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Amazon.com Inc. has informed its marketing affiliates in Hawaii that it is ending its business with them to avoid collecting sales tax in the state.
Lawmakers in Hawaii, following in the footsteps of North Carolina and Rhode Island, have passed legislation that would require companies to collect sales tax if they have marketing affiliates in the state. Affiliate marketers run blogs or Web sites and get a sales commission by featuring links to outside e-commerce sites. Although sales taxes are an efficient way for state and local officials to raise lots of revenue, sales taxes are a vestige of the industrial age which are doomed to extinction in the information age.
Consumers don't have to buy goods and services locally. They can shop on the Internet from amongst retailers worldwide.
That means state and local governments face competition.
Just like Delaware chose to become the most hospitable jurisdiction for corporations, a state like Wyoming (notwithstanding the fact one of its senators is a champion of stepped-up sales tax enforcement) could choose to become the most favored location for online commerce.
Online merchants could establish a physical presence in Wyoming, and -- since most of their customers would reside in the other 49 states -- they wouldn't have to collect sales taxes on most of their sales.
Wyoming merchants could sell their products and services at very attractive prices to the entire country. Wyoming could become a FedEx and UPS distribution hub. Wyoming could become the most dynamic economy in the nation.
If Wyoming doesn't step up to the plate, some other state (or country) will.
Think about it: Sales taxes are doomed.
George S. Ford and Lawrence J. Spiwak at the Phoenix Center conclude in a new paper that government intervention is not warranted in the market for special access services purchased by businesses and institutions (which I discussed most recently here).
They note that the rates of return a prominent study estimated AT&T, Qwest and Verizon are currently earning either are similar to or less than the rates of return these companies used to earn when the market was fully regulated. NRRI bases this analysis on ARMIS rates of return, a perplexing approach once one calculates ARMIS rates of return from the period in which all special access services were price regulated. In 1999, for example, the average rate of return for special access computed using ARMIS data was 32% for Qwest, 37% for AT&T, and only 4.5% for Verizon. For Qwest and AT&T, the returns under complete price regulation are not much different than the “adjusted” returns computed in the NRRI Study. The conclusion, then, is the pricing flexibility has had no effect. For Verizon, its rate of return prior to the Pricing Flexibility Order was substantially lower than the other Bell companies and even below any reasonable estimate of the firm’s cost of capital. One interpretation, then, is that a more deregulatory approach has provided for more reasonable returns on investment for the firm. (footnote omitted.) There is always a high risk well-intentioned regulators will fall victim to lobbyists or simply guess wrong. Ford and Spiwak point out that in the current environment the risk is heightened due to the impairment of credit markets. In the current financial and economic crisis, [the] costs and risks of regulation are even more pronounced, particularly with regard to rate regulation. At the most basic level, one cost of rate regulation is the risk that regulators will establish an incorrect rate. If regulators set a rate too high, then they might redirect investment inefficiently and also whittle away any prospective welfare gains by that intervention. If regulators set a rate too low, then investment will be squelched and entry will be deterred. It is important to note that not only would investment by incumbents be squelched and deterred, but that investment by entrants might be similarly affected. With fixed and sunk costs, regulatory-mandated reductions in prices or profits may very well dissuade new entrants from offering service.
The risk of a regulator setting a rate incorrectly is particularly acute in the current environment, because any form of rate regulation requires the regulator to examine and establish a cost of capital. In a normal rate case, a regulator can obtain reasonably valid estimates of the cost of capital by observing borrowing and equity costs for other firms exhibiting “comparable” risk characteristics.
But today, the Federal Reserve Board of Governors and the Department of the Treasury have concluded that the financial markets are currently so dysfunctional that the public authorities must step in and recapitalize banks, large insurers, and so on. Future taxpayers are being used as a source of capital-of-last-resort for many of these institutions, a process that is necessarily distorting the standard methods in which a regulator may establish a cost-of capital for the industry. Stated simply, if it is true that even economically worthwhile projects are now unable to obtain funding under any conditions, what is the true cost of capital? Once credit is being rationed, the risks of establishing an incorrect rate for a service are very high, and policymakers ought to take this into account when reviewing proposals for immediate regulation of special access rates, at least until the financial markets return to normalcy. (footnotes omitted.) The paper confirms that re-regulating the special access market would be both unnecessary and highly risky.
Related post: “Don’t believe ‘special access’ hype” (6-23-2009).
The Israel Test will be published Jul. 22. The following is an excerpt: The central issue in international politics, dividing the world into two fractious armies, is the tiny state of Israel.
The prime issue is not a global war of civilizations between the West and Islam or a split between Arabs and Jews. These conflicts are real and salient, but they obscure the deeper moral and ideological war. The real issue is between the rule of law and the rule of leveler egalitarianism, between creative excellence and covetous "fairness," between admiration of achievement versus envy and resentment of it.
Israel defines a line of demarcation. On one side, marshaled at the United Nations and in universities around the globe, are those who see capitalism as a zero-sum game in which success comes at the expense of the poor and the environment: every gain for one party comes at the cost of another. On the other side are those who see the genius and the good fortune of some as a source of wealth and opportunity for all.
The Israel test can be summarized by a few questions: What is your attitude toward people who excel you in the creation of wealth or in other accomplishment? Do you aspire to their excellence, or do you seethe at it?
Do you admire and celebrate exceptional achievement, or do you impugn it and seek to tear it down? Caroline Glick, the dauntless deputy managing editor of the Jerusalem Post, sums it up: "Some people admire success; some people envy it. The enviers hate Israel."
. . . . Today in the Middle East, Israeli wealth looms palpably and portentously over the mosques and middens of Palestinian poverty. But dwarfing Israel's own wealth is Israel's contribution to the world economy, stemming from Israeli creativity and entrepreneurial innovation.
