View my remarks during a panel discussion entitled "Regulation and Competition in the Digital Economy," sponsored by the American Consumer Institute on Jun. 6, 2013.
June 6, 2013
Regulation and Competition in the Digital Economy
View my remarks during a panel discussion entitled "Regulation and Competition in the Digital Economy," sponsored by the American Consumer Institute on Jun. 6, 2013.
May 13, 2013
Satellite Carrier Subsidies Are Unwarranted
DISH Network gets another opportunity on Tuesday to plead with Congress for another Satellite Home Viewer Act reauthorization--ostensibly to protect consumers from unwarranted rate increases and program blackouts, but actually to preserve and expand DISH Network's and DirecTV's access to broadcast programming at regulated, below-market rates.
A couple minor provisions in the Act that have nearly outlived their original purpose are due to expire, but DISH Network is taking advantage of this opportunity to argue that "there is much more that Congress can do to expand consumers' access to local programming..." DISH's plea is an example of the narcotic effect of supposedly benign regulation intended to promote competition by giving nascent competitors a leg up. DISH Network, in particular, has become addicted to artificially low prices for broadcast programming, and will seize any opportunity to reduce its programming costs some more through regulation.One of the problems with betting your shareowners' company on regulation is that in politics, nothing lasts forever. Another is that there are certain laws of economics, and they still apply. Shareowners really ought to be on high alert for the appearance of a Beltway, State Capitol or City Hall strategy--firms that can compete and win in the marketplace have no need for regulatory advantages.
January 10, 2013
Crawford's Misplaced Nostalgia for Utility Regulation
In her new book, Captive Audience, Susan Crawford makes the same argument that the lawyers for AT&T made in Judge Harold H. Greene's courtroom in response to the government's antitrust complaint beginning in 1981, i.e., that telephone service was a "natural monopoly." In those days, AT&T wanted regulation and hated competition, which is the same as Crawford's perspective with respect to broadband now. Here is what she said today on the Diane Rehm Show:
Diane Rehm: "Is regulation the next step?"In her book, Crawford candidly says that "America needs to move to a utility model" for broadband ... and "stop treating this commodity as if it were a first-run art film..."
It's time for a stroll down memory lane.
December 9, 2012
FCC Risks Getting Sidetracked on Spectrum Auctions
On Wednesday, the Subcommittee on Communications and Technology will conduct an oversight hearing of the implementation of spectrum auctions by the Federal Communications Commission.
The subcommittee members ought to consider the fact that although the mobile wireless industry faces an acute shortage of spectrum ("broadband spectrum deficit is likely to approach 300 MHz by 2014"), the FCC risks getting distracted and mired in a pointless effort to leverage its spectrum auctioning authority to manipulate the structure of the mobile wireless industry.
In mid-2011, former Commissioner Michael J. Copps warned of "darkening clouds over the state of mobile competition ... we find ongoing trends of industry consolidation." As Copps saw it, increasing concentration will lead to higher prices for consumers. His solution was for the market to have more competitors that look and perform like AT&T and Verizon Wireless.
Since Congress failed to prevent the FCC from engaging in what the late Alfred Kahn once called "oxymoronic efforts to promote competition by regulation" when it adopted the Middle Class Tax Relief and Job Creation (JOBS) Act in February, the path was clear for the FCC to act on Mr. Copps' pessimism. The commission issued a Notice of Proposed Rulemaking in late September for establishing caps on mobile spectrum holdings. The NPRM is designed to eliminate AT&T's and Verizon Wireless' access to additional spectrum they need in the short-term to meet growing demand for mobile broadband services.
November 2, 2012
Roosevelt Tried To Abolish the FCC
No doubt you are aware that the Communications Act of 1934 eastablished the Federal Communications Commission, which has profoundly affected the broadcast, cable, telecommunications and satellite industries. You will recall that the legislation was signed into law by President Franklin D. Roosevelt. What you may not realize is that President Roosevelt made two subsequent attempts to abolish the Federal Communications Commission.
On Jan. 23, 1939, Roosevelt wrote similar letters to Senator Burton K. Wheeler and Congressman Clarence F. Lea urging dramatic FCC reform.
