that his proposed net neutrality regulation "is not about government regulation of the Internet," I do not question his good faith. But the imbroglio over Google Voice already has demonstrated that net neutrality-type disputes (is Google discriminating?) inevitably are about Internet regulation, unless you really do consider Google a phone company and not an Internet company.

My hope – I am an optimist – is that before the FCC is forced to go too far down the road of deciding whether Google is a phone giant or an Internet giant, Google concedes that the regulatory distinctions upon which it has relied and upon which it continues to rely are not viable, and that they are not the basis, going-forward, for creating sound public policy for the entire Internet ecosystem. My hope is that Google will decide to shift its Washington-based efforts away from maintaining in place these outdated regulations – and, indeed, away from enacting still new Internet regulations in the form of net neutrality mandates – and towards joining the fight to fix the broken carrier compensation system it regularly decries.

PS-- Take note that I have used "Internet giant" and "phone giant" with my tongue largely in cheek as a reaction against the reflexive and tiresome use of the "giant" label by the net neutrality advocates. I am by no means opposed to large size per se. Indeed, I appreciate that Google's size -- as well as the size of the leading broadband ISPs -- have enabled these companies to invest in building out more broadband capacity and in making the Internet better.

FCC's Slow-Motion Merger Review

As reported in recent news accounts, the Federal Communications Commission (FCC) has been dragging its feet in conducting its review of the AT&T-Centennial merger. The FCC is now almost four months past its self-imposed 180-day deadline for such reviews.

Although the propriety of the FCC’s practice has been questioned by some, the FCC engages in merger review pursuant to its authority for approving the transfer of FCC-granted licenses resulting from the completed merger.

AT&T filed its application with the FCC to acquire Centennial--a regional wireless and broadband carrier with more than one million subscribers in six states plus Puerto Rico and the Virgin Islands—back on November 21, 2008. The FCC’s 180-day merger review period ended back on June 14, 2009. No date for the conclusion of the review has been set yet by the FCC.

Agency delay is harmful to the merging parties that stand to gain from efficiencies and economies of scale. In a competitive, dynamic market, such delay is also harmful to the consumers who would otherwise benefit from improved services and prices from the merged parties. As the Department of Justice’s Antitrust Division Chief recently stated, “the vast majority of mergers are either procompetitive and enhance consumer welfare or are competitively benign.” If a proposed merger poses real anticompetitive concerns, prompt and decisive agency decision-making gives the merging parties finality and lets them turn their attention elsewhere. Agency delays keep potential merging parties in a state of suspended animation.

Aside from the undesirable economic dislocations, FCC merger review delays have also been the device by which FCC has extracted extra-regulatory “concessions” by merging parties. FSF President Randolph May has called this phenomena “regulation by condition,” with merging parties agreeing to conditions that may have nothing to do with any claimed antitcompetitive effect of the proposed merger. As FSF advisory board member and professor of law Christopher Yoo has written about the precarious position of merging parties subjected to lengthy FCC merger review:

as their need for regulatory approval becomes increasingly urgent, they begin trying to obtain clearance of their merger emphasized by the FCC. Because these conditions are purportedly not the result of agency action, the FCC need not engage in any extended analysis of whether it represents a change in policy or how to integrate the conditions into the larger regulatory scheme.

For instance, in the AT&T-BellSouth merger, FCC approval was obtained at the price of a network neutrality condition based on conjectures about imagined future network discrimination practices. Whereas FCC rules typically arise through the formal APA process that includes public comment and a larger contemplative element, “voluntary” merger conditions are the largely the result of private negotiations made under time-sensitive conditions.

The FCC should only consider imposing merger conditions to address alleged anticompetitive claims raised by a particular proposed merger. A more modest step would be for the FCC to take its 180-day shot clock for merger approval seriously. The AT&T-Centennial merger delay is simply another exhibit pointing to the need for the FCC to engage in self-restraint.

Google's Discriminating Voice

"We believe it is essential to re-evaluate these existing intercarrier compensation regimes in light of increasing competition and new technologies, such as the Internet and Internet-based services, and commercial mobile radio services (CMRS)… The existing intercarrier compensation rules raise several pressing issues. First, and probably most important, are the opportunities for regulatory arbitrage created by the existing patchwork of intercarrier compensation rules."
– FCC, 2001

"We agree with AT&T that the current carrier compensation scheme is badly flawed, and that the single best answer is for the FCC to take the necessary steps to fix it." – Richard Whitt, Google, September 25, 2009.

The tale behind these two quotes could make for a very long, sad story, or a shorter one. Because I have written much about this before [see here and here for starters], and because those who follow the FCC and its ways will understand the shorter story, I'm going to opt for that version here. And I fear the longer version, rightly, would give the uninitiated even more reason to be discouraged about the FCC's past performance and future prospects for implementing, within the confines of its congressional mandate, economically-sound, pro-competitive communications policies.

The story involves Google Voice, Google's "application" that allows consumers to make telephone calls to some but not all locations from its Web-based platform. Somewhat curiously, the service is "by invitation only." And, significantly, calls to certain locations are blocked so the Google Voice customer can't reach them. In a September 25 posting, Richard Whitt, Google's Washington Telecom and Media Counsel, explains the selective call blocking this way:

"This afternoon AT&T filed a letter with the Federal Communications Commission, alleging that Google Voice is preventing its users from making outbound calls to certain phone numbers with inflated access charges, and asking the Commission to intervene…Local telephone carriers charge long-distance companies for originating and terminating calls to and from their networks. Certain local carriers in rural areas charge AT&T and other long-distance companies especially high rates to connect calls to their networks. Sometimes these local carriers partner and share revenue with adult chat services, conference calling centers, party lines, and others that are able to attract lots of incoming phone calls to their networks….Google Voice's goal is to provide consumers with free or low-cost access to as many advanced communications features as possible. In order to do this, Google Voice does restrict certain outbound calls from our Web platform to these high-priced destinations."

So, Google justifies its call blocking to rural locations on the basis that it objects to paying the "inflated access charges" that AT&T and other carriers must pay under the existing access charge/intercarrier compensation regime. As the quote at the top of this post indicates, Google agrees the compensation regime is "badly flawed." It says, beneficently, the "single best answer" is for the FCC to fix it. But until the FCC does, no doubt Google is perfectly happy to go on discriminating against those callers who wish to call certain rural areas in which certain call centers, adult chat lines, and the like happen to be located.

In short, before it stops blocking calls, Google is waiting for Godot – in this instance, that would be the FCC – to fix an intercarrier compensation regime that has been broken since shortly before Genesis. Remember it was 2001 when the FCC said, in light of increasing competition and new technologies, that it was an essential, pressing matter to fix intercarrier compensation. (It has repeated this admonition over the years at regularly-scheduled intervals.) And recall that in 2001 the FCC explicitly bemoaned the opportunities for arbitrage presented by the existing system that rests upon outmoded techno-functional regulatory and jurisdictional distinctions that ought no longer to dictate policy in today's digital environment.