Israel's technical and scientific gifts to global progress loom with similar majesty over all others' contributions outside the United States.
Though Jews in Palestine had been the most powerful force for prosperity in the region since long before the founding of Israel in 1948, more remarkable still is the explosion of innovation attained through the unleashing of Israeli capitalism and technology over the last two decades.
During the 1990s and early 2000s Israel sloughed off its manacles of confiscatory taxes, oppressive regulations, government ownership, and Socialist nostalgia and established itself in the global economy first as a major independent player and then as a technological leader.
Contemplating this Israeli breakthrough, the minds of parochial intellects around the globe, from Jerusalem to Los Angeles, are clouded with envy and suspicion. Everywhere, from the smarmy diplomats of the United Nations to the cerebral leftists at the Harvard Faculty Club, critics of Israel assert that Israelis are responsible for Palestinian Arab poverty. . . .
Denying to Israel the moral fruits and affirmations that Jews have so richly earned by their paramount contributions to our civilization, the critics of Israel lash out at the foundations of civilization itself--at the golden rule of capitalism, that the good fortune of others is also one's own.
In simplest terms, amid the festering indigence of Palestine, the state of Israel presents a test. Efflorescent in the desert, militarily powerful, industrially preeminent, culturally cornucopian, technologically paramount, it lately has become a spearhead of the global economy and vanguard of human achievement. Believing that this position was somehow captured, rather than created, many in the West still manifest a primitive zero-sum vision of economics and life. . . . Click here to pre-order The Israel Test today at 25% off publisher’s price.
Bret Swanson at Entropy Economics makes some fascinating findings in a new paper: We estimate that by the end of 2008, U.S. consumer bandwidth totaled almost 717 petabits per second. On a per capita basis, U.S. consumers now enjoy almost 2.4 megabits per second of communications power, compared to just over 28 kilobits per second in 2000. The ability of Americans to communicate and capitalize on all of the Internet’s proliferating applications and services is thus, on average, about 100 times greater than it was in 2000. It sort of makes you wonder why we need a National Broadband Plan from the government, particularly when you consider the possibility that the government’s well-intentioned efforts may backfire. Consider Swanson’s observation as to the last time the government tried to improve the telecommunications market: The millennial technology and telecom crash was, in part, a result of this broadband dearth. Thousands of Silicon Valley dot-com business plans had been conceived on the assumption that real broadband would be rapidly deployed and adopted across the nation. More than half a dozen communications companies took advantage of the newly deregulated long-haul transmission market and built nationwide fiber optic networks, boosting intercity bandwidth by several orders of magnitude. But local telecom markets werenʼt similarly deregulated. They were re-regulated. At the FCC and in 51 state utility commissions, in fact, complex rules and price controls grew for DSL and threatened to engulf cable modems as well. Investment ground to a halt. The resulting bandwidth gap, with the crucial last mile falling well short of the market’s expectations, helped produce the crash, which lasted through 2002.
(Reprinted from The Gilder Friday Letter.)
Have you ever wondered why, in our time, it is the Left that leads the attack on Israel? After reading “The Israel Test” you will never wonder again. George Gilder brilliantly shows that Israel is the ultimate test dividing those who really stand with Capitalist Democracy from those who always blame America and Israel first.
Obscured by the usual media coverage of the “war-torn” Middle East are Israel’s rarely celebrated feats of commercial, scientific, and technological creativity. In “The Israel Test” Gilder documents Israel’s transformation into a hi-tech powerhouse, profiling the top companies and entrepreneurs that are making Israel into Silicon Valley’s greatest rival—and ally—and shows how the world’s leading-edge technologies increasingly feature “Israel Inside.”
The official publication date of The Israel Test is not until July 22. But we can show you a way to get your copy weeks before it shows up in bookstores.
Click here to pre-order The Israel Test today at 25% off publisher’s price!
Because responsiveness and action are so central to many games, developers are concerned that the lag between when the distant cloud computer renders a scene and when that scene shows up on a player’s screen will spoil cloud computing’s promise. ”The real-time nature of games means that cloud processing will have too long a latency to help with the biggest bottleneck in real-time game graphics,” says Tobi Saulnier, CEO and founder of 1st Playable Productions, in Troy, N.Y.
Julien Merceron, worldwide chief technical director of the London-based Eidos, creators of Tomb Raider, says latency and limited bandwidth ”will tend to severely limit the type of game that could benefit from the cloud and limit the resolution at which you can play the game.” The concerns expressed in this article about latency are surmounted by Otoy, which can spread thousands of games and other apps across scores of thousands of graphics processors and meet all the real-time requirements of the most demanding games. There is no perceptible delay on transmissions of up to 500 miles.
In my alternative life in venture capital, I support Otoy, led by Jules Urbach (well known to Telecosm attendees). Moving from cloud computing to storm-cloud services, Otoy changes the game. It can exploit commonalities in all the popular browsers to move all games or other applications, of any complexity or latency rules, to his petaflop Fusion Render Cloud built with clusters of AMD-ATI graphics processors, playing these aps on any device from a settop box to a cellphone.
The most striking moment at E3 (Electronic Entertainment Expo) for me came when Jules showed Crysis, a game too demanding to handle on any console or ordinary PC, playing with full features on a netbook and a cellphone. The CTO of the Crysis company from Frankfurt could suddenly see the market for his niche high end game opening up to billions of customers around the globe at a cost of single digit or even ultimately sub-digit dollars per customer per month.
This demo means to me that virtually everything is going to move to the cloud, but the cloud will be dispersed around the globe in 40 square foot petaflop containers.
Browsers turn out to work well with graphics processors running in massively parallel arrays without any further customization. For high definition, 4K and 8K progressive images, a 200 kilobyte download is needed. But in general the game is over and graphics processors have won.
