More Spectrum Will Make 4G an Economic Force Multiplier

Deloitte's new report, "The Impact of 4G Technology on Commercial Interactions, Economic Growth and U.S. Competitiveness," previews many of the technological, economic, and social benefits that we should expect from 4G mobile broadband. According to the report, "U.S. investment in 4G networks could fall in the range of $25-$53 billion during 2012-2016." Applying industry-specific multipliers, the report cites estimates that "conservatively, these investments could account for $73-$151 billion in GDP growth and 371,000-771,000 new jobs."

Moreover, "the GDP and job estimates do not take into account the wider effects of applying 4G technology, such as the production of new devices and applications; the creation of new companies; and better ways of working, living, and learning. Any attempt to quantify those effects confronts the difficulty of anticipating the way entrepreneurs will make use of the new platform — just as in the early days of 3G mobile broadband it was impossible to foretell how social networks, smartphones, and tablets would emerge." But given the improved performance characteristics of 4G, it’s a safe bet that 4G will lay the foundation for another generation of breakthrough innovations.

In terms of enhanced capabilities, the report points out that, "[f]rom a technical standpoint, 4G promises three benefits over 3G: increased throughput, lower latency, and stronger security.One result is a reduced cost per megabit." Moreover, "4G networks combined with cloud computing and other advanced technologies have the potential to facilitate interactions among all components of the ecosystem, and thereby accelerate the process through which supply and demand signals interact and create new economic activity."

We have been consistently urging Congress, NTIA, and the FCC on in their efforts to locate and auction more unencumbered spectrum for flexible commercial use. And the report similarly deems it a U.S. policymaking priority to ensure sufficient spectrum supply allocated by free market mechanisms. The report gives a nod to the NTIA/FCC joint effort to free up 500MHz of additional spectrum in the next decade. But it warns that even if that goal is achieved, it could be difficult to keep U.S. commercial wireless spectrum supply and demand in balance as interest in new 4G offerings grows." Thus, "there is a need to find additional ways to make better use of available spectrum and to unlock more."

Report: U.S. Wireless Consumers Enjoying Better Services with Lower Bills

"Americans get more value from wireless communications than anywhere else." That's the takeaway from a report released on August 24 Future and Roger Entner of Recon Analytics. "What's It Worth To You? Comparing Wireless Pricing in 14 Countries" analyzes recent trends in wireless prices and services in the U.S. and provides an international comparison. The numbers and analysis contained in the report reveal how Americans wireless consumers are reaping increasing value from wireless services and enjoying a comparative advantage than their counterparts in several other nations

As the report points out, in recent years, U.S. wireless consumers are getting more while paying less. For starters, prices for wireless voice services have dropped. "From 2007 to 2010, in the United States," says the report, "wireless voice spending per customer has declined by more than $12 per month and total spending on wireless services has declined by more than $4 per month."

Meanwhile, U.S. consumers are increasingly enjoying wireless data services, such as text messaging and wireless Internet. Although the average American spend approximately $7 more per month on wireless data services in 2010 than in 2007, all told their dollars are stretching even further than a few years ago: "Combining wireless voice and data spend, Americans are spending $4.38 less a month on mobile communications than they did three years ago, while the ability and opportunity to do more with their minutes and their bytes has expanded in an unprecedented way."

Taking the wireless markets in several foreign countries into account, the report provides an interesting comparison by "considering how long the average person has to work for their gross income to equal what they spend on a wireless subscription." And the report concludes that "[w]hen it comes to affordability, Americans lead the world: they can talk more than 19 minutes for every work minute." By contrast, consumers in Canada can only talk 4.6 minutes for every work minute, consumers in the U.K. can only talk for 2.4 minutes for every work minute, and consumers in Japan can only talk 1.6 minutes for every work minute.

The report also provides some interesting insight regarding wireless consumer surplus; that is, "the difference between what people actually spend versus what they are willing to spend," or "the amount that consumers are able to spend on other goods and services and are therefore better off by that amount." According to the report, "[t]he 2010 wireless voice consumer surplus in the U.S. was at least $448 billion per year or $1,480 per wireless subscriber in the United States per year." That's a near tripling of the consumer surplus since 2004.

Developments in the dynamic U.S. wireless market continue to enhance wireless consumer welfare. That's the hallmark of a free market characterized by competition. Numbers contained in the report on advanced wireless services and prices present striking evidence of the U.S. wireless market being "effectively competitive."

Address Problems with Wireless Applications, Not Regulations

News outlets have recently covered New York Senator Charles Schumer's urging wireless providers to deactivate stolen cellphones. The Senator is also reported to have sent letters urging the FCC and DOJ to study the United Kingdom's policies for deactivating stolen cellphones.

It's one thing for policymakers to merely urge wireless providers to take certain concerns into account in their business practices. But it's quite another thing to impose new regulations. Urging the FCC and DOJ to consider UK policies sounds like setting the groundwork for new regulations.

Considering the dramatic and dynamic innovation and growth of wireless in recent years has taken place in a light-touch regulatory environment, one should always think twice before imposing new regulations on wireless. When markets are characterized by rapidly changing technology, even well-meaning regulation has the potential to stifle innovative and impose costly controls.

And when it comes to wireless, the lesson for policymakers is that they should never underestimate the app. Wireless apps offer consumers countless ways to obtain functionalities for their own needs. As the FCC's latest Wireless Competition Report points out, "several application stores have launched within the last three years, with each offering thousands of applications for download." The total number of apps downloaded from the Apple App Store surpassed 6.5 billion by September 2010, and by that same time, "the Android Market had over 80,000 available applications and had passed one billion downloads." Ubiquitous, creative, and customizable wireless apps thus provide useful tools as well as ready solutions to problems, rendering well-intentioned regulatory mandates pointless, if not harmful.

Prior calls for FM chipset mandates in wireless devices or "bill shock" regulations miss the fact that wireless apps can deliver many of the same functionalities in an individualized manner that proposed regulations supposedly promise. Similarly, while advanced wireless devices may be attractive items to thieves, those devices also provide their own capabilities to for wireless consumers to protect themselves. There are a number of wireless apps available for consumers to password protect their devices and data, to lock down their devices remotely, and to track the location of their devices.

