Independence Day 2011

On March 22, 1775, in his speech to Parliament "on conciliation with the colonies," Edmund Burke declared: "In this character of the Americans, a love of freedom is the predominating feature which marks and distinguishes the whole….This fierce spirit of liberty is stronger in the English colonies probably than in any other people of the earth."

"A love of freedom is the predominating feature..."

The following year – 1776 -- Thomas Jefferson wrote one of the most famous sentences in history: "We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the pursuit of Happiness."

In penning that sentence in the Declaration of Independence, and referring to "unalienable Rights," Jefferson invoked the natural law tradition which was so influential among many of the Founders. In the face of the impending conflict with England, it is not surprising he would do so. Because in contrast to the natural law position stood the view that acts of Parliament – think the various statutes imposing taxes on the colonies --- were supreme and absolutely binding as law. If this absolutist view of legislative supremacy were accepted, then America's act of declaring independence in order to secure inalienable rights would be essentially lawless.

Of course, Jefferson and his revolutionary compatriots, steeped as they were in English law, had good authority for their natural law view – from Magna Carta, through Bracton and Sir Edward Coke, to Sir William Blackstone. In the decade preceding the Declaration of Independence, some 2500 copies of Blackstone's Commentaries on the Law were purchased in the American colonies. And in the Commentaries, published in four volumes from 1765-1769, Blackstone had said this: "For the principal aim of society is to protect individuals in their enjoyment of those absolute rights, which were vested in them by the immutable laws of nature; but which could not be preserved in peace without that mutual assistance and intercourse, which is gained by the institution of friendly and social communities."

Certainly, when Jefferson, in the Declaration, invoked "the Laws of Nature and of Nature's God" as a source for "unalienable Rights," he knew he was invoking the weight of Blackstone, Coke, and the Magna Carta.

Ever since the Constitution's ratification in 1789, there has been a lively debate concerning whether the Declaration of Independence's principles have any continuing legal import or significance, or whether the Constitution alone now constitutes our fundamental law. If you are getting ready to head off to a Fourth of July picnic or down to the local pool, you'll be relieved to know I am not going to begin a discourse on that subject here. (Maybe next year!)

For my present purposes, it is enough to know the Declaration of Independence is included at the head of the United States Code under the heading of "Organic Laws of the United States of America." And to know Abraham Lincoln's response to Stephen Douglas in 1858 in one of their famous debates: "If the Declaration is not the truth, let us get the statute book, in which we find it, and tear it out!"

No doubt in many ways this Fourth of July holiday carries somber overtones, with very serious challenges confronting America at home and abroad. It would be easy to be pessimistic about America's future. But I think – at least hope desperately -- it would be wrong. For whether or not the Declaration has any legal import is certainly not determinative concerning whether it continues to embody the most fundamental American principles which define us as a nation. And whether its spirit continues to animate us.

With Lincoln, I would say this: If the Declaration is not the truth, then tear it out of the statute book.

With Burke, I would say this: In this character of the Americans, a love of freedom is the predominating feature which marks and distinguishes the whole.

In a letter to Edward Rutledge in 1788, Jefferson wrote: "My confidence is that there will for a long time be virtue and good sense enough in our countrymen to correct abuses."

It is far too easy to take for granted what we have in this country, and too many of us do. But as long as Americans' love of freedom remains strong, I remain optimistic that, for a long time to come, there will be virtue and good sense enough to sustain our ability to maintain our liberties and our prosperity.

***

On that hopeful note, I wish you a most happy Independence Day. And, as always, all of us at the Free State Foundation are grateful for your support for the work we do promoting free market, limited government, and rule of law principles. Most of all, we are grateful for your friendship.

PS – Here are previous Independence Day blogs: 2010, 2009, 2008, and 2007.

Technorati Tags: Randolph J. May,Randolph May,Independence Day,July 4th,Thomas Jefferson,Edmund Burke

OECD: Formal Regulatory Regime Risks Undermining Growth

The paragraph below is excerpted from the just-released OECD document concerning principles for Internet policy-making.

It’s short and worth reading in its entirety. Note the OECD says the development of a formal regulatory regime “could risk undermining growth.”

Wouldn’t it be nice if the FCC regulators were as knowledgeable about the working of this “decentralised network of networks” – and as sensitive to the regulatory risks of straight-jacking this “continuously evolving interaction and independence among the Internet’s various technical components” – as are their European counterparts.

Time was when we were.

“Promote the open, distributed and interconnected nature of the Internet:

As a decentralised network of networks, the Internet has achieved global interconnection without the development of any international regulatory regime. The development of such a formal regulatory regime could risk undermining its growth. The Internet’s openness to new devices, applications and services has played an important role in its success in fostering innovation, creativity and economic growth. This openness stems from the continuously evolving interaction and independence among the Internet’s various technical components, enabling collaboration and innovation while continuing to operate independently from one another. This independence permits policy and regulatory changes in some components without requiring changes in others or impacting on innovation and collaboration. The Internet’s openness also stems from globally accepted, consensus driven technical standards that support global product markets and communications. The roles, openness, and competencies of the global multi-stakeholder institutions that govern standards for different layers of Internet components should be recognised and their contribution should be sought on the different technical elements of public policy objectives. Maintaining technology neutrality and appropriate quality for all Internet services is also important to ensure an open and dynamic Internet environment. Provision of open Internet access services is critical for the Internet economy.”

Technorati Tags: Broadband regulation,FCC,Net neutrality,Randolph May,Randolph J. May

In Congress, More Spectrum and Less Regulation is Key to 4G

"Regulate first, ask questions later" makes for a backwards policymaking process. Unfortunately, legislation recently introduced in Congress adopts that backwards approach. The Next Generation Wireless Disclosure Act (H.R. 2281) would require the FCC to adopt new regulation of next-generation wireless network service disclosure practices…and then later conduct a study on network disclosure practices and performance in market. The bill would also call on the FCC to assume new responsibilities as a 4G wireless reliability ratings board.

H.R. 2281 would saddle advanced services with special regulatory burdens without having established any kind of actual problem that warrants specific new rules. There already are laws against unfair and deceptive trade practices. And the regulation called for by H.R. 2281 ignores the check provided by competition in the wireless market. Such regulation risks hampering rapidly evolving wireless networks that are only now beginning to reach 4G service levels.

And compelling wireless carriers to publish government-set reliability standards even poses First Amendment questions, since less intrusive alternatives are available to the FCC to address network reliability concerns. H.R. 2281 looks to tie down wireless networks with added regulatory burdens when Congress should instead be looking to free up more spectrum for commercial wireless use so that carriers can meet surging consumer demands and give them next generation services at faster speeds and with greater reliability.

According to the text of H.R. 2281, within 180 days of passage the FCC must adopt new rules requiring wireless providers of 4G services to disclose: (1) "guaranteed minimum transmit and receive data rates for Internet protocol packets to and from on-network hosts for the service, expressed in megabits per second"; (2) "[t]he reliability rating of the service" based on a standard method to be established by the Commission "which shall be based on the data session start success percentage (network accessibility) and the data session completion success percentage (network retainability) of the service"; (3) service price; (4) any additional charges not included in the service price; (5) detailed descriptions of its "network management policies of the service with respect to Internet protocol packets to and from on-network hosts"; (6) [t]he "technology used to provide the service" – whether it be LTE, WiMax or HSPA+; and (7) a website address containing terms of service and coverage areas. Also, wireless carriers would have to provide these disclosures prominently and frequently "in all marketing materials for such service, at the point of sale of such service, and (in the case of postpaid advanced wireless mobile broadband service) in all bills for such service" (emphasis added).

Apparently, the regulation called for in H.R. 2281 is motivated by concerns that wireless carriers are puffing up their services' data speeds and reliability beyond actual performance capabilities. Strangely, however, the bill directs the Commission to conduct a study of 4G wireless practices and performance within one year after the bill's passage. That is, the FCC would be required to complete its study within 185 days after it adopts rules governing the subject it's supposed to study. Here, apart from all other problems, H.R. 2281 surely takes a wrong-headed approach.

Obviously, it makes far more sense to first conduct a study of the subject under consideration before imposing regulation on the subject. Such a study could help provide a factual basis for deciding whether there is an actual problem in the market and for deciding whether new regulation specific to 4G wireless service is the best way to address any such problem.