As Bob Metcalfe said a decade ago the browser has become the operating system.
See: “OTOY Demo Puts Crysis, Grand Theft Auto 4 on Your Phone.”
Related entry: “The bandwidth conundrum” (4-25-2008).
A new coalition, NoChokePoints, has been formed to lobby Congress and the Federal Communications Commission to further regulate the prices that incumbent telephone companies (Regional Bell Operating Companies or Incumbent Local Exchange Carriers) can charge for special access services purchased by businesses and institutions. Special access circuits are dedicated, private lines. For example, Sprint purchases special access circuits to connect its cell towers to its backbone.
According to a coalition spokeswoman, Huge companies like Verizon and AT&T control the broadband lines of almost every business in the United States. The virtually unchallenged, exclusive control of these lines costs businesses and consumers more than $10 billion annually and generates a profit margin of more than 100 percent for the controlling phone companies, according to their own data provided to the FCC. This hidden broadband tax results in enormous losses for consumers and the economy, and this country cannot afford it; especially now. An analysis prepared by Peter Bluhm with Dr. Robert Loube under contract with the National Association of Regulatory Commissioners (NARUC) disputes this conclusion.
NARUC represents both state utility commissioners who are pro-business as well as state utility commissioners who are hostile toward regulated utilities. NARUC is not supporting the incumbent network providers on the issue of special access regulation. According to Bluhm and Loube, Buyers have criticized the FCC’s current regulatory regime because it has apparently allowed excessive earnings. For their part, the RBOCs contend that the ARMIS figures are virtually meaningless. We agree with the RBOCs ….
Before 2000, special access investment was categorized by what is called “direct assignment.” The purpose was to assign 100% of investment for interstate special access to the interstate jurisdiction and 100% of investment for intrastate special access to the state jurisdiction. In practice, direct assignment required carriers to perform studies on how their networks were used ….
In 2001, the FCC “froze” separations categories and factors for large companies. At that point, large carriers stopped performing direct assignment studies ….
During [the ensuing] period, carriers greatly increased their sales of interstate special access, and all of that revenue was assigned to interstate. As a result, interstate special access revenues increase every year, but not interstate special access costs. This imbalance has inflated ARMIS special access earnings reports and made them unreliable. (emphasis added.) Likewise, a paper by Harold Ware, Christian Dippon and William Taylor at NERA Economic Consulting concludes, accounting profits generated from [ARMIS] data bear no relationship with economic profits and cannot serve any useful purpose in determining whether pricing flexibility has generated excessive rates of return. In an effort to get to the bottom of this, Bluhm and Loube estimated the current actual cost and found that the carriers are probably earning substantially less than ARMIS indicates. Instead of earning a 138% return on special access investment, AT&T is more likely earning 30%. Qwest is probably earning 38%, not 175%. And Verizon, 15% instead of 62%.
The revised percentages are still more than a regulated utility would be allowed to earn. However, there are at least two points to consider.
First, absent cost studies there is no way to know how much the network providers are earning. According to Ware, Dippon and Taylor, allocations and adjustments can produce wildly different results depending on what factors are used. This is why economists and regulators have long rejected use of cost allocations such as those in the ARMIS data. It is also why [Bluhm and Loube’s] conclusions regarding profits for special access should be summarily rejected. Incidentally, Ware, Dippon and Taylor predict that the potential benefits of additional special access regulation are not worth the “potentially large costs.”
They point out that if different adjustments are chosen, the return on investment could be even lower.
For another, competitors are entering the market and they are capturing market share. Bluhm and Loube concede that Cable television and fixed wireless have low entry and exit costs where their networks are currently established, and each can provide substitutable dedicated services to many customers. Overall, these competitors are still acting on the fringes of special access markets, but they have larger roles in some locations and their market shares appear to be growing. Fixed wireless may hold a large market share in five years, particularly if WiMAX proves reliable and if these carriers can attract sufficient capital to expand. These newer technologies may be poised to become major competitors and are increasingly constraining ILEC behavior, but they have not yet grown beyond fringe competitors in most markets. Maybe these competitors are still “acting on the fringes” because profit margins afforded by the market aren’t fat enough.
If AT&T, Qwest and Verizon are earning excess profits, cable and fixed wireless competitors will be able to undercut their prices and capture market share. The higher the profits, the faster the entry.
What would happen if Congress or the FCC decided to intervene? If regulation pushed special access prices lower, that would reduce the revenue investors could expect to earn from new competitive facilities. If investment won’t be profitable, it won’t be made.
NoChokePoints includes telecommunications providers Sprint, BT (British Telecom) and tw telecom among its members.
These competitors would not be pushing to cap the special access prices charged by incumbent network providers if they wanted to profitably invest in competing facilities. They would want incumbent providers to charge high prices so they could charge lower prices and still make a profit.
The logical conclusion is that competitors don't want to invest in new facilities. They simply want to cut costs. (Sprint, which has partnered with Clearwire and is exploring a combination with Level 3, is hedging its bets.)
A desire to cut costs rather than assume investment risks is not surprising.
But the coalition claims that additional special access regulation will create jobs.
Policymakers need to consider whether they want to help companies who don't want to invest save jobs at the expense of their suppliers, or whether it would be better to maintain incentives for investment. Investment will create sustainable jobs.
Cost cutting will simply lead to more layoffs, here or there.
The message for Congress is: (1) the “controlling phone companies” are not earning margins in excess of 100%, according to any credible observer; (2) determining what the exact margin really is would require cost studies which are expensive, time consuming and would probably lead to litigation and (3) if prices do exceed reasonable costs it will be profitable for competitors to invest in new facilities which will create needed jobs.
For more information, a recent column I wrote about proposals to expand special access regulation can be found here.
