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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.

Continue reading...

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.

>Continue reading

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 T�l�com 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 T�l�com'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.

Continue reading "Network access regulation 4.0" »

December 1, 2011
FCC strikes out on AT&T + T-Mobile opportunity

AT&T and T-Mobile withdrew their merger application from the Federal Communications Commission Nov. 29 after it became clear that rigid ideologues at the FCC with no idea how to promote economic growth were determined to create as much trouble as possible.

The companies will continue to battle the U.S. Department of Justice on behalf of their deal. They can contend with the FCC later, perhaps after the next election. The conflict with DOJ will take place in a court of law, where usually there is scrupulous regard for facts, law and procedure. By comparison, the FCC is a playground for politicians, bureaucrats and lobbyists that tends to do whatever it wants.

In an unusual move, the agency released an analysis by the staff that is critical of the merger. Although the analysis has no legal significance whatsoever, publishing it is one way the zealots hope to influence the course of events given that they may no longer be in a position to judge the merger, eventually, as a result of the 2012 election.

This is not about promoting good government; this is about ideological preferences and a determination to obtain results by hook or crook.

The staff analysis makes it painfully clear that the people in charge have learned very little from the failure of government to reboot the nation's economy. For starters, the analysis notes points out that "there will be fewer total direct jobs across the business," notwithstanding various commitments the companies have made to protect many existing jobs and add many new ones. The staff should have checked with the chairman of President Obama's jobs council, for one. CEO Jeff Immelt drives growth at GE through productivity and innovation, not by subsidizing inefficiency (see this). He realizes that when government tries to preserve wasteful methods, firms become uncompetitive and lose market share. That's a recipe for unemployment. The FCC staff analysis has got it completely backwards. When politicians set out to "create" jobs, it is often at the expense of productivity. We don't need that kind of "help" from Washington. In a wonderful column I am fond of citing, Russell Roberts recounts a story that bears repeating here.

The story goes that Milton Friedman was once taken to see a massive government project somewhere in Asia. Thousands of workers using shovels were building a canal. Friedman was puzzled. Why weren't there any excavators or any mechanized earth-moving equipment? A government official explained that using shovels created more jobs. Friedman's response: "Then why not use spoons instead of shovels?"
FCC Chairman Julius Genachowski got it essentially correct when he remarked in a recent speech that, "Our country faces tremendous economic challenges. Millions of Americans are struggling. And new technologies and a hyper-connected, flat world mean unprecedented competition for American businesses and workers." Sadly, he does not realize that a merger between AT&T and T-Mobile provides a vehicle for that.

The combined company would have the "necessary scale, scope, resources and spectrum" to deploy fourth generation wireless services to more than 97% percent of Americans (instead of 80%), according to a filing they made in April. That would make our nation more productive and improve our competitiveness, which is we want. An analysis by Ethan Pollack at the Economic Policy Institute predicts that every $1 billion invested in wireless infrastructure will create the equivalent of approximately 12,000 jobs held for one year throughout the economy, and that if the combined company's net investment were to increase by $8 billion, the total impact would be between 55,000 and 96,000 job-years. The FCC staff thinks this is an irrelevant consideration, because it might happen anyway.

Several commenters respond that even absent the proposed transaction, AT&T would likely upgrade its full footprint to LTE in response to competition from Verizon Wireless and other mobile and other mobile wireless providers * * * * Nothing in this record suggests that AT&T is likely to depart from its historical practice of footprint-wide technological upgrades with respect to LTE even absent this transaction.
They may be right, but this is wishful thinking at a time when millions of Americans are struggling. The best course of action at this point is to improve incentives for corporations to increase capital investment, improve productivity, capture market share and create more jobs. The Feds should obviously approve this merger, because the record clearly shows that the companies are willing to undertake a massive net increase in capital investment, now.

What about the counter-argument that if there are fewer wireless providers, that may lead to consumer price increases down the road? We can worry about that later. Right now, we need to worry about the unemployed. Incidentally, increasing supply in wireless is very simple. The FCC can simply award additional spectrum for mobile communications. Almost everyone agrees that this is the best tool the government has to promote competition in wireless.

The FCC committed another unforgivable error when it tried to blow up this merger. This is not the first time the commission has recklessly put entire sectors of our nation's economy at risk while it conducts idealistic experiments for attaining consumer savings through rate regulation or regulatory mischief in pursuit perfectly competitive markets. The FCC's cable rate regulation experiment in the early 1990s and its local telephone competition experiment in the late 1990s were both total failures and complete disasters.

This agency could use some humility, or some adult oversight.

December 10, 2009
Comcast + NBC = Blackmail

A Sunday editorial in the New York Times expressed concerns about Comcast's proposed acquisition of NBC, but explicitly stopped short of calling for rejection of the deal.

According to the Times, this combination could be just awful

Comcast could bar rival cable and satellite TV companies from access to desirable NBC shows, or it could offer them only at a high price, bundled with less attractive content .... Comcast could now be tempted to limit access to NBC content on rival Internet services, or charge them high fees. And Comcast could take its bundling business model to the Internet by forcing customers to buy cable packages in order to see content from NBC's network online.
After citing these horrific possibilities, the Times then says,
These concerns might not justify blocking a merger. But they do justify a careful review .... What regulators must not do is let this deal pass unchallenged.
What? If it's so bad, shouldn't we call 911?

Well, if the deal is rejected or withdrawn, various special interests get nothing.

Continue reading "Comcast + NBC = Blackmail" »

October 6, 2009
Verizon Wireless-Google partnership could trigger lawyerfest

Verizon Wireless and Google plan to

co-develop several devices based on the Android system that will be preloaded with their own applications -- plus others from third parties, a possible contender to Apple's huge iPhone application store. They will market and distribute products and services, with Verizon also contributing its nationwide distribution channels.
If the network neutrality mandates in the Markey-Eshoo bill were to become law, I don't see how VZW and GOOG could preload applications, if the applications favor certain content on the Internet when they are used. That would seem to violate the "duty" of Internet access service providers to
not block, interfere with, discriminate against, impair, or degrade the ability of any person to use an Internet access service to access, use, send, post, receive, or offer any lawful content, application, or service through the Internet.
I also wonder how VZW and GOOG could effectively market products and services utilizing VZW's wireless Internet access service without prioritization or favoritism?

Perhaps someone has thought of a clever legal argument already why they could do these things, but I'm reminded of a recent editorialwhich correctly observes that "[o]nce net neutrality is unleashed, it's hard to see how anything connected with the Internet will be safe from regulation."

VZW and GOOG's competitors won't like whatever they do. The competitors will have a captive audience at the FCC. The burden of proof will be on VZW and GOOG to justify every move.

September 5, 2009
Good enough is great

Wired has a good article by Robert Capps, "The Good Enough Revolution: When Cheap and Simple Is Just Fine."

Cheap, fast, simple tools are suddenly everywhere. We get our breaking news from blogs, we make spotty long-distance calls on Skype, we watch video on small computer screens rather than TVs, and more and more of us are carrying around dinky, low-power netbook computers that are just good enough to meet our surfing and emailing needs. The low end has never been riding higher.

So what happened? Well, in short, technology happened. The world has sped up, become more connected and a whole lot busier. As a result, what consumers want from the products and services they buy is fundamentally changing. We now favor flexibility over high fidelity, convenience over features, quick and dirty over slow and polished. Having it here and now is more important than having it perfect. These changes run so deep and wide, they're actually altering what we mean when we describe a product as "high-quality."

Capps acknowledges this sounds a lot like what Professor Clayton Christensen described in Innovator's Dilemma (1997).

These insights have profound implications for antitrust enforcement, e.g. nimble competitors can overthrow established titans without help from antitrust enforcers.

The secret lies in discovering when the qualities consumers value in a particular product are changing, and it isn't rocket science.

Basis of competition

Christensen says the marketing literature provides numerous descriptions of different phases in the life cycle of any product.

He notes that a product evolution model produced by Windermere Associates posits that the product characteristic consumers initially value most is functionality. When two or more vendors fully supply that, consumers demand reliability; and the basis of competition shifts from functionality to reliability. Convenience is the next characteristic, followed by price.

Another model by Geoffrey Moore from his book Crossing the Chasm (1991) says that products are initially used by innovators and early adopters who base their buying decision solely on product functionality; then by the early majority after the demand for functionality has been met and vendors begin to address the need for reliability; by the late majority when reliability issues have been resolved and the basis of competition shifts to convenience; then by the rest when the focus of competition shifts to price.

Markets are sometimes attacked for being "broken" when vendors aren't in a race to cut prices. This is one of the arguments advocates for a government-led National Broadband Strategy are making now.

But a market may simply be in the formative stages of supplying other characteristics consumers demand. It's no fun if you're a price-conscious consumer and you have to wait for the price to fall, but you benefit from this process because the development costs of high value products which will ultimately be vastly more affordable are being subsidized by others.

Integration and modularity

Christensen's sequel (coauthored by Michael E. Raynor), Innovator's Solution (2003) notes that when the basis of competition is convenience and price, vendors solve the problem by evolving the architecture of their products from being proprietary and interdependent toward being modular. Modularity allows firms to introduce new products faster and more cheaply because they can upgrade individual components or subsystems without having to redesign the whole product.

It also permits an industry structure consisting of independent firms who can specialize in individual components and subsystems.

Modularity enables the dis-integration of the industry. A population of nonintegrated firms can now outcompete the integrated firms that had dominated the industry. Whereas integration at one point was a competitive necessity, it later becomes a competitive disadvantage.
Network neutrality regulation is aimed in part at preserving and promoting modularity by limiting the opportunities for integrating content, devices and applications with broadband services.

But Christensen and Raynor point out that market participants must have the flexibility to pursue integration or modular strategies depending on whether existing products do not match consumer expectations for functionality and reliability versus whether product functionality and reliability exceeds consumer expectations.

We emphasize that the circumstances of performance gaps and performance surpluses drive the viability of these strategies [integration, modularity, reintegration, modularity, etc.]. This means, of course, that if the circumstances change again, the strategic approach must also change. Indeed, after 1990 there has been some reintegration in the computer industry.
If technology permits a better product than the market offers, they say competitors "must" have the flexibility to develop an integrated offering to shake up the market.
When firms must compete by making the best available products, they cannot simply assemble standardized components, because from an engineering point of view, standardization of interfaces (meaning fewer degress of design freedom) would force them to back away from the frontier of what is technologically possible.
Think of consumer expectations in the era before the iPhone versus afterwards. The preexisting offerings by firms such as Motorola and Nokia exceeded consumer expectations for a wireless phone, but fell short of consumer expectations for a smart phone, i.e., a mobile computer or "teleputer."

The iPhone is an example of reintegration, where modularity in cellphones eventually led to smart phone integration. The iPhone also demonstrates how reintegration can lead again to modularity (think of the Apps Store).

The broadband service industry never had a period of integration. It has always been modular. Keeping it modular wouldn't be a problem if it was in a position to supply anticipated demand without further investment. But that's not the case. Massive investment is needed, and broadband providers are struggling to convince investors they can make a profit when regulators have successfully driven most profit out of the telephone business.

Integration could be jeopardized if network neutrality regulation becomes the law.

Shifting from modularity to integration won't be easy if a subsequent Act of Congress or FCC order is a necessary prerequisite.

Net neutrality regulation does not prohibit integration, but it does ensure broadband service providers will reap none of the rewards and will face a regulatory minefield if they attempt to work individually with innovative content, device and application providers to maximize the user experience.

The result will be that they won't, meaning that we will be back where we were in the 1960s (remember Lily Tomlin's character, Ernestine?) with a telephone company which -- due to regulation -- cannot derive any benefit whatsoever from innovating and is rewarded only to the extent the status quo prevailes

This is a recipe not for innovation but of self-inflicted failure.

August 19, 2009
Legacy regulation killed Google Voice

Reacting to Apple's decision to not allow Google Voice for the iPhone, Wall Street Journal guest columnist Andy Kessler complains,

It wouldn't be so bad if we were just overpaying for our mobile plans. Americans are used to that--see mail, milk and medicine. But it's inexcusable that new, feature-rich and productive applications like Google Voice are being held back, just to prop up AT&T while we wait for it to transition away from its legacy of voice communications. How many productive apps beyond Google Voice are waiting in the wings?
So Kessler proposes a "national data plan."

Before we get to that, Kessler complains that margins in AT&T's cellphone unit are an "embarrassingly" high 25%. He doesn't point out that AT&T's combined profit margin -- taking into account all products and services -- is only 9.66%.

AT&T is actually earning less now than it was legally entitled to earn when fully regulated -- 9.66% versus 11.75%.

Don't fall for the myth that AT&T killed Google Voice.

The truth is regulators are quietly expropriating wireless profits to hold prices for regulated services like plain old telephone service artificially low.

This has always been how the game is played. Regulation has kept prices for basic phone service at or near the bare cost providers incur to offer the service, forcing providers to chase profits elsewhere.

In a normal business, an unprofitable product or service would disappear. But telecom providers are still required by law to provide plain old telephone service to anyone who requests it. It's called the "carrier of last resort" obligation. Believe it or not, providers are still required to provide copper-based, circuit switched phone service in many places, even though they could cut costs by deploying fixed wireless and VoIP to deliver basic phone service.

This service obligation imposes a tax on those of us who have cancelled our landline service in favor of our cellphones in the form of artificially high prices for wireless service.

Kessler offers one solution, but before we get to that, I've got a simpler one.

The solution is to give providers full freedom to set prices and choose their own technology. Yes, I mean freedom to raise prices for basic phone service so cellphones don't have to subsidize it, because cellphone providers who are affiliated with landline units could afford to lower their prices.

Don't lose me here: Cellphone providers would lower their prices, because every time prices fall subscribers consume more minutes of use.

Kessler favors a more convoluted plan, which I will admit is more practical politically than my own:

  • End phone exclusivity. Any device should work on any network. Data flows freely.
This is stupid. There may be instances where exclusivity promotes innovation, and others where it might not.

For example, a wireless provider might be willing to negotiate its customary profit margin, compromise the level of control it normally exercises over product design, promise to make special efforts to promote the product and provide technical support, and even make fresh investments in its network or back office systems to fully exploit the product's innovative features.

A bright line rule would kill both good and bad exclusivity.

  • Transition away from "owning" airwaves. As we've seen with license-free bandwidth via Wi-Fi networking, we can share the airwaves without interfering with each other.
As Kessler notes, Verizon Wireless, T-Mobile and others all joined AT&T in bidding huge amounts for wireless spectrum in FCC auctions, some $70-plus billion since the mid-1990s. The fact is, our rulers in Washington, D.C., fifty state capitals and thousands of city halls view wireless as a giant taxing opportunity.

Wireless providers are recovering the $70-plus billion they deposited into the U.S. Treasury right now from each and every one of us in the form of artificially high prices for cellphone service.