The bill's findings provide no data-driven basis for concluding that a unique, 4G wireless service disclosure problem exists. After all, wireless carriers are only in the early stages of rolling out 4G services. So H.R. 2281 instead requires specific new regulation on a speculative, prophylactic basis.

Given the competitiveness of the wireless market there is good reason to question whether specific new regulation regarding next generation wireless network disclosure and performance is necessary or wise. According to the FCC's 2011 Wireless Competition Report, "[t]he percentage of the population covered by at least two mobile providers using 3G or 4G network technologies increased from 73 percent in May 2008 to nearly 92 percent in July 2010. In addition, the percentage of the population covered by three or more providers increased from 51 percent in May 2008 to 82 percent in July 2010." And "approximately 68 percent of the population is covered by at least four mobile broadband providers." (We will have more to say about the Report in a subsequent blog post.) Even assuming the AT&T/T-Mobile merger goes through, consumers in most parts of the country would continue to have choice of service from three national carriers – the merged AT&T/T-Mobile, Verizon and Sprint – plus at least one other carrier. Fourth carrier candidates include multi-metro regional providers such as MetroPCS, Leap (Cricket), and US Cellular, recent entrants such as Clearwire also providing choices to consumers; and any of the more than one hundred small, facilities-based regional providers operating in single geographic areas.

With that kind of marketplace competition, carelessness and dishonesty becomes risky business for wireless carriers. Those carriers that routinely overstate their network performance capabilities risk losing customers to their competitors. And those carriers offering realistic assessments of their network capabilities and providing reliable service are well-positioned to lure customers away from those who might be careless or dishonest. Choice and churn provide a check and a balance on the conduct of wireless carriers that should not be ignored.

Most consumers are probably not likely to closely track the data speeds and other performance characteristics of their purchased services with exacting precision. But it's certainly within the ken of most consumers to recognize when their service drops calls, allows for mobile web-surfing at a snail's pace, or takes too long to download files to their handsets. Dissatisfied consumers can change wireless carriers. And even without new regulation specific to next-generation wireless services, in particularly egregious circumstances consumers can still consider legal action.

Wireless carriers are already subject to general prohibitions on unfair and deceptive trade practices. If a wireless carrier were to push particularly egregious kinds of deception in its sales pitches, most consumers in most states could file consumer protection lawsuits. Generally, state consumer protection laws require plaintiffs to prove an unfair or deceptive act or practice affecting the public interest occurred within a trade or business causing the plaintiff an injury to his or her business or property.

H.R. 2881's requirement that the FCC come up with a next generation wireless network reliability ratings system and require wireless carriers to display FCC conclusions also raises concerns. As an institutional matter, there is good reason to be skeptical about government establishing ratings system for advanced information networks in dynamic markets. Even the FCC concedes this general point in its 2011 Wireless Competition Report, stating that "[t]he measurement and representation of the overall quality of a provider's network…present a number of challenges…there is neither a single definition of network quality nor a definitive method to measure it." Engineering and operating wireless networks involves a complex series of constraints that must be balanced by competing carriers, depending on the particular kinds of wireless technologies and devices they are supporting as well as spectrum propagation characteristics, geography, backhaul facilities usage, and data traffic volumes. Wireless networks undergo constant upgrades as new cell towers and are constructed and co-located, as new backhaul arrangements are made, as new devices are put to market, and as data traffic trends on the network change.

Those complexities also pose challenges to any practical implementation of government-set standards. There is the risk of creating a snapshot, partial picture of network reliability based on data session start and completion success percentages that may reflect the FCC's own judgment about reliability but that others may think leaves out other considerations. There is also the likelihood of government standards becoming a drag on wireless carriers that are constantly upgrading their networks. Reliability testing disclosure burdens may not take stock of the latest wireless network performance upgrades, aspects of particular network management such as data prioritization, or geographical factors.

Regulation requiring wireless carriers publish government-set standards also amounts to a compelled speech mandate that raises constitutional issues. Advertising that is inherently or implicitly misleading receives no First Amendment protection. But where no deception is involved, commercial speech regulation is subject to the test set out by the Supreme Court in Central Hudson Gas & Electric Company v. Public Utilities Commission of California (1985). Under Central Hudson, non-misleading commercial speech regulation is permissible where: (1) it advances a substantial government interest; (2) it directly advances that interest; and (3) it is not more extensive than necessary to achieve that interest. The government bears the burden in justifying its regulation to alleviate a real problem in a material way, as opposed to regulation with only a vicarious connection to a merely conjectured problem. And the government must demonstrate that less burdensome alternatives will not suffice to directly advance the substantial interest at stake.

Finally, it is important to consider H.R. 2881's proposal for next-generation wireless regulation in the context of wireless' recent regulatory history. Since 1993, wireless has flourished thanks in significant part to light-touch regulatory treatment. The absence of government intrusion has fostered approximately $285 billion in capital expenditures over the last dozen years, declining revenues per minute for voice and text messaging, and rapid innovation in new smartphone devices, applications, and services. But next generation wireless disclosure regulation now joins the pipeline of regulatory proposals that includes: early-termination fee regulation, handset exclusivity regulation, bill shock regulation, text messaging and common short code regulation, smartphone app regulation and smartphone manufacturing regulation (such as FM chipset mandates). Not to mention wireless network neutrality regulation that was adopted by the FCC in December.

Rather than risk harm to one of the most productive sectors of our economy with a regulatory pile-up, the Congress should instead focus its efforts to what will undoubtedly ensure faster and more reliable wireless service in the future: freeing up more spectrum. The best thing that Congress can do to ensure high speeds and reliability for wireless broadband is to promptly enact legislation giving the FCC authority to identify and auction additional spectrum for commercial use.

Right now, more spectrum, not more regulation, will benefit wireless consumers the most.

The FCC's "Future of the Media" Report: More Madisonian Than Madison Avenue

When the FCC's "Future of the Media" project was announced, I expressed skepticism concerning the need for the FCC to embark on a wide-ranging study of the media. And I expressed concern that the study -- and what I supposed might be proposed recommendations for new regulations and government subsidies – would have serious First Amendment implications that would be minimized. Here is a snippet from what I wrote in an April 2010 blog a few weeks after the project's launch:

"You might think that in an age of media abundance the justification for government support of, and involvement with, the media would be reduced, not heightened. Certainly, this view would be more consistent with my understanding of First Amendment sensitivities. But, rather perversely, media abundance is viewed by some as a rationale justifying more government support and direction of public media."

I was invited to testify at one of the public hearings on "Public and Other Noncommercial Media in the Digital Age," and my April 30, 2010 testimony is here.

The FCC has now released its 450+ page study, prepared under the leadership and direction of Steven Waldman, its principal author, under the title, "The Information Needs of Communities." When I learned that the report was going to be released under this more academic-like title, rather than the more grandiose "Future of the Media" moniker, I suspected that perhaps Madison Avenue-types were laying the groundwork to downplay recommendations for far-reaching regulatory and government policy changes.

With the caveat that I only have had an opportunity to review the Executive Summary, which itself is 25 pages, and that I and other FSF scholars may have more to say in the future, I am pleased to acknowledge that the report appears to be much more Madisonian that Madison Avenue. Although I certainly don't agree with all the report's recommendations, I am happy to concede that the report generally does not propose intrusive new media regulations or expanded government subsidies of "public media".

Here I only want to present two short excerpts that capture key elements of the general tenor of the report:

"Although each citizen will have a different view on which information is important—and who is failing at provid­ing it—Americans need to at least come together around one idea: that democracy requires, and citizens deserve, a healthy flow of useful information and a news and information system that holds powerful institutions accountable."

"Our basic conclusion: with the media landscape shifting as fast as it has been, some current regulations are out of sync with the information needs of communities and the fluid nature of modern local media markets. In crafting recommendations, this report started with the overriding premise that the First Amendment circumscribes the role government can play in improving local news. Beyond that, sound policy would recognize that government is simply not the main player in this drama."

I agree wholeheartedly with both statements. For our democracy to thrive – and I would say, survive – we need a healthy flow of information and news to hold powerful institutions, especially government at all levels, accountable. And as I emphasized in my testimony, the First Amendment circumscribes the role government can play.