Small cellphone operators want Congress or the Federal Communications Commission to prohibit larger carriers from becoming exclusive providers of popular handsets, like the Apple iPhone (AT&T), Blackberry Storm (Verizon Wireless), Palm Pre (Sprint) and Samsung Behold (T-Mobile).
John E. Rooney, President and CEO of United States Cellular Corp., testified at a Senate Commerce Committee hearing this week: These arrangements harm consumers in rural areas and decrease competition nationwide and do not enhance innovation. Let's examine these arguments.
Rural Consumers
Rooney bemoans the fact that many rural residents of Alaska, Arizona, Colorado, Idaho, Kansas, Maine, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, South Dakota, Utah, West Virginia and Wyoming are not served by AT&T network facilities while Victor H. “Hu” Meena, President and CEO if Cellular South, Inc., claims that Vast portions of America – including all or part of Alaska, Arizona, California, Idaho, Kansas, Maine, Minnesota, Montana, Nebraska, Nevada, New Hampshire New Mexico, Oregon, Vermont, Washington, West Virginia and Wisconsin – are not served by any of the largest carriers, so Americans in these areas are prohibited from acquiring the newest and most innovative devices. There are advantages and disadvantages no matter where one chooses to live. The fact that someplace is without a particular amenity traditionally hasn’t justified limiting the ability of private entities to exercise their own judgment as to parties with whom they will deal. While I am fortunate to have the opportunity to own an iPhone, I don’t get to live in a pristine rural setting with a wide open outdoors, low housing costs, etc.
It should be noted that however many rural Americans are unserved by any of the largest carriers, these customers are no threat to United States Cellular Corp. or Cellular South. The threat comes from customers who have the option to switch carriers in pursuit of better devices, and I get the impression there are more of these customers than Rooney and Meena are letting on. According to Rooney, the Big Four’s control over the most advanced, attractive handsets has made it significantly harder for smaller carriers to attract and retain subscribers, and to effectively compete in rural areas, even with federal universal service support. (emphasis added.) Meena says, Cellular South and other regional and rural carriers have competed with the largest carriers for years based on network quality, network coverage and price. These are all factors that are within our control … However, our ability to compete is compromised because the largest carriers lock up devices in exclusivity agreements. Put simply, regional and rural carriers cannot gain access to the latest, cutting-edge devices which gives large carriers a key competitive advantage. Focus groups of customers who have left Cellular South for the largest carriers repeatedly say that they are buying the device, not the network, and certainly not the company. (emphasis added.) A competitor who can offer something you or I can’t is a frequent hazard of doing business.
Competition and Innovation
The cellphone market is wildly competitive. More than 95 percent of the U.S. population lives in census blocks with at least three competing carriers, according to the FCC. And no carrier has a market share exceeding 27 percent.
The cellphone industry was deregulated by a Democratic Congress – with Al Gore’s tie-breaking Senate vote – and signed into law by President Clinton in 1993.
It was an unregulated market in which handset exclusivity was permitted that Apple sought to transform; undoubtedly at least part of the appeal was the fact Apple would be permitted to earn a commensurate profit if consumers liked its product. “There can be no growth without the investment that is inspired and financed by profit,” as John F. Kennedy said.
Rooney offers no evidence in support of his contention that exclusivity decreases competition nationwide. Instead, he entreats policymakers to shift the burden of proof with the statement “There is no evidence showing that these practices create significant pro-competitive benefits.”
Similarly, he claims exclusivity arrangements “do not enhance innovation”; again, he offers no support for this view -- which is untrue.
The iPhone set a transformative new standard for wireless handsets and attracted millions of new subscribers for AT&T. All other handset manufacturers and network operators have been racing to catch up. Before the iPhone, we had awkward devices of limited utility. Now the industry is competing to offer Smart Phones, or “teleputers” as envisioned by George Gilder. It is obvious these developments are a tremendous benefit for consumers. Most consumers will benefit immediately; all consumers will benefit in time.
Rooney and Meena are asking policymakers to reset the basis of competition away from something many consumers apparently value highly (cool devices) back to something that once defined competition in the wireless segment but which these consumers now take for granted (network quality, network coverage and price).
In other words, these executives are asking for protection.
If policymakers proceed down this path, they will be protecting competitors, not competition. There’s a danger where that will lead, as Peter J. Wallison notes Protecting competitors means blunting the skills of superior players, allowing inferior managers and business models to remain in business and thus preventing better managements and business models from emerging. Again, stability wins out over change and progress. Voters Get This
On a related note, a Wall Street Journal/NBC poll this week notes that nearly seven in 10 survey respondents said they had concerns about federal interventions into the economy, including Mr. Obama's decision to take an ownership stake in General Motors Corp., limits on executive compensation and the prospect of more government involvement in health care. The poll also found that Mr. Obama's overall job approval and personal ratings have dropped among independent voters from nearly two-to-one approval to closely divided.
A Pew Poll earlier this month confirmed that independent voters tend to have conservative views about government and regulation, and more liberal views regarding the hot-button social issues, national security and religion.
Democrats deserve much credit for the success of the wireless industry. It's ironic some of them want to reverse course.
The Japanese government filed comments in response to a Notice of Inquiry the Federal Communications Commission issued as part of its effort to design a grand strategy for broadband (see this and this). Japan has been working on opening essential facilities for broadband services to encourage broadband development in a fair competition environment. In 1999, local loop unbundling was ensured (for dry copper and line-sharing), and in 2000, collocation rules were established and optical fiber network unbundling were ensured. These policies accelerated the spread of DSL services and led to the rapid start up of FTTH services. In 2009, we also introduced rules to ensure Next Generation Network (NGN) unbundling. We have enforced the promotion of competition to realize the diversity of interconnection by other operators. The Government of Japan has introduced enforcing policies for interconnection tariffs at proper charges, which has ensured that costs for using infrastructure of broadband have been low, while incentives for facility investment have not been diminished (See Appendix 3.). I don't know why the Japanese government would have prepared comments for an FCC proceeding unless it was asked. Someone who favors an expanded role for government in the broadband marketplace must have requested it.