It's also worth remembering that once a wireless device is reported stolen, typically wireless providers terminate the customer's service to that device. That protects the consumer from incurring charges on the stolen device and sharply reduces the value to the thief who then has a device lacking service though the customer’s account.

When a wireless app can do the job, regulation becomes redundant and perhaps even irresponsible. So in the case of stolen cellphones, policymakers should always consider the ready consumer protections offered by wireless applications before taking a more heavy-handed approach by imposing new regulations.

Eliminating Unnecessary Regulation

The Obama Administration's Regulatory Czar, Cass Sunstein, has an op-ed in today's Wall Street Journal touting the Administration's newfound interest in eliminating unnecessary regulation. This is welcome, because if Administration officials talk enough about reducing unnecessary regulations – regulations for which the costs outweigh the , they may start believing it actually needs to be done. And, to his credit, OIRA Administrator Sunstein seems intent on following through.

Over at the FCC, Chairman Genachowski, following the Administration's lead, is also talking about eliminating unnecessary regulations. In other words, he's talking the talk. Just yesterday, the FCC announced in a news release its intent to eliminate 83 outdated rules. They include the Fairness Doctrine rule, which hasn't been enforced for a quarter-century, and others, like the "broadcast flag" rule, which have not been subject to enforcement for years.

All well and good to get outdated rules off the books that have no practical effect. It will make the CFR books thinner.

But when the FCC starts eliminating outdated rules that are still being enforced, and, therefore, which do impose ongoing unnecessary burdens, then we'll know that Mr. Genachowski is actually walking the walk, not just talking the talk.

Saying No to Merger Review Regulation by Arbitration

The latest and most far-fetched attempt to bog down the proposed AT&T/T-Mobile merger is the subject of a handful of recent press reports. A law firm has been recruiting customers and filed arbitration claims on their behalf against AT&T in a number of jurisdictions across the country in an attempt to try to get arbitrators to tie up the deal.

Apparently, the law firm argues that AT&T customer contracts regarding individual billing disputes gives arbitrators the ability to decide antitrust claims under the Clayton Act. On the face of things, it seems bizarre to suggest that arbitrators are empowered to decide antitrust issues concerning AT&T/T-Mobile. Not surprisingly, AT&T has now filed lawsuits in those same jurisdictions to put a stop to the ploy.

AT&T/T-Mobile is already subject to review by two federal agencies – the U.S. Department of Justice as well as the FCC. DOJ's merger review, in fact, includes an antitrust analysis, focusing on anticompetitive concerns. Regardless of one's views of the competitive merits of the AT&T/T-Mobile merger, those merits are best assessed through the federal regulatory process we have in place. And antitrust issues, in particular, are here best left to DOJ.

We've previously raised concerns about unnecessary duplication of federal merger review processes, as well as the drawbacks from saddling telecom mergers – including wireless mergers – with assorted state regulatory reviews. Now we see yet another unhelpful and most likely harmful obstacle to a sound merger review process, this time through a misuse of the arbitration process to disrupt AT&T/T-Mobile.

Tying up proposed mergers by ginning up lawsuits premised on strange notions of arbitrator activism is bad policy. And it's hardly the best approach to ensuring careful market analysis and promoting overall consumer welfare. In the end, the only good that could come of this legal excursion would be an eventual court appeal and definitive precedent to stand in the way of any similar future attempt to roadblock proposed telecom mergers.

Prices and Profits in the Broadband Marketplace

I read this morning in the trade press that Free Press's Research Director Derek Turner is criticizing FCC Chairman Julius Genachowski for saying some kind words about usage-based pricing for broadband services.

According to yesterday's TR Daily [subscription required], Chairman Genachowski said on Tuesday that consumption-based pricing “can allow consumers that use less to be charged less,” and that it can “encourage efficiency and investment in networks.” And Communications Daily [subscription required] reports today that Mr. Genachowski said usage caps such as those adopted by AT&T and Verizon “fundamentally” may “provide consumers more choice."

Mr. Genachowski's comments follow on the heels of FTC Chairman Jon Leibowitz's endorsement of usage-based pricing for broadband services this past June at the Cable Show. The FTC Chairman expressed surprise that more usage-based pricing plans had not already been adopted, pointing out that most other products on the market are priced based on the volume consumed by customers. According to Chairman Leibowitz, it is only rational that broadband would be treated the same way.

So, according to Communications Daily, here is what Mr. Turner said: “While the rest of the world is moving away from this type of price-gouging, it is puzzling why the FCC chairman would endorse a practice that in the long run will relegate the United States to an Internet backwater.” While acknowledging that adoption of usage-based pricing could help low-volume users “in theory," Mr. Turner said, "doing so would not help [the broadband providers] achieve their primary goal — continued explosive growth of profits."

I suppose, in theory, it is nice that Mr. Turner at least recognizes, in theory, that usage-based pricing may be beneficial to low-volume users. But, unfortunately, his utter disdain for corporate "profits," and his unremitting fondness for accusations of "price-gouging," blind him from recognizing that, in the real world, usage-based pricing promotes economic efficiency in a way that not only benefits low-volume users, but also enhances overall consumer welfare.

By generally railing against "profits" and "pricing gouging" as Free Press does consistently, Mr. Turner makes his intentions – once again – crystal-clear. What he really prefers is government-owned and operated communications networks, or at the very least, private sector communications networks whose rates and service terms are closely regulated under traditional public utility principles. In Mr. Turner's world, with government-owned broadband networks, there would be no need to worry about profits because we don't expect governments to turn a profit. Quite the contrary – deficits and debt are what we expect and what we get.

And with broadband providers regulated as public utilities, Mr. Turner would look to regulators to prevent what he calls "price gouging." I understand that Mr. Turner always prefers a lower price to a higher one. But the only way to determine a "reasonable" price – even though Mr. Turner nevertheless might never agree it is not a "gouging" price – is to conduct full-blown rate cases. Having lived through many of them back in the Ma Bell era of the 70s and 80s, I am absolutely certain that, in today's competitive marketplace, we don't want to turn the clock back to those drawn-out, usually inconclusive affairs.  