At bottom, I still have doubts that such a mammoth government-funded effort was needed, when foundations, universities, and independent academics produce so much research on the subject matter of the report. Nevertheless, I want to commend Steve Waldman, the project leader, and his team, for the effort and dedication they brought to the work.

And I especially want to commend Mr. Waldman for what I came to see, during the study preparation process, as his open-mindedness, his genuine desire to seek out as much information as possible from diverse perspectives, and his sensitivity to the First Amendment concerns raised by government regulation or support of the media. Perhaps I should not have been surprised in this last regard. Mr. Waldman emphasized his appreciation for First Amendment sensitivities when he delivered a keynote last year at a Free State Foundation seminar.

And after I read Mr. Waldman's well-regarded book, "Founding Faith – How Our Founding Fathers Forged a Radical New Approach to Religious Liberty," an insightful study concerning the development of the First Amendment's religion clauses, I came away with the sense he possesses a real appreciation for the Founder's purposes in adopting the First Amendment's protections. In Federalist No. 48, James Madison famously stated: "It will not be denied that power is of an encroaching nature, and it ought to be effectively restrained from passing the limits assigned to it." If you read Mr. Waldman's chapters on Madison, you will understand what I mean when I say his "Information Needs" report is cast in a Madisonian frame.

Finally, I should add that FCC Chairman Julius Genachowski deserves credit for allowing Mr. Waldman the leeway to prepare the study the way he did, and to draw the conclusions he did. I am not privy to any "inside baseball" here, but it is no secret that Commissioner Michael Copps and outside pro-regulation groups wanted a report that recommended much more government regulation and subsidization of the media. Without knowing exactly what the Chairman's role was in the preparation of the final report and recommendations, it was released on his watch, and, in the respects I have mentioned, the effort redounds to his credit.

Technorati Tags: Steven Waldman,FCC,Randolph May,Randolph J. May,Media Regulation,FCC's Future of Media Report,Free State Founfation

Of Timeliness and the Talmud: The FCC's Perspective

On June 8, 2011, the FCC denied a petititon for reconsideration that was filed by the United Talmudical Academy on December 23, 2003. The Talmudical Academy's petition sought reconsideration of two FCC orders,  one issued on January 4, 2000, and the other on October 24, 2003. Both orders involved determinations concerning UTA's eligibility to receive certain universal service subsidies.

The FCC denied the reconsideration petition as untimely because it was not filed within 30 days of the public notice of the action sought to be reviewed as the FCC rules require. Fair enough.

But it does make you wonder why it took the FCC more than seven years to deny a reconsideration petition as untimely when all the agency had to do was calculate that the petition was not filed within the required 30 days. After all, counting the days did not present an issue requiring a lengthy discussion among Talmudic scholars.

Granted, the FCC's action -- inaction, really -- here may not be of great moment. But the fact that the Commission can deny a petition as untimely filed six or more years after the agency should have acted does not inspire confidence in the Commission's ability to handle more important matters.

And the fact that the FCC can do so without displaying any sense of irony makes you wonder whether the Commission really appreciates that it is an institution in need of reform.

I've suggested other reform measures recently, but here's another modest reform suggestion: If the Commission doesn't act on a reconsideration petition within 18 months, it will be deemed granted.

PS. I have a hard copy in hand but I can't find the order on the FCC's website. The agency's website is a whole other story -- one consistent with the theme of an agency that often looks to fix non-existent problems while not fixing real ones. Don't get me started.

The AT&T and T-Mobile Merger: Thinking Things Through - Part III

The AT&T-T-Mobile merger proposal has prompted opponents such as Free Press and others to mount a mass email campaign against the merger. As thousands of identical, or nearly identical, three or four sentence comments have flooded the FCC's electronic docket, discussion of the role these mass campaign web-generated comments should play in the FCC's deliberative process has increased.

Here's my comment on the FCC's consideration of mass comments.

It is a fact of digital-age life that such mass comments increasingly flood administrative agency dockets. To be sure, there are some downsides to this phenomenon, not least of which are the costs imposed on the agency in terms of personnel, data processing, and other resources required to handle the comment tsunami. Nevertheless, there is a value in enabling citizen participation and citizen input in government decisionmaking processes that cannot ignored. While letter-writing campaigns to influence agencies occurred before e-filing became commonplace (the FDA's rulemaking proposal in the 1990s to assert its authority over tobacco generated approximately 100,000 citizen postcards and letters), electronic filing obviously greatly facilitates such citizen input.

While the FCC's merger review proceeding is not technically a rulemaking, the FCC, for procedural purposes and to facilitate public participation, treats it essentially as an informal rulemaking proceeding under the Administrative Procedure Act. With respect to rulemaking proceedings, the APA states simply that the agency shall consider "the relevant matter presented." This directive generally governs the FCC's actions on merger applications as well. In other words, in reaching a decision, the agency can't just ignore relevant facts and arguments presented.

Of course, the directive to consider relevant matter doesn't tell us much at all about the weight to be accorded thousands of identical or nearly identical e-comments. As I mentioned at the outset, the pro-regulatory group, Free Press, is leading a campaign to generate mass comments opposing the merger in which it suggests sending this (or a similar) comment to the FCC:

"AT&T's takeover of T-Mobile would stifle choice and innovation in the market, harm, consumers, and lead to higher prices and fewer jobs nationwide. Don't let AT&T put our mobile future at risk. Please stand with me and reject such reckless consolidation of the mobile industry."

So, the FCC's docket now contains thousands of three sentence comments identical to this one. After you have read the very first one, the next 10,000, or the second 10,000, do not add any "relevant matter presented" at all.

Now, this is not to say that the FCC's decisional process should totally ignore the fact that thousands of identical comments have been submitted. Even taking into account the increasing ease with which Free Press and others can generate mass comments through web-based campaigns, the sheer number of such comments may indicate to the Commission that the AT&T-T-Mobile proposal has generated intense interest among the American public concerning the merger's potential impact and that, much more than in the run-of-the-mill proceeding, the agency should carefully consider such impacts.

But the FCC should take care that it not become, or allow itself to be viewed as becoming, an agency that makes decisions based on counting noses, or that gives undue weight to comment counts. Because if it does so, it will substantially diminish whatever credibility it possesses as an "expert" independent agency that renders decisions based on the facts and the law. Certainly, the agency would destroy any notion that its decisions are "data-driven," as FCC Chairman Julius Genachowski is fond of proclaiming. If you take another look at the mass comment generated by Free Press reproduced above, you will see that it contains no data at all.

Of course, the aversion to mere nose-counting is not a one-way street. For example, AT&T has made a point of highlighting the number of mayors and governors that have submitted comments supporting the merger. Standing alone, the sheer number of these public officials submitting comments shouldn't be outcome-determinative either. But to the extent that individually-drafted submissions by public officials, such as this letter from Arkansas Governor Mike Beebe, contain information concerning present or projected wireless coverage, local businesses, schools, and other institutions that will be affected by increased or faster wireless service, investments made by infrastructure providers in the local area, and the like, they ought to be given considerably more weight than the three-sentence mass comments. Certainly, there is a degree of political accountability that arises when public officials express views on issues that lend credence to the substance of their positions.

In the end, neither the sheer number of mass-produced comments, nor the number of filings of mayors and governors, ought to be as important to the FCC's decision concerning the merger as its fact-based analysis of the wireless marketplace and the public benefits that the merger may be expected to produce. While Free Press and others should not be precluded from generating mass comments, if that is their wish, it is incontrovertible that the FCC's competitive and public benefit analysis is not going to be aided much by such comments.

As readers of this space know, I have been very critical for many years of the FCC's merger review process for reasons I think are entirely valid. A recap with links to several more pieces is here. And I remain critical of this Commission's pronounced pro-regulatory proclivities and general disposition to downplay marketplace competition and dynamism. Be that as it may, it does not seem too much to ask, as the merger review process moves forward, that the Commission separate the wheat from the chaff when it considers comments.

Technorati Tags: AT&T and T-Mobile merger,FCC merger review process,FCC,rulemaking comments,Randolph J. May,Randolph May

State Regulators Should Refrain from Reviewing Wireless Mergers

The U.S. Department of Justice and the FCC are undertaking their respective reviews of the AT&T/T-Mobile merger. But Sprint is urging state regulators to conduct their own merger review proceedings. For instance, Sprint urged the West Virginia Public Services Commission to review the merger. Meanwhile, the Louisiana Public Service Commission has sought public comment on the AT&T/T-Mobile merger, but not opened an actual investigation. And the California Public Utility Commission has opened an inquiry concerning the proposed merger.