Giving competitors access to legacy telephone facilities may have made some sense in Japan, notes Robert W. Crandall of the Brookings Institute and Debra J. Aron of LECG and Northwestern University, because Japan doesn’t have ubiquitous cable connections. In many countries where there is little or no intermodal competition – as between telephone and cable companies – unbundling and collocation may be the best prescription available to policymakers.
In the U.S., deregulation has been an investment magnet. The cable industry invested $130 billion in network upgrades after the 1996 Telecommunications Act deregulated cable rates. A competitive spiral has ensued. When the FCC adopted a deregulatory strategy in 2004, phone companies began investing in video services. Cable companies responded by investing in voice-over-Internet services. The competitive struggle continues as both sides race to provide faster broadband.
Some believe Japan proves that unbundling and collocation will drive broadband providers to invest in new facilities, so we don’t need regulatory reform.
But notice how when Japan imposed local loop unbundling at low wholesale prices and collocation to stimulate competition for Digital Subscriber Line (DSL) services in 2000, incumbent NTT invested in fiber-to-the-home – which was free of similar requirements. This is the same strategy Verizon is following here.
NTT is now required to unbundle fiber loops – years after NTT made a strategic investment commitment – but according to a report by Robert D. Atkinson, Daniel K. Correa and Julie A Hedlund of the Information Technology and Innovation Foundation, the price that competitors pay is quite high, enabling NTT to obtain an adequate rate of return on its fi ber investment. As a result, NTT has invested more than $200 billion in optical fi ber installations. Crandall and Aron make a similar observation. They add, As a result of the limited use of leased unbundled facilities, competition in FTTH services is largely facilities-based among NTT, the electric power companies, and USEN, the largest Japanese cable company. Unbundling obligations have not led to significant competition in providing fiber-based broadband services in Japan. Atkinson, Correa and Hedlund observe that A number of European Union (EU) nations with similar unbundling regimes as France—for example, Italy and Spain—rank below the United States in terms of broadband adoption. Furthermore, most EU nations adopted unbundling regulations because they had almost no intermodal broadband competition—in part because their cable regulations signifi cantly limited investment in cable modem service.
For countries like our own which do have intermodal competition, unbundling and collocation are not only unnecessary but they are counterproductive since they encourage private investment to flow somewhere else. Why would our government want to allocate scarce tax dollars to broadband deployment when there are so many other urgent priorities?
The lesson from Japan is unbundling and collocation wouldn't make sense in the U.S.
President Obama received a Cyberspace Policy Review from cybersecurity experts this week and pledged to create an Office of Cybersecurity Coordinator in the White House.
A federal cybersecurity coordinator may help government agencies better coordinate their responsibilities and authorities and eliminate duplicative or inconsistent efforts.
But most of the networks and computers which power the world’s most dynamic economy and support the strongest military are owned and operated by the private sector, as the cybersecurity experts and the President acknowledged. The private sector has been hard at work improving the reliability of software and building security features into the network.
The importance of the network in combating cyber attacks has largely been overlooked. Network operators eliminate most spam, which, according to Semantech, comprises 90 percent of email.
Unusual traffic patterns give network operators early warning of worm strikes and distributed denial-of-service attacks. Network operators can divert malicious traffic to scrubbers so it never reaches its intended destination. Networks are the first and possibly the most effective line of defense.
The federal government will not dictate security standards for private companies nor monitor private sector networks or Internet traffic, according to the President. But with new high-level officials there will be a continuing temptation for government to micromanage the dynamic technology, telecommunications and cable sectors.
The President may bemoan the extent of taxpayer investment in cyberspace, just as we failed in the past to invest in our physical infrastructure – our roads, our bridges and rails – we’ve failed to invest in the security of our digital infrastructure, but unlike roads, bridges and rails, there are still opportunities for profit in software, hardware and broadband.
The biggest threat to continued private investment in cyberspace may be the President’s oft-repeated support for net neutrality regulation, which would divert investment away from the core of the network. Cybersecurity requires investment throughout the network. The network is an ecosystem in which everyone has an important role to play.
The President’s interest in cybersecurity is a good thing. But the federal government can do more to harm cybersecurity than to promote it.
The European Union issued the opinion explaining its decision to fine Intel $1.45 billion for offering discounts to large purchasers (see this and this), a common and typically procompetitive business practice.
Although antitrust originated in the U.S., antitrust enforcement has become more active in other parts of the world where awareness of the limitations and dangers of overly-aggressive antitrust enforcement is still in the embryonic stages. This has created a regrettable forum-shopping opportunity for less-successful U.S. and foreign competitors. According to one report, Many smaller companies complaining of abusive practices by their larger rivals were so frustrated that they went overseas to the European Commission and to Asian authorities to find receptive enforcement officials. The Obama administration plans more aggressive antitrust enforcement, and it has withdrawn a 215-page report, entitled “ Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act (2008),” which was issued by the Department of Justice during the Bush administration. According to Christine A. Varney, who is the new Assistant Attorney General in charge of the Antitrust Division, the report raised too many hurdles to government antitrust enforcement and favored extreme caution and the development of safe harbors for certain conduct within reach of Section 2[.] Antitrust enforcement is supposed to prevent monopolists from stifling competition and harming consumers. But frequently the interests of competitors and consumers are not closely aligned.
Obviously, consumers are better off when prices are low and there is a wide variety of products to choose from. But it also stands to reason that competitors are better off when they can produce a minimum number of products and charge high prices.