Let unlicensed devices operate in the "white spaces," then refund the $70-plus billion so new and existing carriers can compete on quality of service rather than on artificial cost disparities.

  • End municipal exclusivity deals for cable companies ... A little competition for cable will help the transition to paying for shows instead of overpaying for little-watched networks. Competition brings de facto network neutrality and open access (if you don't like one service blocking apps, use another), thus one less set of artificial rules to be gamed.
Congress invalidated exclusive cable franchises in 1984, and most states have recently streamlined the video franchising process so new entrants can obtain statewide franchises instead of negotiating individually with thousands of local franchising authorities.

Kessler's certainly accurate that competition between telephone and cable providers brings de facto network neutrality and open access. We have that competition already. In 2008, competition has pushed down the rates for bundles of Internet, phone and TV service by up to 20 percent, to as low as $80 per month, according to Consumer Reports.

  • Encourage faster and faster data connections to our homes and phones. It should more than double every two years.
One way to encourage it is to make it clear up front that investors will be allowed to earn a profit -- that's unclear now due to the possibility of extensive new regulation which would lead to bureaucratic control of broadband networks and bandwidth rationing.

The other way to encourage it is to subsidize it to make up for the harmful effects of taxes and regulation.

If we accept the idea there are too many vested interests to permit meaningful reform of legacy telephone regulation, then we are forced to look for ways to treat the various symptoms.

But the advent of wireless and VoIP technology mean that legacy phone service is unsustainable and will die unless politicians are going to treat it like GM because it provides employment for thousands of unionized workers.

There is still time for the politicians to simply let go of it and let it adapt.

July 6, 2009
Telecoms face antitrust scrutiny

The Department of Justice is looking into whether large U.S. telecommunications companies such as AT&T Inc. and Verizon Communications Inc. are abusing the market power they have amassed in recent years, according to the Wall Street Journal.

One area that might be explored is whether big wireless carriers are hurting smaller rivals by locking up popular phones through exclusive agreements with handset makers. Lawmakers and regulators have raised questions about deals such as AT&T's exclusive right to provide service for Apple Inc.'s iPhone in the U.S.

The department also may review whether telecom carriers are unduly restricting the types of services other companies can offer on their networks, one person familiar with the situation said. Public-interest groups have complained when carriers limit access to Internet calling services such as Skype.

I discussed why cell phone exclusivity is procompetitive here. A small carrier (Madison River Communications, LLC) limited access to Internet calling services, but the FCC intervened. No large U.S. carrier has limited access to Internet calling services.

The Supreme Court has ruled,

The Sherman Act is indeed the "Magna Carta of free enterprise," but it 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. (citation omitted.)
This was a judgment delivered by Justice Scalia in which Justices Rehnquist, O'Connor, Kennedy, Ginsburg and Breyer joined. Justice Stevens filed a concurring opinion in which Justices Souter and Thomas joined.

AT&T and Verizon are not monopolists, although they are large, successful companies. They are not monopolists because their customers can terminate their service and take their business somewhere else -- to a cable company offering Internet voice service or to a competitive wireless carrier.

The Justice Department can review whatever it likes, but it will need to prove a violation of the antitrust laws before it will be allowed to reorganize an entire sector of the economy pursuant to its interpretation of antitrust jurisprudence.

June 29, 2009
'Special access' shouldn't be fixed

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).

June 23, 2009
Don't believe 'special access' hype

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.

November 25, 2008
Bracing for new regulation

Observers predict stepped-up regulatory battles in telecom, according to the Wall Street Journal,

New congressional leaders as well as policy makers in the Obama administration are expected to press for fresh limits on media consolidation and require phone and cable firms to open their networks to Internet competitors, lobbyists and industry officials say.
The article overlooks the fact that broadcast ownership limits and forced access policies are restraints on the free speech rights of broadcasters and network providers, and that the constitutionality of new regulation could ultimately be decided by the courts.

November 24, 2008
Regulation and investment?

Misguided regulatory policy is "among the most important inhibitors of capital investment in telecommunications," conclude Debra J. Aron and Robert W. Crandall in a recent paper.

The authors observe that

Business firms do not make investments for altruistic reasons but rather make investments in order to earn a return on the invested capital. For any company to make any investment, it must determine, and convince the capital market, that the investment is reasonably likely to produce a positive return in net present value (NPV) terms sufficient to compensate for the risk incurred. When companies seek funding to execute a project, they compete for those funds with all other potential projects in the economy, not just with other investment opportunities available to the company itself and not just with investment opportunities in the same industry or geographic area.
Regulators cannot set optmal prices -- as a practical matter -- only prices which either are too high or too low. Prices which are too low discourage investment.
The risk that regulatory prices would not be compensatory is magnified by the fact that any investment in new fixed-wire networks is largely sunk. That is, the company making the investment cannot remove the assets and deploy them in alternative pursuits if they prove to be non-remunerative in the telecom sector. Thus, a decision to invest today in a given technology is irrevocable and potentially very costly. In contrast, if a competitor were to be granted access to these assets, once they are in place, at regulated rates, the competitor's decision would not be irrevocable. If it is allowed to lease these facilities on a short-term basis, it could simply walk away if a new technology were to appear. For this reason, economists refer to the competitor as having a "real option" which should be priced into the regulated rate. Alternatively, the competitor could be required to share the incumbent's investment risk by leasing the asset for its entire life. In this way, if the competitor remained solvent, it would be faced with its proportionate share of the risk of early obsolescence. (footnotes omitted.)
But that is not what regulators do. Regulators require incumbents to share the rewards of successful investments, not the losses arising from investment failures. The competitor gets to walk away while the incumbent is forced to write off huge amounts of fixed investment.

Next, the authors confirm that Wall Street is skeptical of Verizon's and AT&T's massive broadband investments.

A recent report by Bernstein Research, for example, concludes that "Even with aggressive assumptions about incremental adoption and retention, we believe the FiOS [Verizon's fiber-to-the-home initiative] project, in aggregate, falls well short of earning its cost of capital." An earlier report by industry analysts Pike & Fisher was also pessimistic, stating that its "report suggests Verizon is spending so much on FiOS that it could take a decade or more for the company to pay back its investment should it fall considerably short of its market-penetration goals." In contrast, Stifel Nicolaus analysts Christopher King and Billie Warrick were fairly optimistic about Verizon's FiOS product, predicting that "Verizon will still be able to offer a superior product to cable (and AT&T) due to its FTTH [fiber-to-the-home] architecture, and will still be able to generate a positive ROI [return on investment], given its superior product offering to its cable competitors, in our view." (footnotes omitted.)
The authors caution that regulation harms some consumers more than others.
The effects of the depressed investment incentives would be most immediately and directly felt in areas where the economics of investment are at the edge of profitability even without unbundling burdens. This is likely to be in already disadvantaged geographic areas. Hence, consumers in the least attractive areas for investment in advanced broadband networks would be the ones who would likely be disproportionately deprived of the new investment.
The authors point out that
The vigor and speed with which ILECs make investments in
broadband infrastructure will affect the vigor and speed with which cable and wireless broadband companies will continue to invest in response, and the ferocity of intermodal competition.
Finally, we are reminded that that the Federal Communication's Commission policy of deregulating broadband investment by incumbent telephone companies has in fact unleashed a virtuous cycle of multi-billion dollar investment by the phone companies and their competitors in the cable industry.
In this deregulatory environment, broadband subscriptions in the U.S. have soared, more than trebling in the three years ended June 2007. Clearly, the FCC's forbearance policy has borne substantial fruit for U.S. citizens.

Verizon and AT&T are not alone among communications companies in the U.S. in substantially increasing their investments since the TRO decision. Consistent with the mutually-reinforcing dynamic of responsive competitive investments we discussed earlier, cable companies have made massive investments in their broadband infrastructures as well. While the combined annual capital expenditures of AT&T and Verizon have increased from $17.1 to $24.6 billion since 2004, the aggregate annual capital expenditures of the three largest publicly held cable providers, Comcast, Cablevision, and Time Warner Cable, have nearly doubled, from $5.6 billion to $10.1 billion. (footnotes omitted.)

The paper is entitled "Investment in Next Generation Networks and Wholesale Telecommunications Regulation."

October 30, 2008
Reform intercarrier compensation

The Federal Communications Commission began a broad inquiry of intercarrier compensation in 2001 and now it may finally be getting around to acting on it on Nov. 4 while everyone's thoughts are on something else.

This is about 12 years overdue. Congress in 1996 foresaw that implicit phone subsidies were unsustainable and ordered the FCC to replace them with a competitively-neutral subsidy mechanism. Due to political pressure, regulators have failed to complete the job.

Intercarrier compensation refers to "access charges" for long-distance calls and "reciprocal compensation" for local calls. A long-distance carrier may be forced to pay a local carrier more than 30 cents per minute to deliver a long-distance call, but local carriers receive as little as .0007 cents per minute to deliver calls they receive from other local carriers.

Once upon a time, before fiber optics, there were significant distance related costs. Now distance isn't a major factor.

The high access charges remain only because the recipients, typically small and mid-size phone companies serving sparsely populated areas, have successfully lobbied regulators and legislators to keep them.

Thanks to outdated regulatory classifications, wireless and VoIP services pay far less when the connect to the legacy phone network.

This is the reason a small phone company named Madison River Communications attempted to block its customers from accessing VoIP services, however the FCC intervened. As a result of that episode, and others have argued for imposing common carrier regulation on broadband providers under the guise of net neutrality. Regulation truly tends to beget more regulation.

Reducing the hidden subsidies for local phone service would put incumbent phone companies in a better position to attract private investment to expand their broadband offerings and ought to be a key item in any agenda for promoting broadband deployment.

Otherwise, investors face a choice between investing in one category of broadband providers whose broadband profits may be forced to subsidize plain old phone services, and another category who get to reinvest 100% of their broadband profits or distribute them as dividends.

Reducing access charges would also remove a perverse disincentive which may be inhibiting some providers of legacy phone service in rural areas from updating their networks. If they offer wireless or Internet phone service, they are deprived of the generous compensation they currently receive for handling long-distance calls.

It may no longer be politically correct to criticize regulation, but intercarrier compensation is an example of harmful regulation which distorts competition. It needs to be eliminated and replaced with something which does not harm competition.

The FCC ought to just allow the carriers to negotiate these rates. The small and mid-size carriers would be afraid of that, and even the big carriers might prefer a reasonable FCC-set rate to endless bickering with 1,400 other carriers.

Either approach would be a huge improvement and is long overdue.

July 7, 2008
Evolving theory of network effects

Should antitrust enforcers be concerned about entry barriers in the search ad market? Some believe the market exhibits "network effects," according to the New York Times.

Although traditionally applied to Industrial Age industries with high fixed costs like railroads and telephone exchanges, anything now exhibits a network effect if its value increases because more people use it. Network effects are "everywhere," according to a top former antitrust official. Coke and Pepsi drinkers, for example, "benefit from the network of their fellow consumers because Coke and Pepsi are widely available in restaurants and in vending machines," claims Timothy J. Muris.

A preexisting network of vending machines is admittedly tough for soft drink imitators to replicate. But a barrier to imitation can also be viewed as a spur to innovation because it acts as a reward which inspires creators and investors. Not an incentive to create a barely distinguishable alternative, to be sure, but to create something transformative.

The alleged network effects in search advertising are more subtle than in the case of railroads, telephone exchanges or soft drinks (in fact, they even bear a striking resemblance to what one might term legitimate and hard-won competitive advantages).

[E]conomists and analysts point out that Google does indeed have network advantages that present formidable obstacles to rivals. The "experience effects," they say, of users and advertisers familiar with Google's services make them less likely to switch. There is, for example, a sizable cottage industry of experts who tailor Web sites to get higher rankings on search engines, which drive user traffic and thus ad revenues. These experts understandably focus their efforts on the market leader, Google -- another network effect, analysts say.
This sounds remarkably like how the European Union sees the market for streaming media players. The EU prohibits Microsoft from including a free player with its PC operating system because its competitors couldn't give away enough copies of their own media players.

Network effect theory overlooks whether, perhaps, there are no other objective differences in the value propositions of the competing products. If consumers have a choice between a superior product versus an inferior product which most of their neighbors are using, the theory assumes most consumers will choose the latter. Thus, there is no incentive for anyone to design a superior streaming media player for a desktop PC.

But that may not be a bad enough thing to warrant letting politicians and bureaucrats rearrange the market. It is inherently destructive to innovation to allow them to do that, because they principally serve constituencies who are more interested in preserving the status quo.

May 23, 2008
Defining 'anticompetitive'

Is it anticompetitive for Google to let Yahoo use some of its technology to earn more money in the search ad business if Google had 61.6 percent of the search market in April while Yahoo had 20.4 percent and Microsoft, 9.1 percent?

It's only anticompetitive if you believe search ad revenue is--and always will be--the bedrock of the Internet economy. But that's quite an assumption. Not too long ago some believed Microsoft's success in desktop software would allow it to monopolize the online world.

Then along came Google and search ads, which no one foresaw.

An outsourcing deal between Google and Yahoo could be profoundly procompetitive because Yahoo makes less than it could in search ads. Using Google's technology may enable Yahoo to pocket an extra $1 billion which could make Yahoo a stronger player in the search for the next big thing.

It's important to consider that there may be a next big thing because neither Yahoo nor Microsoft may be capable of giving Google a run for its money in search ads despite their vast resources, in which case it would not be procompetitive to keep them afloat through government intervention. It would just be inefficient.

What if Google becomes a monopoly in search ads? Most monopolies are temporary. Schumpeter teaches that durable monopolies are aided and abetted by government. The risk of that grows with government intervention led by antitrust attorneys.

Microsoft and Yahoo need to find their strengths; we shouldn't subsidize their weaknesses.

What would be procompetitive would be for Microsoft and Yahoo to invent something new.

May 22, 2008
Build a better mousetrap

The Rural Cellular Association wants the FCC to eliminate exclusivity arrangements between cellphone carriers and manufacturers of popular handsets.

For many consumers, the end result of these exclusive arrangements is being channeled to purchase wireless service from a carrier that has monopolistic control over the desired handset and having to pay a premium price for the handset because the market is devoid of any competition for the particular handset.
Exclusivity deals are common throughout the business world and often serve procompetitive purposes. And there is no way to condemn AT&T-Apple iPhone, Verizon Wireless-LG Voyager or Sprint Nextel-Samsung Ace without condemning exclusivity generally. For one thing, there are five major cellphone carriers and many smaller competitors. AT&T (Mobility), the largest, has an approximate market share of only 26 percent. You can't argue this is a concentrated market. The only thing unique about this market is the unnecessary presence of a legacy regulator.

The obvious course of action for the rural carriers is to partner with a handset manufacturer and develop something of their own which customers will want. "If you build a better mousetrap...," as they say. Perhaps some rural carriers lack the imagination or the ingenuity. But it's really not the job of government to try to compensate for that.