State regulatory reviews of wireless mergers raise policy concerns about needless and harmful duplication of review efforts. Like other telecom mergers, AT&T/T-Mobile is already subject to separate reviews by two federal agencies. State reviews add yet another layer of multi-agency proceedings to the merger review process. The more agencies conducting reviews, the more likely such reviews are to delay the overall merger process and saddle merging parties with administrative and lost market opportunity costs. And federal law preempting states' authority over wireless rates and entry casts serious doubt about the legal authority of state regulators to place conditions on wireless mergers.

We have previously pointed out significant process concerns with state public utility commission (PUC) reviews of telecom mergers. Many times merging parties gain approval only after state PUCs obtain a series of so-called voluntary concessions that serve as conditions for approval. Those conditions, such as broadband investment and build-out imposed by some state PUCs in the CenturyTel-Embarq merger and in other mergers, may, by themselves, appear laudable. But they are frequently unrelated to any conceivable competitive harm posed by the mergers. For example, some state PUCs reviewing the Qwest-CenturyLink merger and the Frontier-Verizon transactions expressed concerns about the financial solvency of the respective parties following the proposed deals, but they nonetheless imposed conditions requiring the acquiring parties to spend even more money on broadband. Such conditions can also result in ordinary business decisions regarding service and pricing options being cemented into enforceable regulatory mandates that quickly become outdated, assuming they are not unwarranted at the time they are adopted.

State PUCs' leverage over merging parties makes it tempting for such agencies to impose ambitious regulatory-minded conditions on proposed mergers. This is especially so when outside interest groups and competitors press for conditions on the merging parties. In some instances, state PUCs impose conditions on merging parties that they otherwise lack the power to impose through rulemaking because of the narrow scope of their delegated authority. This only heightens concerns about regulatory power grabs posing as state merger reviews. But the individualized nature of mergers means that onerous conditions amount to company-specific regulation that may result in unequal and unfair treatment. Significant policy initiatives should not be the subject of state merger conditions, but where necessary should instead be implemented through industry-wide rulemaking proceedings.

There are additional reasons unique to wireless for keeping states out of the merger review process and avoiding a further agency review pile-up. Wireless merger reviews are incommensurate with states' limited scope of jurisdiction over wireless. And wireless carriers typically don't have carrier-of-last resort or other special public interest obligations that legacy wireline providers have by virtue of rate-of-return or price cap regulation.

All of these policy concerns raised by state regulatory reviews of wireless mergers apply with vigor when it comes to the AT&T/T-Mobile merger. The proposed deal is already subject to scrutiny by DOJ and the FCC. Reviews by those federal agencies will focus on any anticompetitive harm posed by AT&T/T-Mobile. To the extent that the merger raises any anticompetitive concerns in particular geographic markets, the federal agencies conducting market analyses can adopt targeted remedies. In recent telecom merger reviews such as AT&T/Centennial and Verizon/ALLTEL, for example, the FCC ordered partial divestitures of assets in specific geographic areas by merging parties as conditions for approval.

Importantly, serious legal questions about jurisdictional authority surround state regulatory reviews of wireless mergers. For starters, it is questionable whether states have any authority to review such mergers under federal law. The FCC is primarily entrusted with managing the spectrum resource. And in 1993, Congress amended the Communications Act, thereby providing in Section 332 that the federal government has exclusive authority over the "rates charged" for wireless services and "entry" of wireless carriers. States, however, were permitted to continue regulating only "other terms and conditions" of wireless services.

It is reasonable to regard any state regulatory approval for mergers of wireless carriers as a regulation of wireless entry. But if that's the case then states are categorically preempted from subjecting mergers of wireless carriers to regulatory approval.

But even assuming federal law jurisdiction over wireless entry does not categorically preempt state regulatory approval requirements for wireless mergers, one could still reasonably conclude that federal law prohibits states from requiring wireless carriers to receive PUC approval under certain circumstances.

A strong case can be made that federal law restricts state merger reviews of wireless carriers in at least some important respects. For instance, if a state's PUC's review becomes especially prolonged and demands made by the state agency become particularly onerous, such a review could effectively serve as a barrier to market entry for merging wireless carriers within the contemplation of Section 332's preemption provision. Also, federal preemption of wireless rates would most likely mean that no state PUC could make wholesale or retail or other rate-related terms a condition for its approval of a wireless merger.

To be sure, there is a dearth of case law authority concerning state merger approval of wireless carriers. But that is hardly surprising given the similar dearth of cases regarding the merger review authority of the FCC. Merging parties essentially give up any grounds for challenging onerous conditions on the approval of their respective deals because they are said to be voluntarily agreeing to them. Moreover, merging parties who have already spent vast sums of money and time in moving their proposed mergers along the process want to close the deal. Moving administrative disputes into litigation incurs even more costs, delays and uncertainties that merging parties cannot afford in today's competitive landscape.

One shouldn't expect state PUCs to go out of their way to suggest they lack regulatory authority to subject wireless mergers to conditions. But given their limited authority over wireless, they should be expected to realize they are not typically in the best position to review wireless mergers. In fact, the West Virginia Commission provides an example of state regulators sensibly deciding to avoid entangling themselves in mergers that are already subject to review by federal agencies. On prior occasions, West Virginia regulators declined to review mergers involving voice carriers such as Bell Atlantic/GTE, SBC/AT&T and Verizon/MCI, citing ongoing federal reviews. And when it comes to AT&T/T-Mobile, the PUCs in West Virginia and elsewhere should follow the hands-off course once again.

Whatever one's opinion about the merits of the AT&T/T-Mobile merger, those merits should be addressed at the federal level. No wireless merger should be bogged down with the unnecessary costs and delays resulting from duplicative state merger reviews that, in any event, may be in conflict with federal law. Hopefully, West Virginia and other states will show a lot of restraint when it comes to wireless mergers such as AT&T/T-Mobile and defer to the DOJ and FCC merger reviews already underway.

Memorial Day 2011

On May 30, 1884, less than twenty years after the end of the Civil War, Oliver Wendell Holmes, Jr., Civil War veteran and future Supreme Court Justice, delivered a Memorial Day address in Keane, New Hampshire. The speech, titled "In Our Youth Our Hearts Were Touched With Fire," was given before John Sedgwick Post No. 4, Grand Army of the Republic, in a white painted town hall on the village common.

As we remember those who have served – and especially those who have paid the ultimate price, what Lincoln at Gettysburg called "the last full measure of devotion" – it is worth contemplating Holmes's address, and particularly the beautiful ending:

"Such hearts--ah me, how many!--were stilled twenty years ago; and to us who remain behind is left this day of memories. Every year--in the full tide of spring, at the height of the symphony of flowers and love and life--there comes a pause, and through the silence we hear the lonely pipe of death. Year after year lovers wandering under the apple trees and through the clover and deep grass are surprised with sudden tears as they see black veiled figures stealing through the morning to a soldier's grave. Year after year the comrades of the dead follow, with public honor, procession and commemorative flags and funeral march--honor and grief from us who stand almost alone, and have seen the best and noblest of our generation pass away.

But grief is not the end of all. I seem to hear the funeral march become a paean. I see beyond the forest the moving banners of a hidden column. Our dead brothers still live for us, and bid us think of life, not death--of life to which in their youth they lent the passion and joy of the spring. As I listen, the great chorus of life and joy begins again, and amid the awful orchestra of seen and unseen powers and destinies of good and evil our trumpets sound once more a note of daring, hope, and will."

With all our differences and diversity – including our differences of opinion on the great issues of the day – surely we Americans should be united on this day, and every day, in honoring and remembering those who have served, and still do, to defend our freedom.

While Lincoln at Gettysburg spoke at a particular time in a particular place, and on hallowed ground, his words transcend time and place. To me, recalling the ending of his Gettysburg Address has always seemed especially fitting on Memorial Day:

"We here highly resolve that these dead shall not have died in vain -- that this nation, under God, shall have a new birth of freedom -- and that government of the people, by the people, for the people, shall not perish from the earth."