For antitrust enforcement, the issue boils down to whether it should aim only to prevent conduct by a monopolist which has disproportionately little or no procompetitive benefits, or whether it should go so far as to prohibit a big firm from doing anything which could cause smaller rivals to lose market share, i.e., cutting prices; bundling products; refusing to deal with rivals who seek access to inputs, property rights or resources; or supplying parties who agree to purchase all or a large share of their requirements from one source.
When enforcers employ measures like these to prevent weaker competitors from losing market share, consumers can easily be forced to pay higher prices or accept shoddier or less-convenient products, unfortunately.
Permitting less-efficient incumbent rivals to go under usually doesn’t mean that a big firm will eventually be able to charge whatever it wants anyway. If it charges unreasonable prices (or fails to offer appealing products) in the future it will enable new competitors to profitably enter the market, unless there are unusual barriers to competition – such as physical or legal barriers (not merely brand recognition).
The “Anti Dog-Eat-Dog Rule” in Atlas Shrugged, an indispensable desk reference for the modern age by Ayn Rand, was for the purpose of preventing shippers who were dissatisfied with the deteriorating service provided by an ailing railroad from taking their business to a more efficient rival who offered superior service. The rivalry between the two railroads was attacked for being “destructive,” because the ailing railroad couldn’t take it. The ailing railroad had political connections, however, so a new market was created in which the politically-connected were the winners and the losers were the most competent businesspeople. It’s not as far-fetched as it sounds.
No one wants to see an evil monopoly crush a virtuous rival.
But as Professor Joseph Schumpeter once noted, the English-speaking public has acquired a habit of attributing to the term “monopoly” practically everything it dislikes about business. To the typical liberal bourgeois in particular, monopoly became the father of almost all abuses—in fact, it became his pet bogey. The alternative is for politicians and bureaucratic allies to attempt to create a utopia for small businesses through regulation – not for the benefit of entrepreneurs who create a better mouse trap or offer superior service, because those who find and exploit a niche can be successful regardless of their size.
It is the smaller potential rivals who merely seek an advantageous street corner as their competitive advantage and offer little additional value who stand to benefit from aggressive antitrust enforcement.
Antitrust enforcement makes sense as a full-employment policy, but it reduces the incentives for innovation. It can channel investment into building gas stations on every corner as it did in the 1960s and 1970s, for example, but it reduces the incentives for innovators to find an alternative to gasoline.
In the computer age, it is doubtful that antitrust enforcement can accomplish what it once did. Consumers can now easily survey offerings not only on the nearest street corner but across the country, or even overseas.
The Department of Justice report that the new administration is attempting to erase synthesizes views expressed by over 100 academics, businesspeople and antitrust practitioners during a series of hearings over the course of a year which consisted of twenty-nine separate panels. It also encapsulates opinions from scholarly commentary, Supreme Court and lower court opinions and reflects the enforcement policy of the Department of Justice.
The purpose of the report is make progress toward the goal of clear and understandable standards that will lead to more predictability, which is what businesspeople and investors and investors want and need.
The only reason to make antitrust enforcement less clear, less understandable and less predictable is to increase the scope for politicians and allied bureaucrats to substitute their personal preferences for transparent principle.
In North Carolina, the Utilities Commission Public Staff (an independent agency which represents consumers before the Utilities Commission) sent legislators an email objecting to legislation which would update the state’s antiquated telecommunications law. The email contained the following arguments: - CURRENT LAW ALLOWS LOCAL EXCHANGE COMPANIES AMPLE FLEXIBILITY TO COMPETE WITH CABLE AND WIRELESS.
- UNDER THE PROPOSED LEGISLATION, THE COMMISSION WILL NO LONGER BE ABLE TO ENSURE THE AFFORDABILITY OF BASIC LOCAL SERVICE OR ADEQUACY OF SERVICE QUALITY, OR HANDLE COMPLAINTS FOR CONSUMERS ABOUT BILLING OR SERVICE.
The first argument is misleading -- although it is true there is some flexibility, it certainly isn't adequate (let alone ample).
The second argument is technically correct in some respects but is utterly beside the point.
Telecommunications was a monopoly up until the 1980s or so. Today, cable phone service is available to over 100 million homes nationally. Comcast, a cable provider, is the nation’s third largest provider of telephone service.
There are now far more cellphones in service (249.2 million) as compared to traditional land lines (158.4 million). In the South, 19.6 percent of adults are living in households with only wireless telephones, according to a study by the National Centers for Disease Control. In these tough economic times, many consumers are dropping their regulated land line service in favor of unregulated wireless offerings which offer mobility and, arguably, greater flexibility and better value.
Don't hesitate to check out a paper I coauthored with George Gilder, which includes references and further analysis.
Current law in North Carolina does provide more flexibility for telecommunications providers to set prices and offer promotions or new services than in the past. But providers are still regulated, and still have to to get Utilities Commission approval when they want -- or are forced by competition -- to modify their business plans. This makes no sense in a competitive industry.
What other competitive enterprise who seeks to set prices or terms or offer services has to contend with lengthy notice and comment at a government agency with full opportunities for its competitors to participate and appeal?
Normally, full procedural safeguards are a good thing. But competition in the telecommunications market is here. The market is one of the most competitive arenas in the global economy. Lengthy government procedure favors competitors and inappropriately harms incumbents. And, yes, consumers suffer the consequences.
Disclosure by the incumbent -- and an opportunity for competitors to obtain sensitive data and lobby the regulator -- means that rivals never have to worry about losing sales because they failed to anticipate a promotional offering or the introduction of a new or improved product or service; a lower price and/or better terms by a competitor. Rivals can wait until they receive formal notice of a competitor‘s intentions before they lower the price or improve the quality of their own product or service as necessary to avoid losing sales. Or they can even delay it as a result of a timely objection before the Utilities Commission. This can become a dangerous game (for consumers), which reduces the incentives both for the incumbent and the rival to innovate.