Who can argue it's so much easier to go whining to a regulator? Particularly for some small rural carriers who've perhaps been treated far too indulgently over the years and appear to have developed traces of an entitlement mentality. Then again, the current FCC has acquired something of an unfortunate reputation lately as an easy target for anticompetitive populist appeals.

The rural carriers point out that for some rural consumers

these exclusivity arrangements prevent them from purchasing many of today's most popular handsets because they reside in areas not served by the one carrier offering the desired handset.
Well, yes, there is a multiplicity of cellphone carriers and none is big enough to serve the entire market. Both the markets for cellphone service and handsets are, to repeat, highly competitive. This is exactly the opposite of a valid basis to regulate the sale of handsets.

Note that if the rural carriers' customers "reside in areas not served by the one carrier offering the desired handset" then, by definition, a Big 5 carrier offering an exclusive handset can't be acting anticompetitively to crush a smaller rival.

What apparently is needed are better sales and marketing relationships between handset makers and rural carriers. You wonder what these guys are up to? Spending too much time in Washington, D.C.

Perhaps the rural carriers ought to persuade the handset makers next time to offer exclusivity to a Big 5 carriers only throughout the territory in which the big carrier offers service.

April 24, 2008
'We'd have nothing to do!'

Several state public utility commissioners are pleading with the Federal Communications Commission to preserve unnecessary, burdensome and anticompetitive accounting requirements that I have discussed below.

Sara Kyle, Tre Hargett and Ron Jones of the Tennessee Regulatory Authority say they review the data required of telephone companies, even if their review has little or nothing to do with the purpose for which the data was originally required.

This information is particularly useful in evaluating competition levels in Tennessee; further, such information may be necessary in fulfilling our Commission's responsibilities should we decide that a state universal service fund is necessary.
The argument the FCC essentially is hearing is without the data there would be less work for state regulators, which would diminish their power.

The state commissioners think they have a chance to persuade FCC commissioners Robert M. McDowell and Deborah Taylor Tate to reject the AT&T petition along with one or both of the commission's two Democrats.

The question McDowell and Tate ought to be asking is whether it is the role of the feds to collect information primarily for the use of the states? The states can do that for themselves.

Of course it rankles state officials when change is forced upon them. They perceive and resent the regrettable implication that they cannot be trusted to know what's right. So it's not surprising they're beseeching McDowell and Tate to let them prune the rules thicket. According to the Arizona Corporation Commission,

[T]he Bell Operating Companies ("BOCs") in particular are using the forbearance process to achieve wholesale changes to FCC rules and regulations when in fact these changes should be going through the rulemaking process ... the type of changes sought in these petitions should be first addressed by the Separations Joint Board and then through the rulemaking process with widespread industry participation ...
Even state regulators acknowledge that some regulatory reform is needed in this area. It's "under consideration."
Perhaps the FCC's cost allocation rules could be simplified to reflect the reduced uses of separations results. However, wholesale abandonment of the existing rules through the forbearance power is not justified. The Separations Joint Board is currently considering the same separations reform issues raised by this forbearance petition. In 2006, the Commission asked the Joint Board to examine numerous separations questions that affect the obligations of petitioners in this proceeding. The scope of that proceeding is quite broad, including "whether there is a continued need to prescribe separations rules" for price cap incumbent LECs.
McDowell and Tate should know this process will probably lead nowhere. Congress almost eliminated the rules in 1999 but relented when these same arguments were made, and we're still debating.

Regulators presumably like their jobs. They want to regulate. One of the principle reasons Congress created the forbearance procedure is because it was skeptical that regulators would have any enthusiasm for deregulation.

McDowell and Tate shouldn't fall for this. There's a big picture here, which is we need a strong forbearance process. If the FCC establishes a pattern of rejecting forbearance petitions on picky and technical grounds we could wind up with a forbearance process in theory only, not in practice.

April 23, 2008
Settling accounts, part 2

Recenty I commented that the Federal Communications Commission has an opportunity to relieve AT&T of several unnecessary, burdensome and anticompetitive accounting requirements.

I noted that the data derived from the legacy accounting procedures simply isn't used anymore to regulate revenue or set prices. That's true, by the way.

This week a group which calls itself the Ad Hoc Telecommunications Users Committee filed a letter (in which it didn't identify its members) claiming:

As we explained at the debate, the data produced by the cost allocations at issue have been used by the Commission and private parties in the past (CALLS), are being used by the Commission and private parties in the present (272 Sunset Nonstructural Safeguards, Separations reform and theSpecial Access Rulemaking) and will in all likelihood be used by the Commission and private parties in the future (Special Access Rulemaking, Inter-Carrier Compensation Reform and monitoring the efficacy of the Price Caps formula).
What's going on here?

Well, like I said, the commission doesn't use the data to regulate revenue or set prices, but competitors apparently do use the data to argue that incumbent telephone companies can "afford" to charge lower wholesale prices.

The FCC doesn't seriously consider these arguments, mostly, because it recognizes that the accounting rules became political long ago and lead to arbitrary conclusions.

What Ad Hoc's argument shows is the legacy accounting rules have become an unintended device for protecting smaller, possibly inefficient, rivals. But remember, if we ensure that inefficient rivals can be profitable we are requiring that consumers pay higher prices than they would have to in a competitive market.

The rivals want to argue that AT&T shouldn't be allowed to earn more than legally prescribed rate of return for a legally protected monopoly. In other words, the minimum profit necessary for a company which faces no competition and no risk whatsoever. But AT&T isn't a monopoly anymore . It faces competition from cable, wireless, satellite, municipally-backed WiFi and power companies. Unwise investments by AT&T can fail. And that's good.

That's why the traditional rate-of-return margin afforded to a monopoly is irrelevant. Investors are going to want AT&T to be able to return a profit which corresponds to the profit their investment can make somewhere else.

The argument the CLECs make here is that regulation is needed to protect smaller and possibly inefficient firms from bankruptcy, because without them there would be fewer firms to compete to lower prices for consumers.

But this is not a fair argument because it ignores cable, wireless, satellite, municipally-backed WiFi and power companies. According to Noll and Owen, in The Political Economy of Deregulation (1983),

True competition -- the kind that is in the interests of consumers -- exists when a firm that tries to charge excessive prices, that offers a poor quality of service, or that has a high price because it is inefficient finds that other firms expand or enter by offering lower prices or better service. The number of companies in an industry is a poor measure of true competition. Better measures take account of structural conditions affecting the incentives to compete or cooperate and the number of firms that could relatively easily enter if the incumbents did not charge competitive prices.
This is no longer a protected market where "competitive" local exchange carriers are the only competitors. CLECS don't include cable, wireless, satellite, municipally-backed WiFi and power companies. The CLECs are simply new wireline entrants whose business plans depend on the artificial wholesale prices set by regulators.

Check out this argument made by Ad Hoc in its letter to the FCC:

AT&T claims (without documentation) to spend $11 million to comply with the subject rules. We explained that $11 million is thousandths of percent of AT&T's 2007 revenues of $118 billion, and that given 2007 revenues AT&T's earns $11 million in about forty five minutes.
I don't think there is a better illustration of what I am talking about: Force AT&T to overcharge its other customers $11 million so we, the CLECs, can make a profit. We deserve it.

April 10, 2008
Settling accounts

The Federal Communications Commission is facing another deadline at the end of this month to accept or reject a petition for regulatory forbearance. The petition would relieve AT&T of several unnecessary, burdensome and anticompetitive accounting requirements.

The accounting rules at issue were designed to restrain telephone prices when AT&T was a monopoly entitled to recover its costs plus a reasonable profit. Rate-of-return or cost-plus regulation, as it was known, was a complete failure. It gave companies like AT&T an incentive to inflate, misallocate and manipulate costs. The companies responded, according to critics, by gold-plating their operations.

AT&T hasn't been subject to rate-of-return regulation at the FCC or in any of the states in which it operates for 10 years. And no one is proposing to bring it back.

The FCC and the states now merely set maximum prices AT&T can charge ("price caps"), which is why the rules cited in the petition are no longer necessary. The data derived from the legacy accounting procedures simply isn't used anymore to regulate revenue or set prices.

There are one and perhaps two reasons why the rules have survived.

First is that AT&T's competitors, who aren't subject to a similar requirement, have assumed the information AT&T has to file might be useful to them.

Second, the rules continue to provide employment for accountants.

In 1999, Congress was determined to eliminate many if not all of the rules until, at the last minute, the complaints of these two groups were heard.

Now it's the FCC's turn.

Regulation which is unnecessary to protect consumers and which imposes costs and madates detailed disclosure on some competitors but not others is almost always wrong. The justification for these rules has evaporated. Eliminating the rate-of-return accounting rules is at least 10 years overdue.

Also, don't we have a better use for bureaucrats who administer unnecessary rules like these? For example, just yesterday the FCC asked Congress for $25 million to conduct new audits and investigations for the purpose of preventing and remedying waste, fraud and abuse in the Universal Service Fund.

The forbearance process, which I discussed here, has recently come under some criticism from regulatory enthusiasts who claim it deprives the FCC of the right to set its own agenda (which is code for the right to bury and never vote on proposals for meaningful regulatory reform). The rate-of-return accounting rules are a good example why we need the forbearance process.

(Note: The AT&T petition was filed Jan.25, 2007, and if the FCC stored the entire document in a single place I would have included a hyperlink. But they didn't. The document is divided into multiple files which aren't linked to one another. Brilliant. To see the files, go to: and search for documents filed on behalf of AT&T on the date above.)

April 8, 2008
Google's bids

Communications Daily ($) cited my recent post comparing Google's limited objectives for the 700 MHz auction with the expansive objectives it outlined to the Federal Communications Commission last summer, and it included the following reaction to my comments from Richard Whitt of Google:

Whitt said in response that Haney had misread his company's comments from last summer. "We consistently have argued that the open access license conditions adopted by the FCC would inject much-needed competition into the wireless apps and handset sectors, but would not by themselves lead to new wireless networks," he said Monday. "Only if the commission had adopted the interconnection and resale license conditions we also had suggested -- which the agency ultimately did not do -- would we have seen the potential for new facilities-based competition."

Another way to look at this is if there wasn't any potential for new facilities-based wireless competition without the interconnection and resale license conditions Google wanted, why would Google have submitted bids for the spectrum which it might have won and had to pay for?

I do agree that prior to the FCC's adoption of two of the four open platform principles Google proposed the company consistently premised its commitment to participate in the auction on the FCC adopting all four principles. I also agree Google was clear that it believed all four principles were necessary to promote competition.

Then it participated in the auction anyway.

This case may reveal how some regulators and some legislators are shrewd, have their own ideas about how to get what they want and even think they know what's in the best interest of corporations like Google.

It makes sense, as Whitt told Communications Daily, that the interconnection and resale license conditions would seem necessary to a hypothetical competitor who is a network provider. But in its Jul. 9th letter (and in the statement to Communications Daily) Google characterizes all four principles as being relevant to whether a new entrant would bid for the spectrum. For example:

Should the Commission not adopt the four open platforms requirements listed above, we believe it is doubtful that even the most determined and committed new entrant will be able to outbid an equally determined and committed incumbent wireless carrier, or consequently pave the way for second order competition.
In other words, each of the principles could be of interest to a new entrant who might bid for the spectrum. That seems logical, and the proof is Google. A new entrant who isn't a network provider -- such as Google -- might be more interested in open platforms for applications and handsets upon which its lucrative advertising plans depend. It might be worth it for Google to become a wireless broadband competitor in order to promote its highly profitable legacy business model.

Google was presenting an all-or-nothing-offer. But in Washington all-or-nothing-deals are rare. Google must have known this. Google got half of what it asked for (the typical return on investment here). And half a loaf seemed to be enough in view of the fact Google participated in the auction.

If in its prior conduct Google was saying only that it intended to ensure that the reserve price was met but it had no interest in owning the spectrum itself, that wasn't particularly clear.

Reasonable people might differ, but I think if Google never intended to win the spectrum (unless there was no way around it), and it was merely advancing its hypothesis that the four open platform conditions would summon forth hypothetical new entrants that wasn't especially clear at the time, either. Nor would it have seemed convincing to many people. Google's proposal wouldn't have acquired much momentum. The excitement was around the possibility Google would become the competitor. Google's previous Jul. 9th letter to the FCC said "Google remains keenly interested in participating in the auction" and its subsequent behavior continued to highlight that interest.

April 4, 2008
Back to spectrum giveaways

In 1993 Congress substituted auctions for the deplorable practice of giving away valuable spectrum to well-connected commercial entities.

Lawmakers who think spectrum is a valuable public resource for which the taxpayers should be compensated need to wake up for a minute. FCC rulemaking could render the remaining assets worthless, distort wireless competition and contribute to the unfortunate perception of the FCC as a candy store.

Google has made it clear that it plans to weigh in at the FCC as it determines how to re-auction the D-block from the recent 700 MHz auction, and that it wants to open the white spaces between channels 2 and 51 on the TV dial for unlicensed broadband services.

Anna-Maria Kovacs, a regulatory analyst, reported that in the recent 700 MHz auction AT&T Mobility paid an average price of $3.15 per POP in the B-block while Verizon Wireless paid 77 cents per POP in the C-block which was subject to special rules advocated by Google.

Now comes an admission that Google's main goal was not to win C-block licenses in the auction but to jack up the price just enough so the reserve could be met, according to the New York Times.

"Our primary goal was to trigger the openness conditions," said Richard Whitt, Google's Washington telecommunications and media counsel.
This certainly isn't consistent with the way Google presented the open access proposal to the Federal Communications Commission last summer. Google stressed that open access was for the purpose of leading to the introduction of new facilities-based providers of broadband services.
Chairman Martin has articulated the critical issues at stake in this proceeding:
The most important step we can take to provide affordable broadband to all Americans is to facilitate the deployment of a third "pipe" into the home. We need a real third broadband competitor....The upcoming auction presents the single most important opportunity for us to achieve this goal. Depending on how we structure the upcoming auction, we will either enable the emergence of a third broadband pipe -- one that would be available to rural as well as urban American -- or we will miss our biggest opportunity. Such a status quo outcome certainly would not sit well with consumer groups that have been strongly urging us to adopt rules that facilitate the ability of a "third pipe" to develop.
Further, Chairman Martin has observed that Google and other members of the Coalition for 4G in America are "the only parties that have promised to try to provide a national, wireless broadband alternative."

As Chairman Martin recognizes, the actual method of providing a broadband alternative is through a "real third broadband competitor." This means that the would-be new entrants should not be aligned with either an incumbent wireline carrier or incumbent wireless carrier. Those carriers, quite rationally, seek to extend and protect their legacy business models, and in particular not take any actions that would jeopardize existing and future revenue streams. For this reason, the appropriate public policy stance is not simply to facilitate an additional spectrum-based broadband platform, but rather to facilitate independent broadband platforms.