Mr. Turner's preference for a world without profits or prices is one way to go – but it is completely the wrong way. Indeed, it was tried in the Soviet Union for seventy years with disastrous results before being abandoned.

There is no dispute that in the past five years, private sector broadband providers have invested over $300 billion in private capital to build-out and upgrade high-speed broadband networks that now provide access to over 95% of the nation's households. And, there is no dispute that, even so, with Internet usage continuing to explode, and especially for wireless, there will be a continuing need to invest at least $30-$40 billion per year to expand and upgrade capacity-constrained broadband networks in order to meet consumer demand and expectations.

The notion that the private sector will continue to invest hundreds of billions of dollars in broadband networks, as it has over the past decade, without the prospect of profits, however Mr. Turner chooses to characterize them, is fanciful.

And the notion that broadband providers, in a competitive market, should not be allowed to employ price signals so consumers can avail themselves of choices is fanciful too. Indeed, in the context of today's broadband marketplace, it is downright mischievous. For what "all you can eat" pricing means in this context is that either low-volume users will be required to subsidize the usage of high-volume users, which raises equity issues. Or that all – repeat, all -- users will be required to pay more for the build-out of additional network capacity than they otherwise would absent the adoption of usage-based pricing. It is either/or.

In other words, usage-based plans, by giving consumers choices related to pricing signals, promote both fairness and efficiency.

Neither FTC Chairman Leibowitz nor FCC Chairman Genachowski, both Obama Administration picks, can possibly be characterized as corporate stooges or anti-regulation. I certainly don't always agree with them. Indeed, I think often they are too quick to look to impose new regulations. But I am happy to come to their defense when they take positions that are consistent with enhancing overall consumer welfare.      

That is manifestly the case here – and I happily rise in their defense. 

Calling for a Moratorium on New Discriminatory Wireless Taxes

In our troubled economy it makes little sense to bog down the most vibrant, innovative, and investment-heavy markets with special tax burdens. Onerous and unequal tax burdens penalize growth markets that are best positioned to bring about overall economic prosperity. Unfortunately, discriminatory taxation has been our policy for the last several years when it comes to wireless.

Legislation now working its way through Congress, however, would put a temporary halt on wireless discriminatory tax trends. And it would turn the spotlight onto state and local governments that are responsible for targeting wireless consumers with extra tax burdens. The legislation's proposed federal moratorium on new discriminatory wireless taxes could be just the thing to motivate state and local government reforms that will put wireless services in a position of tax parity.

In a February blog post I discussed a State Tax Notes report by Scott Mackey that concluded "[w]ireless users now face a combined federal, state, and local tax and fee burden of 16.3 percent, a rate two times higher than the average retail sales tax rate and the highest wireless rate since 2005." Significant blame can be placed on rising federal universal service fund (USF) surcharges. But state and local governments single out wireless consumers by sticking them with disproportionately heavy taxes.

When all respective state taxes on wireless are combined with their respective statewide average for local wireless taxes, the numbers show that 47 states subject wireless to tax rates that are higher than their combined average sales tax rates. As of July, 2010, the three worst offenders were: (1) Nebraska, whose state and local tax rates on wireless of 18.64% compared to a state and local sales tax rate of only 7%; (2) Washington State, with a wireless state and local tax rate of 17.95% compared to a 9% sales tax rate; and (3) New York, with a with a wireless state and local tax rate of 17.78% compared to an 8.25% sales tax rate.

This trend of discriminatory tax treatment of wireless services must stop.

On July 29, the House Judiciary Committee reported out H.R. 1002 – the "Wireless Tax Fairness Act of 2011." The legislation is sponsored by Rep. Zoe Lofgren. A Senate companion, S.543, sponsored by Sen. Ron Wyden, was also introduced earlier this year and referred to the Senate Finance Committee.

H.R. 1002 would put in place a 5-year freeze on new discriminatory state and local taxes on wireless services. The core of the bill, as reported out of the House Judiciary Committee, provides:

No State or local jurisdiction shall impose a new discriminatory tax on or with respect to mobile services, mobile service providers, or mobile service property, during the 5-year period beginning on the date of enactment of this Act.

As the legislation makes clear, a "new discriminatory tax" is defined as a tax imposed by a state or local jurisdiction on a mobile service that "is not generally imposed, or is generally imposed at a lower rate" than is generally imposed on: (A) other services or transactions involving tangible personal property; (B) other persons that are engaged in businesses other than mobile services; or (C) other property devoted to commercial or industrial use and subject to a property tax levy. And H.R. 1002 grandfathers in all discriminatory wireless taxes already in force at the state and local level as of the day the bill is enacted.

Obviously, running a government requires a steady source of revenue to fund its basic operations. This is true for state and local governments no less than for the federal government. Accordingly, Congress can't trample the taxing power of the states without violating the basic structure of constitutional federalism. And the ability of local governments to levy taxes likewise depends on delegations of state taxing power provided by their respective state constitutions or legislatures. H.R. 1002 is therefore written with careful attention to constitutional concerns and the preservation of state taxing power.

H.R. 1002 would not interfere with states' ability to lower or raise general purpose taxes that include wireless services, such as general state and local sales taxes. Nor would the bill interfere with the ability of state and local governments to assess and collect fees "imposed on a particular entity or class of entities for a specific privilege, service, or benefit." It likewise excludes federal and state USF charges as well as fees "specifically dedicated by a State or local jurisdiction for the support of E–911 communications systems."

A July 13 letter by a half-dozen local government lobbying organizations opposing H.R. 1002 contends that the bill takes away state and local governments' ability "to tax the wireless industry – at the expense of other taxpayers and businesses," thereby "mandating that state and local governments provide favorable treatment to the wireless industry."

But this is a disingenuous, over-simplistic mischaracterization of H.R. 1002. As the legislation specifies, existing wireless-discriminating taxes would remain in effect. And the bill would not interfere with the ability of state and local governments to raise or lower general purpose taxes, or to assess fees and charges. (As a prior blog post pointed out, the CBO review of the bill – also cited in the House Committee's Report – indicates that H.R. 1002 won't impose any direct costs on state or local governments.)