As to the Commission’s argument that it will no longer be able to ensure the affordability of basic local service or adequacy of service quality: The fact is that a commission is no longer necessary to ensure these things. The availability of voice over Internet and wireless offerings for the vast majority of consumers means that most consumers are now “virtual regulators.” By that I mean most consumers can switch providers if they are dissatisfied with the price or quality of service they are currently receiving. When a provider loses customers because it isn't offering a competitive value proposition, it either has to lower its prices or improve its services to avoid losing sales.
Public utility commissions are no longer necessary to protect the vast majority of consumers, who can choose between competing services. This means that commissions can be eliminated entirely (at least for these consumers), freeing scarce public resources for higher prioritiies.
What about rural Americans -- who comprise, perhaps, 5 to 10 percent of telecommunications users -- who do not or will not have competitive options?
Although this is a subject for a separate blog post, competition has been slow to develop in rural areas in large part because current regulation sets prices below costs, thus depriving investors in competitive service offerings of a profit.
The solution to this problem is not to retain a Utilities Commission to regulate the telecommunications services available to rural consumers. The solution is to remove the disincentives to investment in rural areas. This can be done without unduly harming residents in rural areas where well-paying jobs are less common.
President Obama intends to nominate Mignon L. Clyburn to the Federal Communications Commission. Clyburn is a good pick. She has been a member of the Public Service Commission of South Carolina since 1998. She chaired the South Carolina commission from 2002 to 2004, is a past chair of the Southeastern Association of Regulatory Utility Commissioners and is a respected leader in the National Association of Regulatory Utility Commissioners (NARUC). She is trained in economics and has a reputation for thoughtfulness.
The remaining question is who ought to be the Republican nominee to fill the seat vacated by former chairman Kevin J. Martin (a soon-to-be-vacant seat held by Republican Robert M. McDowell will also need to be filled). By law, two of the commssion’s five members may not be from the President’s political party.
Let’s pretend you’re president. You have to appoint two opponents to the FCC. You don’t need their votes to pass your agenda, because you get to appoint three members from your political party who agree with your views.
Do you fill the other two slots with people who hold few clear convictions, who are inclined to compromise and who crave positive feedback? Or do you look for people who are intellectually-engaged and are inclined to debate?
If you believe your agenda is radical and you worry it will lead to negative consequences for which you will be blamed, you would want to appoint opponents who can be induced to vote with you. That way, you can claim your agenda had bipartisan support. This is the “cover you ass” approach.
On the other hand, if you believe your agenda is correct and will ultimately be viewed as wise and far-sighted, you don’t care whether your opponents supported it. In fact, if your opponents opposed it, you can use that to bury your opponents.
I believe the President would be better served by appointing real Republicans to the FCC rather than token Republicans.
Real Republicans will scrutinize and dissect issues before the commission and suggest better approaches. Token Republicans will basically just vote with the majority.
Token Republicans will tee up fewer issues for judges to review on appeal, but appellants will fill that void. Real Republicans will encourage the formulation of sounder policies which have a better chance of surviving judicial scrutiny.
During the Clinton administration, pliable Republicans were chosen. Commission decisions were unanimous. Those decisions were appealed and were ultimately overturned after years of litigation. Short term success was purchased at the expense of any permanent legacy.
So which Republicans should the President appoint?
The most qualified candidate obviously is Ajit Pai, currently serving as Deputy General Counsel of the FCC. Pai was Chief Counsel of the U.S. Senate Judiciary Committee’s Subcommittee on the Constitution, Senior Counsel at the Office of Legal Policy at the U.S. Department of Justice and Deputy Chief Counsel of the U.S. Senate Judiciary Committee’s Subcommittee on Administrative Oversight and the Courts. He graduated with honors from Harvard College and from the University of Chicago Law School, where he was an editor of the University of Chicago Law Review.
Pai would probably be the most outstanding FCC commissioner ever confirmed, based upon prior experience.
Another excellent candidate is Lee Carosi Dunn, currently a counsel to Senator John McCain. Dunn has 15 years experience working on communications issues.
McCain is one of the leading advocates of deregulation for the communications industry. He wisely voted against the 1996 Telecommunications Act because it didn’t go far enough in deregulating the industry and spurring competition. He has consistently supported legislation to loosen media ownership rules, provide equality in regulation for cable and satellite companies to allow for greater competition in subscription televisions services, reduce government ownership in satellite companies, and allow for the FCC to forgo merger reviews that are duplicative to the Department of Justice review.
Pai and Dunn blend tremendous experience and free market views.
Pai and Dunn are conservatives, to be sure. But conservatives aren’t a threat to good policy.
Three of the five commissioners will be Democrats. The two Republicans aren’t going to change the outcome on most issues. Their job will be to offer principled arguments and counterproposals, and to write well-reasoned dissents. If they don’t do it, someone else will.
Policies can either be debated and refined in the commission, or in the courts. It can take the courts years to consider the legality and constitutionality of commission decisions. Years of uncertainty can be devastating to private investment.
The objective needs to be for the courts to review good policies, which stand a better chance of being upheld. If the courts review policies which were not well-considered, there is a higher chance those policies will be reversed.
That necessitates a high caliber of FCC commissioners.
If the President wants a new era of bipartisanship and competent government, he has nothing to fear from the appointment of real Republicans to the FCC.
He ought to fear rubber-stamp Republicans who may be inclined to approve well-intentioned but imperfect policies which could use a bit of tinkering to make them survive judicial scrutiny.
