The Slow Winding Road to Intercarrier Compensation Reform

The intercarrier compensation system is outdated, complex, and in need of reform.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

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

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

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

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

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

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

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

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

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

The Massachusetts Vote and Internet Regulation

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

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

And ended this way:

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

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

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

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

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

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

Clearing the Air on Wireless Text Messaging

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

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

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

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

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

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

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

A New Year, Same Old POTS

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

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

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

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

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

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

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

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

 

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

 

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

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

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

New Year's 2010

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

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

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

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

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

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

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

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

Getting the Message on Text Messaging Prices

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"Another problematic aspect of spending affordability is that the spending

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

prevents legislators or citizens from comparing estimated State general fund

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

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

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

manipulated. The General Assembly reduces special fund appropriations but

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

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

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

through budget amendments."

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

Reform Universal Service Now: Two New Data Points

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

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

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

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

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

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

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

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

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

Secrecy in Annapolis

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

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

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

What 'Free Enterprise Fund' Means for the FCC

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

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

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

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

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

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

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

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

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

Fairly Disclosing ETFs vs. Price Regulating ETFs

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

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

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

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

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

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

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

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

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

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

Google's Discriminating Goggles

Did you see the December 8 Wall Street Journal article about Google's new search engine products? One of the Web giant's new products, called Google Goggles, caught my eye because it appears to be another example of a discriminatory (read: non-neutral) Google Internet offering.

Recall the minor Googlegate that erupted in October when it was revealed that Google's Internet telephone service, Google Voice, discriminated against certain high-cost rural locations by refusing to deliver traffic to those locations. The FCC ultimately sent Google a series of questions inquiring about the nature of its phone service and the justification for the discrimination. You can read about this controversy in my earlier post, Google: Phone Giant or Internet Giant?

Now, according to the December 8 WSJ article, one of the new services the dominant search engine is banking on is Google Goggles, which allows Google users to pull up information about a landmark or a product by taking a picture from a cellphone instead of typing in a query. The WSJ reports that the "service is only available currently for cellphones running versions of Google's Android software." In other words, if you want to use this cool new Internet service, you can't do so with your iPhone or other phones with non-Google operating systems. Or, in still other words sounding in FCC-speak, Google Goggles is offered on a discriminatory basis that favors devices using Google's operating system in a way that violate net neutrality principles.

Now I understand that Google's position will be that this has little to do with net neutrality because the Goggles offering is an "information" rather than a "telecommunications" service, or an "edge" service rather than one at the "core" of the network. But as I explained in Google: Phone Giant or Internet Giant?, this twenty-year old regulatory distinction is increasingly difficult, if not impossible, to maintain in today's digital age, at least not without imposing substantial consumer welfare costs that outweigh any consumer benefits. Under a net neutrality rule that prohibits discrimination, there will be constant, never-ending litigation concerning the not-so-bright line to be drawn between services at the core and at the edge of the Internet. Apart from the direct litigation costs, the intangible costs imposed by the uncertainty of not knowing what the regulators ultimately will do are likely to be great. Investment and innovation do not thrive in the face of such regulatory uncertainty and instability.

It may be that Google, exercising its increasing and highly visible political muscle, will itself be able to wriggle out from under the neutrality strictures. Indeed, the FCC's net neutrality rulemaking proposal appears going in to exempt "application" providers from the neutrality mandates, while focusing solely on Internet service providers.

I almost wrote next: "Well, more power to Google" for, thus far, avoiding FCC regulation. But in light of Google's dominant position in the web search and adjacent markets, and the way it is exercising its political muscle pushing for neutrality mandates that would entrench its own business models, I don't really want to wish "more power to Google." What I wish is that Google would realize that the "government-as-enforcer-of-Internet-neutrality-game" is a dangerous one, even for itself. Because once the government starts regulating any part of the Internet ecosystem, the necessarily blurry regulatory lines among Internet participants can be used as a sword turned any which way.

Having said all this, please do not mistake my bottom line, which I have stated in this space many times: I do not advocate subjecting Google to the FCC's outstretched regulatory arms, even though Google is doing everything it can to ensure that Internet service providers' freedom to innovate and develop new business models is constrained – or neutered, if you will. And my position would be the same even if the FCC were to decide – wrongly – to impose net neutrality regulations on ISPs.

I prefer to stand, consistently, on the fundamental principle that in today's competitive and technologically dynamic broadband Internet environment, neither Google, no matter its increasing Web dominance, nor the ISPs, should be regulated by the FCC in a fashion akin to last century's telephone common carriers, which was the same as the 19th Century's railroads.