The point of H.R. 1002 isn't to provide wireless with preferential tax treatment – it doesn't – but to provide a remedy to an ongoing pattern of discriminatory tax treatment. The bill puts a halt on further abuses. And it imposes a time-out for state and local governments, calling their attention to the problem and giving them opportunity adopt their own measures for putting wireless taxation on stable and equitable footing. H.R. 1002 expressly provides that during the 5-year freeze period the bill's restrictions will not apply to states and local tax reforms that subject wireless services to general purpose taxes — even when those general purpose tax rates are simultaneously raised.

In addition to the basic tax principles at stake, there are other policy and economic considerations that favor a moratorium on new discriminatory wireless taxes. For instance, as the House Judiciary Committee Report for H.R. 1002 points out, taxes depriving the wireless industry of capital that could otherwise be invested in infrastructure hinders the goals of universal access and expanding economic opportunity envisioned by the President's Wireless Innovation and Infrastructure Initiative.

Also, "tax policies that discourage wireless use also negatively affect secondary markets for smartphone applications, wireless based Internet service, and digital goods and services delivered over telecommunications networks." The market for mobile applications, in particular, has been a bright spot in an otherwise sluggish economy. According the FCC's latest Wireless Competition Report, "both the number of mobile applications launched and the number of applications downloaded by consumers has grown significantly over the past three years," and that "by the end of 2009, U.S. consumers had access to more than 130,000 applications, a number that has grown to well over 300,000 today and continues to grow daily." But subjecting wireless to even more discriminatory taxes could impede the progress and potential economic benefits of this important and growing market segment.

Ideal tax policy includes broad-based taxes that treat all goods and services equally and at low rates, without exceptions or carve-outs. Realistically, even if Congress adopts a moratorium on new discriminatory wireless taxes, reforming state and local taxes on wireless by bringing them under streamlined, broad-based, low-rate taxes would not be easy. Even with a federal moratorium, state and local governments would still have to do their part. But by focusing national and local attention on the problem that now exists, H.R. 1002 would give us a shot at turning the corner on wireless tax discrimination and rolling back some of the worst abuses at the state and local level.

That is a shot worth taking.

Consent of the Governed as a Protection against Government-Owned Broadband Debt

Negotiations over the federal government's debt ceiling bring to mind some recent experiences of local governments facing financial shortfalls on account of overpriced and undersubscribed municipal broadband projects. In an October blog post I described a plan being considered by several Utah cities to issue $60 million in new bonds just to cover the existing debts of their muni broadband project called "UTOPIA" and keep the project afloat. And in a January blog post I wrote about two North Carolina towns that shelled out nearly $580,000 to provide a temporary bailout for their muni broadband project, MI-Connection.

When muni broadband projects fail, the fall guys aren't the paid consultants who pitch the projects or local government officials who buy the pitches. Rather, the real fall guys are local residents who bear the losses through budget cuts to other local government services and through local tax hikes.

As I pointed out in January, "one thing responsible cities and towns should do in the year ahead is keep from making their financial problems worse by engaging in expensive and risky new ventures."

This spring, the North Carolina legislature took steps of its own to better ensure responsible action by cities and towns considering new muni broadband projects. The North Carolina legislature passed House Bill 129 into law in May. HB 129 includes a number of limitations and safeguards on muni broadband projects and how they can operate. In particular, HB 129 requires a public vote of approval by local residents before their local government can assume debts for financing on any muni broadband project:

A city shall not incur debt for the purpose of constructing a communications system without first holding a special election … on the question of whether the city may provide communications service. If a majority of the votes cast in the special election are for the city providing communications service, the city may incur the debt for the service. If a majority of the votes cast in the special election are against the city providing communications service, the city shall not incur the debt.

Broadband networks are expensive and risky undertakings, particularly in our current economic climate. Given the deep financial liabilities saddled on local residents when muni broadband projects go bad, adding an extra layer of taxpayer protection from financial peril by requiring the consent of the people is a commonsense idea.

Wireless - No New Taxes!

Communications Daily reports that the CBO issued a report yesterday to the effect that passage of the Wireless Tax Fairness Act wouldn't cost state or local governments any lost revenue. The bill would impose a five year moratorium on new state and local taxes on wireless services, which are already overburdened with these levies.

CBO said no there would be no cost because no state or local governments plan to impose such taxes.

Whatever. There is no sound rationale for imposing new taxes on wireless. There is a rationale for reducing them -- at least to bring them in line with sales taxes imposed on other goods and services.

Good luck Gig.U Project

Blair Levin has launched an exciting new venture called the Gig.U project. In short, Gig.U, or the University Community Next Generation Innovation Project, is a broad-based group of almost 30 leading research universities -- including my alma mater, Duke -- from across the nation. The idea of the project is for the research universities, and the communities in which they are situated, to serve as bases for the deployment of ultra high-speed broadband networks. Then, with the universities' rich in-place intellectual capital using the super high-speed networks, the hope is that a whole new generation of innovations will be spurred.

You can read all about the new project here.

All in all, it looks like a very worthwhile venture, one that, if successful, could bring many benefits, not only to the university communities involved but to the nation at large.

So, I commend Blair not only for the innovative idea, but for the energy required to accomplish the practicalities necessary get the idea off the ground to the launch phase.

PS -- His only mistake: He let Carolina in on the project too....Should have been Duke in, Carolina out.

Red Tape Rising at a Rising Rate

On July 25, James Gattuso and Diane Katz at Heritage Foundation released the latest iteration of their overview of increasing federal regulatory mandates. "Red Tape Rising: A 2011 Mid-Year Report on Regulation" spotlights the continuing growth of federal bureaucratic rules and their corresponding burden on the economy.

As Gattuso and Katz point out, regulatory costs aren't merely a business problem since "the costs of regulation are inevitably passed on to consumers in the form of higher prices and limited product choices." Moreover, "[u]nlike the budgetary accounting of direct tax revenues, Washington does not track the total burdens imposed by its expensive rulemaking."

But even a glimpse at the first half of fiscal year 2011 is enough to give one a sense of the problematic growth of new regulatory burdens. Relying on Government Accountability Office numbers, Gattuso and Katz observe that over 1,800 rulemakings were completed in the first half of FY 2011. Thirty-seven of those rulemakings were classified as "significant/substantial" or "major," meaning they had an expected economic impact of $100 million per year. And fifteen of those thirty-seven impose new mandates or limits on private-sector activity. According to Gattuso and Katz, "[t]he annual costs of the 15 new major regulations total more than $5.8 billion and impose nearly $6.5 billion in one-time implementation costs. And just as significant is the fact that "[n]o major rulemaking actions decreased regulatory burdens during the first half of fiscal 2011."