Obviously, the idea that an open access requirement would facilitate a third "pipe" was naïve on the part of pliant regulators.

We now have a block of spectrum owned by an incumbent with an open access requirement which aligns nicely with Google's business model. Yet it's fairly obvious that the open access requirement contributed to a substantial loss for the Treasury.

The admission by Google's counsel that winning the spectrum wasn't the company's goal and that Google submitted bids for the purpose of spiking the auction price casts doubt on the company's motivation and veracity in view of Google's previous representations to the FCC.

It may be that "everyone" attempts to "influence" the regulatory process when they can get away with it, but that doesn't make it right.

March 27, 2008
Problem solved

Comcast and BitTorrent are working together to improve the delivery of video files on Comcast's broadband network.

Rather than slow traffic by certain types of applications -- such as file-sharing software or companies like BitTorrent -- Comcast will slow traffic for those users who consume the most bandwidth, said Comcast's [Chief Technology Officer, Tony] Warner. Comcast hopes to be able to switch to a new policy based on this model as soon as the end of the year, he added. The company's push to add additional data capacity to its network also will play a role, he said. Comcast will start with lab tests to determine if the model is feasible.
Over at Public Knowledge, Jef Pearlman argues that the pioneering joint effort by Comcast and BitTorrent "changes nothing about the issues raised in petitions" before the FCC advocating more regulation, because Comcast and BitTorrent are "commercial entities whose goals are, in the end, to make sure that their networks and technology are as profitale as possible."

Setting aside whether the pursuit of profit is a good thing or not, what this episode actually proves is that the Federal Communications Commission has done its job, the threat of regulation is a credible deterrent to prevent unreasonable discrimination by broadband service providers and we don't need a new regulatory framework with the unintended consequences which regulation always entails.

If we want innovation, more choices and ultimately lower prices we have to be prepared to allow broadband service providers to experiment and to succeed or fail in the market. Regulator always discourages all three.

We also need an enforcement backstop, of course. But it doesn't have to be formalistic and inflexible.

Aside from FCC authority under the Communications Act of 1934 as amended, the professional staff of the Federal Trade Commission has concluded that antitrust law is "well-equipped to analyze potential conduct and business arrangements involving broadband Internet access."

Here at the Tech Policy Summit in Hollywood, one panelist claimed during a breakout session that antitrust enforecement in this area is impaired as a result of the Supreme Court's decision in Verizon v. Trinko (2004). But it isn't so.

In that case, the plaintiff was trying to convert an alleged breach of the Communications Act into an antitrust claim under §2 of the Sherman Act. In other words, the plaintiff was trying to expand the application of antitrust jurisprudence. The Court ruled that the Telecommunications Act of 1996 neither expanded nor limited the antitrust laws.

The 1996 Act has no effect upon the application of traditional antitrust principles. Its saving clause--which provides that "nothing in this Act ... shall be construed to modify, impair, or supersede the applicability of any of the antitrust laws," 47 U. S. C. §152--preserves claims that satisfy established antitrust standards, but does not create new claims that go beyond those standards.
The Court went on to conclude that the activity of Verizon which Trinko complained of did not violate pre-existing antitrust standards.

The bottom line is that we have three federal agencies, which include the Antitrust Division of the Department of Justice in addition to the two previously mentioned, who have the jurisdiction, expertise and some actual experience to intervene if broadband providers unreasonably discriminate.

Groups like Public Knowledge have done a great job and can declare victory now.

March 12, 2008
Conyers opposing regulation
John Conyers, Jr.

If broadband providers turn the Internet into a "world where those who pay can play, but those who don't are simply out of luck," current antitrust law can solve the problem says House Judiciary Chairman John Conyers, Jr. (D-MI).

I believe that antitrust law is the most appropriate way to deal with this problem -- and antitrust law is not regulation. It exists to correct distortions of the free market, where monopolies or cartels have cornered the market, and competition is not being allowed to work. The antitrust laws can help maintain a free and open Internet.
The comment came at a Congressional hearing yesterday. Of course the broadband market isn't characterized by monopoly or cartel, so I would dispute whether antitrust could be used to prevent broadband providers from experimenting with innovative pricing and network management (and it wouldn't matter -- antitrust law wouldn't be needed because consumers could take their business elsewhere). But if one believes the market is or soon will become a cartel, Conyer's assessment should be reassuring.

The Federal Trade Commission staff have expressed the same opinion as Conyers:

The competitive issues raised in the debate over network neutrality regulation are not new to antitrust law, which is well-equipped to analyze potential conduct and business arrangements involving broadband Internet access.
Aside from antitrust law, the Congressional Research Service, among others, concludes that the Federal Communications Commission already has the authority to regulate broadband providers.
[N]either telephone companies nor cable companies, when providing broadband services, are required to adhere to the more stringent regulatory regime for telecommunications services found under Title II (common carrier) of the 1934 Act. However, classification as an information service does not free the service from regulation. The FCC continues to have regulatory authority over information services under its Title I, ancillary jurisdiction. (footnotes omitted)
Conyers acknowledged at the hearing that the Internet has become the "dominant venue for the expression of ideas and public discourse," as I believe everyone can agree.

But if there's a risk broadband providers could do something bad does that mean Congress should prohibit everything? Not according to Conyers.

[W]hen it comes to the Internet, we should always proceed cautiously. Unless we have clearly documented the existence of a significant problem that needs regulating, I do not believe Congress should regulate. And even in those instances, we should tread lightly.

February 22, 2008
Unleashing the Exaflood

Bret Swanson and George Gilder have a column in today's Wall Street Journal in which they argue that more Internet capacity will be necessary to keep up with movie downloads, gaming, virtual worlds and other fast-growing applications.

They explain that Internet capacity will have to increase 50 times in the next couple years in their recent report "Estimating the Exaflood: The Impact of Video and Rich Media on the Internet -- A 'zettabyte' by 2015?," which I discuss here.

In their column, Gilder and Swanson warn this won't happen if politicians re-regulate network providers:

The petitions under consideration at the FCC and in the Markey net neutrality bill would set an entirely new course for U.S. broadband policy, marking every network bit and byte for inspection, regulation and possible litigation. Every price, partnership, advertisement and experimental business plan on the Net would have to look to Washington for permission. Many would be banned. Wall Street will not deploy the needed $100 billion in risk capital if Mr. Markey, digital traffic cop, insists on policing every intersection of the Internet.
I included a similar warning in comments to the Federal Communications Commission last week.

December 18, 2007
Brazen act of defiance

The FCC voted today to allow a single entity to own a newspaper as well as a broadcast TV or radio station in the same market under certain conditions, and some people seem truly alarmed.

Democratic FCC commissioner Jonathan Adelstein worried that the FCC "has never attempted such a brazen act of defiance against Congress. Like the Titanic, we are steaming at full speed despite repeated warnings of danger ahead. It might yet sink. We should have slowed down rather than put everything at risk," according to Broadcasting & Cable.

Many people were similarly horrified in 1987 when the FCC repealed the Fairness Doctrine, which required broadcasters to air contrasting viewpoints on "vitally important controversial issues of interest in the community."

Former FCC chairman Dennis Patrick recalled the bitter controversy, questionable motives and a demonstrably successful outcome resulting from the repeal during a wonderful lecture this past summer at an event sponsored by the George Mason University School of Law.
Patrick recalled how the FCC tried to duck the issue for years because it was so controversial, but the courts forced it to do something. What he and his fellow commissioners wanted (or thought they needed) to do wasn't popular on Capitol Hill.

Both houses of Congress had voted to codify the Fairness Doctrine in June 1987. A veto by President Reagan put the issue back on our plate, but the congressional vote made it clear that a majority in congress with broad support in both parties wanted the Fairness Doctrine to remain the law....

[On Aug. 4] the commission found the Doctrine unconstitutional and inconsistent with the public interest....
On August 5 all hell broke loose. House Commerce Chairman John Dingell held a press conference to call us all "lickspittles." Senate Commerce Chairman Ernest Hollings called us "wrongheaded, misguided and illogical."

And then it got nasty.

Oversight hearings were held. Investigations were conducted. Motives and processes were questioned.

He also commented on why there are members of both parties who wanted to regulate the media.
... the most distressing discussions I had were with those who stated quite clearly that they supported the Fairness Doctrine because it gave them a federal club with which to discourage broadcasters from airing perspectives they found politically offensive.

In this context, I had conservatives complain what the liberal networks might do, and liberals recoil at the thought of unconstrained media conglomerates.

Those discussions were not about diversity, or access, or robust debate. It was about using the federal government to control speech.......just what, as I recall, the founding fathers feared.

Also, Patrick pointed to the fact that it became clear fairly quickly that repealing the Fairness Doctrine was a huge success.
In an exhaustive study published in the Journal of Legal Studies in 1997, Drs. Tom Hazlett and David Sosa documented a dramatic increase in informational programming on radio after the elimination of the Fairness Doctrine.

Most impressively, the percentage of AM stations programming news, talk and public affairs jumped from just over 7% in 1987 to over 27% in 1995. To put that in perspective, in 1975 there were no AM stations in America with a news/talk format. In 1995 there were 854.

Of course, the fact that the elimination of the Fairness Doctrine spurred an abundance of programming aimed squarely at our most important and controversial issues is no longer seriously debated.

The goal today is to improve the quantity and quality of local news gathering. There's a dearth of local news reporting in some communities because current regulation makes it uneconomical. Relaxing the newspaper-broadcast cross-ownership restriction should improve the situation by allowing media outlets to pool their resources.

The FCC ought to eliminate all media ownership restrictions now that that the traditional "scarcity rationale" (i.e., the limited availability of broadcast frequencies) has completely eroded due to the availability of digital compression technology as well as competition from direct broadcast satellites, cable operators, telephone companies, wireless providers and unaffiliated Internet-based content providers such as iTunes, YouTube and opinionated bloggers.

The new rule, which primarily affects newspapers, radio stations and smaller TV stations in the nation's 20 largest cities, is at least a positive start.

December 12, 2007
FCC following EU precedent

The FCC has settled on an inappropriate definition of what constitutes a competitive market. A memorandum explaining why the FCC denied the Verizon's forbearance petition seeking deregulation in Boston, New York, Philadelphia, Pittsburgh, Providence and Virginia Beach suggested it's because Verizon's market share has to be less than 50% AND Verizon's competitors must have ubiquitous overlapping networks with significant excess capacity.

While there is some evidence in the record here regarding cable operators' competitive facilities deployment used in the provision of mass market telephone service in the 6 MSAs at issue, we find that it does not approach the extensive evidence of competitive networks with significant excess capacity relied upon in the AT&T Nondominance Orders ... where the Commission has found an incumbent carrier to be nondominant in the provision of access services, it had a retail market share of less than 50 percent and faced significant facilities-based competition. (footnote omitted)

A market share in excess of 50% would justify regulation in the EU, but not in the U.S. pursuant to settled antitrust principles.

J. Bruce McDonald
, formerly Deputy Assistant Attorney General
 with the Antitrust Division
, explains:

EU law seeks to control the conduct of firms that are dominant, while U.S. law addresses monopolies, the creation or maintenance of monopoly power. Take this practical comparison of market share thresholds. The dominance standard ­ the power to behave to an appreciable extent independently of competitors, customers and ultimately consumers allows a presumption of dominance where a single undertaking holds 50% or more of the market, and less may be enough. The U.S. standard - the ability to raise price and exclude competition - would rarely be proved where market share is less than 70%. Of course, neither jurisdiction relies solely on market share evidence. (footnote omitted)

The FCC memorandum doesn't disclose Verizon's market shares. However, I suspect it is less than 50% in one or more places or the memorandum wouldn't make it so clear that even a market share below 50% won't justify deregulation unless competitors have ubiquitous overlapping networks with significant excess capacity like MCI and Sprint did in the long-distance market of the mid-1990s.

The U.S. doesn't regulate dominant companies like the EU and the FCC because it doesn't make any sense. If there is rising demand, other providers will enter the market. They will be successful if they offer better service or a superior product, or competitive pricing. If competitors can't figure out how to differentiate themselves in the market, they tend to hire former FCC staffers to importune their former colleagues to bestow regulatory advantages on the hapless competitors. That's called "competitor welfare," and it leads to higher prices for consumers and diminished innovation.

If Verizon has a market share below 50% or even in the 50% range, the FCC would do well to recall what Alan Greenspan says:

It takes extraordinary skill to hold more than fifty percent of a large industry's market in a free economy. It requires unusual productive ability, unfailing business judgment, unrelenting effort at the continuous improvement of one's product and technique. The rare company which is able to retain its share of the market year after year and decade after decade does so by means of productive efficiency -- and deserves praise, not condemnation.

In other words, even if the FCC didn't exist, it would be nearly impossible for Verizon or anyone else to sustain a market share above 50%. Greenspan continues:
The Sherman Act may be understandable when viewed as a projection of the nineteenth century's fear and economic ignorance. But it is utter nonsense in the context of today's economic knowledge. The seventy additional years of observing industrial development should have taught us something. If the attempts to justify our antitrust statutes on historical grounds are erroneous and rest on a misinterpretation of history, the attempts to justify them on theoretical grounds come from a still more fundamental misconception.

The FCC isn't ignorant. It's just trying to help its friends, who it hopes will one day return the favor. It's an incestuous little world.

December 6, 2007
FCC no free market ally

Two commentators tried to argue that FCC Chairman Kevin J. Martin has held true to conservative principles nowithstanding recent attempts to re-regulate the cable industry. Cesar V. Conda and Lawrence J. Spiwak posited that a "pro-entry/pro-consumer-welfare mandate" is the very "hallmark of economic conservatism." This is a bizarre statement.

"Pro-entry" is a euphemism for competitor welfare, the antithesis of consumer welfare. Competitor welfare used to be the guiding principle of antitrust law -- a legacy of the populist movement. The idea was that more competitors equaled stronger competition. It's intuitively appealing, but it confuses quantity with quality and is wrong if the competitors are inefficient. Protection of inefficient competitors is a form of subsidy.

For example, the Clinton FCC tried to jumpstart competition in telecom with a "pro-entry" policy which allowed startups to lease facilities and services below cost from incumbent providers like AT&T and Verizon. You might think that's no big deal, AT&T and Verizon can probably afford it. But the truth is they don't absorb such losses, they pass them on to their remaining customers.

Okay, you might say, maybe it's a negative in the short term, but won't all consumers be better off in the long run when pro-entry regulation leads to more competition -- which should push prices down for everyone?

The answer depends on whether the competitors are viable -- whether they can thrive in a free market without price controls or similar regulation.

The few remaining telecom startups who managed to avoid bankruptcy clearly cannot, but the FCC doesn't seem to have read the memo.