Now, you might think that I am going to go after Google for the discrimination that appears inherent in the operation of its telephone service, a discrimination apparently not tolerated by AT&T and other providers classified as "telecommunications" carriers rather than "information service" providers. After all, Google is one of the foremost proponents of net neutrality and a non-discrimination mandate, and the way it runs Google Voice appear to run counter to net neutrality principles. But going after Google for hypocrisy regarding its net neutrality posture would be part of the longer story, the one I am not telling here. In any event, I do not favor government-dictated net neutrality mandates, and I don't want to urge that Google be subject to them. I prefer avoiding going any further down the net neutrality regulation road than the FCC already has traveled.

What I want to urge the FCC to do is to devote its energies to really important priorities like fixing the "badly flawed" intercarrier compensation regime instead of initiating a new net neutrality proceeding. The FCC was correct in 2001 when it said fixing intercarrier compensation rules was an essential, pressing matter. Yet it is 2009, and despite taking many rounds of comments amounting to tens of thousands of pages, and several notices to "update" and "refresh" the record, the agency has done nothing.

The FCC's failure to act has impaired sustainable facilities-based competition, retarded new investment, and impeded the development of new technologies. Why has the FCC not acted? Mainly because the agency has lacked the political will – even though it is supposed to be an "expert" agency, not one driven by politics – to change a system in which rural carriers are allowed to charge what Rick Whitt rightly calls "inflated access charges." The FCC's inaction has been an institutional failure of the highest order.

Now, a decade on – truth be told, the FCC started the task in the '90s – the FCC apparently still is not making intercarrier compensation/universal service reform a top priority, even though all knowledgeable communications policymakers and scholars know it should be. Instead, the agency will devote major resources to developing, in an anticipatory rulemaking, new Internet regulations that almost certainly will be overly broad, even though, to date, only a few isolated "neutrality" incidents have occurred and they have been remedied quickly through voluntary action or the through the existing complaint regime.

I suggest the new FCC should readjust its priorities, committing itself to reforming outdated legacy regulations like the current intercarrier compensation/universal service regime that cause all consumers to bear enormous costs supporting uneconomic subsidies and arbitrage opportunities. Once the Commission has completed this task, there will be time enough, in light the then-existing marketplace realities, to determine whether new Internet regulation is warranted.

Despite Rick Whitt's acknowledgment that the "badly flawed" access charge compensation system needs fixing -- and that when it is fixed Google will then be pleased to play by the rules other service providers must play by -- we can be pretty sure that Google is not all that anxious to have the system fixed. It appears much more eager to see the FCC chasing neutrality bugaboos, betting – perhaps wrongly -- that when the dust settles it will remain just outside the edge of the new Internet regulation's reach.

test blog

Test blog

Let's Rally Around Net Neutering

For those of us opposed to Internet regulation under the guise of the "net neutrality" label, admittedly a superficially appealing slogan, it has always seemed to me that we needed to come up with an equally appealing moniker to capture the reality behind the proposed net regulation. For many years, I've thought "net neutering" was a good such banner.

Indeed, I had started to use the term "net neutering" in the 2004-2005 time frame in opposition to the net neutrality forces. At the time, I believe it was the earliest use of the term. In 2005, I published a paper titled, "Net Neutrality and Net Neutering in a Post-Brand X World: Self Regulation, Policy, Principles and Legal Mandates in the Broadband Marketplace." And, when I edited a book with my then-colleague Tom Lenard that was published in 2006, I titled it: "Net Neutrality or Net Neutering: Should Broadband Internet Services Be Regulated?" In 2007, I published a law review titled, "Net Neutrality Mandates: Neutering the First Amendment in the Digital Age."
(The constitutional objection to net neutrality is a whole other story.)

Thus I was pleased to see Holman Jenkins' column in today's Wall Street Journal titled, "Neutering the 'Net,"
in which he explains why FCC Chairman Genachowski's just announced proposal to impose new net neutrality mandates would have the effect of neutering the net.

For many years, I have thought that, in today's digital age, imposing analog-age common carrier-type rules – yes, that is truly what net neutrality mandates are – would have the effect of neutering the net. In other words, such Internet regulation would slow down innovation and investment by removing incentives for Internet service providers to differentiate themselves lest they violate nondiscrimination (neutrality) mandates.

Because there are many sound policy and legal arguments why new common carrier-type regulation should be rejected for the Net, it is not essential to have a sound bite slogan to refute proposals for such regulation. After all, it ought to be the ideas that matter. But I sure think "net neutering" is a good banner around which to rally, one which fairly captures the peril inherent in net neutrality regulation.

Let me know what you think.

Richard Epstein on Net Neutrality

Richard Epstein, a member of FSF's Board of Academic Advisors, is widely acknowledged to be one of the nation's foremost law and economics scholars. Among many other positions, he is Distinguished Service Professor of Law at the University of Chicago, where he has taught since 1972. His impressive bio is here. Please peruse it.

But more importantly for the moment, please consider carefully the last paragraph (reproduced below) from Professor Epstein's chapter in the Free State Foundation's new book, New Directions in Communications Policy, published by Carolina Academic Press. Richard's chapter is titled, "What Broadcast Licenses Tell Us About Net Neutrality: Cosmopolitan Broadcasting Corporation v FCC." In it, he shows -- brilliantly, as usual – what one piece of the FCC's history of broadcasting regulation teaches us about the perils of net neutrality regulation.

In his summary and conclusion, Professor Epstein explains that we ought to be able to distinguish between regulations that strengthen markets and those that undermine them, but that there is a long-standing pattern of government's failure to do so. The regulators' proclivities to overreach are often driven by a denigration of property rights and systems of voluntary exchange. So here is how he concludes his chapter:

"A similar pattern is at work in the modern debates over net neutrality. The defense of that position starts out as a plea to end discrimination. Yet there is little evidence that the new dose of regulation will produce any gains in the short run. In the long run, we can expect a repetition of the sorry performance of the FCC (or, for that matter, Congress) with respect to broadcast rights to work its way through the law of net neutrality. The sad truth is that the parties who seek to develop sophisticated and sensible schemes for state control quickly lose control over the administrative process to persons whose ambitions for state control are not bound by any fine-grained rationale. The dangers for this predictable drift usually suffice to err on the side of caution. Stated otherwise, the expected rate of depreciation of sound public norms that rely on administrative discretion is high. There are too many pressure points to keep the rascals at bay. So the recommendation here is to follow classical liberal principles that treat all state intervention as a mistake until it is shown to be a good. More practically, and much to the point of the current public policy debate: Keep private control over broadband pipes by abandoning the siren call for net neutrality."

Having in mind even a bit of regulatory history, it is difficult to put more concisely the case against net neutrality mandates that FCC Chairman Genachowski intends to have the FCC impose.

I wish those FCC commissioners considering new Internet regulation would stop for a moment and think about Professor Epstein's warning:

"The sad truth is that the parties who seek to develop sophisticated and sensible schemes for state control quickly lose control over the administrative process to persons whose ambitions for state control are not bound by any fine-grained rationale."