The problem is worse than new regulatory burdens, however. Gattuso and Katz make the point that the rate at which regulatory burdens are growing is itself increasing. As Gattuso and Katz go on to describe new regulations currently in the works:

The spring 2011 Unified Agenda…lists 2,785 rules (proposed and final) in the pipeline. Of those, 144 were classified as 'economically significant.' With each of the 144 pending major rules expected to cost at least $100 million annually, they represent at least $14 billion in new burdens each year.

This is an increase of 15.2 percent in the number of economically significant rules in the agenda between spring 2010 and spring 2011. Moreover, in the past decade, the number of rules has increased a whopping 102 percent, rising from 71 to 144 since 2001.

Policymakers considering even more regulatory mandates would do well to consider this backdrop of regulatory burdens and the already increasing regulatory burden rate. Reversing the trend of increasing regulatory burdens means not only reducing the rate at which we adopt new rules, but also undertaking new rulemakings that eliminate older rules and reduce the overall regulatory burden.

USF Reform Is Not For Sissies

My beloved, late Aunt Betty, well into her 90s, was fond of saying: "Aging is not for sissies."

Well, neither is serious Universal Service Fund reform, which is long overdue.

So repeat after me: "USF reform is not for sissies."

As everyone who follows telecom policy knows by now, a group of telecom providers – AT&T, CenturyLink, FairPoint, Frontier, Verizon, and Windstream – has submitted a USF reform plan to the Federal Communications Commission. They call their plan the "American Broadband Connectivity" plan, or ABC plan.

Shortly after the plan was filed with the FCC, here is what I said:

"The USF reform plan represents a major step forward in the effort to achieve a more efficient, technology-neutral, economically-sound universal service system. Capping the USF fund, directing support only to unserved areas, eliminating subsidy payments to more than one carrier in an area, introducing competitive bidding, and making the remaining subsidies more explicit are all positive market-oriented steps. While I would prefer even more substantial reform with deeper subsidy cuts, it is now up to the Commission, for the benefit of the nation's consumers, to seize the opportunity presented by the plan to quickly accomplish at least this much reform."

As I said, I would prefer a plan that contemplates more substantial cuts in the existing subsidy levels. The present subsidies, which amount to $8 billion annually, require a nearly 15% surcharge ("tax") on all long distance calls to fund them. More than half of the $8 billion per year goes to fund subsidies that are distributed in an overly indiscriminate way to telecom providers in so-called high-cost areas.

In comments filed this past May in the FCC's USF reform proceeding, I urged, along with my FSF colleague Seth Cooper, that the Commission cap the high-cost fund and then lower it over time. And we called for sunsetting the subsidy program, say, in ten years, and then reviewing whether, in light of technological and marketplace developments, it ought to be renewed on some basis for a further limited period.

That said, I don't get to design the reformed USF regime, the FCC does. And as I said in my statement above, the ABC plan has several positive, market-oriented elements. Capping the size of the fund, providing subsidies only to presently unserved areas and only to one provider, employing competitive bidding to determine the low-cost provider, rationalizing the intercarrier compensation system to eliminate existing arbitrage opportunities, and making the subsidy regime more technology-neutral are all market-oriented steps.

Now the ball is in the FCC's court, and the agency would be derelict not to seize the opportunity to achieve at least as much reform as proposed in the ABC plan. Note the emphasis on "at least."

There is a public policy rationale for transforming the existing regime from support of narrowband voice service to broadband service. But only if this transformation is accomplished in a fiscally responsible way that enhances overall consumer welfare. This means ensuring that subsidies are not distributed any longer in an indiscriminate way that discourages the use of the most efficient technologies or deters the development of further competition.

I always try to maintain my innate optimism about the ability of good public policy to win out in the end, even though I know it doesn't always.

In this instance, now that the ABC plan has been submitted, I would be even more optimistic if Chairman Genachowski would call together his fellow commissioners, join them in a circle, and all holding hands, have them chant in unison: "USF reform is not for sissies."    

FCC Marks End of Merger Price Controls By Better Recognizing Market Competition

On July 27, the FCC issued an order in which it declined to extend the three-year price cap "voluntary" condition it imposed on the Sirius-XM merger. It's welcome news to see the FCC decline to extend price controls on satellite radio services. The order is also revealing for the FCC's acknowledgment that Sirius-XM faces competition, including new competitive alternatives that have emerged since the merger was approved. The existence of such competition demonstrates the emptiness of the horror stories once repeated by the merger critics who sought to block or tie down Sirius-XM with conditions on the basis of narrow market definitions. The FCC's acknowledgment of such competition from close substitutes should be remembered as it analyzes competition in other dynamic markets, including its market analysis of mergers.

The FCC's order pointed out: (1) "[n]o specific proposals to extend the price cap condition were submitted in response to the Public Notice" and (2) "[n]umerous individual consumers commented, the vast majority stating that the Commission should remove the price cap condition and allow Sirius XM to set the price of its subscription packages in response to market forces." There, the agency concluded (3) "the record before us now does not support extending the price cap condition."

Remember that critics of the Sirius-XM merger, such as the National Association of Broadcasters, called the deal a "merger to monopoly." The slogan traded on an unduly narrow set of market definitions, suggesting Sirius-XM would face little or no competition in a field all to itself and be able to wield market power to charge consumers above-market prices. It was also a thoroughly disingenuous claim. As FSF President Randolph May pointed out in comments to the FCC:

If satellite radio constitutes a distinct market, why would the terrestrial broadcasters devote so many resources to trying to defeat the merger? The answer, of course, is that satellite radio does, in fact, compete with terrestrial AM, FM, and HD radio, and a combined XMSirius, with the cost savings realized, should be a stronger competitor than either alone.