The trade association representing the startups, COMPTEL, has written to the FCC that its members "do not have the scale and scope to compete with the Bells for the major purchasers of special access," and reasons that regulation is in the public interest because this particular segment of competitors "have to offer extremely steep discounts off the Bells [sic] tariff price in order to win any modest portion of the customer's business."

Wall Street is of the same view. The viability of the startups, referred to as CLECs, is regarded as so bleak that Covad sold in late October for $1.02 a share, for example.

Since the fundamentals suck for the CLECs, they would be fools not to try to hire better lobbyists to convince the FCC to improve their regulatory advantage over the incumbents. This can become and endless game. And it has.

Yesterday the FCC refused to deregulate Verizon's local phone services in six cities including New York, Boston and Philadelphia, even though Verizon pointed out that in New York, for example, cable operators offer competitive voice services to the vast majority of homes and intend to provide voice services throughout virtually all of their franchise areas in the near future; and each of the nation's major wireless carriers offers service that is competitive with Verizon's wireline service and is available throughout (or virtually throughout) the New York area.

This afternoon, Covad was trading at 82 cents a share. Obviously, investors aren't optimistic that continued regulation of Verizon will revive Covad.

The FCC issued the following explanation:

The Commission found that the current evidence of competition does not satisfy the section 10 forbearance standard with respect to any of the forbearance Verizon requests. Accordingly, the Commission denied the requested relief in all six MSAs.

The forbearance standard, for all the criticism it has received lately, really gives the FCC wide latitude to do whatever it chooses. For example, it must make a finding that continued enforcement of a regulation is "not necessary for the protection of consumers." It also must find that forbearance is "consistent with the public interest." I just wish I were in the private practice of law right now so I could charge $500 an hour to argue what those terms mean.

The FCC ought to be asking itself why it is attempting to protect start-ups who, by their own admission, cannot cut it in a free market when cable operators and cellphone companies are offering competing voice services that consumers really want. But apparently irrational criticism from a few Congressional Democrats is becoming too much, and we are witnessing a classic case of Stockholm syndrome.

December 3, 2007
Forbearance: What Congress Intended?

One of the very few positive things in the Telecommunication Act of 1996 is Section 401 (codified as Sec. 10 of the Communications Act of 1934, as amended), which requires the Federal Communications Commission to forbear from applying unnecessary regulation to telecommunications carriers or services.

Congress tucked the provision into the 1996 act to improve the chances that pro-competition regulation would be eliminated once fully implemented and no longer necessary to ensure competition.

On Friday the FCC issued a notice of proposed rulemaking requesting public comment on whether the forbearance procedure needs more procedure. Commissioner Michael J. Copps issued a statement indicating dissatisfaction with the whole forbearance concept:

Too often forbearance has resulted in industry driving the FCC's agenda rather than the reverse being true. Decisions are based upon records lacking in data and the Commission faces a statutory deadline that requires a decision with or without such data. Perhaps most egregious is the fact that if the Commission fails to act, forbearance petitions may go into effect based upon the industry's reasoning rather than the Commission's own determination. All of this is to say that I do not believe that forbearance is being used today in the manner intended by Congress.

I admire Commissioner Copps' confidence that he knows what Congress intended, but I actually sat on the Senate floor when the Telecommunications Act of 1996 was debated and the forbearance provision (which originated in the Senate) wasn't debated at all. It was included in the committee mark, which was supported by Commissioner Copps' old boss, the committee's ranking member and former chairman, Senator Ernest Hollings (D-SC).

Hollings could have kept the forbearance provision out of the Telecom Act if he had chosen. He had won the ideological battle over immediate deregulation versus eventual deregulation. And the committee chairman, Larry Pressler (R-SD), was up for reelection and desperate to pass a major piece of legislation.

Hollings didn't keep it out. And although his reasons aren't a matter of public record, I can think of a couple reasons why he let it become law.

One, there was great concern at the time that the Telecom Act wasn't sufficiently deregulatory to reflect well upon a Republican-controlled Senate. Senator McCain and a few others were highly critical. Majority Leader Bob Dole didn't like it, either. The bill's chief sponsors, Pressler and Hollings (and also various cosponsors such as Trent Lott), were anxious to title the bill "Telecommunications Competition and Deregulation Act"; and the forbearance provision was one of the few things in the entire bill which could be described as deregulatory.

The justification for the pro-competition sections of the act -- which were undeniably regulatory in nature -- was that they would lead to competition and that competition would make it possible to deregulate, thus they were a temporary evil. Everyone agreed that regulation should go away when the local telephone market was competitive. For example, Reed E. Hundt, who was FCC chairman at the time, claims: "On competition, I had two sub-themes: clear, enforceable rules opening monopolized markets to entrepreneurs, and the elimination of regulation where competition existed."

I've always suspected that the regulate-now-so-we-can-deregulate-later argument ignores the slippery slope and therefore is or should be regarded as a completely disingenuous fiction, but since Hollings used it, that undoubtedly placed him in a difficult position to object to the forbearance provision.

Also, it was Hollings' staff, I believe, who limited the reach of the forbearance provision. The only concern I can recall being raised against the provision (it was during the premarkup phase) was, what if the FCC forbears from applying a provision of the '96 act immediately? A limitation was added prior to markup prohibiting the FCC from forbearing to apply the pro-competition portions of the Telecom Act until it determined that they were fully complied with.

Origin of the "Deemed Granted" Clause

The "deemed granted" clause was very intentional.

The forbearance provision allows a carrier to request forbearance, and provides that the request shall be "deemed granted" in one year (with the option of a 90 day extension) if the FCC doesn't deny the request.

In the absence of something like Sec. 10, the FCC could simply ignore a forbearance petition, allowing it to languish for eternity. That's because inaction can't be appealed. If the FCC accepts or rejects a petition, there is "final agency action" which can be appealed. But if it ignores a petition, there is nothing to appeal. Sec. 10 forces the FCC to take final action -- and if it doesn't, turns inaction into final agency action which can be appealed.

In 1995, when I was legislative assistant to the chairman of the Senate Communications Subcommittee and the former chairman of the full Commerce Committee and when we were deliberating the Telecom Act of 1996, we were mindful that the FCC had attempted to forbear from tariffing long-distance and the Court of Appeals for the DC Circuit said it didn't have the authority. We were mindful that it took the FCC decades to license cellular telephony and almost a decade to repeal the Fairness Doctrine. We knew that the long-distance carriers -- AT&T, MCI and Sprint -- would do anything to block deregulation of the Regional Bell Operating Companies. We knew that the FCC frequently ignored -- or failed to meet -- deadlines set by Congress.

Sec. 10 was intended to shift the paradigm from regulation, unless Congress specifically repealed it; to deregulation, unless the experts at the FCC could demonstrate that it is still needed.

The "deemed granted" clause recently became controversial because the deadline for action on a Verizon petition occurred while Commissioner Robert M. McDowell was awaiting Senate confirmation. With two Republicans and two Democrats, the FCC deadlocked on the Verizon petition. The petition was deemed granted by operation of law because of the tie vote.

The outcome was, and is, a disappointment for struggling competitive local exchange carriers who are trying to compete on price rather than innovation. These entrants invested in sales and marketing rather than their own facilities. They are mere retailers who can only offer the incumbents' services under a different name. Now that cable companies offer VoIP and wireless pricing is comparable with wireline rates, there is no non-political reason for the CLECs to exist.

The problem with emasculating the forbearance provision is that it takes the FCC years to accomplish anything novel or controversial.

Will the forbearance provision lead to chaos, e.g., will the FCC allow large carriers to refuse interconnection with small carriers(?) as Rep. Ed Markey, chairman of the House telecommunications subcommittee suggests:

Take the issue of forbearance. Some incumbent phone companies have asked the FCC to eliminate their essential network sharing arrangements under Section 10 of the Act. One of today's witnesses -- Cavalier Telephone -- leases copper phone lines for the last mile and provides residential consumers with the "triple play" bundle of voice, 150 channels of cable TV, and high speed broadband for approximately $80 a month. But if the forbearance petitions are granted, Cavalier, Time Warner Telecom, and other broadband competitors will lose access to the critical, bottleneck facilities they need.

Of course I can't, and would never, say no one would disagree to interconnect with, Cavalier, Time Warner Telecom, and other broadband competitors. But considering there are approximately 1,000 local telephone companies in the U.S., I am confident at least one or two would interconnect if Cavalier, Time Warner Telecom, and other broadband competitors are willing to pay their freight. And, of course, one or two interconnections would gain Cavalier, Time Warner Telecom, and other broadband competitors access to every consumer in the country.

November 13, 2007
Micromanaging cable

Kevin J. Martin, politically-savvy and a highly effective chairman of the Federal Communications Commission, has a strong free-market orientation. So why would the New York Times report that the FCC may be on the verge of enacting new regulation which would:

  • Force the largest cable networks to be offered to the rivals of the big cable companies on an individual, rather than packaged, basis;
  • Make it easier for independent programmers, which are often small operations, to lease access to cable channels; and
  • Set a cap on the size of the nation's largest cable companies so that no company could control more than 30 percent of the market?

Martin believes "[i]t is important that we continue to do all we can to make sure that consumers have more opportunities in terms of their programming and that people who have access to the platform assure there are diverse voices," according to the New York Times article. In other words, regulators (i.e., philosopher kings) should intervene to improve on the free market.

There are already plenty of opportunities for independent programmers to lease access to spare cable channels. The independent programmers aren't excluded from cable networks. Making it "easier" for independent programmers to lease access to cable channels, according to one report, is code for a government-mandated rate reduction of 75 percent.

The FCC and state public utility commissions embarked on a similar crusade some 10 years ago when they tried to introduce competition in telecommunications. It was a complete failure.

In his recent book, Competition and Chaos: U.S. Telecommunications Since the 1996 Telecom Act (2005), Brookings Institution Senior Fellow Robert W. Crandall points out that efforts by the FCC and the states to promote competition in telecom was "not only wasteful but unnecessary." Wasteful, because the policies "simply transferred billions of dollars from incumbent telephone companies to fund marketing campaigns required to sell the same services under a different name."

Unnecessary, because most of the competitive local exchange carriers declared bankruptcy due to the fact they couldn't offer a compelling product while "competition has developed in ways totally unanticipated by regulators, namely through unregulated wireless providers and cable platforms" -- sectors which regulators ignored.

Fortunately, federal and state regulators were denied the right to regulate wireless rates and services, and cable television regulation was scaled back considerably in 1996. As a result, the wireless sector began to launch an unregulated competitive rate war and to offer national calling plans as soon as it could consolidate into six national players after new frequencies were auctioned in 1995-96. At about the same time, cable operators began to expand their capabilities to meet satellite competition and were thus poised to be early movers in the broadband race .... [W]hen unregulated voice over Internet protocol (VoIP) services began to appear, cable operators were forced to offer voice services rather than allow third-party carriers to siphon revenues from their cable modem customers. None of this new competition required the guiding hand or patient nurturing of regulators.
In a current FCC proceeding about whether to continue some of these failed policies, a trade association representing the new entrants claimed that its members "have to offer extremely steep discounts" relative to the prices charged by incumbent telephone companies to remain competitive. And obviously, they also need to be able to demonstrate profitability to raise capital. The only way regulators can guarantee that new entrants can profitably offer steep discounts is to ignore actual costs incurred by the incumbents. If the incumbents have to sell at a loss, why would they commit to risky investments in network infrastructure when they could safely invest in government bonds?

There have been several failed attempts to micromanage the cable industry in the past 20 years or so. In 1984, Congress had to pass legislation to prevent local franchise authorities from regulating and taxing cable companies into oblivion. Cable companies thereupon made massive investments in new channels and compelling content. In 1992, Congress responded to popular pressure to control cable rates and the resulting price controls nearly bankrupted the cable industry. (The FCC chairman at the time, Reed E. Hundt recounts in his book how the Wall Street Journal "ran an editorial awarding me their supreme insult: 'French bureaucrat.' In their cartoon I looked lobotomized." Aside from drafting the cable retail pricing regulations of the early 90's, Hundt made the same effort to lower wholesale access prices in telecom that Martin is now making in cable.) In 1996, Congress scrapped the regulation and ushered in a decade in which cable companies invested $110 billion upgrading their networks. Now, Verizon and AT&T -- whose broadband offerings were recently deregulated -- are spending billions of dollars to deliver video, and the cable companies are being forced to invest more money to keep up.

Even when well-intentioned, regulation of competitive markets -- whether perfectly competitive, like a commodity market; or imperfectly competitive, like all the rest -- should be avoided because it usually leads to bad things. As Crandall describes in the same book:

Students of regulation are generally wary of regulated competition. Airline, trucking, railroad and petroleum regulation in earlier decades became a form of cartel management, keeping prices artificially high and entry low in order to protect competitors.

Alfred E. Kahn, who served in the Carter administration, counsels that "even very imperfect competition is preferable to regulation" in The Economics of Regulation: Principles and Institutions (1988).

The solution, again according to Crandall (who is hardly a lone voice), is for regulators to get out of the way:

The economic lesson from the history of regulation is that regulation and competition are a bad emulsion. Once the conditions for competition exist, it is best for regulators to abandon the field altogether. This is particularly true in a sector that is undergoing rapid technological change and therefore requires new entry and new capital. The politics of regulation favor maintaining the status quo, not triggering creative destruction.

October 26, 2007
Let cable operators compete

I want to comment on Adam Thierer's recent paper, "Unplugging Plug-and-Play Regulation," which makes several excellent points. Adam briefly summarized his thesis (i.e., there is no need for government "assist" in private standard-setting) here a couple days ago and generated a couple comments.

The cable industry and consumer electronics manufacturers are touting competing standards initiatives. The pros and cons of each approach, from a technology perspective, are somewhat bewildering to a non-engineer like myself. But there appears to be one clear difference that matters a lot. Adam points out that under the initiative sponsored by the consumer electronics industry,

the FCC would be empowered to play a more active role in establishing interoperability standards for cable platforms in the future. [It's] a detailed regulatory blueprint that specifies the technical requirements, testing procedures, and licensing policies for next-generation digital cable devices and applications.
Why would ongoing assistance be required from the FCC, which mainly consists of lawyers? It's that same old argument we hear over and over: Cable companies are big, therefore they must be regulated, right? Back before the emergence of DISH Network, DIRECTV, FiOS, U-verse, the iPod and who knows what else may be coming over the Internet, that argument was hard to refute. The world has changed, as can clearly be seen in how Wall Street is valuing the cable companies versus phone companies who offer comparable programming .
Already Wall Street has gone negative on cable stocks because of concern over FiOS as well as the slowing growth of the high speed Internet business and the rollout of more high definition TV stations by satellite companies. Comcast is now trading in the $23 range, down from its 52-week high of over $30 a share in January. Verizon's stock, on the other hand, is trading in the $45 range, its highest level since early 2002, with some on Wall Street partially crediting FiOS. Shares of Verizon rose 48 cents, or 1.1%, to $44.81 in 4 p.m. in New York Stock Exchange composite trading yesterday.
Cable companies need to be able to respond to the competition -- they need to be able to raise capital, which requires that investors earn a return which meets or exceeds the return available somewhere else -- yet the FCC is on the path of regulating the navigation devices used by cable companies but no one else.