In Dynamic Markets, Potential Competition Matters

Yesterday, FSF President Randolph May and I submitted comments to the FCC in an important forbearance remand proceeding. At stake in the proceeding is the importance of the potential for competition by new entrants in the broadband marketplace when the FCC conducts regulatory forbearance analysis. The FCC has questioned whether or to what extent it should consider potential competition when it weighs petitions for forbearance from regulation. As our comments relate, it is crucial for the FCC to adhere to those precedents in which it has considered both existing and potential competition in the telecommunications marketplace.

FSF advisory board scholars Dr. Dennis L. Weisman and Prof. Glen O. Robinson have aptly described telecommunications as a dynamic industry characterized by rapid innovation and competition, not stasis. The FCC has similarly recognized this dynamism, as we point out in our comments. Unfortunately, the FCC failed to take this dynamic market seriously when it rejected both Verizon's and Qwest's respective forbearance petitions from certain unbundled network element (UNE) regulations.

As explained in the FSF Perspectives piece, "Assessing the FCC’s Competition-Assessing Competence," the D.C. Circuit recently held that the FCC failed to consider the marketplace impact of potential competition in rejecting Verizon's forbearance petition. The D.C. Circuit remanded the case for the FCC to give a reasoned explanation of its decision. It also remanded Qwest’s forbearance case because the FCC had similarly rejected Qwest's forbearance petition without properly considering potential competition. At stake in the remand proceeding is the fate of both forbearance petitions, and (possibly) the continuing role of potential competition in the FCC's forbearance analysis.

Forbearance is an important deregulatory tool that Congress intended the Commission use to keep the fast-evolving telecommunications marketplace free from outdated and burdensome regulations. (For more on that, see the FSF Perspectives piece, "Why Forbearance History Matters.") It's especially important for the FCC to exercise its forbearance powers with respect to a dynamic market, and consideration of potential competition by new entrants or existing rivals is a crucial element in any dynamic market.

The FCC's own precedent concerning UNE regulations includes careful consideration of potential competition as an important force for ensuring improved price and service options for consumers. Our comments to the FCC emphasized that the Commission, especially in such a dynamic market as communications, should carefully examine potential competition and take it into account when conducting a forbearance analysis.

An Immodest Proposal for Internet Regulation

Despite the appealing modesty of FCC's Chairman Julius Genachowski's tone, the Internet regulation proposal unveiled in his speech today at the Brookings Institution is anything but modest. Indeed, the peril lies in its immodesty. It is immodest in the way that those imbued with a certain faith in their good intentions often, in their regulatory zeal, may fail to recognize.

I will be saying much more about the FCC’s proposal in the weeks and months ahead. But here I just want to explain briefly what I mean about the troubling immodesty of Chairman Genachowski's remarks. In order to appreciate what I am saying, please have in mind these two statements from his address: "We cannot know what tomorrow holds on the Internet, except that it will be unexpected." And: “I understand the Internet is a dynamic network and that technology continues to grow and evolve." There are others in a similar vein but these suffice.

Here is some of what makes Genachowski’s proposal so immodest from a regulatory perspective:

While asserting that he cannot know what tomorrow holds for the Internet and that the Internet is a dynamic network that continues to evolve, it is clear that Genachowski nevertheless presumes that all worthwhile innovation takes place at “the edge of the network,” and not within the various broadband networks. This presumption drives his view that that there must be a strict non-discrimination rule – the same type of rule that was at the heart of nineteenth and twentieth century common carrier regulation. Ultimately, this rule means enforcing a strict separation of content and applications from transmission media. This separation precludes any efficiencies and cost-savings and innovation that might result from integration of content, applications, and transmission. What's more, in the digital broadband world of integrated bit streams, such separation of content and applications from transmission necessarily will involve more metaphysical conjecture than sound regulatory policy. On this point, see my piece, "The Metaphysics of VoIP," written back in 2004. The principle is the same.

It may be that, as the Internet evolves in the dynamic way that Genachowski concedes it has without common carrier regulation, separation of content and applications from transmission will prove to be the best business model. Or, more likely, the 'best' business model will change continually over time. But Genachowski presumes to lock a business model in place based on all innovation "at the edge," even while admitting he cannot know what tomorrow holds for the Internet.

He says "this is not about government regulation of the Internet," it is about "fair rules of the road for companies that control access to the Internet." Of course, it is all about government regulation of the Internet, regardless whether he believes the rules or "fair" or not, or whether they are put in terms of "access to the Internet" or some other way. Genachowski surely knows this. But he asserts, soothingly, that "we will do as much as we need to do, and no more, to ensure that the Internet remains an unfettered platform for competition, creativity, and entrepreneurial activity." Nice thought, but not very comforting, despite the good intentions. The history of the FCC shows that the error costs from overregulation – especially in a dynamic environment in which Genachowski concedes we cannot know what tomorrow holds for the Internet – are likely to be exceedingly high. The presumption that the FCC will know the point at which it has regulation "just right" – as much as is needed, but no more -- demonstrates an immodest faith in the prescience of the FCC commissioners that likely would cause Goldilocks to blush.

Despite acknowledging the growth and many successes of the Internet in the past decade, Genachowski asserts at one point that "as American consumers make the shift from dial-up to broadband, their choice of providers has narrowed substantially." It is discouraging that he would make this claim, because it is true only if one does not appreciate the difference between the facilities-based competition that continues to grow in the broadband world and the artificial or "managed" competition that prevailed in analog dial-up world. While the FCC may have created more dial-up "competitors" under its regulated resale mandates, these so-called competitors weren't investing in network facilities and innovating. They were offering what generally were acknowledged to be plain vanilla services. It is true that we would like to see even more robust competition among providers than we have today, even as the competition between wireline, cable, satellite, and wireless providers continues to increase. But to say that consumers had more choices of providers in the dial-up world than now is like comparing a 56Kbs modem – remember? – to a DSL, FiOS or cable broadband connection, or even today's wireless or satellite broadband connections. Apples and oranges, as they say.

Finally, the notion of proposing new Internet regulation in the midst of the FCC's efforts to develop a national broadband plan is immodest as well. With all the emphasis the FCC has placed on gathering data in that proceeding, it would make sense for the agency to finish that job before proposing new rules. After all, if the agency thinks new common carrier-type Internet regulation should be adopted, wouldn't it be advisable to include such a proposal in the broadband report being prepared for Congress before forging ahead?

FSF Conference Video Posted

The video from the Free State Foundation's September 10 conference at the National Press Club is now available on the NextGenWeb site here.

The keynote addresses of FCC Commissioner Meredith Baker – her maiden FCC address – and Blair Levin, the Coordinator and Executive Director of the FCC Omnibus Broadband Initiative, deservedly, have garnered much press attention. It's worth emphasizing that the presentations of Professors James Speta, Christopher Yoo, and John Mayo not only were scholarly, as one might expect from these prominent scholars, but they were informative, interesting, and entertaining as well. Looking out into the audience while they were speaking, I was struck – nearly dumbstruck – that the berries, pods, and other assorted handheld devices, had all but disappeared.