Here at the Free State Foundation, we are committed to free market, limited government, and rule of law principles. Whatever your own beliefs, as we remember and commemorate, best wishes to you for a safe and contemplative Memorial Day!

PS – In the past week, several long-time readers of this space have asked me for past Memorial Day messages. Here they are:

Memorial Day 2007; Memorial Day 2008; Memorial Day 2009; Memorial Day 2010

Technorati Tags: Memorial Day,Randolph J. May,Randolph May,Oliver Wendell Holmes,Lincoln,Gettysburg Address

Section 706 and the FCC's Pro-Regulatory Proclivities

So, the Federal Communications Commission has now issued its Seventh Broadband Progress Report pursuant to Section 706 of the Communications Act. Section 706 requires the FCC periodically to determine whether broadband capability "is being deployed to all Americans in a reasonable and timely fashion." If the Commission's determination is negative, the Commission is directed to "take immediate action to accelerate deployment of such capability by removing barriers to infrastructure investment and by promoting competition in the telecommunications market."

Suffice it to say that by virtue of their indeterminateness "reasonableness" and "timeliness" are, to some extent, in the eye of the beholder – or, in this instance, in the eye of the regulator. Before Julius Genachowski became Chairman of the FCC, in each of the prior five Section 706 reports the agency had determined that broadband was, in fact, being deployed on a reasonable and timely basis. Under Chairman Genachowski's watch, the FCC has determined precisely the opposite in the last two reports.

This does not mean that in making such a negative determination Chairman Genachowski and his two Democratic colleagues are acting in bad faith. But it does drive home the point I made in a blog almost two years ago that "data" – no matter how sweet-sounding the oft-repeated "data-driven" mantra – not infrequently is viewed differently, and put to different uses, depending upon one's regulatory philosophy and perspective.

It is clear that the communications policy perspective of Chairman Genachowski and his two Democratic colleagues is presumptively pro-regulation. In my view, in light of the technological and market dynamism that characterizes the communications and information services marketplace, their perspective should be presumptively deregulatory. Be that as it may, viewed through its presumptively pro-regulation mindset, the FCC majority evaluated the data and determined broadband is not being deployed in a "reasonable" or "timely" manner.

As noted above, this negative determination may have important consequences because Section 706 directs the Commission to take immediate action to accelerate broadband deployment. And, we know that, based on recent history – for example, think net neutrality and data roaming mandates -- the actions taken by the Genachowski Commission are most likely to be adoption of more new regulations – despite the fact that the statute refers to "removing barriers to infrastructure investment."

While I have acknowledged above that it is possible to draw different conclusions from the available data depending upon one's regulatory perspective, Commissioner McDowell in his dissenting statement persuasively argues that, in this instance, the majority's ultimate determination is highly questionable. As Commissioner McDowell points out, for the first time, the Commission claims the statutory terms "deployment" and "availability" refer to something other than deployment of physical network infrastructure. The Commission's apparent motivation in abandoning the previous understanding is to re-interpret the terms to encompass the notion of "adoption" of broadband, not just access to broadband networks. In other words, the Commission now factors into its "reasonableness" and timeliness" determination, in an amorphous, unconstrained way, various professed concerns about the rate of adoption (already over 65% of Americans use broadband at home). Without digressing here into a discussion of the proper modes of statutory construction, it is enough to say that the Commission's novel re-interpretation of Section 706 – after a contrary interpretation in previous reports – is almost certainly incorrect.

The Commission's concession that, for purposes of its Section 706 determination, it will completely exclude the deployment of wireless broadband capabilities – even though 4G wireless networks are now being deployed – casts further doubt on the validity of its ultimate determination. Even as the number of wireless-only households now exceeds 25%, the Commission has stubbornly refused to consider wireless phones a competitive alternative to landline phones in forbearance proceedings. It now appears that, even as the number of smartphone subscribers increases rapidly, the Commission will pursue a similar tack of simply ignoring wireless broadband network deployment and availability for purposes of its Section 706 determination. This despite Chairman Genachowski's very recent statement that "3G wireless services can deliver speeds capable of handling a dramatically wide array of consumer applications." And despite the acknowledgment in the Section 706 report that "[c]urrently, a number of wireless providers are building out nationwide fourth-generation (4G) mobile broadband networks."

The Genachowski Commission's inclination to interpret evidence – not to mention re-interpreting statutory terms – in a way designed to provide support for its pro-regulatory proclivities is likely, over time, to have adverse consequences. In the news release accompanying release of the report, the Commission states: "Despite the difficult economy, the private sector continues to invest tens of billions of dollars in broadband infrastructure each year -- $65 billion in capital expenditures in 2010 alone -- expanding capacity, increasing speeds on fixed networks and rolling out next-generation mobile services like 4G." In a recent press release, Broadband for America, an industry trade organization, claims that since 2008 cable operators, telephone companies, and wireless firms have invested over $250 billion in private capital in broadband networks." To be sure, private investment of this magnitude, during the "difficult economy," is extraordinary, and a testament to American private enterprise.

The Commission refuses to acknowledge, or fails to understand, that the costs imposed on broadband providers by increased regulations, such as the recently adopted net neutrality mandates, likely will have the effect of discouraging private investment. Discouraging private sector investment, especially on the huge scale indicated by the figures above, would be contrary to the goal, shared by all, for broadband to be made available to those remaining unserved areas (96% of American households already have broadband access), and for existing facilities to be continually upgraded with higher speed offerings.

In sum, the Commission, by filtering certain evidence through its embedded pro-regulatory lens, and departing from its previous interpretations of key statutory terms, has reached a determination in its Section 706 report that apparently it will use to adopt more new unnecessary regulations. I fear that, in the end, American consumers – and the American economy -- will be the real losers.

***

Finally, the Commission's handling of the evidence in this most recent Section 706 report has left me more convinced than ever that Congress should amend the Communications Act as l suggested in my recent essay, "A Modest Proposal for FCC Regulatory Reform." As I explain there, and in this more abbreviated "Rolling Back Regulation at the FCC" version published in the National Review Online, the Communications Act's forbearance and periodic regulatory review provisions should be amended to establish a presumption that, absence clear and convincing evidence to the contrary, the statutory consumer protection and public interest criteria for granting regulatory relief have been satisfied. I invite you to consider my proposal in conjunction with the way the FCC evaluated the evidence in its Section 706 report.

 

Technorati Tags: Section 706,FCC,Randolph May,Randolph J. May,Broadband Regulation,Competition Policy,Broadband Adoption,Julius Genachowski

FCC's Wireless Competition Report Should Take Wireless Substitution Seriously

A year ago this month the FCC issued its annual Wireless Competition Report. So a new report from the Commission should be just around the corner. One of the biggest questions surrounding its forthcoming report is whether the Commission will finally take stock of wireless substitution for wireline services.

In its next Wireless Competition Report, the FCC should take the opportunity to more closely examine the growing phenomenon of wireless customers "cutting the cord" and going without wireline voice service altogether. The Commission should also forthrightly examine in its report the impact of wireless on the wireline market. Particularly when it comes to voice service, a strong case can be made that competition from wireless service is rendering legacy wireline regulation unnecessary and costly.

From time to time, the FCC has acknowledged the increasing numbers of wireless subscribers. The Commission's recent Local Telephone Competition Report, for instance, states that as of the end of June 2010, the number of wireless voice subscribers nationwide had increased to almost 279 million – up almost 14 million from a year before and up more than 61 million from four years prior.

It's difficult to imagine how such a momentous spike in wireless subscribership could possibly leave wireline unaffected. And, in fact, the Commission has acknowledged the decreasing numbers of switched access lines. Its Local Telephone Competition Report indicates that the number of switched access lines for both ILECs and non-ILEC telecommunications providers total some 122 million. (ILECs and non-ILECs also serve a combined total of approximately 29 million VoIP subscribers). This number for switched access lines is down from approximately 133 million the year before and down from over 172 million from June 2006. In addition, the number of ILEC access lines and VoIP subscribership has declined relative to increases for non-ILECs. On June 30, 2010, ILEC total end-user switched access lines and VoIP subscriptions equaled just over 102 million, down over 10 million from a year prior and down nearly 40 million from four years earlier. Non-ILEC total end-user switched access lines and VoIP subscriptions equaled nearly 49 million as of June 30, 2010, up over 4 million from a year prior and up almost 20 million from four years before.