I am thoroughly dissatisfied with the present legal framework and administrative machinery of the [Federal Communications] Commission. I have come to the definite conclusion that new legislation is necessary to effectuate a satisfactory reorganization of the Commission. New legislation is also needed to lay down clear Congressional policies on the substantive side - so clear that the new administrative body will have no difficulty in interpreting or administering them. I very much hope that your committee will consider the advisability of such new legislation.
Although proposals for FCC reorginization were introduced at the time, Congress did not act. Then World War II intervened. It wasn't until 1996 that Congress "comprehensively" updated the 1934 Act. But the 104th Congress left the "present legal framework and administrative machinery of the Commission" intact, and it failed to to "lay down clear Congressional policies on the substantive side."
Roosevelt wanted to transfer the functions of all independent agencies like the FCC to cabinet departments. A 1937 initiative for this purpose failed. Two years later, Roosevelt took aim at the FCC directly.
Roosevelt's specific issues with the FCC of the 1930s are a subject for a subsequent essay (they were primarily on the radio side, although also relevant to the telephone side). In any event, his 1939 letter reinforces a libertarian critique of the 1934 act. The law was overly broad and created too much room for the FCC to establish its own policy preferences instead of serving to enforce the policies of elected congressional representatives and the president.
Althouth well-intentioned, the FCC (even to its most famous creator) was a disapointment and a mistake. The 113th Congress should carefully consider the 32nd president's advice.
August 13, 2012
No More Backscratching Between Phone Companies
An ad campaign urged residents of Butler, GA to "Stop AT&T From Raising Your Rates" by planning to attend a public hearing earlier this month at the Taylor County Courthouse to provide testimony in Docket #35068, Rate Cases on the Track 2 Companies.
The Georgia Public Service Commission sets the phone rates in Butler, but politics are politics, and AT&T is a better scapegoat for an ad campaign. AT&T doesn't even provide the town's phone service, although the telecom giant does help finance it. That's because Georgia consumers pay a hidden tax on their phone bills that subsidizes the phone service provided by Public Service Telephone Co. in Butler. You guessed it, PST paid for the ads.
July 9, 2012
Still Seeking Advantageous Regulation in Telecom
One of the most egregious examples of special interest pleading before the Federal Communications Commission and now possibly before Congress involves the pricing of "special access," a private line service that high-volume customers purchase from telecommunications providers such as AT&T and Verizon. Sprint, for example, purchases these services to connect its cell towers.
Sprint has been seeking government-mandated discounts in the prices charged by AT&T, Verizon and other incumbent local exchange carriers for years. Although Sprint has failed to make a remotely plausible case for re-regulation, fuzzy-headed policymakers are considering using taxpayer's money in an attempt to gather potentially useless data on Sprint's behalf.
Sprint is trying to undo a regulatory policy adopted by the FCC during the Clinton era. The commission ordered pricing flexibility for special access in 1999 as a result of massive investment in fiber optic networks. Price caps, the commission explained, were designed to act as a "transitional regulatory scheme until actual competition makes price cap regulation unnecessary." The commission rejected proposals to grant pricing flexibility in geographic areas smaller than Metropolitan Statistical Areas, noting that
because regulation is not an exact science, we cannot time the grant of regulatory relief to coincide precisely with the advent of competitive alternatives for access to each individual end user. We conclude that the costs of delaying regulatory relief outweigh the potential costs of granting it before [interexchange carriers] have a competitive alternative for each and every end user. The Commission has determined on several occasions that retaining regulations longer than necessary is contrary to the public interest. Almost 20 years ago, the Commission determined that regulation imposes costs on common carriers and the public, and that a regulation should be eliminated when its costs outweigh its benefits. (footnotes omitted.)>Continue reading
June 14, 2012
Government cares more about politics than the tech economy
The hottest companies in Washington, DC right now include Netflix, Sprint and T-Mobile. What do these firms have in common? They are all marketplace losers.