According to House Subcommittee on Communications, Technology, and the Internet Chairman Rick Boucher (D-VA) Deep packet inspection enables the opening of the packets which hold the content of Internet transported communications. Through the use of DPI the content can be fully revealed and examined.
It has generally accepted beneficial uses such as enabling better control of networks and the blocking of Internet viruses and worms. It also enables better compliance by Internet service providers with warrants authorizing electronic message intercepts by law enforcement.
But its privacy intrusion potential is nothing short of frightening. The thought that a network operator could track a user’s every move on the Internet, record the details of every search and read every email or attached document is alarming.
And while I’m certain that no one appearing on the panel today uses DPI in this way, our discussion today of the capabilities of the technology, the extent of its deployment and the uses to which it is being put will give us a better understanding of where to draw lines between permissible and impermissible uses or uses that might justify opt-in as opposed to opt-out consent. But as Kyle McSlarrow, CEO of the National Cable and Telecommunications Association notes, Packet inspection serves a number of pro-consumer purposes. First, it can be used to detect and prevent spam and malware, and protect subscribers against invasions of their home computers. It can identify packets that contain viruses or worms that will trigger denial of service attacks; and it can proactively prevent so-called Trojan horse infections from opening a user’s PC to hackers and surreptitiously transmitting identity information to the sender of the virus.
Packet inspection can also be used to help prevent phishing attacks from malicious emails that promote fake bank sites and other sites. And it can be used to prevent hackers from using infected customers’ PCs as “proxies,” a technique used by criminals, in which user PCs are taken over and used as jumping-off points to access the Internet, while the traffic appears to be generated by the subscriber’s PC. As a result, the technology can be used in spam filters and firewalls.
Second, packet inspection can be used for network diagnostics and capacity planning. Cable operators cannot plan for network growth without understanding how Internet traffic is growing and the uses to which it is put. By using this technology to analyze the aggregate growth and usage changes in network traffic patterns over time, cable operators can anticipate the needs of their subscribers and appropriately plan for network growth.
Third, packet inspection can help network operators accurately respond to formal requests from law enforcement agencies for the interception of communications for law enforcement purposes. When law enforcement agencies identify traffic of concern, this technology allows network operators to comply with their legal obligations to flag that traffic.
Finally, the Internet is not static. Different opportunities and challenges will emerge and this technology may prove useful in providing consumers more choice and control in ways that are difficult to predict today. For instance, as streaming video capabilities increase, this technology could be a means of supporting more advanced parental controls. It will not be possible for Congress to outlaw deep packet inspection, because the consumer benefits are too compelling.
And besides, deep packet inspection is only one of the ways oneline providers can accumulate personally-identifiable information about consumer preferences.
If Congress tries to regulate how online providers collect sensitive consumer data it runs the risk of choosing the wrong technology winner and losers.
Consumers ought to be allowed to opt in or out.
AT&T says it will let consumers opt in AT&T will not use consumer information for online behavioral advertising without an affirmative, advance action by the consumer that is based on a clear explanation of how the consumer’s action will affect the use of her information. But other entities, such as Google, are using an opt-out approach.
Both are excellent business models which allow consumers to choose. The AT&T approach may promote more privacy; the Google approach may promote more free services. Both approaches give consumers notice and control.
AT&T, Google and others ought to be allowed to compete. And consumers ought to be allowed to choose.
With freedom to innovate, who can predict what new service and features the providers will come up with?
A legitimate issue for Congress is what should the liability for online providers be for violations of privacy policicies, including breaches of sensitive consumer data?
This is an area in which it would be appropriate for Congress to enact tough sanctions, if it is so inclined.
In Alabama, HB 478 and SB 373 would protect competitive telecommunications, voice over Internet, cellphone and broadband services from utility regulation.
Competition drives innovation which benefits consumers, as we have seen so often in telecommunications beginning in the 1980’s and 90’s—when small steps towards free and open competition enabled new services and features.
For example, long distance service used to be fairly expensive. Long distance prices have come down dramatically. They have come down to the point that for many consumers—consumers whose phone service is not subject to regulation by the state Public Service Commission—long distance is a bundled service with unlimited use.
Cellphone service—again not subject to PSC regulation—used to cost 47 cents per minute. Now, with many providers and ample competition, the cost to consumers has dropped to around 6 cents a minute, while new features, innovations, and uses for cell phones have proliferated.
For example, 20 years ago there were no text messages. In 2005 , when the Alabama legislature last amended the state’s communication laws, wireless companies nationwide carried 9.8 billion text messages a month. In 2008 that number was 75 billion a month. Why? Consumers demanded it, and technology provided it in a market free to innovate.
We all know that technology and consumer needs and preferences are changing faster now than ever before. The telecommunications market is dramatically different than it was four short years ago. It might surprise you to know that the third largest phone company in the United States today is a cable company, Comcast. Or that in the South, 19.6 percent of adults live in households with only wireless phones, according a survey conducted by the National Centers for Disease Control.
Competition pushed down the rates for bundles of Internet, phone and TV service in 2008 by up to 20 percent, to as low as $80 per month, according to Consumer Reports.
Technology has continued to evolve. The consumer’s need for services has changed. Other states have updated their laws.
Don’t be misled by those who oppose modernizing outdated laws. Competition is here. Other states are taking advantage of it, and Alabama needs to do so as well. In the 21st century, success in economic development will be determined in part by which states have the technology infrastructure to compete for new, high tech, high paying jobs.
Quality service, fair pricing and new features and services will be determined by which areas have rules that permit full competition among all providers on a level playing field. Voice over Internet, cable phone service, cell phones that far outnumber land lines are benefits of competition that we could not have imagined in the telecommunications world 20 years ago, or even four years ago. Alabama must remain competitive by updating antiquated rules, or risk falling behind in the race to provide good jobs and a rising quality of life for all its citizens.
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