An A+ for Careful Targeting

The announcement by the National Cable & Telecommunications Association that is initiating what it calls its "Adoption Plus (A+)" program to increase digital literacy and broadband adoption for millions of low-income middle school students is welcome news. The two-year A+ pilot program combines digital literacy training with discounted home computers and discounted broadband service for qualifying low-income households. The details of the program are here in the NCTA press release.

The pilot program is called a public-private partnership because the federal government may choose to provide additional subsidies (presumably with already appropriated federal stimulus funds) for further discounts off of the price of the computers and school districts will be involved in implementing the digital literacy training. The federal government is also going to assess the effectiveness of the pilot program. NCTA says the value of the discounted broadband services provided by its participating member cable operators could reach $572 million over two years, depending on the extent of the low-income household participation.

It is always possible that the execution won't match the announcement's promise, at least in full. Nevertheless, NCTA should be commended for devising a carefully targeted program likely to have a positive impact. The focus on low-income households without computers targets assistance to a demographic group that lags in broadband adoption.

(The NCTA press release states the proposal is the product of discussions with FCC Chairman Julius Genachowski and Omnibus Broadband Initiative Executive Director Blair Levin, and that it was developed with their "encouragement." Assuming, as I do without any indications to the contrary, that the "encouragement" to which NCTA refers did not cross the line and become coercive – always a legitimate concern when a regulator encourages a regulated party to undertake a voluntary action – then these FCC officials deserve credit too.)

There is a lesson in design here too for the FCC. As my colleague Deborah Tate, FSF's Distinguished Adjunct Senior Fellow, proposed in August in a commentary piece, "the Lifeline/Linkup programs, which thus far have been somewhat underutilized, could be expanded to provide discounts for installation and monthly charges for today's broadband services just as they have for old-fashioned telephone services." In other words, the way to address universal service is by careful targeting of subsidies, not by making available broad subsidies in an unfocused manner that necessarily is wasteful of scarce resources.

The fact of the matter, as I have written many, many times in this space over the last several years, is that the FCC has been derelict in its responsibilities by not having done more to reform the broken universal service regime. With the universal service tax on every interstate and international telephone call reportedly set to jump from 12% to 14% in the first quarter of next year, it is imperative that the FCC – and Congress for that matter – face up to the responsibility to reform a system designed for a bygone era. The already bloated existing regime should not be expanded in an unfocused manner generally to include broadband services. Rather, as former Commissioner Tate has suggested, the FCC should alter the Lifeline/Linkup programs to allow subsidies for qualified low income households.

Cable's A+ pilot program, with its careful targeting of private resources, provides a good template for the way any complementary federal subsidy programs should be designed.

 

 

 

Thanksgiving 2009 -- "Free Markets and Free Speech"

With Thanksgiving 2009 upon us, in the last several days I have been reflecting upon its meaning to me this year, and relating this meaning to the Free State Foundation's work, where we proclaim our mission to promote free market, limited government, and rule of law principles.

Of course, there are many ways we Americans think about Thanksgiving, including conjuring up our favorite cranberry sauce or stuffing, or deciding which team we're rooting for in the traditional Thanksgiving Day football games. Not to mention which Black Friday sales will draw us out of bed pre-dawn on Friday morning.

But I have no doubt that, aside from enjoying the turkey, the football games, and the shopping sprees, most Americans, and especially those who are more recent arrivals to our shores, marvel at the sheer abundance that prevails in America as we approach the end of 2009. And, even amidst the more difficult economic times, I have no doubt that, although not always consciously, and at times perhaps even grudgingly, most Americans recognize, and are thankful for, that abundance -- and for the success of the American experiment in democratic capitalism that has made such abundance possible.

The success of this experiment depends at its core on the protection of individual liberty – that is, the preservation of sufficient freedom from government interference and control that individuals and businesses can nurture the entrepreneurial spirit that fosters the drive for self-betterment, the willingness to take risks on new ideas and to innovate, and the willingness to invest capital in new businesses.

With the twentieth anniversary of the fall of the Berlin Wall earlier this month, we were reminded, but perhaps not often enough, of President Reagan's famous June 1987 injunction: "Mr. Gorbachev, tear down this wall!" Later in his Berlin speech, President Reagan proclaimed: "This wall cannot withstand freedom."