Both Jim Speta and Christopher Yoo, in the context of addressing the FCC's decision last year in the Comcast file-sharing case now on review, discussed both procedural and substantive failings in the way the FCC handled the case. While their focus was principally on net neutrality and the agency's decisionmaking process, the cautionary note they sounded concerning the perils of regulatory overreach, and the potential consumer harms from such overreach, has more general applicability as the Commission considers other competition issues. Similarly, John Mayo's discussion of the urgent need for universal service reform, while cogently making that case, does double duty as a basic refresher, for those in need, of some fundamental economic principles.

In other words, the video contains much useful and thought-provoking information, and much for the new FCC to consider as it gets ready to tackle formulating the broadband plan and addressing other communications issues. So, as they invariably say in New York, when they bring your hot pastrami sandwich and pickle: "Enjoy!"

PS: As I said at the conference, there is 20% discount for Free State Foundation friends and family on FSF's new book, New Directions in Communications Policy, published by Carolina Academic Press. In addition to Professors Speta, Yoo, and Mayo, other contributors to the book are: Professors Gerald Brock, Diane Disney, Richard Epstein, Bruce Owen, Glen Robinson, Dennis Weisman, and Steven Wildman. They are all members of FSF's Board of Academic Advisors. The secret code for the discount is COMM20 – but don't spread it around too freely. You can order the book on CAP's website here, or call 800-489-7486.

The Fiction of Forced Access

Adam Thierer, my friend and former colleague, was kind enough to link to my piece, "When Friends Agree to Disagree: Data and Regulatory Philosophy," in a blog on the Technology Liberation site.

Adam has always contributed greatly to the fight against "forced access" regimes in the broadband world, and, as usual, his latest piece, "Fiction of Forced Acccess 'Competition' Revisited", is well worth reading.

When Friends Agree to Disagree:Data and Regulatory Philosophy

At last Thursday's Free State Foundation conference at the National Press Club, celebrating the release of FSF's new book, New Directions in Communications Policy, there was an exchange between me and Blair Levin concerning the respective roles of data and regulatory philosophy in the development of the broadband plan. As I said in my introduction before his opening keynote: "I am an admirer and respecter of Blair's communications law and policy expertise, his experience, and his dedication. And I consider Blair a good friend." Those of you who have heard me over the years introduce Blair, now the Coordinator of the FCC's national broadband plan efforts, know that when I call him a good friend and say I respect his expertise, I am not just making small talk.

I think Blair will agree – and indeed he said so in his remarks at the conference – that he considered our exchange, now carried on, and perhaps magnified a bit, in the press, valuable in helping to think about the development of a broadband plan that best serves consumers and the overall national interest. You can read the reports about the conference in Communications Daily [subscription required], Broadcasting & Cable, and TR Daily [subscription required] to get a flavor of the exchange.

As background, I had been quoted earlier in Communications Daily as saying that while I thought the broadband workshops had been useful, I would like to see, in addition to the Commission's ongoing emphasis on data-gathering, more focus on what regulatory philosophies or models work best. In my introduction of Blair on Thursday, I said:

"Certainly, the essays in the New Directions book contain considerable data concerning broadband subscription, the number of competitors, the growth in USF funds, and the like. I agree, of course, that it is important for our public policymakers to have good, reliable data as they make decisions – and I bet our opening keynoter, a very key player at the FCC, might make the point that the new Commission is going to be 'data-driven,' and that it needs good data to develop a broadband plan. True enough."

And then I went on to say:

"But the development of sound policy truly does depend on what you do with the data, how you interpret it. Here's an example. Free Press says that prior to the abandonment of the FCC's sharing requirements for the incumbent telcos' lines there were 6000 ISP competitors in the country and now, as a result of deregulation, there are less than a dozen. Well, that is true only if you don't recognize as a matter of regulatory policy the important distinction between facilities-based competition and competition based on regulated resale, and if you don't think it makes any difference whether competition is facilities-based or resale-based. So if you take the 6000 figure at face value and run with it, you would be making a big mistake, in my view, in terms of developing sound policy. Indeed, the development of sound policy depends on having good data and having a good understanding of the economics of network industries and, in the case of communications policy, especially of the dynamic nature of technological change in the marketplace."

During his presentation, which is now posted on the FCC's Blogband website, Blair made several points responsive to my contention concerning the need for some focus on regulatory models and perspectives. I agree with much of what he said. For example, Blair said that if the FCC doesn't get data on who is unserved, where they are, and what it costs to build out a network to serve them, "you are going to get the wrong answer no matter how thoughtful your philosophy." Agreed. He also said it is not the staff's role to focus on regulatory policy, but rather the Commission's. I agree, of course, that it is the Commission's role, ultimately, to establish regulatory policy. But I think it is also the staff's role, with its expertise and the tools available to it, to facilitate the commissioners' understanding of how various regulatory policy and perspectives may impact their decisions. In my view, the broadband workshops would be one appropriate way of doing so, along with others. But I don't disagree with Blair's statement that the fact-finding comes first, during what he called "the early stages of a policy process." After all, he did state that we "will get to that point in the dialogue when philosophy does matter, where different views about the appropriate role of the public sector will be germane to the issues."

Thus, on this matter of the intertwined relationship between "data" and "regulatory philosophy," in reality our differences probably are not that large, especially as Blair agrees that there is a point in the process – before decisions are made – where "philosophy does matter," when the appropriate role of the public sector is germane. (There is a reason why FSF's masthead proclaims "Because Ideas Matter.")

Let me illustrate a couple of instances in which good data certainly matter, and an instance in which regulatory perspectives or philosophy matter, and why in this latter instance being "data driven" in and of itself is insufficient to lead to sound policy.

In my comments filed with FCC on the plan, I urged that the priority should be the targeting of federal support for the deployment of broadband facilities in presently unserved areas. If deploying broadband to unserved areas is a priority, and it should be, it is necessary to have good (which is not the same as perfect) data that indicates which areas presently lack service. Fortunately, through the now prevalent ongoing mapping exercises, to the extent that such data previously was unavailable, it is now quickly becoming ever more so.

With respect to increasing adoption, an objective I consider consistent with the development of a sound broadband plan, having good data is also important in many respects. For example, in my comments I suggested it may be appropriate for the government to subsidize the purchase of computers by low income persons as a means of promoting more widespread adoption. Whether this makes sense or not, or the extent to which it does, depends on having sound data concerning computer ownership by low income households, the number of persons affected, the cost of the computers and the like.

And regarding adoption, there is good data, especially from the Pew Internet and American Life Project, showing that, while there are many non-financial reasons for non-subscription to broadband, for some the principal reason is related to income. FSF Distinguished Adjunct Fellow Deborah Tate, who chaired the Federal-State Joint Board on Universal Service while serving as FCC Commissioner, recently advocated in a Baltimore Sun commentary that the Lifeline/Linkup program be changed to provide support to low income persons for broadband subscriptions. Again, having good data on the extent to which income level correlates with broadband subscription, and the extent to which a particular level of financial aid is likely to correlate with an increase in take rates, is useful in developing sound policy in this regard.