That Sirius-XM faces plenty of competition in the broader audio entertainment market was hinted at in the FCC's recent order. It contends that "there is evidence that new competitive alternatives have arisen since 2008." As the FCC explained:

it appears that since the Merger Order new audio services have emerged as viable consumer alternatives, including smartphone Internet streaming applications that can be used in mobile environments such as automobiles equipped with user-friendly interfaces. For example, Pandora Media Inc. ("Pandora"), which provides audio services via Internet streaming and smartphone apps, has demonstrated remarkable growth in popularity in the years since the merger. Other examples of apps that have emerged as alternatives since the Merger Order include Rhapsody, Slacker, Last.fm, and iheartradio. Ford, Toyota, MINI, GM, Mercedes-Benz, and Hyundai are introducing Internet-based streaming services in their vehicles. In addition, data suggest that HD radio has increased since the merger.

Whether Sirius-XM will remain solvent or be a serious player over the long-run in the audio entertainment market remains to be seen. The issue is bigger than Sirius-XM or any one particular competitor it might face. In today's dynamic, digital marketplace, consumers enjoy a variety of information and entertainment options from different platforms operating on different pricing and service models. As pointed out in a prior blog, Thinking "Siriusly" About Satellite Radio Competition – or thinking seriously about competition in general – means that "continued investment and innovation depend on regulators at DOJ and the FCC not taking such a constrained, static view of marketplace competition that they end up maintaining in place or adopting new regulations, or preventing market-driven mergers, which have such investment and innovation-stifling effects."

Hopefully, the end of satellite radio price caps will mark the beginning of clearer thinking about market definitions in dynamic markets.

State Regulators Shouldn't Meddle with AT&T/T-Mobile Merger

A small handful of state public utility commissions (PUCs) have opened their own proceedings to review the AT&T/T-Mobile merger. This despite the fact that the U.S. Department of Justice and the FCC are conducting independent reviews of the proposed deal. While as a general matter, we contend that State Regulators Should Refrain from Reviewing Wireless Mergers, this month there have been some encouraging signs coming from some of the states in which PUC reviews have been opened.

First, as National Journal's TechDailyDose blog pointed out on July 5:

The Arizona Corporation Commission, the state agency that oversees telecom providers, approved AT&T's acquisition of T-Mobile USA, the nation's fourth biggest wireless provider, without a hearing and with a minimal condition requiring the firm to notify T-Mobile customers by mail of the deal.

Next, TRDaily reported on July 13 that the West Virginia Public Service Commission's (WVPSC) legal and technical staff issued a recommendation that the WVPSC approve the AT&T-T-Mobile merger. Among other things, the WVPSC staff's recommendation pointed to T-Mobile's lack of substantial in-state presence as a factor for its conclusion.

Most recently, on July 25 TRDaily reported that the Louisiana Public Service Commission (LAPSC) staff issued a Report and Recommendation that the LAPSC approve the AT&T/T-Mobile merger. The LAPSC Staff Report and Recommendation is noteworthy for its recognition of the need to avoid unnecessary and duplicative merger reviews that should instead be undertaken at the federal level:

Sprint's comments are largely focused on the impact the merger will have on a national level, even stating, 'the national market is the relevant geographic scope on which to evaluate the proposed acquisition.' Sprint's comments also [contain] several references to the FCC, the DOJ, to federal jurisdictional issues, and to the proceedings that are ongoing before those agencies. Yet Sprint would presumably have the LPSC review those same issues, through a protracted proceeding not contemplated 301.M [ the LAPSC's streamlined rules for reviewing and approving telecommunications service providers mergers and acquisitions]. Staff is confident the FCC and DOJ, with their expansive resources and expertise on these matters, will perform a thorough review of Sprint[']s concerns regarding the impact this acquisition may have on a national level.

Rather than focus the Commission's resources on an unnecessary duplicative review, the Staff recommends the Commission zero in on the requirements of Section 301.M…

California's PUC would do well to take this point into consideration. With ongoing, overlapping reviews of AT&T/-T-Mobile by DOJ and the FCC, the merger will most certainly be scrutinized.

Unfortunately, the California PUC's review of AT&T/T-Mobile has expanded into a series of hearings and public workshops, with interest groups calling for a series of conditions on the merger's approval. Whatever one's view about the competitive aspects of AT&T/T-Mobile and whether the merger should ultimately be approved, Multiple Government Regulatory Reviews Burden Telecom Mergers with Too Many Conditions.

DC Circuit Vacates [Net Neutrality] Rule

Did you hear about the D.C. Circuit's opinion last week vacating the Commission's major new rule?

Here are just a few key quotes from the decision:

"Here the Commission inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters."

"The petitioners also maintain, and we agree, the Commission relied upon insufficient empirical data…."

"As we have said before, this type of reasoning, which fails to view a cost at the margin, is illogical and, in an economic analysis, unacceptable."

"By ducking serious evaluation of the costs that could be imposed upon companies from use of the rule…."

As you are reading this, you could be forgiven for thinking that the D.C. Circuit has ruled, anticipatorily, on the FCC's net neutrality regulations (aka the "Open Internet" rules), which were voted on last December but which have not yet become effective. But, alas, you would be wrong, and my blog title with the bracket is meant, for now, as only a tease. Sorry.

The above quotes are taken from the D.C. Circuit's July 22 opinion in Business Roundtable v. Securities and Exchange Commission in which the court vacated the SEC's rule requiring public companies to provide shareholders with information about, and their ability to vote for, shareholder-nominated candidates for the board of directors. Obviously, the SEC is not the FCC. And the SEC's enabling statutes required, in the Business Roundtable case, the SEC to consider the rule's impact upon efficiency, competition, and capital formation.

Nevertheless, the court's analysis, which ultimately concludes the SEC's shareholder information rule is arbitrary and capricious under the Administrative Procedure Act's judicial review standard, is certainly relevant to considering review of the FCC's net neutrality mandates. Quoting from the Supreme Court's leading case, the D.C. Circuit explained: "We must assure ourselves the agency has 'examine[d] the relevant data and articulate[d] a satisfactory explanation for its action including a rational connection between the facts found and the choices made.' Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)."

The court's critique of the SEC's reasoning, as illustrated by the quotes above, surely has some applicability to the FCC's reasoning – more properly, the deficiencies in its reasoning – regarding the net neutrality order. Without rehashing the FCC's order here, the agency's market failure and competition analysis is decidedly thin, based much more on possible hypothetical problems that could occur in the future rather than on evidence of market problems that have occurred.