On this Thanksgiving, Reagan's freedom cry in Berlin called to mind for me that part of his January 1989 Oval Office Farewell Address in which, for the last time, he invoked John Winthrop's "shining city upon the hill" image. Here is what Reagan said:

"And that's about all I have to say tonight. Except for one thing. The past few days when I've been at that window upstairs, I've thought a bit of the "shining city upon a hill." The phrase comes from John Winthrop, who wrote it to describe the America he imagined. What he imagined was important because he was an early Pilgrim, an early freedom man. He journeyed here on what today we'd call a little wooden boat; and like the other Pilgrims, he was looking for a home that would be free. I've spoken of the shining city all my political life, but I don't know if I ever quite communicated what I saw when I said it. But in my mind it was a tall proud city built on rocks stronger than oceans, wind-swept, God-blessed, and teeming with people of all kinds living in harmony and peace, a city with free ports that hummed with commerce and creativity, and if there had to be city walls, the walls had doors and the doors were open to anyone with the will and the heart to get here. That's how I saw it, and see it still."

"An early Pilgrim. An early freedom man."

The Pilgrims didn't set sail seeking the prospect of more government control over the way they lived their lives, and practiced their beliefs. They were seeking less.

In that same farewell address, President Reagan also proclaimed:

"Countries across the globe are turning to free markets and free speech and turning away from the ideologies of the past. For them, the great rediscovery of the 1980s has been that, lo and behold, the moral way of government is the practical way of government: Democracy, the profoundly good, is also profoundly productive."

"Free markets and free speech."

This is not the time to rehearse the Free State Foundation's voluminous scholarly position papers, commentaries, blogs, event transcripts, and the like. They are available on the FSF website for the taking. But if America is to continue to be that "shining city on the hill," it is always a proper time – and, yes, Thanksgiving, is a particularly proper time – to reflect upon the importance of preserving free markets and free speech. For without free markets and free speech, America would not enjoy the abundance that we do today.

Much of the work we do at the Free State Foundation involves the ongoing fight to preserve free markets and free speech. It happens this is especially true with respect to our work in the communications law and policy realm, where, for example, new proposals for government regulation of the Internet threaten both. Indeed, as I have explained here, here, and here, proponents of the benign-sounding Internet regulatory regime called "net neutrality" turn the First Amendment on its head, arguing we have more to fear from private Internet providers censoring speech than from the government enforcing its own brand of content neutrality. History and our founding principles belie this notion. Our liberty is more secure when the promotion of "fairness" and "non-discrimination" in our media resides in the hands of citizens exercising choice in the competitive marketplace rather than in the hands of the government as enforcer.

For now, it is enough to reflect and be thankful. And I am especially grateful for the support of so many friends of FSF. There will be time enough to carry on the battles for free market, limited government, and rule of law principles.

In the meantime, and for now, Happy Thanksgiving to all!

The November 12 IPI Telecom Conference

My friends at the Institute for Policy Innovation have put together an excellent conference, "Unlocking the Future of Communications," for November 12 in Washington, DC. FCC Commissioner Robert McDowell is a keynoter, heading a lineup of notable speakers.

Communications policymaking is entering a crucial phase in the next 12-18 months. If you're interested in learning about the issues from a cast of knowledgeable experts, I commend to you the IPI conference. Details here.

The Computer Inquiries – Then and Now

There is much with which I agree in the Oct. 29 post, "43 Years of Internet Policy" by the FCC's Bob Cannon. And because I was happily ensconced at the FCC as Associate General Counsel at the time the Second Computer Inquiry decision was developed, and played at least some role in its development, I get somewhat nostalgic when the Computer Inquiries are invoked. I might take issue with the description of the Computer Inquiries proceedings as "wildly successful" in light of the generally lengthy delays experienced in modifying the policies once they became outdated. But I have no problem in agreeing they were successful in helping to achieve an important public policy objective – encouraging the development of nascent online services – at a particular time in history, when AT&T and then the divested Bell Companies exercised dominant market power.

But just because an FCC policy was successful when adopted does not mean that it should be carried forward for all time. Indeed, Mr. Cannon's post itself makes clear that the then-market power exercised by the Bell Companies was a central premise underlying the adoption of the Computer Inquiry orders. ("The FCC wanted to ensure that carriers were offering the telecommunications services necessary in order for computer services to thrive and that the telecommunications networks could not use their market power to engage in anti-competitive behavior.") I can testify from my own experience – without fear of contradiction – that the Bell Companies' dominant market power was central the Commission's understanding of the desirability of developing safeguards to prevent the carriers from acting anti-competitively in a way that would injure the emerging online services. I agree the Computer Inquiries' separation of basic and enhanced services, and the implementation of safeguards, worked…for a considerable amount of time. And the Commission can take pride in this success.