Is this a big deal? Yes. The motion picture association points out that the CE manufacturers' favored approach "fails to adequately address content creators' reasonable concerns regarding content protection, presentation and interactivity." I'm not going to get into a discussion about the level of content protection the motion picture industry is seeking, only comment on the inappropriateness of placing cable operators in the middle of that dispute without a paddle.

MPAA's ominous warning, that "high value programming will be made available for bidirectional navigation devices only if content is adequately protected from unauthorized copying and redistribution," has enormous implications for broadband competition.

The FCC ought to take a step back and completely reassess what it is doing here. In my view, mature consideration leads to the conclusion that government has no business in this space at this time.

September 13, 2007
Is the FCC losing its nerve?

This week the Federal Communications Commission failed to muster 3 votes to deregulate the broadband access services of Qwest Communications, as it has already done for Verizon in early 2006. The nature of the relief we're talking about is analogous to the commission's reclassification of DSL as an "information" service rather than a "telecommunications" service in 2005. In both cases, the effect is to free broadband providers from onerous common carrier regulation, allow them to tailor their offerings to customer needs and not be forced to offer their services to competitors at regulated, cost-based rates for resale.

To be fair, the relief Verizon got didn't garner 3 of 5 votes. Verizon's petition was filed pursuant to Sec. 10 of the Communications Act, which provides that a forbearance petition (a petition which asks the FCC to forbear from applying a regulation) will be granted automatically unless the commission denies it for good reason within one year plus a 90-day extension. That didn't happen, so Verizon's petition was granted automatically. This procedure may not sound like an ideal way to conduct public business, but Congress enacted Sec. 10 because of a long history of FCC foot-dragging. The commission is a political animal, and many former staffers are employed by the companies the FCC regulates.

Word is that Chairman Kevin J. Martin and Commissioner Deborah Taylor Tate were both prepared to vote "yes" on the Qwest petition. Republican Commissioner Robert M. McDowell, meanwhile, claims that the commission as a whole was prepared to grant at least some of the relief sought by Qwest, and that he is disappointed an "appropriate accommodation" could not be found. Qwest chose to withdraw its petition before it could be denied.

Maybe Qwest was unwilling to settle for half a loaf, but maybe the commission wasn't prepared to offer anything of value. The commission's recent ruling allowing Qwest and other telecom providers to integrate their long-distance and local services provided some of the regulatory relief Qwest sought in the petition it withdrew this week. Thus it may be Qwest was merely offered the portion of its petition which matched the relief it won a couple weeks ago.

It's ironic: The broadband services offered to consumers and used by most small businesses have been deregulated.  One would assume the primary concern of government would be to "protect" consumers and small businesses -- those who can least afford to hire expensive lawyers, consultants and lobbyists. But now that the question is whether to finish the job -- to deregulate the broadband services offered by AT&T, Embarq, Qwest and Verizon to large businesses and competing carriers, the FCC is receiving pushback.  Big business and competitive carriers oppose deregulation, hoping to pay less -- even if that means residential and small business users who rely on DSL have to shoulder a greater share of carrier revenues.  There is no free lunch. 

The outcome of the Qwest petition coupled with the commission's recent decision in the matter of ACS of Anchorage, Inc., suggests that the commission has set a new bar which could slow, or possibly even reverse, the commission's successful policy of promoting investment and competition in broadband through deregulation. In voting to grant a recent petition for regulatory forbearance submitted by an Anchorage telephone company which is subject to unusually intense competition, Republican Commissioner Robert M. McDowell -- the commission's swing vote --adhered to a competitive analysis focusing not on the existence of the requisite conditions for competition nor even the actual presence of competition, but on the competitors' market share.

I support the relief from regulation that is granted in this forbearance petition filed by ACS of Anchorage, Inc. (ACS). The Anchorage, Alaska study area is a unique market, where the incumbent local exchange carrier, ACS, faces significant facilities-based competition from other carriers, primarily General Communication Inc. (GCI). For instance, GCI purportedly has over one-half of the exchange access market and 60 percent of the high-speed Internet market in Alaska. In addition, the geographic location of Anchorage contributes to the special characteristics of that market that are not duplicated in any other market in the country. With regard to ACS's enterprise broadband services, forbearance from regulating those services is appropriate based on the level of competition it faces in the Anchorage market, not only from GCI but also from AT&T and other providers. I believe that a local market analysis, rather than a national market analysis, is the correct basis for determining whether this type of relief is warranted. (emphasis added.)

Although the commission reached the correct result, ACS's petition was granted, the vote was 3-2 and McDowell's analysis combined with the pro-regulatory sentiments of the commission's two Democrats raises the possibility that the commission is in the midst of retreating from its preexisting policy of deregulating incumbents based on the presence of competitive facilities -- which is comparatively easy to verify -- in favor of an analysis of relative market shares, which could lead to endless quarrels over methodology, data and the appropriateness of desired thresholds.  McDowell also said that he thinks localized market analysis is the correct basis for determining whether deregulation is warranted.  Since there are hundreds if not thousands of localities, this would only magnify the problem.    

The commission is considering other proposals for deregulation and re-regulation. Rep. Ed Markey (D-MA), who chairs the House subcommittee responsible for FCC oversight, recently asked the commission to complete any review of special access issues (as I have discussed here) necessary to revise the current rules no later than Sept. 15th.  Though somewhat cleverly couched, Markey's letter is a clear signal to the FCC to re-regulate the services that telecom providers offer large businesses and competitive carriers.

But to do so would completely ignore what's happening in the marketplace.  There is abundant evidence that competition is increasing, actual prices are declining and that additional regulation is not only unlikely to promote competition but is actually more likely to reduce it, as I recently noted in comments to the FCC on this matter.

Cable operators and fixed wireless providers are currently investing in new facilities that will compete with the special access services provided by incumbent LECs. For example, Sprint Nextel is partnering with Clearwire to build a nationwide WiMAX network partly in order to reduce the backhaul costs it pays to route calls from cell towers to switching centers (Sprint claims in this proceeding that special access constitutes, on average, approximately 33 percent of the monthly cost of operating a cell site). Sprint has also inked a deal with FiberTower to provide backhaul for its 4G/WiMAX service in several markets. [AT&T has submitted an affidavit which claims] that Sprint told AT&T negotiators it has "many other options" to meet its backhaul needs.

Cablevision and Time Warner are making "major pushes" to offer packages of phone, TV and high-speed Internet service to small and midsize businesses, according to the Wall Street Journal, and Comcast has said that offering services to small and midsize businesses will be its top new priority of 2007 and 2008. (citations omitted.) ....

If the Commission arbitrarily reduces what incumbent LECs can charge for special access, that would also reduce the revenue investors could expect to earn from these new facilities which, in turn, may affect their willingness to follow through with these investments. The risk that Sprint Nextel, for example, might cancel its plans to build a WiMAX network if the Commission reduces its backhaul costs via regulation of incumbent LECs is a risk the Commission should avoid.

As another example, Google CEO Eric Schmidt has commented that "One of the neat things about the bubble is that people built all of this fiber that is now essentially free."

The dilemma facing the commission is, small new entrants are struggling in the marketplace (yes, they employ several well-regarded former FCC staffers).  As I pointed out in my comments, it may not be possible to save these carriers without indefinite regulation.

The rates incumbent LECs charge for special access aren't the primary  headache facing CLECs, just the easiest for lobbyists to fix.  As COMPTEL acknowledges, CLECs "do not have the scale and scope to compete with the Bells for the major purchasers of special access."  AdHoc makes a similar point when it observes that the "rummage sale prices" at which the divestiture assets from the AT&T/BellSouth merger were sold may indicate that the assets conferred little competitive benefit to the CLECs.  Since the CLECs can offer high-revenue customers only limited facilities and a limited array of services, COMPTEL confirms that its members "have to offer extremely steep discounts" relative to the prices charged by incumbent LECs. (footnotes omitted.)

The point is this: Indefinite regulation isn't necessary to protect robust competition from cable and wireless. In fact, regulation will diminish their enthusiasm for new investment. 

We can't have  it both ways.  Either we ensure that investments can profitably be made in new facilities by letting the market set prices, or we can attempt through regulation to keep prices low which will encourage competitors to share existing facilities and beseech regulators to impose ever-lower prices.  In that case, their offerings will simply mirror the incumbents' and the incumbents will search for investment opportunities that don't require profit-sharing.  This is not a recipe for innovation.   

July 20, 2007
Podcast on open access regulation in the 700 MHz band

This week in the Tech Policy Weekly podcast, Adam Thierer, James Gattuso, Jerry Brito, Tim Lee and I discuss FCC Chairman Kevin Martin's reported plan to encumber a portion of the 700 MHz band with open access rules sought by Frontline Wireless LLP, Google and others.

We react to a statement issued by a top executive at AT&T claiming that the draft FCC order -- which none of us have seen -- would "simply take one block of the upper 700 band being auctioned to allow an experiment with an alternative open-devices/open applications business model of the type proposed by Google and others," and that "the proposal does not mandate a wholesale business model in any particular block, nor does it mandate net neutrality style regulations on the other commercial spectrum being auctioned."

Also, the AT&T statement claims there would be a reserve requirement to ensure that no one would be able to obtain any block of spectrum without paying an "appropriate price to the US Treasury." If bids for this particular block do not meet the reserve requirements, or if no qualified bidder comes forward, the block would be withdrawn and re-auctioned without the open device/open applications requirements.

July 10, 2007
Will Procompetition Policy Work This Time?

Google wants the Federal Communications Commisison to make net neutrality a licensing requirement in the Upper 700 MHz spectrum band -- "(1) open applications, (2) open devices, (3) open services, and (4) open access." According to media reports, FCC Chairman Kevin Martin is circulating draft rules which would impose such a requirement (see: this, this and this).

What's Martin's agenda? I suspect he thinks he's come up with a brilliant strategic maneuver -- give Google the chance to acquire a nationwide broadband wireless footprint on the cheap and maybe the company will give up funding the advocates of net neutrality regulation. AOL ended its support for open access the minute it merged with Time Warner, didn't it?

But as we learned from the 1996 Telecommunications Act, procompetition policy is tricky and unpredictable. That debacle proved Thomas Sowell's observation that a self-equilibrating system like the market economy means a reduced role for intellectuals and politicians. Unfortunately, as Sowell added in an interview with Jason Riley, "even today many still haven't accepted that their superior wisdom might be superfluous, if not damaging." Nowhere is this more true than in communications policy.

It might be one thing if the FCC auctioned the spectrum with no strings attached, so the winning bidder could enter the market with the same advantages and disadvantages as the incumbents. That would offer the best hope for sustainable competition, the kind that doesn't require extensive oversight and participation by regulators into the future. The artificial kind we saw in the aftermath of the 1996 law with the competitive local exchange carriers (CLECs), who endlessly clamored for more regulatory favors, precipitated years of rulemaking and litigation.

But I realize I'm missing the point: It wouldn't be precompetitive if an incumbent bid for the spectrum and won, would it? As I've pointed out, the incumbents are effectively barred from the bidding by a requirement that the successful bidder must "adopt open access policies ... on any other licensed spectrum it holds." It would lead to less regulation if the FCC explicitly precluded AT&T, Alltel, Sprint, T-Mobile, Verizon et al. from participating in the upcoming auction instead of encumbering the successful bidder as a less transparent means of excluding the established carriers. Then we could expect the successful bidder to sink or swim without further regulatory intervention.

There doesn't seem any prospect for sustainable competition in this instance, if a letter filed with the FCC by one of Google's attorneys is any indication. In it, Google identifies itself as a "new entrant" (which is code for a client of procompetition policy) and cites a very long list of competitive "disadvantages" it apparently has belatedly discovered it will have to overcome with the help of regulators:

Since filing its comments some six weeks ago, Google has undertaken further internal analyses, including meeting with auction experts and conducting extensive game theory scenarios, to determine whether and how it makes sense to participate -- and do so successfully -- in the upcoming auction. Our analysis has confirmed the view that incumbent wireless carriers are likely to prevail in a spectrum auction when they compete head-on with a potential new entrant like Google. This especially appears to be the case when incumbents and would-be new entrants are bidding for large, unencumbered blocks of spectrum, such as the 22 MHz REAG Block proposed by the Coalition for 4G in America.

Simply put, large incumbents have significant built-in advantages that are very difficult to overcome. While some argue that Google could simply choose to outbid any single entity in the auction, the notion of "deep pockets" alone is not the correct measure in this particular instance. Instead, the decisive factors include other significant economic and operational barriers to entry, and the relative value and usefulness of spectrum to the bidders. In particular, Verizon and AT&T are well-established, vertically-integrated incumbent providers of wireless and wireline services. By contrast, Google is a Web-based software applications company, not a service provider, with little pertinent experience in the wireless market and no legacy business models to protect. The incumbent carriers have an embedded national network of towers, backhaul, customers, retail outlets, and advertising. The incumbents also have far more ready cash flow at hand, and the willingness to spend it in furtherance of existing business plans. Consequently, the spectrum simply has more economic value and overall usefulness to incumbents like Verizon or AT&T, than to a would-be new entrant like Google.

To overcome these disadvantages, Google is also asking the FCC for a dynamic auction mechanism,

where a designated entity would provide access to spectrum on an as-needed basis. Payments would be made in perpetuity as the spectrum is being used, rather than months or even years in advance. Such a dynamic auction would facilitate infrastructure build-outs, remove barriers to entry for smaller and more innovative infrastructure.

And, oh yes, the company has told the FCC that "overly stringent deployment mandates will only harm the very entities that offer the greatest promise for independent broadband platforms." In other words, Google wants more time than the agency would normally allow a successful bidder to build out its network.

I'll predict it won't end here. If necessary to protect its investment, Google won't hesitate to seek more special favors for itself or more obstacles for its rivals. The company's track record demonstrates that it sees government as a tool, useful idiot or both. The letter cited above will serve down the road as a convenient "I told you" -- the first step in laying the groundwork to petition the FCC in a year or two. But of course, by then Martin will be gone.

I'm old-fashioned, I confess. I believe the market will deliver open-access -- if allowed to function freely -- because that's what consumers will demand.

Google obviously doesn't believe a broadband wireless network operating on an open access principle would be competitive, or it wouldn't seek regulatory advantages. I'd like to see Google put its money where its mouth is. Show the world that skeptics of net neutrality regulation don't know what they're talking about. Bid on the spectrum, with no strings attached, and voluntarily adopt an open-access model.