And the costs imposed by the regulation were certainly downplayed or ignored as evidenced by the fact that the FCC had failed completely to analyze the regulatory costs pursuant to the Paperwork Reduction Act requirements. A reviewing court is not likely to be impressed by the fact that such consideration is now taking place – a half-year after the rule was voted on -- rather than before. The House Energy and Commerce Committee's Report, dated April 1, 2011, accompanying its resolution of disapproval of the FCC's net neutrality regulation contains an excellent analysis of the FCC's arbitrary reasoning.

In short, in broad outline, the FCC's failure of reasoned decision-making mirrors that of the SEC's regarding promulgation of the shareholder information regulation. My guess is that, like the D.C. Circuit in Business Roundtable, a court reviewing the FCC's net neutrality regulations will find the Commission, in the words of State Farm, failed to make a rational connection "between the facts found and the choices made."

And, finally, there is this to consider: There was no question whatever with respect the SEC rule as to the agency's jurisdiction to promulgate the rule. With regard to the net neutrality order, the FCC's jurisdiction to regulate the business practices of Internet service providers is, to put the matter charitably, by no means clear. Indeed, many think it is highly doubtful. As Free State Foundation advisory board member Daniel Lyons explained recently in this Perspectives piece, jurisdiction-stretching agency orders should not receive Chevron deference upon review.

I understand that the FCC's lawyers can go about distinguishing the court's opinion in Business Roundtable from review of the FCC's order adopting new net neutrality regulations. But, in my view, the D.C. Circuit's decision is another foreboding sign.

City Should Stick to the Law and Evidence When it Comes to Cellphones and Health

Recently in the news is the San Francisco Board of Supervisors' latest misguided attempts to impose health warning mandates on stores selling cellphones. This latest stab by the San Francisco Board comes in the wake of yet another published scientific study suggesting cellphones do not pose the kinds of dangers that certain San Francisco politicians persist in claiming they might.

Apparently, the San Francisco Board is seeking to amend the wireless warnings ordinance it adopted last year that required stores to post each phone' "specific absorption rate" or SAR – a measure of radiation absorbed by a user's body. This prompted an industry lawsuit against the city, since the federal government has broad authority over the electromagnetic spectrum and wireless and exclusive authority over wireless "entry" under. As the initial lawsuit complaint spells out plainly, federal government clearly occupies the field when it comes to radio frequency (RF) emissions and SARs, including a number of FCC regulations dealing specifically with SARs. CTIA later amended its lawsuit complaint to include a First Amendment challenge to the ordinance. So now the San Francisco Board is trying to get around the lack of scientific merit, federal preemption, and First Amendment problems by dropping the SARs warning and instead imposing some kind of generic warning about radiation.

Frankly, the San Francisco Board has little to no credibility when it comes to wireless handset technologies and medical health issues. Its ordinance and revision efforts are unwarranted, unwise, and a waste of time. The better approach is found in the American Legislative Exchange Council's Resolution Opposing State and Local Mandates Requiring Warning Labels on Wireless Devices and Packaging. The San Francisco Board should direct any concerns they have to the federal authorities that actually have jurisdiction over the matter.

Court Ruling Factors First Amendment into Video Regulation Review

In prior blog posts we have analyzed D.C. Circuit rulings that call into question the relevance and legitimacy of legacy video regulation in light of today's dynamic video market. Now comes Cablevision v. FCC (2011), a ruling issued in June by the D.C. Circuit. Directly at issue was whether the FCC had the delegated authority to adopt program access regulation "closing the terrestrial loophole." The D.C. Circuit upheld most of the particular regulation at issue on statutory grounds. But the real significance of Cablevision is the latest jurisprudential wrinkle it provides regarding the analytical basis for video regulation and the requirements the FCC must meet to justify such regulation under the First Amendment.

First, Cablevision v. FCC confirms a subtle shift in the D.C. Circuit's analytical basis for upholding video regulation in the face of First Amendment challenges. Early and mid-1990s video regulations were upheld by the U.S. Supreme Court in Turner v. FCC I (1994) and Turner v. FCC II (1997) against First Amendment free speech claims on the basis of a perceived "bottleneck" for cable video services. Such regulation was said to satisfy intermediate level scrutiny because it responded to concerns about so-called cable bottlenecks. But as the D.C. Circuit observed in Cablevision:

The video programming industry does indeed look very different today than it did when Congress passed the Cable Act in 1992…Although cable operators then controlled approximately 95% of the national market for video programming… by 2007 their share had decreased to 67%, and it has apparently continued dropping in the face of competition from DBS providers and, more recently, from telephone companies offering fiber optic services…In addition, the number of programming networks has increased dramatically while the percentage of networks vertically integrated with cable operators has declined.

Echoing a prior ruling, Cablevision v. FCC (2010), the D.C. Circuit ruling from last month characterizes the video market as "mixed," with some geographical areas experiencing higher levels of competition than others. Now one might question whether the D.C. Circuit's characterization of the video market as merely "mixed" provides an oversimplified understatement of the competitiveness of today's market. And such a characterization is perhaps less forceful than the D.C. Circuit's assertion in Comcast v. FCC (2009) that "the record is replete with evidence of ever increasing competition among video providers…Cable operators, therefore, no longer have the bottleneck power over programming that concerned the Congress in 1992."

Those considerations aside, one should still recognize that by characterizing the video market as "mixed" in both cases the D.C. Circuit is effectively analyzing First Amendment challenges to legacy video regulation on a basis that differs from what the Supreme Court set out in Turner I and cases that followed.

This slight shift in the legal rationale for analyzing video regulation subject to First Amendment challenges makes it more likely that the Supreme Court will agree to revisit and perhaps reformulate its First Amendment jurisprudence regarding video regulation.

In such a future case the Supreme Court could, for instance, reexamine its precedents that give less speech protection to certain broadcast, cable, or other media than to print publications. On such an occasion, the Court could even address whether competition now present in the video market requires that legacy video regulation be subjected to strict scrutiny rather than to intermediate scrutiny – a possibility explored in prior writings by FSF scholars.