So, these are examples where good data points are necessary if policies designed to increase deployment and adoption are to be implemented in the most effective and efficient way.

Now, consider an instance in which regulatory perspective and philosophy matters a lot. As I said on Thursday, Free Press has suggested in its Dismantling Digital Deregulation paper that at one time there were 6000 Internet Service Providers in the country and that the average American consumer had access to more than a dozen ISPs. As a result of the FCC's abandonment of DSL line sharing and wholesale price regulation policies around 2003-2004, this story line goes, only a handful of the 6000 ISPs remain and consumers no longer, on average, have access to a dozen ISPs. Well, in deciding how to interpret this data, how to process it, here regulatory philosophy matters a lot.

Let's assume for the sake of argument that the 6000 figure for the number of independent ISPs is an indisputable fact. Nevertheless, I would not want the FCC's development of a broadband plan to be "data driven" (in the wrong way) by this particular data point. Rather, I would want commissioners to understand that the 6000 ISPs existed merely at the sufferance of an agency policy of "managed competition" through regulated common carrier resale, and that such a "managed competition" policy does not provide incentives either for the incumbent providers to upgrade their networks or for the so-called "competitors" actually to build out their own network facilities. And I would want them to understand that, in the long run, which is what matters, consumers benefit more from facilities-based competition that supports sustainable competition than from managed resale that does not support sustainable competition.

And here is the key point: In deciding whether to recommend returning to the common carrier/net neutrality/open access regulatory regime advocated by Free Press and others, or whether to adhere to the deregulatory broadband policies the Commission largely adopted five or so years ago, what matters in reaching the right decision is not only knowing the 6000 ISP data point. Rather what matters is having in mind a regulatory philosophy that enables one to understand why this particular data point should not be considered a reason for supporting a common carrier regulation in light of the difference in investment and innovation incentives created by facilities-based and non-facilities-based competition. This is what I mean when I say that, in developing the broadband plan, the commissioners should have in mind a regulatory philosophy.

Commissioner Meredith Baker, who delivered the closing keynote at Thursday's conference, was most eloquent in speaking to the importance of having both good data, what she called "fact-based evidence," as well as a regulatory philosophy grounded in free market principles. In her speech, titled, "Incentives Matter: Decision Making at the FCC," Commissioner Baker said that having "good data is critical," especially with respect to what ought to be the highest priority in broadband policy, "to get broadband to all remaining unserved areas of the country." (As stated above, I fully agree this should be the top priority in the plan.)

As for regulatory principles, Commissioner Baker said she starts "with an assumption that markets work better than government intervention and that competition regulates market behavior more efficiently than regulators can." This is a simple but fundamental "first principle," but not one to which everyone subscribes, certainly not those parties urging the Commission to impose common carrier regulation on broadband ISPs. Commissioner Baker added: "[M]ost importantly, I believe incentives matter. Actions government takes –or doesn't take – affect market behavior and create incentives. I recognize that nearly any regulatory change the Commission makes will disturb the balance of the market—maybe for better, but possibly for worse. Therefore, our decisions must be fact based, fully considered, and reasoned. Good intentions are not enough."

Speaking more specifically about the analytical framework she proposes to use in reaching policy decisions, Commissioner Baker identified these elements: (1) identify objectives when launching proceedings; (2) look to the statute; (3) understand the context of the policy at issue; and (4) weigh the costs and benefits of any decision, including the potential unintended consequences. This last element is critical, because if the wrong balance is struck, "we risk imposing costs and other regulatory burdens on providers." That raises prices, reduces quality of service, and harms innovation, outcomes that "damage consumer welfare and endanger economic growth in the dynamic sector of the economy at a time when we can least afford it."

The upshot is this: The extent to which one starts with a basic assumption that markets work better than government intervention or the other way around is part and parcel of a regulatory philosophy. Whether one embraces cost-benefit analysis, or appreciates the law of unintended consequences, or the principle of "first, do no harm" is part and parcel of a regulatory philosophy. So is the extent to which one accepts, especially in regard to communications markets, the power of Schumpeterian dynamism to change markets, as opposed to embracing a static or snapshot market view. And while it is easy to hypothesize that regulators should "let go" of regulation at just the right time as competition becomes more robust, one's regulatory philosophy influences whether one believes the error costs of waiting too late generally exceed the error costs of deregulating too early. These are but some of the ways in which one's regulatory philosophy is brought to bear on analysis of available data.

In my view, as Commissioner Baker articulated so nicely, a regulatory philosophy grounded in an understanding of free market principles best serves consumers. As I said in my comments to the Commission back in June, the broadband plan should be grounded firmly in such principles.

I am grateful to Blair Levin for his thoughtful and thought-provoking remarks at Thursday's FSF conference. It is true we don't always agree, but we always learn something by listening to each other. As Blair said on Thursday: "One of the nice things about friendship is it does not require agreement." I agree.

And, finally, I am very grateful to Commissioner Baker for delivering her maiden address at the FSF conference, and for doing so after flying back all night from Brazil to do so. Her keynote will repay many times those who read it closely, as I have several times.

PS – I should add that, by all accounts, the presentations of the three scholars – Jim Speta, Christopher Yoo, and John Mayo – were extremely informative and useful. More about these terrific presentations when the transcript is released. In the meantime, you will be able to watch them on the video soon if you missed attending the conference.

DC Circuit: Vindicating Video Competition

In a sensible and straightforward ruling, the U.S. Court of Appeals for the District of Columbia Circuit struck down the Federal Communication Commission's (FCC) regulations limiting the market share of any single cable operator to 30% of all subscribers. In an opinion by Judge Douglas Ginsburg, the D.C. Circuit panel held that the FCC’s 30% limit is "arbitrary and capricious." The FCC's "open field" analysis supporting the 30% limit, ruled the D.C. Circuit, was contradicted by "overwhelming evidence" concerning "the dynamic nature of the communications marketplace" and by "the entry of new competitors at both the programming and distribution levels." The D.C. Circuit's ruling in Comcast v. FCC was significant for a few reasons.

First, the D.C. Circuit expressly recognized the increasingly competitive and dynamic marketplace for video:

First, the record is replete with evidence of ever increasing competition among video providers: Satellite and fiber optic video providers have entered the market and grown in market share since the Congress passed the 1992 Act, and particularly in recent years. Cable operators, therefore, no longer have the bottleneck power over programming that concerned the Congress in 1992. Second, over the same period there has been a dramatic increase both in the number of cable networks and in the programming available to subscribers.

Judge Ginsburg went on to write that "[t]here can be no doubt that consumers are now able to receive far more channels than they could in 1999, let alone in 1992."

Second, the D.C. Circuit shredded the FCC's proffered reasons for disregarding direct broadcast satellite (DBS) competition with cable service. The D.C. Circuit held that the supposed cost-prohibitive barrier to switching from cable to DBS was belied by evidence that almost half of all DBS customers previously subscribed to cable. It also rejected the FCC's claims that DBS competition was not significant because cable operators typically offer triple-play packages that bundle phone and Internet access with cable video. As the D.C. Circuit observed, DBS providers have partnerships with phone companies to offer bundled services. Moreover, the D.C. Circuit dismissed as non-empirical conjecture the FCC's assertions that cable consumers will not switch to competitors because they can't know the quality of competitor’s programming before they consume it. Finally, the D.C. Circuit similarly dismissed the FCC’s claim that the 30% subscriber limit is needed to help upstart networks secure financing. DBS companies already serve more than 30% of the video provider market.