But it is a mistake of the highest order to assume that a regulatory policy devised for a certain time in a particular environment is appropriate three decades later in a radically different environment. The fact of the matter is that, in today's broadband environment, the providers no longer exercise the dominant market power that concerned the Commission at the time of the Computer Inquiries. Indeed, Mr. Cannon's post, rightly, keeps referring to the "telecommunications networks" of the time. Now, as a result of findings made by the FCC beginning in 2002 concerning the competitive nature of the marketplace, the broadband providers that pro-regulatory zealots want to put under the yoke of common carrier regulation are no longer even classified as "telecommunications" providers. Rather, in light of the integration of communications and data processing functionality and marketplace changes, they are classified as information services providers.

Even in the 1980s marketplace conditions had begun to change sufficiently, along with the agency's understanding of the costs to consumers of strict separation of basic and enhanced services, that the FCC replaced the structural separation requirements of Computer II with the non-structural safeguards of Computer III. Even a casual skimming of the massive Computer III record will show this relaxation of regulation had mostly to do with the Commission's understanding that the costs of strict separation outweighed the benefits.

Well, it almost 2010. We can argue if you like about exactly how competitive the broadband marketplace is today. I'll grant it is not now and never will be the perfectly-competitive wheat marketplace that I read about in my Econ-101 text. But it certainly is no longer similar to the communications marketplace in which the Bell Companies once exercised dominant market power – the marketplace upon which the Computer Inquiries decisions were premised. Today's broadband Internet marketplace -- with wireline, cable, satellite, and wireless providers all competing, even if not with totally substitutable services – simply is much more competitive. In today's dynamic Internet environment, the costs to consumers of imposing separation requirements of the Computer Inquiries-variety greatly outweigh the benefits of such regulation that seeks to maintain a "bright line" separation between "telecom" and "information" services. Anyone pretending otherwise is living in the past, and conjuring up a black-telephone handset and 56K modem dial-up communications world that, thankfully, no longer exists.

FCC Keeps its Hands Off Handset Exclusivity, For Now…

The Federal Communications Commission has just approved the transfer of spectrum licenses as part of the AT&T-Centennial merger. This finality is welcome news, not the least reason being the finality itself. As I blogged previously, it was a year ago this month that the first applications for this merger were first filed at the FCC. To its credit, the FCC also declined to impose unwarranted restraints on the merging parties' business dealings with handset manufacturers.

In sum, the FCC found that "competitive harm is unlikely in most of the overlap markets" that will result from the merger "primarily because multiple other service providers in these markets would be an effective competitive constraint on the behavior of the merged entity." However, consistent with the U.S. Department of Justice's (DOJ) requirement that Centennial divest its wireless operations in seven local areas, the FCC likewise concluded that “absent a remedy, competitive harms would likely result." In addition to its mirroring of the DOJ's divestiture requirement for those areas, the FCC also is imposing a number of "voluntary commitments" as conditions of FCC approval.

Significantly, the FCC rejected calls to intrude on existing business practices involving wireless carriers and handset manufacturers. It found that proposals for prohibiting exclusive handset arrangements "are not narrowly tailored to prevent a transaction-specific harm." Rather, the FCC concluded that the concerns animating such calls for handset exclusivity prohibition "apply broadly across the industry and are more appropriate for a Commission proceeding where all interested industry parties have an opportunity to file comments." Without addressing the merits of handset exclusivity prohibition or even tipping its hand on the matter, the FCC chose to address the issue another day.

Wisely, the FCC avoided hasty imposition of backdoor regulation. Regardless of what one thinks of handset exclusivity agreements or prohibition of such agreements as a general matter, a selective imposition of such regulation hardly makes for fair public policy. For starters, handset exclusivity agreements are an industry-wide phenomena, not something limited to the carriers in this particular merger. Imposing such regulation only on one carrier is not a neutral, even-handed approach.

Moreover, it hardly makes for fair administrative practice to use a merger between two carriers to regulate business relationships between a carrier and manufacturers. Some recent analyses suggest that handset exclusivity agreements owe more to the hard bargaining of handset manufacturers than carriers. As Robert Hahn and Hal Singer have written, "[h]andset makers seek exclusive agreements with carriers…to share the enormous risk associated with launching a new device, to align the incentives of the carrier with the handset maker, and to ensure network quality." Manufacturers want carriers to commit to providing customers with technical support, to market their devices, and to uphold their brand name's good will. That being the case, a merger review proceeding is particularly inapposite for imposing new regulations that would have sweeping effects on a different sector of the marketplace.