June 8, 2007
Don't Re-Regulate Special Access
Rep. Ed Markey

Rep. Ed Markey (D-MA), chairman of the House subcommittee on telecommunications, wants the Federal Communications Commission to re-regulate "dedicated special access" services (the telephone services provided to businesses and institutions, as opposed to residential customers). He recently sent a letter to the five commissioners, which said:

My concern is that significant concentration in the special access market through mergers and bankruptcies, combined with the [FCC's] deregulatory pricing regime, has resulted in higher prices and little competitive choice for special access connections. These are also the conclusions of a November 2006 Report by the General [sic] Accountability Office ("GAO") ....

I respectfully request each of you to respond to me by close of business on June 11, 2007, as to whether you support or oppose completing any review of special access issues necessary to adopt an Order revising such rules by no later than September 15, 2007.

Markey's facts are wrong and his prescription will harm rather than promote competition.

The Government Accountability Office report Markey cites carefully acknowledges, on pg. 13, for example, that it is talking about average list prices. Actual contract prices have declined.

[O]ur analysis shows that most contracts (emphasis added) provide discounts that, coupled with CALLS Order decreases in phase I areas, can eliminate any increases in the list prices and result in an overall decrease in price when compared with prices that existed prior to pricing flexibility .... Average revenue for channel terminations and dedicated transport for DS-1 and DS-3 has generally decreased over time, although the decline in average revenue for channel terminations is larger in phase I areas compared with phase II areas.

The report notes on pg. 32 that rates have declined 5-6%.

What about the bankruptcies of many competitive local exchange carriers and the mergers of the super-carriers? They are simply a sign that the market is becoming more efficient, which is good for consumers. Fewer suppliers can be a problem if barriers to entry are high, but the GAO report notes that a competitor need only sign up a couple customers to justify the cost of extending their own facilities to a building:

[R]epresentative from one firm estimated that they would need three to four DS-1s of demand, while representatives from two other firms estimated demand of greater than 2 DS-3s was required. However, one incumbent firm and one cable company noted that the necessary revenue to extend a nearby network into a building is relatively low.

Cablevision and Time Warner are making "major pushes" to offer packages of phone, TV and high-speed Internet service to small and midsize businesses, according to the Wall Street Journal, and Comcast has said that offering services to small and midsize businesses will be its top new priority of 2007 and 2008.

Markey's letter notes that special access pricing is of particular concern to his friend Sprint Nextel -- it's trying to cut costs, like everyone else. Somebody should have told Markey that Sprint already has a plan for dealing with this issue. As noted in Business Week, Sprint Nextel is building its own WiMAX network to reduce the backhaul costs it pays to route calls from cell towers to switching centers. In many cases, Sprint Nextel uses special access services provided by other carriers to carry this traffic, and the investment in its own WiMAX network may enable Sprint Nextel to reduce its network operating costs by a staggering two-thirds.

The investments in new facilities by cable companies and Sprint Nextel are the direct result of the FCC's current focus on deregulation. For example, the re-designation of DSL as an "information service" and franchise reform have empowered AT&T and Verizon to aggressively compete for the cable companies' TV and broadband customers. The cable companies, in turn, are looking for new markets to enter to sustain their growth. Similarly, the FCC's deregulation of dedicated special access services has led Sprint Nextel to invest in network construction, rather than buy more lobbyists in an attempt to preserve favorable regulation.

Policymakers should applaud these developments, and set a timetable for the complete elimination of all remaining special access price-controls. Proponents agree they should be eliminated someday, when the market is "truly" competitive. But true competition is in the eye of the beholder.

Randy May at the Free State Foundation has written an excellent paper on the regulation of special access which talks about how it is impossible for regulators to, in the words of the FCC, "time the grant of pricing flexibility relief to coincide precisely with the introduction of interstate special access alternatives for every end user."

If policymakers want to do something to help the CLECs, they may want to check out the GAO report at pg. 27. There, GAO underscores that competitors do face some serious problems that have nothing to do with incumbent phone companies: Some cities have moratoriums on the construction of new telecom facilities. And some building owners try to charge the competitors for accessing their buildings or deny access altogether. But the question is: should the investors, employees and customers of the incumbent phone companies be called upon to offset these disadvantages? The answer is no. Not when the FCC has authority to preempt local regulation which inhibits competition and when building tenants can demand from their building owners access to competitive alternatives.


See: "FCC Needs to Improve Its Ability to Monitor and Determine the Extent of Competition in Dedicated Access Services," GAO-07-80 (Nov. 2006)

See: "Cable Firms Woo Business In Fight For Telecom Turf," by Peter Grant,Wall Street Journal," Jan. 17, 2007

See: "Sprint's Secret to Cost Cutting: WiMAX," by Olga Kharif, Business Week, Dec. 27, 2006

See: "Special Access and Sound Regulatory Principles: The Market-Oriented Case Against Going Backwards," by Randolph J. May, Perspectives from FSF Scholars, Vol. 2, No. 16, Jun. 4, 2007

May 22, 2007
Twombly shot down

The Supreme Court rejected the argument that a conspiracy in restraint of trade can be inferred from the parallel behavior of competitors.

As to the ILECs' supposed agreement to disobey the 1996 Act and thwart the CLECs' attempts to compete, the District Court correctly found that nothing in the complaint intimates that resisting the upstarts was anything more than the natural, unilateral reaction of each ILEC intent on preserving its regional dominance.
A contrary ruling would have subjected every business entity to antitrust liability merely because it has a similar business plan as that of its main competitors, thus imposing an "originality for the sake of originality" mandate on the marketplace.

The case is Bell Atlantic Corp. v. Twombly, which is discussed here, here and here.

April 6, 2007
"National strategy" for broadband?

Japan has 7.2 million all-fiber broadband subscribers who pay $34 per month and incumbent providers NTT East and NTT West have only a 66% market share. According to Takashi Ebihara, a Senior Director in the Corporate Strategy Department at Japan's NTT East Corp. and currently a Visiting Fellow at the Center for Strategic and International Studies here in Washington, Japan has the "fastest and least expensive" broadband in the world and non-incumbent CLECs have a "reasonable" market share. Ebihara was speaking at the Information Technology and Innovation Foundation, and his presentation can be found here. Ebihara said government strategy played a significant role. Local loop unbundling and line sharing led to fierce competition in DSL, which forced the incumbents to move to fiber-to-the premises.

Others have taken a slightly different view. Nobuo Ikeda, formerly a Senior Fellow with Japan's Research Institute of Economy, Trade and Industry, says that the "success of Japan's broadband has been brought about by such accidental combination of a Softbank's risky investment and NTT's strategic mistakes." Ebihara acknowledges that the results of the unbundling regulation have been "mixed" in terms of competitors investing in their own local switching and last-mile facilities, as the U.S. discovered for itself.

The whole point of Ebihara's lecture was that the U.S. doesn't have what he and others consider a national broadband strategy. Never mind that Verizon already plans to spend $23 billion to construct an all-fiber broadband network, which will pass up to 18 million homes by 2010, according to USATODAY. And AT&T is spending $4.6 billion to deploy VDSL to 19 million homes by 2008.

Viewed in hindsight, and not because the Bush Administration has done a particularly good job touting its own success, a clear strategy emerges. It consists mainly of relief from unbundling regulation for fiber deployments; flexibility to offer broadband services a common-carrier basis, a non-common carrier basis, or some combination of both; and national guidance for local franchising authorities.

When, on Feb. 20, 2003, the FCC set new rules for telephone network unbundling which freed fiber-to-the-home loops, hybrid fiber-copper loops and line-sharing from the unbundling obligations of incumbent carriers, then-SBC Communications (now AT&T) and Verizon quickly responded. Verizon announced it would begin installing fiber to the premises (FTTP) in Keller, Tex. and that it planned to pass "about 1 million homes in parts of nine states with this new technology by the end of the year." SBC outlined its own plans to deploy fiber to nodes (FTTN) within 5,000 feet of existing customers in order to deliver 20 to 25 Mbps DSL downstream to every home (amd that it would construct fiber to the premises for all new builds. SBC projected that FTTN deployment can be completed in one-fourth the time required for an FTTP overbuild and with about one-fifth the capital investment. Verizon subsequently announced it would hire between 3,000 and 5,000 new employees by the end of 2005 to help build the new network, on which it planned to spend $800 million that year. And that it planned to pass two million additional homes in 2006.

It may look like these major investment decisions didn't depend on subsequent deregulatory actions -- such as the Jun. 27, 2005 decision of the Supreme Court in NCTA v. Brand X Internet Services -- clearing the way for the FCC, on Aug. 5, 2005, to eliminate the requirement for telephone companies to share their DSL services with competitors. The FCC decision finally put DSL on an equal regulatory footing with cable modem services. However, it began to emerge as early as 1998 -- in an FCC Report to Congress -- that asymmetric regulation between the broadband offerings of the telephone companies versus their competitors would be impossible to sustain as a matter of logic. A decision by the U.S. Court of Appeals for the Ninth Circuit in 2000 all but confirmed this. Thus, it was possible to foresee that either cable would have to be regulated or the phone companies would have to be deregulated. When cable modem service achieved a higher market penetration than DSL, and given the Bush administration's preference for less regulation, it became possible to anticipate that DSL would ultimately be deregulated.

The FCC didn't enact national guidelines for local franchise authorities until Dec. 20, 2006, however there was a long history of abuses by local franchise authorities. In a report to Congress in 1990 the FCC said that "in order '[t]o encourage more robust competition in the local video marketplace, the Congress should ... forbid local franchising authorities from unreasonably denying a franchise to potential competitors who are ready and able to provide service.'" Despite howls of protest from local officials, Congress imposed limits on the franchise authorities in the Cable Act of 1992. Similar abuses began showing up when the telephone companies looked serious about upgrading their broadband services. After months of discussion, the FCC began the proceeding which resulted in the current guidelines in Nov. 2005.

There's more to be done. Spectrum policy, in particular, remains mired in special-interest broadcaster and public safety politics and must be fully sorted out. But it's not clear the U.S. should follow the costly Japanese model, with its heavy reliance on tax breaks, debt guarantees and subsidies (see, e.g., this). And don't forget that Japan had zero interest rates. Industrial policy leads to higher costs, because taxpayers are footing the bill. It also relies on policymakers, who usually understand the least about technology. Consider this poignant example, as noted by Philip J. Weiser:

It was the threat of Japan's rise in the 1980s that spurred the course toward digital television that the United States still follows today. Washington committed wide swaths of spectrum to digital television, leaving U.S. mobile-phone providers with less bandwidth than they needed and only about half the amount of their European counterparts. The entire effort assumed that Americans would continue to watch television shows broadcast over the air. Yet over the past two decades, more U.S. consumers have begun to watch cable and satellite television, undermining the rationale for this expensive policy, which has also delayed innovation and imposed unjustifiable costs on the nation.

March 30, 2007
Podcast on patent reform and FreeConference v. AT&T
This week in the Tech Policy Weekly podcast, Jerry Brito, Drew Clark, Tim Lee and I discuss patent reform, FreeConference's antitrust suit against AT&T and e-voting.

On patent reform, I observed that the momentum for fundamental reform reminds me in some ways of the eagerness for telecom reform in the mid 1990s. The Telecommunications Act of 1996 created many problems, demonstrating the inevitability of unintended consequences. Meanwhile, the Supreme Court has stepped up to the plate and has a chance to recalibrate the patent system without major reform. I'd like to see what the Supreme Court does, and hope Congress takes it's time. A long time.

I'm not sure what to make of FreeConference v. AT&T. As Tim Lee points out, in effect, FreeConference appears to have been thwarted in an arbitrage scheme. I wonder why FreeConference hasn't filed a formal complaint with the FCC alleging a violation of the commission's rules or policies (the commission has a net neutrality policy, though you might never know it from the left-wing hype promoting net neutrality regulation). Last time the FCC considered a similar complaint it acted expeditiously against a midsize phone company named Madison River Communications. Why didn't FreeConference file an FCC complaint? Instead it has brought an antitrust claim in federal district court. That may take longer to resolve, and leads me to wonder what is FreeConference seeking here? Is it primarily interested in a cease-and-desist order -- which the FCC could issue -- or perhaps in a broader settlement agreement, or, possibly, some kind of ongoing publicity value. I don't know.

The podcast is here.

March 15, 2007
FCC is Backsliding

A Federal Communications Commission staffer reports that commissioners are considering a 30% cap on the number of households a single cable operator may serve. Multichannel News notes that a cap would primarily affect one company:

Citing Kagan Research, Comcast recently told the FCC that it serves 26.2 million subscribers, or 27% of the country's 96.8 million pay TV subscribers. Under a 30% cap, Comcast could, in a few years, find itself refusing service to customers seeking to sign up for its fast-growing voice-video-data triple-play bundle. The 30% cap would also effectively block Comcast from buying a cable company with more than 3 million subscribers.
If cable operators were the only source of video programming, it might make sense to have a rule like this. But, as everyone knows, they aren't. There are the broadcasters, the Direct Broadcast Satellite providers and now the big telephone companies and the Internet. It's hard to imagine any one company dominates this media galaxy. But if so, that's why we have the Antitrust Division.

Intuitively, some people feel if we have more cable TV owners and CEOs, it stands to reason we'll get more diverse views and programming. In reality, most investors and managers are motivated not by individual political, cultural or artistic agendas, but on serving customers, i.e., providing whatever sells. Others recall that, for whatever reason, back when we had heavy-handed regulation television seemed much more "tasteful" than it does today. But that's only because society's values used to be different. It's impossible to legislate taste and morality.

A 30% cable cap will allow the FCC to extort anything it wants from Comcast, the only cable company with a market share approaching 30%. Because, eventually, Comcast will need to seek a waiver. We don't know who will be running the FCC when that happens, nor what their political, cultural or artistic agenda may be.

March 6, 2007
Growth and Jobs for Europe?

EUROCHAMBRES, the association of European chambers of commerce, has a new report out measuring the EU's progress achieving its ambitious plan of becoming "the most dynamic and competitive knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion, and respect for the environment." Unfortunately, the report concludes that the EU is still losing ground.

In two years' time, the gap EU-US (sic) has widened for all economic indicators:
  • Income (GDP per capita). The current EU level for income was achieved by the US in 1985. Since the first edition of the study, the time gap has increased by 3 years;

  • Employment and R&D. Both the current EU levels for employment and R&D investment per capita were reached by the US in 1978. (+3 years and +5 years respectively);

  • Productivity (GDP per employed). The current EU productivity level was achieved by the US in 1989 (+3 years).

  • The current EU level of Internet users per capita was reached by the US in 2002. The gap for this indicator was assessed for the first time in this edition of the study.