A few years ago, the Supreme Court said that the Sherman Act "does not give judges carte blanche to insist that a monopolist alter its way of doing business whenever some other approach might yield greater competition" (see: Verizon v. Trinko, 2004). Yet this is precisely the course of action that technocrats are taking as a result of accepting invitations from Netflix to conduct a "wide-ranging antitrust investigation" of the cable industry and from Sprint and T-Mobile to find a way to block Verizon Wireless' acquisition of additional spectrum.
Netflix built a successful mail order DVD business when it wasn't very practical to download movies over the Internet. Fortunately for Netflix, consumers can send and receive, but they cannot rent DVDs from the Post Office. There are legal and political constraints that prevet the U.S. Postal Service from diversifying into new lines of business, and these restrictions conferred a significant degree of monopoly protection on Netflix. Incidentally, saving the Postal Service requires diversification, among other things. What was great for Netflix wasn't so good for the postal system (upon which we all depend).
Although some advocates of network neutrality wanted to postalize broadband, the Federal Communications Commission said no. Apparently, we are going to have that debate all over again.
Cable companies obviously will not be prevented from competing against Netflix and other online video providers. But a drive to eliminate any conceivable competitive advantage that cable providers may have would ultimately lead to extensive regulation, including, most likely, infrastructure sharing rules like those the Supreme Court looked at in AT&T v. Iowa Utilities Board (1999). In his separate opinion, Justice Stephen Breyer warned that "rules that force firms to share every resource or element of a business would create, not competition, but pervasive regulation, for the regulators, not the marketplace, would set the relevant terms."
The current administration promised to reinvigorate antitrust enforcement. What that means is a return to the economic stagnation of the 1970s, when antitrust forced consumers to do business with uncompetitive, inefficient firms. It is no exaggeration to speak of antitrust as a form of corporate welfare financed by hidden taxes on consumers. The reality is that government cannot create competition; it can only suppress competitors.
May 10, 2012
Network access regulation 4.0
More this week on the efforts of Reed Hastings of Netflix to reignite the perennial debate over network access regulation, courtesy of the New York Times. Hastings is seeking a free ride on Comcast's multi-billion-dollar investment in broadband Internet access.
Times columnist Eduardo Porter apparently believes that he has seen the future and thinks it works: The French government forced France Télécom to lease capacity on its wires to rivals for a regulated price, he reports, and now competitor Iliad offers packages that include free international calls to 70 countries and a download speed of 100 megabits per second for less than $40.
It should be noted at the outset that the percentage of French households with broadband in 2009 (57%) was less than the percentage of U.S. households (63%) according to statistics cited by the Federal Communications Commission.
There is a much stronger argument for unbundling in France - which lacks a fully-developed cable TV industry - than in the U.S. As the Berkman Center paper to which Porter's column links notes on pages 266-68, DSL subscriptions - most of which ride France Télécom's network - make up 95% of all broadband connections in France. Cable constitutes approximately only 5% of the overall broadband market. Competition among DSL providers has produced lower prices for consumers, but at the expense of private investment in fiber networks.
April 26, 2012
Nothing to fear from pricing freedom for broadband providers
The airline would not let coach passenger Susan Crawford stow her viola in first class on a crowded flight from DC to Boston, she writes at Wired (Be Very Afraid: The Cable-ization of Online Life Is Upon Us).
Just imagine trying to run a business that is utterly dependent on a single delivery network -- a gatekeeper -- that can make up the rules on the fly and knows you have nowhere else to go. To get the predictability you need to stay solvent, you'll be told to pay a "first class" premium to reach your customers. From your perspective, the whole situation will feel like you're being shaken down: It's arbitrary, unfair, and coercive.Most people don't own a viola, nor do they want to subsidize viola travel. They want to pay the lowest fare. Differential pricing (prices set according to the differing costs of supplying products and services) has democratized air travel since Congress deregulated the airlines in 1978. First class helps make it possible for airlines to offer both lower economy ticket prices and more frequent service. Which is probably why Crawford's column isn't about airlines.