Third, the FCC demonstrated a willingness to discipline a defiant agency. The D.C. Circuit struck down an earlier version of the FCC's 30% subscriber cap on cable providers, and ordered the FCC to consider DBS competition in reformulating its rules. But the FCC refused to do this, essentially dismissing DBS competition as insignificant (as recounted above) and insisting that assessment of DBS competition is difficult. Wrote Judge Ginsburg, "That a problem is difficult may indicate a need to make some simplifying assumptions…but it does not justify ignoring altogether a variable so clearly relevant and likely to affect the calculation of a subscriber limit—not to mention one the court had directed the agency to consider." In reaching an appropriate remedy, Judge Ginsburg had sharp words for the FCC, writing that "[t]he Commission's dereliction in this case is particularly egregious," that it "failed to heed our direction," and that "[i]t is apparent that the Commission either cannot or will not fully incorporate the competitive impact of DBS and fiber optic companies into its open field model." The D.C. Circuit vacated the FCC's order, thereby eliminating the 30% subscriber limit.

Incidentally, the D.C. Circuit reiterated that First Amendment protections apply in the context of video service and media regulations. For Judge Ginsburg and concurring Judge Brett Kavanaugh, the First Amendment burdens imposed by the subscriber limits were a factor supporting the vacating of the FCC's order. (Senior Judge Raymond Randolph maintained that the Administrative Procedures Act requires courts to vacate all unlawful administrative rules or orders without any multi-factor analysis.) The recognition of First Amendment protection for cable providers doesn't break any new jurisprudential ground, as that must likely fall to the U.S. Supreme Court. But the principled application of the First Amendment to media outlets is significant, not a mere afterthought.

Stimulus Strings Tied to Uncertainties

Recent news and commentary have highlighted large incumbent broadband providers' apparent disinterest in federal stimulus dollars. But it's hardly surprising that large incumbents would forego federal broadband grants. Given current and projected private investment in broadband infrastructure, why would anyone expect large broadband providers to suddenly subject themselves to the administrative and legal uncertainties that come with federal stimulus dollars? And why would they want to invite media and public criticisms that would certainly follow from taking taxpayer dollars? One can't read the minds of broadband provider execs, and any number of factors could be playing into their decisionmaking. However, regulatory uncertainties surrounding the broadband grant program and public anti-stimulus sentiment are likely to be contributing factors to the major broadband providers' pass on federal dollars.

The incumbent providers are making broadband investments with their own money and based on their own best judgments about how to provide service in the marketplace. As many stories point out, these broadband providers are investing annually billions of their own dollars into broadband infrastructure. It's estimated that broadband providers have invested over $200 billion in broadband deployment in recent years. This means they’re investing billions and billions more than the entire $7.2 billion federal stimulus appropriation.

Attached to federal stimulus dollars for broadband are statutory conditions governing network management that include 'nondiscrimination obligations.' Those statutory conditions have been interpreted expansively by the National Telecommunications and Information Administration (NTIA) and the Rural Utility Service (RUS) so that 'nondiscrimination obligations' go beyond the Federal Communications Commission's (FCC) 2005 'Broadband Policy Statement' by mandating a so-called 'non-discrimination condition' that prohibits the favoring of any lawful Internet applications or content over others. The literal letter of these new rules might be interpreted to prohibit innovative attempts by broadband providers to more efficiently manage their networks through flexible billing options that tie consumer prices to amount of usage. But the new rules could reach even further into network management practices. Through administrative action, the FCC could conclude that a particular broadband provider’s network management techniques do NOT fit with 'reasonable network management practices.' (The FCC is the primary venue for hearing complaints alleging non-compliance with the broadband grant program’s requirements.) Uncertainties arise from the fact that the FCC has little or no precedent in interpreting and applying its 'Broadband Policy Statement.' And the 'non-discrimination condition' contained in the NTIA/RUS rules gives the FCC an added new hook to rely on.

Through administrative interpretation and enforcement actions, agencies can routinely impose expansive new obligations on private parties without clear pre-existing rules. Arguably, the FCC did precisely this in its recent attempt to impose network management requirements on Comcast concerning peer-to-peer traffic. Without any official rulemaking or any administrative adjudication of the facts, the FCC declared the 'voluntary principles' of its 'Broadband Policy Statement' to be enforceable regulations, and then immediately held Comcast to be in violation. The net result of all this is regulatory uncertainty piled upon regulatory uncertainty, compounded by more regulatory uncertainty. Such and atmosphere of uncertainty could hardly make participation in the broadband grants program more appealing to broadband providers.

Another contextual factor to keep in mind concerning the federal broadband stimulus is the media scrutiny and public outrage over the spending activities of major financial and auto execs whose companies were receiving federal bailouts. America is still in the grips of the Great Recession and a bailout backlash sentiment still exists. Surely, no company wants decidedly negative headlines each time its CEO takes a trip on a private jet that the press, public opinion, and political officials all view as being fueled by federal stimulus dollars. Banks and broadband are apples and oranges, but people recognize the distinction between government and private industry. When private competitors forego federal funds, any perks lavished on their execs are the shareholders' problem. But when private competitors do take federal funds, the shareholders' problem becomes reasonably viewed as the taxpayers' problem. I don't know for sure, of course, but it is certainly plausible that a broadband provider would take these kinds of concerns seriously when considering the broadband grants program. Accordingly, a large broadband provider could simply see its current and existing private investment in broadband deployment as the safer path.

NTIA and RUS acknowledge that the eligibility rules for the broadband grant program and its implementation are works in progress that will be adjusted as the process goes along. Both agencies have received some 2,200 broadband grant applications, with smaller private businesses or municipal broadband providers actively seeking federal dollars. But uncertainties surrounding the regulatory mandates accompanying implementation of the program and consideration of public opinion are two factors that hardly seem favorable to large, incumbent broadband provider buy-in.

Governor O'Malley's Budget Cuts

Yesterday Governor Martin O'Malley announced $454 million in budget cuts, including $17 million in savings resulting from 205 layoffs and the elimination of 159 vacant positions. You can read the outlines of the cuts here. To close the anticipated budget gap of $1.5 billion, there definitely will need to be more trimming of people and programs. Arguably, Governor O'Malley should have done more trimming earlier and even now.

Laying off workers and cutting services is never easy. People's lives are affected. But the reality is that Maryland's budget has gotten bloated, with excessive spending on too many programs and entitlements that might be nice if money grew on trees or if taxpayers were cash cows. But money doesn't and taxpayers aren't.