The FCC has also acknowledged the increasing numbers of consumers who have "cut the cord" and now rely exclusively on wireless. For instance, one 2010 survey cited by the Commissionshows that a fast-growing number of households — now approximately one-quarter of all households — have "cut the cord" and rely exclusively on wireless: "For the last 3 years, the proportion of households subscribing to both landline and mobile wireless service has fluctuated around 59%, while the proportion of households that subscribe only to mobile wireless increased from 13.6% to 24.5%." The latest iteration of that survey suggests those same trends are continuing. Age demographics alone should suggest these cord-cutting trends will continue, as the number of wireless-only subscribers increases among users in younger age brackets. The chart below conveys a general sense of the upward trajectory of wireless-only subscribership as a percentage of all wireless subscribers.

Furthermore, when it comes to assessing wireless in competition with wireline, one should also take into account the degree of wireless choices available to consumers. Consider the Commission's findings in its 2010 Wireless Competition Report that "[t]he percentage of the population served by at least two mobile broadband providers increased from 73 percent in May 2008 to nearly 90 percent in November 2009," "the percentage of the population served by three or more providers increased from 51 percent in May 2008 to 76 percent in November 2009," and "approximately 58 percent of the population is served by at least four mobile broadband providers." A forthcoming Wireless Competition Report should provide an updated set of numbers. But the continuing presence of wireless alternatives to wireline services in the voice market is a certainty.

Unfortunately, the FCC's Qwest Phoenix MSA Order from last year followed a string of prior orders in which the Commission has declined to incorporate these insights regarding wireline and wireless subscribership into its overall regulatory approach to wireline services. This despite the Commission's concession that "most subscribers to wireline and wireless engage in some usage substitution," and that "[t]he increasing percentage of residential customers that rely solely on mobile wireless voice service suggests that an increasing percentage of voice customers view wireless and wireline services as close substitutes, increasing the likelihood that wireless services may materially constrain the price of residential wireline service."

The Commission excluded wireless as a substitute for wireline in its market analysis in the Qwest Phoenix MSA Order by suggesting mere usage substitution is not the same as access substitution, and that conclusive proof of the latter would be required to show price-constraining effects. The Commission insisted that "[k]nowing the percentage of households that rely exclusively upon mobile wireless is insufficient to determine whether mobile wireless services have a price-constraining effect on wireline access services." But the Commission suggested that what it calls conclusive proof of price-constraining effects might not itself be enough to treat wireless as a substitution for wireline, claiming that cord-cutting "could be driven more by differences in consumers' age, household structure, and underlying preferences than by relative price differentials."

The Commission's refusal to consider wireless substitution in the Qwest Phoenix MSA Order runs contrary to a commonsense look at the data regarding increasing wireless subscribership, decreasing ILEC access switches, and increasing wireless-only subscribership that is bound to continue rising in light of associated age demographics. But it should also be remembered that the wireless substitution issue was subsumed by the FCC's rollout of a new and controversial market power analysis in the Section 10 regulatory forbearance context and its application to one particular metropolitan statistical area.

The next Wireless Competition Report now offers the FCC a better place to take a fresh look at the big picture of wireless competition and cord-cutting. The Commission should take that opportunity to face up to the substitutability of wireless for wireline. Once that long overdue step is taken, the Commission can then begin to recognize that aspect of market competition into its future rulemakings, regulatory reviews, and forbearance proceedings.

Video Competition Should Lead FCC to End Old Regulation

The FCC's preparations are underway for its forthcoming Video Competition Report. The Commission confesses its information and outlook toward the video marketplace is outdated. So for what will be its 14th report analyzing the state of video competition, the Commission has issued a notice seeking information about much of the abundant variety of content, aggregation, and delivery services that characterize today's innovative video market.

Although cable video services are primarily governed by the Cable Act of 1992, the video market landscape of 2011 is fundamentally different. That changing landscape has upended many assumptions behind the 1992 Act as well as other regulations dating back to the 1990s or earlier. Direct broadcast satellite (DBS) video services are subject to antiquated regulations as well. And the more the Commission's forthcoming report recognizes the abundance of choices in today's vibrant video market – which it already does either explicitly or implicitly – the less plausible the Commission renders any continuation of old regulation based on an increasingly arcane snapshot of yesteryear's market.

In seeking an up-to-date look at video competition the Commission should use its report as the occasion to promptly begin eliminating out-of-date regulation that now hinders further innovation and competition. And, to the extent that congressional action is required to accomplish this, the Commission should recommend such deregulatory action to Congress.

The very fact that the Commission is calling for comment and information on how new forms of video content, aggregation, and delivery are impacting and providing substitutes for (multi-channel video programming distributor) MVPD services should be revealing. Implicit in the Commission's line of inquiry is the realization that the days of perceived cable monopoly are over. Although the FCC has frequently admitted that market share alone does not equate to monopoly, the chart below showing franchised cable companies' market share of MVPD subscribers conveys some sense of where the market was in the mid-1990s.

In the years immediately following, consumers in areas once served by only one incumbent cable provider began enjoying additional choices. As the next chart shows, by 2001, the competitive potential of two national direct broadcast satellite (DBS) service providers had begun to materialize.

More recently, telco providers have entered into the MVPD business with competing services. Although at this point AT&T and Verizon claim only a small percentage of MVPD subscribers compared to cable and DBS companies, such telco providers still claim approximately 6.5 million MVPD subscribers. Meanwhile, DBS has continued to make further incursions into cable companies' market share throughout the last decade.

In large part, such dramatic changes in the video marketplace prompted the U.S. Court of Appeals for the District of Columbia Circuit to declare in Comcast v. FCC (2009) that the cable bottleneck no longer exists. These changes are reflected in the final chart below based on numbers cited in the FCC's recent notice.

This last chart does not take into account other types of video services that were factored into the prior two charts, such as satellite master antenna (SMATV). More significantly, broadband-delivered video services are not factored in this market share snapshot, even though the presence of potential competition offered by broadband is now too serious to ignore.

Broadband services now provide an additional source of delivery for video programming. Consumers today obtain video content through online services such as iTunes, Netflix's subscription service, and Amazon. Hulu and a number of individual broadcast and cable TV programmer websites offer streaming content to consumers for free by using ad-supported models.

In addition, consumers have a growing variety of choices for devices to use for receiving video programming. An increasing number of "smart TVs" being brought to market, for instance, are capable of downloading video content directly from the Internet. Roku, Boxee, and Apple TV also offer content delivery services through their respective new devices. Broadband-connected video game consoles such as Sony PlayStation 3 and Xbox 360 are also increasingly popular devices for obtaining video programming. Just last week, in fact, Xbox began offering additional video content through a new Hulu Plus application. Not to be forgotten, new broadband-enabled tablet devices and smartphones are giving video consumers mobility options.

By taking into account a broader view of this rapidly changing, dynamic market, the Commission's forthcoming video competition report should be the occasion – now long overdue – for reducing regulation of cable and DBS services premised on an old, static picture of the market. A broadened perspective on video competition and substitutes should mean that outdated regulation of cable and DBS services – such as cable must-carry/retransmission consent regulation or its CableCARD regulation for cable set-top boxes – should be prime candidates for elimination. Both types of regulation are premised on an antiquated monopolistic mindset toward cable video.

It was expressly on a monopolistic premise, in fact, that must-carry regulation barely survived First Amendment challenge in a pair of 5-4 U.S. Supreme Court rulings from 1994 and 1997. In a market where conditions are competitive, however, must-carry forced-speech mandates are untenable under the First Amendment. And in Section 629 of the Telecom Act of 1996, Congress inserted a special sunset clause regarding set-top box regulation, requiring the Commission to remove regulation when there is "effective competition." The state of today's video market should prompt the Commission to invoke that sunset provision.