For one thing, Crawford seems to be annoyed that the "open Internet protections" adopted by the Federal Communications Commission in 2010 do not curtail specialized services -- such as an offering from Comcast that lets Xbox 360 owners get thousands of movies and TV shows from XFINITY On Demand. As the commission explained,
"[S]pecialized services," such as some broadband providers' existing facilities-based VoIP and Internet Protocol-video offerings, differ from broadband Internet access service and may drive additional private investment in broadband networks and provide end users valued services, supplementing the benefits of the open Internet. (emphasis mine)
April 17, 2012
Landline rules won't work for telecoms, or for Susan Shaw
the telecom industry is forcing policymakers to re-examine what has long been a basic guarantee of government - that every American home should have access to a phone, along with other utilities such as water or electricity. Industry executives and state lawmakers who support this effort want to expand the definition of the phone utility beyond the century-old icon of the American home to include Web-based devices or mobile phones.The quid pro quo for a monopoly franchise was an obligation to provide timely service upon reasonable request to anyone, subject to regulated rates, terms and conditions. The Telecommunications Act of 1996 eliminated the monopoly franchise, but the obligation to serve remains in the statute books of most states. Telecom providers, aka carriers-of-last-resort (COLR), are stuck with the quid without the quo.
This has become a problem as more and more consumers are "cutting the cord" in favor of wireless or VoIP services. AT&T, for example, has lost nearly half of its consumer switched access lines since the end of 2006. However, most of the loops, switches, cables and other infrastructure which comprise the telephone network must be maintained if telecom providers have to furnish telephone service to anyone who wants it within days.
April 16, 2012
New Client of the Regulatory State Expects Results
When the federal government torpedoed the AT&T/T-Mobile USA merger in December pursuant to the current administration's commitment to "reinvigorate antitrust enforcement," it created a new client in search of official protection and favors.
It was clear there is no way T-Mobile - which lost 802,000 contract customers in the fourth quarter - is capable of becoming a significant competitor in the near future. T-Mobile doesn't have the capital or rights to the necessary electromagnetic spectrum to build an advanced fourth-generation wireless broadband network of its own.
T-Mobile's parent, Deutsche Telekom AG, has been losing money in Europe and expected its American affiliate to become self-reliant. In 2008, T-Mobile sat out the last major auction for spectrum the company needs.
The company received cash and spectrum worth $4 billion from AT&T when the merger fell apart, from which T-Mobile plans to spend only $1.4 billion this year and next on the construction of a limited 4G network in the U.S. But it must acquire additional capital and spectrum to become a viable competitor.
Unfortunately, every wireless service provider requires additional spectrum. "[P]rojected growth in data traffic can be achieved only by making more spectrum available for wireless use," according to the President's Council of Economic Advisers. Congress recently gave the FCC new authority to auction more spectrum, but it failed - in the words of FCC Chairman Julius Genachowski - to "eliminate traditional FCC tools for setting terms for participation in auctions."
Everyone fears it will take the FCC years to successfully conduct the next round of auctions while it fiddles "in the public interest." That's why Verizon Wireless is seeking to acquire airwaves from a consortium of cable companies, and why T-Mobile will do anything to stop it.
March 20, 2012
Federal broadband loan program hopelessly duplicative
A hearing tomorrow in the House Subcommittee on Rural Development, Research, Biotechnology, and Foreign Agriculture will examine duplicative rural development programs. The subcommittee should pay particular attention to the Broadband Loan Program administered by the Rural Utilities Service of the Department of Agriculture.
Audits have uncovered serious shortcomings and the agency has resisted needed reforms for years. The time has come for lawmakers to brush aside rosy assurances from agency officials and wind the program down.
Testifying in February of last year, the Department of Agriculture's Inspector General briefly summarized a shocking set of audit findings from 2005 that included waste, fraud and abuse, and noted that most of the issues had still not been resolved satisfactorily .
Of the $895 million in grants and loans RUS issued from 2001 to 2005, we reviewed $599 million and questioned the expenditure of $340 million for reasons including loans that were approved despite incomplete applications, loans that defaulted, and grant funds used for inappropriate purposes. We further found that RUS had not maintained its focus on rural communities lacking preexisting broadband service. ****It is likely impossible for this program to fulfill its intended purpose.