In a Washington Post news article on the day the cuts were announced, Patrick Moran, director of the American Federation of State, County and Municipal Employees in Maryland, is quoted to the effect that his union is "disappointed by the governor's decision to balance the budget on the backs of state workers and residents…Even in these tough times, it is essential that we remember our priorities in Maryland and that the people of this state come first." Very nice sentiments, indeed -- if you like platitudes.

What does it mean to say that "the people of this state" come first and the governor's proposing to balance the budget "on the backs of state workers and residents"? Isn't that all of us? Of course, cuts are going to affect state workers and residents – because the state government employs workers to provide services to residents, even including many residents who are not lawfully in the country. Does Mr. Moran have some cuts in mind for Maryland's budget that would affect only residents of Mars, or at least only those in other states? Or that would affect only government workers in states other than Maryland?

I seriously doubt it. The point is, rhetoric like Mr. Moran's is not very helpful – indeed, it's harmful -- because it implies no tough decisions need be made to trim the deficit. They do. The time for smoke and mirrors is rapidly drawing to a close, and the public will be best served by straight talk.

 

 

What Andy Kessler Doesn't Get

It is possible that Andy Kessler was a good hedge fund manager in his day. But his recent Wall Street Journal commentary ("Why AT&T Killed Google Voice,") reveals there is a lot he doesn't understand about communications policy and communications network economics. Apparently in a heat because Apple rejected Google's voice application for its iPhone, Mr. Kessler launches into a misguided attack on AT&T and other broadband providers. He's especially perturbed that wireless broadband service providers have entered into certain exclusive arrangements with handset device manufacturers, such as Apple. And he makes clear he'd prefer to pay less rather than more for his wireless services, or at least to be offered a pricing package designed to fit his own particular usage patterns.

A few basic points in response. Mr. Kessler says that "the trick in any communications and media business is to own a pipe between you and your customers so you can charge what you like." Andy, it's no trick. These communications pipes don't grow on trees. Over the last few years, service providers like AT&T, Verizon, and Comcast have invested over $200 billion in private capital building out wireline and wireless broadband networks with the latest technologies, including fiber optic lines and 3G and 4G wireless platforms. Curiously, Mr. Kessler – while complaining about the "pricing power" of the wireless providers – acknowledges that "Verizon Wireless, T-Mobile and others all joined AT&T in bidding huge amounts for wireless spectrum in FCC auctions, some $70-plus billion since the mid-1990s." He doesn't understand that implicit in his statement concerning AT&T, Verizon, T-Mobile, and others is an acknowledgement that competition already exists in the wireless market, albeit as a result of a huge amount of investment of private capital. Indeed, five facilities-based providers offer nationwide coverage.

Mr. Kessler calls the Google Voice application "the new competition." Andy, how wrong! What Google wants is to continue using the wireless networks of AT&T, Verizon and the others without having to pay a market price for doing so, regardless of the costs incurred in creating and operating the networks. (For years it has employed the same "ride the back of others on the cheap" strategy with respect to broadband wireline communications.) While Google made feints a few years ago designed to cause the FCC and others to believe it might actually bid at auction for spectrum and build its own network – in other words, become a real facilities-based competitor -- when the FCC adopted "open access" policies for that spectrum block, Google quickly dropped out of the bidding. It realized it was much cheaper to lobby the FCC than to build and operate a communications network.

Mr. Kessler's complaints about exclusivity arrangements between wireless providers and handset manufacturers demonstrate a surprising lack of appreciation that such arrangements provide the incentives that lead to the development of innovative devices such as the iPhone, or the new Palm Pre, available exclusively through Sprint. And his complaints about wireless prices are equally puzzling in that he doesn't relate prices in any way to the cost of providing service. Nor does he seem to know U.S. consumers enjoy the lowest wireless prices per minute and highest minutes of usage of any developed nation.

There are other basic errors in his piece, such as his complaint that, with respect to video, cable needs "a little competition." Doesn't he know that in most areas there is vigorous competition among the telephone companies and satellite and cable operators for video services?

The short of it is that Mr. Kessler shows little comprehension of the role that competitive markets and respect for property rights play in encouraging investment and innovation and, ultimately, enhancing consumer welfare. While most people rightly look at the U.S. wireless marketplace, largely deregulated since 1993, as a real success story, Andy seems to just want regulators to allow him to pay less money for any particularized service plan that he imagines he might fancy. And to make sure the government continues to allow Google to ride on the backs of others' network investment without bearing any burdens of such capital costs.

I'm not sure I'd want to invest in one of Andy's hedge funds, but I'd sure like to have a debate with him about sound communications policy.

Or at least have a talk at a backyard Beer Summit to explain what he doesn't get about network economics and today's digital marketplace environment.

Interesting, But Deeply, Deeply Flawed

The OECD's broadband rankings have been misused by those with an agenda to talk down the progress the U.S. has made during the last decade in making broadband available. Now over 90% of America's households have access to broadband, with a subscription rate of 60%. The agenda -- to drive policymakers towards exercising much more regulatory control over, and even government ownership of, Internet networks -- is not subtle or hidden.

At a June 5 Free State Foundation seminar, Ambassador David Gross, State Department's immediate past U.S. Coordinator for Communications and Information Policy, stated: "Almost everyone agrees that the OECD's broadband statistics are useful and certainly interesting. However, virtually everyone agrees that they are deeply, deeply flawed." And, true to his title, Ambassador Gross was probably speaking diplomatically. The transcript is here.

Now comes the OECD with a new report that purports to show that the prices paid by U.S. consumers for wireless services are higher than those paid by consumers in many OECD countries. Perhaps the report is interesting, but it also looks, like the broadband reports, to be "deeply, deeply flawed."

The fundamental problem is that the OECD assumes, for purposes of determining price values, hypothetical usage packages that do not reflect the reality of the extent to which U.S. consumers use their mobile devices each month. In short, the calling profile of the average U.S. consumer is nearly three times as much as the calling profile for the assumed "high use" OECD package and six times as much as the "medium" use package.

A report released in May 2009 by CTIA, the wireless industry trade association, indicates that Merrill Lynch's research shows the price per minute of service in the U.S. is the lowest of the 26 OECD countries and U.S. consumers have the highest minutes of use per month of the 26 OECD countries.

You can review both the OECD and CTIA reports, and you should do so. Aside from the pricing data, the CTIA report contains much data, fully consistent with other sources and not contested, which demonstrate the competitiveness of the U.S. wireless industry, and, concomitantly, the extent to which such competitiveness has led to a wide array of choices in applications and equipment for consumers.

Presumably, it is good that Americans, on average, use their wireless devices much more, on average, than do their counterparts in OECD countries. U.S. consumers must perceive value in doing so.

Before any policymakers begin to use the new OECD report as a pretext for regulating the highly successful U.S. wireless industry, they should understand, to borrow from Ambassador Gross, that the OECD report may be interesting, but "deeply, deeply flawed."

Riding the Back of the Internet Public Utility Tiger

There is a remarkable interview with Robert McChesney, a founder of the Free Press organization, in the current edition of a publication called "The Bullet." The Bullet is published by the Socialist Project. The interview with McChesney, a long-time guru to those advocating more government control and regulation of the media, may be found here on the Socialist Project's website.