Now, with respect to the FCC's recent notice seeking information concerning the video marketplace, when a regulatory agency begins asking questions about successful new products and services it naturally raises worries over whether the agency might actually be seeking new rationales for expanding its regulatory authority rather than opportunities for reducing regulation in light of more competition. Might a broadened Commission inquiry into video mark the beginning of broader new regulation of the dynamic video market? Recent Commission activities – such as its adoption of regulatory conditions regarding online video in the Comcast-NBCU merger as well as its "AllVid" proposal to expand regulation of video navigation devices to all MVPDs – give real plausibility to such worries. (I discuss these in a prior FSF Perspectives paper.) Hopefully, those worries will go unrealized this time.

And, hopefully, in re-examining its old cable and DBS regulations in light of new marketplace conditions, the Commission will act consistent with the President's Executive Order for improving regulation and regulatory review. The President's Order calls on federal agencies to review their regulations to remove barriers that are needlessly hurting businesses and our economy, and to ensure that existing regulations "promot[e] economic growth, innovation, competitiveness, and job creation … [and] use the best, most innovative, and least burdensome tools for achieving regulatory ends." In February, Chairman Julius Genachowski stated he "expect[s] the FCC to perform its responsibilities consistent with the principles in the executive order."

The Commission's report should provide us with a fresh set of numbers about competitive conditions regarding several aspects of today's dynamic video market. And the report will give the Commission the perfect opportunity to finally face up to what common sense observation of today's video market reveals: rapid innovation and competition prevails, the old cable bottleneck doesn't exist, and outdated regulation of cable and DBS service based on a legacy monopolistic outlook is ill-suited for the current competitive environment. Consistent with the principles in the President's Executive Order, the Commission should use its report to remove old regulatory barriers rather than erect new ones that could stifle further innovation and competition in the video market.

Rolling Back Regulation at the FCC - Part II

The House Commerce Committee's Subcommittee on Communications and Technology has scheduled a hearing for Tuesday, May 3, on FCC process reform, and all five commissioners are to testify. FCC regulatory reform is certainly fertile ground, and I hope the committee is gearing up to do some serious plowing. [Just as I am about to post this, I see that the Subcommittee apparently has postponed Tuesday's hearing.]

In a piece entitled "Rolling Back Regulation at the FCC" published on April 18 in National Review Online, I suggested a modest change to the Communications Act, in the nature of a process reform, that could go a long way towards effectuating Congress's intent that the Telecommunications Act of 1996 be implemented in a deregulatory way. I explained that two entirely new provisions in the 1996 Act – the forbearance and periodic regulatory review provisions -- were intended by Congress to be primary tools for reducing regulation as competition developed, but that both have largely failed of their purpose. (For further detail, see my April 7 FSF Perspectives piece, "A Modest Proposal for FCC Regulatory Reform: Making Forbearance and Regulatory Reform Decisions More Deregulatory.")

In order for the forbearance and regulatory review provisions to achieve their intended purpose, I proposed that both be amended by incorporating an evidentiary standard that, in effect, would establish a deregulatory presumption. The Commission would be required to presume, absent clear and convincing evidence to the contrary, that the consumer protection and public interest criteria in the two provisions have been satisfied. The substantive criteria relating to consumer protection and the public interest would not be altered, and the revision would not dictate the outcome of any particular regulatory relief proceeding. But with the rebuttable presumption in place, the FCC would bear a considerably steeper burden in order to retain legacy regulations in the face of competition. Surely this is what Congress had in mind when it directed the agency in the regulatory review provision to determine whether a regulation is "no longer necessary in the public interest as a result of meaningful economic competition between providers of such service."

Now a point of clarification. In suggesting the forbearance and regulatory review provisions be amended to incorporate a deregulatory presumption by virtue of inclusion of the "clear and convincing" evidentiary standard, I did not mean to suggest that all entities regulated by the Commission should not be able to avail themselves of these provisions for regulatory relief. I was primarily focusing on the mechanism for achieving the deregulatory goal, not the scope of coverage. But to be clear: The two provisions should be revised so that all entities subject to Commission regulations are included, say, by adding "and a multichannel video programming distributor and any other regulated entity" after "telecommunications carrier," and "multichannel video programming service and any other service regulated by the Commission" after telecommunications service, each time "telecommunications carrier" or telecommunications service" appears.

As I noted in my National Review piece, my proposal does not lessen the need for comprehensive reform of our communications laws. But, in the meantime, if adopted, the proposal could go a long way towards forcing the FCC to eliminate what President Obama called, in his recent executive order, "outmoded, ineffective, insufficient, or excessively burdensome" regulations.

I received many favorable responses to my proposal. Perhaps in the course of the hearing on FCC reform, Committee members can ask the FCC commissioners for their reaction to this idea, along with many others.

Technorati Tags: Randolph J. May,Randolph May,FCC Reform,Forbearance,Regulatory Reform

The AT&T and T-Mobile Merger: Thinking Things Through - Part II

On April 21, AT&T and T-Mobile filed the applications seeking the FCC's consent to their proposal for T-Mobile to be acquired by AT&T.

For those readers who may not be familiar with the FCC's merger review processes, and its historical timeline for ruling on merger applications, don't expect any decision from the FCC this calendar year. I'm not suggesting the government (the Department of Justice included – after all, it is one government we have!) shouldn't be able to reach a decision before next year, I am just predicting it won't.

As I said in a statement issued on March 20, the day the merger proposal was announced, "[l]ike all mergers of this size, the proposed AT&T – T-Mobile combination will get close scrutiny, and it should." I stand by that statement.

I went on to say that:

"My preliminary sense is that the benefits from the proposed merger, with the promise of enhanced 4G network capabilities implemented more quickly than otherwise would be the case, outweigh the costs. Even after the merger, the wireless market should remain effectively competitive with the companies that remain. Over the last several years consumers have benefited from a continuing downward-sloping price curve indicating a substantially competitive market. And it is important to remember that, with respect to many services, the wireless market increasingly is just part of a larger overall broadband market."

Nine days later, in a piece entitled, "The AT&T and T-Mobile Merger – Thinking Things Through," I offered some thoughts on ways to think about the merger as the review process commences. In re-reading the piece, they still seem apropos, so, if you're inclined, I commend them to you.

In the same vein of "thinking things through," I want to call your attention to a claim made by Sprint that strikes me as somewhat odd. Sprint, the third largest wireless provider after Verizon and AT&T, suggests that if the merger is consummated, consumers will pay higher prices for their wireless services. Sprint spokesman John Taylor said the merger would harm consumers and "raise prices."

This is an odd claim coming from Sprint because you would think that Sprint would benefit, as a competitor, if the result of the merger is that the combined AT&T and T-Mobile will charge higher prices than either would charge uncombined. After all, the higher the price charged by one marketplace competitor, the easier it is for other competitors to take away – compete away – the customers of the higher-priced provider.

So, I would take Sprint's crocodile tears alleging the likelihood of higher post-merger prices with a grain or two of salt. This is especially so in the face of the long-running steep declining price curve that, without interruption, has characterized wireless prices in the U.S. over the past 15 years. According to the FCC's 2010 Wireless Competition Report, only Hong Kong has lower rates. Consumers in Great Britain, Germany, and France, Japan and most other countries pay more. In reality, Sprint might well think, and be justified in thinking, the merger will lead to even lower prices and better service for AT&T's and T-Mobile's consumers as a result of the integration efficiencies achieved from combining spectrum resources and otherwise.

But if Sprint really thinks the proposed merger will lead to higher prices for AT&T's and T-Mobile's customers, it should welcome the opportunity to use this higher "price umbrella" to lure away those customers with its own lower prices. Indeed, as Scott Cleland pointed out in a post this week, Sprint features its low prices and "unlimited" calling plans in its advertising. (Scott's piece, "AT&T – T-Mobile in Competitive Perspective," contains a lot of pertinent data relevant to an antitrust-like market analysis.)

It may be that Sprint already is so focused on its role as "leading merger opponent" that its attention will be diverted away from what ought to be its primary job -- fighting for the customers presently served by AT&T and T-Mobile, and, for that matter, by Verizon, and by MetroPCS, Leap, Cox, and the myriad of other regional providers. Indeed, statements from Sprint's officials sound as if the company, in its "leading merger opponent" role, already has adopted a static mindset that will go a long way towards consigning it to back-seat status. Here is spokesman John Taylor: "America could say goodbye to competition in the wireless industry if two companies are allowed to control nearly 80% of wireless industry revenues." The notion that the wireless providers "control" their customers in a sense that renders these subscribers non-contestable is simply wrong. The providers battle fiercely not only to sign-up new customers but to get existing ones to switch. Witness their non-stop ad campaigns – and their marketing expenditures.