The Broadband Loan Program was conceptually flawed at its inception. Broadband is not available in remote areas when the cost of building a broadband network is so high that the broadband provider does not expect to recover the investment. If it is uneconomic to provide service to a particular locale, how can a loan recipient repay the loan? This is why most of the loans are used to build redundant facilities in areas that are already served. As a general matter, a grant not a loan would be required to finance the construction of facilities in an area that is uneconomic to serve.
March 7, 2012
Kentucky considering telecom update
States including Alabama, Florida, Georgia, Indiana, Illinois, North Carolina, Ohio, Tennessee and Wisconsin have all recently revamped their telecommunications statutes, and Mississippi is in the process of considering similar legislation. SB 135 would put Kentucky in a strong position relative to these nearby states in terms of creating a favorable business climate for private investment in advanced networks.
Rates for basic local exchange service would be market-based and not subject to commission jurisdiction beginning 60 months after a telephone utility elects (or has already elected) to adopt price cap regulation. The requirement to file tariffs would be eliminated at that time.
March 1, 2012
Telecom reform in Mississippi
The bill also clarifies that nothing in Title 77, Chapter 3 (Regulation of Public Utilities) of the Mississippi Code may be construed to apply to video services, voice over Internet protocol services ("VoIP"), commercial mobile services, Internet protocol ("IP") enabled services, in addition to broadband services.
The commission would continue to regulate intrastate switched access service, as well as arbitrate and enforce interconnection agreements between telecommunication providers. Providers of intrastate access and unbundled network elements would not be required to file financial, service quality or other information with the commission. Intrastate access fees would be the same as the fees for interstate access services.
Utility regulation was appropriate years ago when telephone service was furnished by monopolies. But the federal Telecommunications Act of 1996 removed legal barriers to competition, and now wireless providers, cable operators and others compete to provide voice service. Only about 16% of Mississippi voice connections were served by incumbent local exchange carriers (ILECs) subject to legacy utility regulation at the end of 2010, according to the Federal Communications Commission (see tables 9 and 17).
Continued regulation of competitive ILEC services is actually harmful to consumers, by forcing providers to maintain single-purpose voice networks when voice can be delivered over multifunctional broadband platforms at lower cost. The National Broadband Plan embraces a vision of the future in which the traditional circuit-switched telephone network will be replaced by an IP-enabled network, and the plan confirms that legacy telephone regulation is an impediment to a smooth transition (see p. 59).
As it becomes increasingly costly to maintain a legacy telephone network to serve fewer and fewer subscribers, there is a danger that telephone service providers may be forced to subsidize legacy service from wireless and broadband revenues, which is wasteful and inefficient. Forcing wireless and VoIP customers to subsidize legacy networks would penalize - and therefore diminish - investment and innovation in advanced new services.
At present, 44% of Mississippi households have a broadband connection over 200 kbps in at least one direction, and 11% have a connection at least 3 mbps downstream and 768 kbps upstream, according to the FCC (see tables 15 and 16). Nationwide, 13% of households have a broadband connection of at least 100 mbps in both directions (Table 5). Connected Nation concluded in 2008, when the FCC defined broadband as over 200 kbps in at least one direction, that a mere 7% increase in broadband adoption (similar to the household broadband adoption achieved in Kentucky, above the national average, by addressing local supply and demand issues) would create or save almost 19,000 new jobs per year in Mississippi. The jobs are not just in telecommunications equipment and services, but also in manufacturing and service industries (especially finance, education and health care).
By enacting regulatory reform so that all providers of voice services are subject to minimum regulation which does not discriminate on the basis of technology or history, just like in any competitive market, legislators will expand customer choice and ignite the broadband expansion necessary for economic growth, technological progress and ultimately lower prices.
Illinois' outdated rules hurt the very competition and consumer protection needed to provide greater broadband access and to make it affordable, said Hance Haney, director and senior fellow for the Discovery Institute's Technology and Democracy Project.
Legacy utility regulation threatens new technological opportunities and economic efficiencies which, according to others, promise a direct economic stimulus of at least $3.3 billion in Georgia over the next five years in the form of lower prices for voice services, plus an additional $3.9 billion in economic impact annually from increased broadband availability and use – including over 70,000 new jobs per year.