To appreciate – or I should say understand – the radical vision that undergirds Robert McChesney's views concerning media policy, you should read the entire interview. The extreme nature of his anti-capitalistic views ought to be at home in only a few places in the world, say, in Hugo Chavez's Venezuela, Castro's Cuba, or perhaps Putin's Russia.

Here I only want to focus attention on what McChesney has to say about network neutrality. Again, read the entire interview, but this is a key statement:

"The battle for network neutrality is to prevent the Internet from being privatized by telephone and cable companies. Privatization would give them control over the Internet, would allow these firms to privilege some information flows over others. We want to keep the Internet open. What we want to have in the U.S. and in every society is an Internet that is not private property, but a public utility. We want an Internet where you don't have to have a password and that you don't pay a penny to use. It is your right to use the Internet."

I understand that there are several definitions that one might put forward for "net neutrality," and that the fact that this is so has caused some to suggest, including those broadband providers that would be subject to net neutrality mandates, that net neutrality might be a relatively benign concept. Well sure, it all depends on the definition. But it would be a big mistake to ignore what a founder of Free Press says he wants net neutrality to mean – "an Internet that is not private property, but a public utility" and one in which "you don't pay a penny to use."

I have explained over and over again for many years that, for most of its proponents, net neutrality means regulation of the Internet as a common carrier or traditional public utility. In the FCC's broadband policy proceeding and other venues, Free Press acknowledges that this is its position. See my recent pieces here and here, and my reply comments in the FCC's broadband proceeding.

Professor McChesney also says this in the Socialist Project interview:

"[W]e have had much success around the net neutrality struggle. I expect within the next twelve months, we will have a formal law passed by U.S. Congress, signed by President Obama, and backed up by orders from the Federal Communications Commission (FCC). Network neutrality is well on its way to becoming the new law of the land."

It may be that Professor McChesney's vision of a government takeover and control of the Internet, running it as a public utility, will come to pass. If it does, this takeover will occur in the form of net neutrality mandates that, initially, may seem to some as benign as the net neutrality label itself. But the ultimate harm to consumers caused by diminished private sector investment and discouraged innovation will be substantial.

Finally, the risk to free speech posed by government policing Internet "neutrality" and "non-discrimination" regulations should be cause for concern to all those who appreciate that the First Amendment's free speech values are not promoted by government control of the means of speech. I sounded an early warning about the threat to the First Amendment posed by net neutrality mandates in this September 2006 Broadcasting & Cable commentary entitled "Net Neutrality and Free Speech," and at greater length in this 2007 law review article entitled "Net Neutrality Mandates: Neutering the First Amendment in the Digital Age."

There is an old Chinese proverb, one of President John F. Kennedy's favorites, that goes like this: "Those who ride the back of a tiger may find themselves inside."

There will be a tremendous push at the FCC and in Congress during the next year to implement net neutrality mandates and the Robert McChesney/Free Press vision of the Internet as a public utility. Those who underestimate the push – or who suppose they might be able to work out the "right type" or "a manageable type" of net neutrality mandates -- are riding the back of a tiger. And I think I know where they are likely, ultimately, to be found.

Increasing Broadband Adoption

This piece by FSF Distinguished Adjunct Senior Fellow Deborah Tate is very useful in showing how the FCC can quickly implement targeted measures that should increase broadband adoption without jeopardizing the overall effort to reform the bloated and ineffcient USF regime. That USF reform effort is still desparately needed.

Shared via AddThis

New Potential for Forbearance at FCC

A noteworthy item on the FCC forbearance front is Qwest's recently-filed forbearance petition requesting regulatory relief for certain services it provides in the Phoenix-Mesa-Scottsdale Metropolitan Statistical Area (MSA). It seeks relief from unbundling obligations, dominant carrier requirements, price cap regulations, certain Computer III requirements, and some other rules. Qwest's new forbearance petition is its second petition seeking forbearance relief from these regulations for the greater Phoenix MSA. This time around Qwest maintains that it "provides 'an even stronger case for forbearance for the Phoenix MSA.'" How the FCC handles this new forbearance petition will be interesting for a couple of reasons.

First, Qwest's new forbearance petition for the Phoenix MSA will be considered by the FCC under part of its new procedures for forbearance petitions. How the FCC's new procedures might affect the outcome is uncertain. When considering Qwest’s prior forbearance petition, the FCC rejected calls to adopt new forbearance procedures. In a display of administrative discipline, the FCC insisted it would only consider adopting new procedures in its rulemaking proceeding.

Qwest's new forbearance petition must satisfy the formal burden of proof that the FCC has now erected. And Qwest is bound by the FCC's new procedural rules limiting petition withdrawal. Since Qwest's new forbearance petition was filed before the FCC issued its new forbearance procedures, however, the FCC itself suggests that Qwest's new petition won’t be obligated to meet the FCC's new "complete as filed" requirements.

Second, and more significantly, the FCC will have to take potential marketplace competition in the MSA seriously in its analysis under the Section 10 forbearance provision of the Telecom Act of 1996. (Or the FCC will at least be required to explain why potential competition should no longer be relevant to its own forbearance analysis.) This should weigh in Qwest’s favor for its new forbearance petition, particularly because the FCC failed to take potential marketplace competition seriously when it denied Qwest’s prior forbearance petition.

The importance of potential marketplace competition follows from the D.C. Circuit's recent ruling in Verizon v. FCC (also discussed in an earlier post). In that case, the Court held that the FCC had arbitrarily and capriciously departed from the FCC precedent in relying only upon existing market share in denying a Verizon forbearance petition. The Court remanded to the FCC for reconsideration of Verizon’s forbearance petition. For its part, the FCC will have to either consider potential marketplace competition or explain its departure from precedent.

Here's the connection between Verizon v. FCC and Qwest's prior forbearance petition: Qwest's prior forbearance petition was denied largely according to the same rationale that the FCC had used in wrongfully denying Verizon’s petition. Qwest's own court challenge of the FCC's denial of its prior forbearance petition was deferred pending the outcome of Verizon v. FCC.

Just this month, the FCC's General Counsel filed a motion with the D.C. Circuit requesting remand to reconsider Qwest's prior forbearance petition. The General Counsel acknowledged that "[t]he Qwest Forbearance Order involves the denial of petitions for forbearance of the same regulatory requirements" that were at issue in Verizon v. FCC, and it said that remand would enable the FCC "to issue a ruling on the Qwest petitions in light of the Court’s guidance provided by the Verizon decision."

So Qwest's new forbearance petition for the Phoenix MSA will be considered in light of the new arguments and information proffered by Qwest and under the FCC's new formal burden of proof. And both Qwest's new forbearance petition and its prior forbearance petition for Denver, Minneapolis-St. Paul, and Seattle MSAs should hopefully be analyzed by the FCC in light of both existing market share and potential marketplace competition.

In today's technologically dynamic and rapidly changing marketplace environment, it certainly doesn't make sense for the FCC to shut a blind eye to potential competition, which, after all, operates to constrain any market power that Qwest may retain.