So, in thinking things through at this early stage of a long review process, one thought I have is that, as the months go by, I hope Sprint doesn't become so focused on opposing AT&T and T-Mobile in the regulatory and antitrust arenas that the company fails to avail itself of the opportunities to compete in the marketplace. I suspect that while AT&T and T-Mobile executives are heavily preoccupied with the merger themselves, opportunities for Sprint to devise marketplace responses will be plentiful.

Technorati Tags: Randolph May,Randolph J. May,FCC,AT&T,T-Mobile,Merger Reform,Competition Policy

"Bill Shock" Regulation Raises First Amendment Concerns

Over the last several months the FCC has been wading into what it calls wireless "bill shock." However, there is a real question whether bill shock constitutes a real problem – let alone a problem substantial enough to warrant a new slate of regulatory mandates. This question is particularly important considering that the proposed bill shock regulation presents constitutional problems under the First Amendment.

For starters, most consumers don't incur overage charges. The Nielsen Company analyzed 78,633 post-paid wireless bill accounts spanning from the third quarter of 2009 to the second quarter of 2010 (see here and here). According to Roger Entner's analysis of the Nielsen Study, "86.5% of accounts never have a voice overage and 82% never have a data overage." Of those that do incur such charges, they're usually much smaller than the extreme anecdotes that have been highlighted before the Commission, such as a report by an AT&T customer that he was charged over $9,000 when his teenage son watched YouTube for 45 minutes on his smartphone from Guatemala. The Nielsen Study numbers suggest the median charge for consumers going into voice overage once per year is $17.89 and twice per year is $29.90. And the median charges for going into data overage once per year is $2.00 and twice per year is $3.85.

Small overage charges imposed on consumers who exceed their usage plans are hardly shocking. Requiring consumers whose usage exceeds their plan allotment to pay for such extra use makes sense. What makes little sense is to automatically equate mere overage charges to bill shock. The FCC's bill shock survey – which contends that one in six wireless consumers or 30 million experience bill shock each year – appears to equate the two.

Consider also that in some instances, paying an extra charge for extra use of a service — beyond what is provided in a consumer's chosen service plan — is more efficient for a consumer than purchasing the next most expensive service plan. And in many instances, carriers will allow consumers who incur overage charges to retroactively upgrade to a higher-tiered service plan.

Last fall the FCC issued a proposed rulemaking to lay the groundwork for new "bill shock" regulation. The Commission proposes to require wireless carriers to clearly disclose any tools they offer consumers to set usage limits or review usage balances. Although many carriers already do this, the Commission would cement the practice into disclosure rules. Furthermore, the Commission proposes to require wireless carriers to provide some kind of warnings to consumers – perhaps voice alerts or text alerts – when consumers exceed their respective plan's monthly mobile use limits and begin to incur overage charges for voice, data, and text. (Carriers already provide consumers with a variety of alert options, too.)

The Commission also proposes to mandate warnings when customers "are approaching an allotted limit" on their monthly mobile use limits. Prepaid wireless services are swept up in the Commission's proposal, too, even though prepaid users don't pay recurring monthly bills and therefore are not even in the category of consumers who would face potential overage charges, let alone charges constituting bill shock. And the Commission proposes requiring warnings from wireless carriers when consumers are about to incur domestic roaming charges or international roaming charges that are not covered by their monthly plans.

Commenters in the bill shock rulemaking proceeding go further. Some even urge the FCC to require wireless carriers to provide multiple, individualized usage and overage alerts with specific information customized to particular consumers. Commenters insist that the Commission require carriers to offer a variety of choices regarding overage and usage alert delivery. Additional mandatory alerts are urged by commenters for informing consumers that they are no longer voice or data roaming and not subject to roaming fees. Commenters also argue the Commission should mandate wireless device screen notice and alert icons as part of the required slate of warnings.

Previously, I've raised concerns about the effect of imposing a slew of new regulatory controls on a thriving, competitive wireless market that is only in the beginning stages of delivering broadband services and upgrading network capabilities to 3G and 4G specs. (See the FSF Perspectives piece "Don't Let 'Bill Shock' Regulation End Light-Touch Treatment of Wireless.") But now I want to highlight a different concern. Because the regulation being considered isn't meant to address actual fraud or deception and because the scope of proposed regulatory controls appears so broad, many aspects of proposed bill shock regulation may infringe on First Amendment free speech rights.

The U.S. Supreme Court has repeatedly recognized that freedom of speech means not only a right to speak but also a right not to speak — or a right against being compelled by the government to speak. Although the Supreme Court's First Amendment jurisprudence typically accords a lesser degree of protection to what it categorizes as "commercial speech" and is generally more favorable to compelled disclosures of speech than to outright restrictions on speech, even government regulation requiring disclosures of factual information is subject to constitutional scrutiny. Commercial advertising that is inherently or implicitly misleading is not deserving of First Amendment protection. But where no fraud or deception is involved, commercial speech regulation is subject to set out by the Supreme Court in Central Hudson Gas & Electric Company v. Public Utilities Commission of California (1985).

Under Central Hudson, government regulation of non-misleading commercial speech is permissible where: (1) the regulation advances a substantial government interest; (2) the speech directly advances that interest; and (3) the regulation is not more extensive than necessary to achieve that interest. The government bears the burden in justifying its regulation as alleviating a real problem in a material way, as opposed to regulation having a vicarious connection to a merely conjectured problem. This also means the government must establish that less burdensome alternatives will not suffice to directly advance the substantial interest at stake.

When it comes to bill shock regulation, remember again that misleading information is not at issue. Instead, the Commission is proposing regulation for the purpose of "assist[ing] consumers in avoiding unexpected charges on their bills." Let's assume a court would find that the government proves there is an actual bill shock "problem" and that the Commission's stated purpose is "substantial" enough to warrant regulation. The government would still have to establish that the myriad regulations proposed by the Commission – and commenters, to the extent the Commission were to adopt their proposals – would materially address that problem beyond the extent is already addressed by available usage monitoring tools and alerts.

A question about diminishing returns immediately occurs when considering mandated usage monitoring tools and alerts when those tools and alerts are already widely available. But even if a court found that some or all of the requirements the Commission might ultimately adopt directly and materially advanced the government's purposes, questions would still remain about whether those same purposes could be achieved by more narrowly tailored approaches.

The Commission's proposal to require wireless carriers to clearly disclose their respective usage-monitoring tools to consumers certainly constitutes as a less burdensome alternative to achieving that purpose. If the problem, as stated by the Commission, is that consumers are often unaware of or unable to use them or gain access to the relevant information, then compelling disclosure could more likely satisfy First Amendment scrutiny. As the Supreme Court recently declared in Milavetz v. U.S. (2010): "Unjustified or unduly burdensome disclosure requirements offend the First Amendment by chilling protected speech, but 'an advertiser's rights are adequately protected as long as disclosure requirements are reasonably related to the State's interest in preventing deception of consumers.'" And a court would likely conclude that promoting consumer awareness through educational efforts provides an even less burdensome alternative that is even more directly focused on the perceived problem. The Commission has already undertaken such educational initiatives, including a bill shock "tip sheet" that it released to the public last year.

But recognition of the proposed disclosure requirement and educational efforts as less burdensome alternatives throws the broader array of Commission and commenter proposals for bill shock regulation into much greater uncertainty under the Supreme Court's First Amendment jurisprudence. The more bill shock requirements the Commission ultimately adopts and the broader their scope, the more likely it is that such requirements would be considered by a court to be unnecessary to achieving the Commission's purpose – and consequently contrary to the First Amendment.

At this point, the ultimate scope and particulars of any bill shock regulation that the Commission might adopt remains uncertain. Wireless has thrived in recent years thanks in part to light-touch regulatory treatment. But the broader regulatory approach to bill shock that the Commission and pro-regulatory voices have recently endorsed embodies a more heavy-handed approach – and one even at odds with the First Amendment in some respects.

Given questions about whether bill shock is a real, substantial problem, and a problem that multiple regulatory mandates are needed to fix, I hope the Commission will think again before imposing regulation so broad as to also raise First Amendment questions.