Second, Cablevision v. FCC is significant simply for taking First Amendment challenges to regulation of video market competitors seriously. The D.C. Circuit struck down the Commission's regulation that categorically treated as "unfair" all conduct involving terrestrially-delivered programming if similar conduct was designated "unfair" according to Communications Act Section 628(c)(2)'s provisions regarding satellite-delivered programming. In the court's words, the Commission "failed to justify its assumption that just because Congress treated certain acts involving satellite programming as unfair, the same acts are necessarily unfair in the context of terrestrial programming." At least when it comes to conduct in the video market not expressly prohibited by Congress, the court concluded that the Commission is required to consider and ultimately justify its prohibition of the types of conduct at issue. The D.C. Circuit's ruling pointed out that one of that the "substantially narrowed scope of [the Commission's] regulation…focusing on the effect of terrestrial withholding in individual cases…is one of the reasons why its [other] rules survive First Amendment scrutiny."

In other words, under the First Amendment the Commission cannot simply impose new video program regulations mirroring its old regulations without either statutory authorization or adequate analytical justification when using its ancillary powers. The ruling essentially requires that any FCC regulation of conduct in the video market involving programmers and multichannel video programming distributors (MVPDs) lacking express statutory authorization be justified by an analysis of the competitive aspects of the types of conduct at issue. And even where such justification exists, the First Amendment requires the Commission to provide a case-by-case process for inquiring into particular purposes or effects of conduct of particular video programmers and MVPDs such as cable operators and DBS providers.

The Communications Act, the Cable Act, and the Administrative Procedures Act, have long been recognized as providing statutory limitations on the FCC's power to adopt and enforce regulation of competitors in the video market. And the D.C. Circuit has given at least a slight nod to First Amendment considerations in recent cases. For instance, ruling by the D.C. Circuit in Comcast v. FCC (2009) offered First Amendment considerations for its remedial order vacating FCC regulation limiting video subscribership, though the Court invalidated the regulation on APA grounds.

But despite its upholding most of the FCC's expansion of video regulation, in this latest Cablevision ruling the D.C. Circuit took First Amendment claims head-on and made free speech considerations a matter of consequence to the validity of legacy video regulation. Without drastically reshaping First Amendment jurisprudence regarding video regulation, Cablevision suggests that First Amendment considerations will be taken more seriously in the times ahead, as they should be.

Engaging Regulatory Reform Efforts

The flurry of federal regulatory activity taking place in the last couple years has led to renewed attention to regulatory reform efforts to scale back the growing scope of government agency rules and ease the burdens of bureaucratic restrictions. In a newly-published article in Engage titled "Prospects for Regulatory Reform in 2011," Susan Dudley provides an excellent introductory and overview of current regulatory reform initiatives, with a special attention to legislative efforts in the 112th Congress. Dudley formerly served as Administrator for the Office of Information and Regulatory Affairs (OIRA) and currently serves as director of George Washington University's Regulatory Studies Center.

Dudley's Engage article begins with a useful background section, tracing regulatory reform implemented in the mid-1970s to mid-80s, as well as mid-90s reform proposals from the 104th Congress. Dudley focuses primarily on two categories of reforms for the 112th Congress to consider. The first category includes procedural reforms – that is, reforms to the processes by which regulations are adopted. The other category emphasized by Dudley includes decision criteria reforms – in other words, "improving upon the decisional criteria by which regulatory alternatives are evaluated." Both categories include a handful of different legislative approaches to regulatory reform that merit careful consideration by Congress.

And speaking of procedural regulatory reforms, FCC process reform, in particular, is a subject of continuing interest in policymaking circles this year. Free State Foundation recently posted the panel discussion transcript for its lunch seminar entitled "Regulatory Reform at the FCC: Why Not Now?" The panel followed a keynote address by Congressman Cliff Stearns, Chairman of the House Commerce Committee's Subcommittee on Oversight and Investigations. FSF President Randolph May moderated the event, and offered his own views in testimony at a June hearing on "Reforming FCC Process" before the House Commerce Committee's Subcommittee on Communications and Technology.

States Should Defer to DOJ on Antitrust Reviews of Interstate Wireless Mergers

Recent press reports point out that a handful of state attorneys general offices are now undertaking their own respective antitrust reviews of the proposed AT&T/T-Mobile merger. The reviews being conducted by Arizona, Florida, Hawaii, Illinois, Minnesota, NewYork, Pennsylvania, Texas and Washington come on top of the pending review of the merger by the U.S. Department of Justice's Antitrust Division and the review proceeding at the FCC.

Late last year I described the unnecessary and costly nature of duplicative state public utility commission (PUC) reviews of telecom mergers in a Perspectives paper titled "Multiple Government Regulatory Reviews Burden Telecom Mergers with Too Many Conditions." In that paper I pointed out that:

The existing multi-level, multi-agency telecommunications merger review process involves costly, time-consuming, redundant reviews by federal and state regulators. And it often results in merging carriers being subjected to numerous approval conditions that are unrelated to specific harms posed by such mergers.

Telecom mergers are already subject to review by two federal agencies – the FTC or DOJ as well as the FCC. Thus, I concluded that:

Once market power concerns are addressed by FTC-DOJ reviews, a law of diminishing returns kicks in with regard to subsequent FCC and state PUC merger reviews. There is little reason to expect seven, thirteen, or two-dozen government agencies will provide an optimum outcome that would not otherwise be reached through reviews conducted by one, two or even a few government agencies.

For similar reasons, I also made the case why state PUCs should stay out of the AT&T/T-Mobile merger in a blog post from June titled "State Regulators Should Refrain from Reviewing Wireless Mergers."

Most – if not all – of those same considerations that weigh against state PUCs creating a multi-state regulatory review pile-up on proposed interstate wireless mergers also weigh against state AGs creating their own multi-state review pile-up on such mergers. State antitrust analyses of intrastate conduct and effects based on consumer welfare criteria possibly might embody more disciplined approaches to interstate wireless mergers than state PUC "public interest" standards.

Nonetheless, state antitrust reviews pose similar concerns regarding expensive, repetitive, delay-prone processes that are most likely unnecessary in light of DOJ's antitrust review process.