The merger review process shouldn't be the FCC's incubator for experimental policies or pet projects for which it doesn’t have rules for or which it otherwise has no authority to impose. For a decade FSF President Randolph May has been urging the agency to reform its merger review process. Here's one of his pieces, "Any Volunteers," from March 2000.

Unfortunately, the FCC's recent track record does include some special pleading regulation through selective merger condition requirements. As I mentioned in a prior post, the FCC imposed network non-discrimination requirements as a condition for approving the AT&T-BellSouth merger. Like in many other contexts, the FCC's "public interest" standards for merger review are much more fuzzy than the market power analysis that the DOJ is limited to under the Clayton Act. Earlier this year, the FCC solicited public comments on how to reform its merger review process. Absent any pending reforms stemming from that proceeding, the FCC's modest self- restraint in this merger review makes good sense.

More on "The Faulty Berkman Report"

In my recent FSF Perspectives piece, "The Faulty Berkman Report: The Fallacy of Overlooking Secondary Consequences," I challenge the Berkman Report’s myopic focus on the touted benefits of a public policy to one segment of beneficiaries to the exclusion of the broader costs associated with that policy. The Report's retelling of the Federal Communications Commission's (FCC) prior attempts to impose "open access" or "forced access" policy through unbundling regulations on incumbent wireline providers is a highly selective and thereby misleading account. It fails to mention the adverse infrastructure investment incentives of mandated access policies that effectively require incumbents to subsidize facilities to be used by their competitors. And the Report nowhere even mentions the telecom disinvestment trends, discussed in my Perspectives, that plagued the industry until the courts and the FCC begun to roll back unbundling regulations.

One aspect of the Report that I left unaddressed was its insistence that the FCC's unbundling regulatory regime failure was attributable in large part to the incumbents' lobby and litigation efforts, and ultimately to the courts' disagreement with FCC policy judgment. The Report asserted that the courts failed by not according proper discretion to regulatory experts. Urging a force-fit of extensive broadband regulatory regimes used by several foreign social democracies on the American broadband marketplace, the Report suggested that the U.S. give more "engaged" regulators greater "professionalism, independence, and power" in order to impose a next generation set of "open access" mandates on broadband network providers.

This argument about the woes of the FCC's unbundling regulations oversimplifies to the point of being totally unhelpful. To say that the courts simply disagreed with the FCC's policy is misleading. Moreover, the Report's trumpeting of regulators' independence and power in foreign nations as an antidote simply doesn’t translate in the U.S. government institutional setting.

The reality is that the FCC and other federal agencies receive a considerable degree of deference from U.S. courts under Administrative Procedures Act and the "Chevron doctrine." Under the former, courts typically decline to second-guess agency judgments or "expertise" on public policy questions. And under the latter, courts routinely acquiesce to agencies' interpretations of ambiguous statutory language unless the interpretation is clearly impermissible.

However, the independence of U.S. courts means that there are constitutional and statutory limits to agency discretion. (Such judicial independence is often lacking in foreign systems of parliamentary supremacy.) Contrary to the Report's claims about judicial disagreement with agency policy judgment, it was the FCC's own contravention of legal limits through its improper sub-delegation of federal agency authority to state regulators and the FCC's implausible readings of the terms of the Telecommunications Act of 1996 that led to judicial invalidation of many of the FCC's unbundling rules. To be sure, the U.S. Court of Appeals for the District of Columbia forthrightly recognized that "[e]ach unbundling of an element imposes costs of its own, spreading disincentive to invest in innovation and creating complex issues of managing shared facilities." But the Court’s observation about the economic drawbacks to the unbundling rules was made in a larger context. The Court was attempting to ascertain whether an expansive unbundling policy with such obvious infrastructure investment disincentives was what Congress conceivably had in mind in passing the Act.

Moreover, Courts are not likely to unilaterally drop existing legal limits on arbitrary and capricious decision making by federal agencies on the grounds that even greater bureaucratic power and independence should alleviate agency capture concerns. Perhaps the Report seeks to trumpet a best-of-all-possible-worlds policy in its implicit calls for judicial retreat from review of any future agency "open access" regulations. But in this world, federal agencies must make do with the constitutional and statutory slack they have been given. In other words, they must act in accord with the rule of law.