  • European leaders are attempting to overtake the U.S. without cutting taxes or reducing regulation. That's what they mean when they talk about sustainable economic growth, social cohesion and respect for the environment. I hope they're successful, but I fear they've set unrealistic goals and will continue to punish innovative American companies as a result. After accusing Microsoft of market dominance for commanding a mere 34% of the server market in the aggregate, European Union regulators have turned their attention to other successful American companies. Qualcomm, which offers discounts on bundled products, and Intel, which offers volume discounts, are both under investigation as a result of complaints the EU has received from American and European competitors. This is because the current generation of European leaders, like their mercantilist forbears, possess a vision of finite possibilities in which one country's success comes at the expense of another's. At least that's how I interpret the following passage from a high-level report prepared by the EU in 2004:
    Europe has to develop its own area of specialisms, excellence and comparative advantage which inevitably must lie in a commitment to the knowledge economy in its widest sense -- but here it is confronted by the dominance of the US. The US threatens to consolidate its leadership. The US accounts for 74 % of top 300 IT companies and 46 % of top 300 firms ranked by R & D spending. The EU's world share of exports of high-tech products is lower than that of the US; the share of high-tech manufacturing in total value added and numbers employed in high-tech manufacturing are also lower. In a global economy, Europe has no option but radically to improve its knowledge economy and underlying economic performance if it is to respond to the challenges of Asia and the US.

    In fact, "economic integration runs deep," as the EU commissioner for the internal market and services, Charlie McCreevy, noted this week in a Wall Street Journal column comparing Sarbanes-Oxley to the Europe's more cautious approach in regulating financial markets. The EU resisted the temptation to impose Sarbanes-Oxley regulation and this is a key reason their capital markets are thriving and outperforming ours as a result. Some Europeans are celebrating, but McCreevy pointed out "anything that hurts U.S. capital markets also hurts European companies and our economy." That's how the U.S. and the EU need to view antitrust and competition policy. Since we're economically integrated, anything that harms innovation on one side of the Atlantic hurts companies and the economy on the other side. And obviously the reverse also must be true.

    January 18, 2007
    EU vs. Intel

    Staff at the European Union's Competition Directorate are recommending formal charges against Intel, according to the Wall Street Journal.

    At the heart of the EU case are AMD's allegations that Intel withholds rebates from computer makers when they buy too many AMD chips. "It is simply a coercive tactic," Tom McCoy, AMD executive vice president for legal affairs, said this month.
    Forbes is reporting that AMD's complaints include the offering of rebates to computer manufacturers for shutting out AMD and allegations that Intel has engaged in predatory pricing aimed at keeping AMD's competing CPUs (central processing units) out of the market. Intel denies these charges.

    This could just be negative spin for volume discounts. Intel, or any other firm, offers volume discounts to induce further sales. The discounts are justified because higher sales volumes lower unit production costs. Predatory pricing occurs if the discounts reduce the sale price below the cost of production. Predatory pricing is inefficient. Assuming, that is, that we're talking about Intel's cost of production and not AMD's. Sometimes what the complainant is really saying is it can't make a profit, so it assumes the defendant's price is below-cost. Besides, if it can't make a profit then it will go out of business and the defendant could raise its prices with impunity. Sounds scary. Problem is, the remedy would be awful. If we required the most efficient firm in a market to set its prices high enough to allow the least efficient firm to make a profit, we would wind up with a cartel where prices constantly rise, quality falls, innovation suffers and everyone except the consumer is fat and happy. Since Intel can't possibly know what AMD's cost of production is, we either have to accept collusion or accept that Intel will attempt to avoid further legal trouble by setting its prices in a safe zone, which is likely to be well above its costs. These are some of the reasons antitrust law doesn't protect less efficient firms, since to do so would saddle consumers with higher prices.
    Competition law as practiced by the EU provides far more scope than our own antitrust jurisprudence for enforcers to intervene in the market in search of perfection. Yet Competition Commissioner Neelie Kroes'ds summation of her own philosophy is consistent with our approach,

    My own philosophy on this is fairly simple. First, it is competition, and not competitors, that is to be protected. Second, ultimately the aim is to avoid consumers harm.

    Trouble is, the EU is trying to make Europe more competitive without making it more efficient.

    January 16, 2007
    Microsoft and net neutrality regulation

    Life is about "repeating the same mistakes" in different contexts, says Larry Lessig. In the current issue of Wired, the Stanford law professor compares the prevailing wisdom in the 1990s that Microsoft's operating system would chill competitive innovation in the software industry with the current popular wisdom that we need net neutrality regulation to prevent broadband providers from blocking any use of the Internet which threatens their bottom line. Regulatory enthusiasts didn't in the 1990s foresee the success of Linux, according to Lessig, and they may not appreciate the significance of municipal networks.

    According to, there were 312 cities and counties in the U.S. with networks up and running, or in the deployment or planning phase at the end of 2006. The number of cities and counties issuing RFPs and deploying networks has tripled since July, 2005.

    Lessig is skeptical municipal networks will check the power of broadband providers, but concedes they must have potential or else broadband providers wouldn't oppose them. To be fair, most broadband providers oppose the possibility that local officials will subsidize municipal networks directly or indirectly. The proliferation of municipal networks demonstrates there's a thriving broadband alternative which consumers could use to bypass any telephone, cable or wireless company which discriminates against particular Internet applications or services. Yeah, Wi-Fi may not be available everywhere. But that's the wrong yardstick to measure whether the broadband market is so concentrated as to require net neutrality regulation. Analysts at the big broadband providers and in the investment community look both at where municipal broadband already exists today and where there could be sufficient demand for it to exist tomorrow. If broadband providers turn their networks into walled gardens, there will be lots of demand everywhere. Broadband providers won't do that. They won't give municipal Wi-Fi an enormous competitive advantage.

    January 8, 2007
    Status of merger conditions unclear

    Jonathan S. Adelstein

    AT&T's opponents may not get everything they thought they had from the FCC's review of the AT&T/BellSouth merger. The process was a disgrace, as I discussed here and elsewhere leading up to the final decision. No federal or state regulator identified any competitive or public interest harms, yet Commissioner Jonathan S. Adelstein and Commissioner Michael J. Copps leveraged the process to deliver cash to state and local officials, unwarranted discounts to AT&T's competitors and 3,000 previously outsourced positions to the labor unions.

    AT&T also volunteered to maintain "a neutral network and neutral routing in its wireline broadband Internet access service," subject to certain limitations. I argue that a nondiscrimination principle applied to the Internet would outlaw the partnership, bundling and pricing strategies that are the basis for all advertising efforts (see, e.g., this and this).

    Continue reading "Status of merger conditions unclear" »

    December 22, 2006
    Michigan adopts statewide video franchise relief

    HB 6456 -- the bill which would streamline video franchising in Michigan -- was signed into law by Gov. Jennifer Granholm, who noted that she expects it to create 2,000 jobs.

    Michigan becomes the 11th state to reform video franchising.

    December 20, 2006
    FCC fixes video franchising

    The FCC finally approved a long-overdue reform of anticompetitive video franchise rules by a vote of 3-2 after nearly a year of study. An Order will be issued sometime within six months. Grasping local officials won't be able to drag out negotiations over franchise agreements with video service providers until the exhausted applicants capitulate to legal blackmail, a process which sometimes takes a year or two. Now, the negotiations will have to be completed within 90 days.

    The deregulatory milestone is a victory for consumers, who will benefit from more rapid investment in competitive video offerings by AT&T and Verizon. It will also further reduce the possibility that broader telecom reform legislation will move through the next Congress, meaning fewer options to enact net neutrality regulation or pump up the current unsustainable universal service regime (which could lead to taxation of Internet traffic).

    Continue reading "FCC fixes video franchising" »

    October 28, 2006

    Here is more proof that cellphones compete with landline phones, and it's not from the usual industry or FCC sources:

    Most polls depend on land-line phones, but one in 10 adults now has only a cellular telephone. That poses a potential sampling problem, since nearly half of voters with only a cellular phone are under 30 years old, compared with 13% who have land-lines[,]

    according to the Wall Street Journal.

    October 19, 2006
    AT&T-BellSouth merger nears approval

    Thomas O. Barnett, Assistant
    Attorney General for Antitrust

    Antitrust enthusiasts thought they scored a coup in 2004 when they persuaded Congress to encourage the courts to conduct more assertive reviews of corporate mergers (with rights of participation for gadflys, busybodies and other pests) pursuant to the Tunney Act (see my previous post). Apparently, the move was too clever by half. The Antitrust Division sidestepped this feature of the Tunney Act completely by approving the AT&T-BellSouth merger with no conditions. The New York Times claims the Bush Administration has abdicated its responsibility to act as a "referee," as if one is needed. The newspaper complains the administration hasn't brought a single major monopoly case under the Sherman Act, as if that proves anything. Most amusing of all, it notes that career officials were "demoralized" when the administration cleared Whirlpool's acquisition of Maytag, inferring this could happen again. The Times didn't explain the relevence of that. Apparently, some believe, bureaucrats ought to be able to perform their jobs as they see fit, or at least their judgment is superior to elected politicians or officials who've been confirmed by the Senate.

    Continue reading "AT&T-BellSouth merger nears approval" »

    May 2, 2006
    Twombly's conspiracy theory

    Imagine if you ran a business and independently came to the same conclusion as your competitor about the products you would offer and the customers to whom you would offer them? That would be called "conscious parallelism," a result of legitimate shared economic interests. That's always been perfectly legal. Well, there are some trial lawyers who believe that parallel business behavior is or could be proof of conspiracy, which would be a violation of the Sherman Antitrust Act.

    The Court of Appeals for the Second Circuit agreed in a case called Twombly v. Bell Atlantic. The Supreme Court is now considering a petition for certiorari. The case alleges that the Bell operating companies "conspired" not to compete against one another for local telephone service, but there is no proof.

    The absence of proof is entirely understandable. The explanation for the Bells' conduct is simple: Pervasive regulation skewed the benefits and risks of investment. The Bells eagerly pursued the opportunity to enter the long distance market, because for years regulation allowed fat profit margins despite declining costs. The Bells avoided local competition in each others' markets because regulation kept prices below cost or because the UNE-P fiasco rendered significant facilities investment uneconomical.

    April 26, 2006
    Microsoft v. EU, Part 1

    Microsoft's legal challenge to the European Commission's antitrust ruling got underway this week in the European Court of First Instance. At issue on the first day of the hearing was the requirement that Microsoft separate its media player from its operating system. The commission's ruling and subsequent enforcement gets more absurd every day, and I can't imagine it would have been taken seriously by any competent court of law in the U.S.

    Jean-Francois Bellis, an attorney for Microsoft, told the court that 1,787 versions of Windows without Media Player (Edition N) have been ordered, compared with 35 million versions of Windows with Media Player, the Financial Times reports. The lawyer for the European Commission conceded that "I am afraid we cannot say our remedy has had any real impact, as far as we can see," according to the the Times of London. Then he hinted that the commission may regulate how Microsoft prices the two products, according to the International Herald Tribune, to entice consumers who otherwise lack any compelling reason to buy the stripped-down version. This case is thus a classic example of regulatory quicksand, or the inexorable tendency of regulation to degenerate into micromanagement.

    This all may seem like good news to Microsoft's competitors, but its certainly a defeat for consumers and investors. When bureaucrats, here or there, attempt to suspend the laws of supply and demand, we all suffer.

    Does the Bush Administration realize this?

    March 29, 2006
    EU Treating Microsoft like a Utility

    Microsoft has been warned by Commissioner Neelie Kroes of the European Union that there are some features it should not bundle into its new operating system (see, e.g., "European regulator warns Microsoft about new operating system" from European Business News Online). The EU's competition directorate has already decided that competition could be costly and involve risk for Microsoft's competitors. Yes, it sounds ridiculous -- but essentially that's what it is. Kroes' warning may indicate that Microsoft is losing its freedom to innovate and in effect will now be required to obtain preapproval from the EU for any new product design. If so, the EU could be doing to Microsoft what the FCC did to the Regional Bell Operating Companies by forcing them to share every element of their business. Commenting on the folly of the FCC's grand strategy to achieve a state of perfect competitive equilibrium in telecom, Justice Breyer noted that forcing firms to share every resource creates "not competition, but pervasive regulation."

    March 6, 2006
    "There you go again"

    One of history's great propaganda experts believed that if you repeat a lie often enough it becomes the truth. A lot of politicians follow this advice.

    The Consumers Union and the Consumer Federation of America endlessly wave the same bloody shirt of higher phone rates. The latest incantation is:

    "If approved, [the] merger [between AT&T and BellSouth] will lead to higher local, long distance and cell phone prices for consumers across the country."

    This is absurd because AT&T and BellSouth do not compete against each other for local or mobile phone services. And any competition between them in long distance is de minimis. The consumer groups see these companies as potential competitors. They have argued unsuccessfully for years that antitrust enforcers should take a more active role protecting and nurturing potential competition. This would require a clairvoyance that government simply does not possess.

    The consumer groups also repeat their second most frequent remark:

    "Telecommunications has now gone from a regulated monopoly to an unregulated duopoly with just two major players."

    The implication seems to be that there is barely any difference between a monopoly and a duopoly. Sometimes that's true, but a fact-specific analysis is required. The answer depends on the barriers to entry. Telecom used to bear the hallmarks of a "natural monopoly" where the barriers were very high. But technology has led to plummeting costs for network equipment and Congress eliminated the legal barriers in 1996. So any company who abuses a dominant position will simply invite competitive entry.

    VoIP and cellphones are destroying traditional wireline phone services as the phone companies invest everything they can to become broadband providers. This has got to be one of the most dynamic markets in the world today. Why would anyone want to turn back the clock?

    March 3, 2006
    Texas consumers score

    A survey conducted by the American Consumer Institute documents significant consumer savings as a result of the statewide franchise legislation enacted in Texas. For example:

    "The benefits claimed by those who switched were very substantial. According to the survey, customers that claimed benefits from switching to a competitor saved, on average, $22.50 per month on their cable bill, and those switching to any provider saved, on average, $22.27 per month. This suggests that price competition is occurring among the providers. For these customers, the savings represented approximately a 30% decrease in price, which is nearly identical to the FCC's estimate of 27% lower price per channel in competitive markets (footnote omitted). From this, we can safely assume that the new competitor dropped prices and incumbents responded -- either preemptively or post-entry -- by offering similar discounts. The result is that competitive entry has led to heightened price competition, and, as a result, consumers are saving."

    February 24, 2006
    Barton, Pickering & Upton to the rescue

    House Energy & Commerce Chairman Joe Barton (R-TX), along with Reps. Chip Pickering (R-MS) and Fred Upton (R-MI) have an alternative plan in mind for cable franchise reform, according to this afternoon's National Journal's Technology Daily ($). Like the Dingell plan, the Republican vision includes a national franchise according to which new entrants would pay the customary 5% franchise fee to localities. But the Republican is superior in two critical respects:

    • No build-out requirement.
    • No requirement to negotiate with local franchise authorities as a pre-condition to obtain a national franchise.

    It may sound counterintuitive, but the absence of a build-out requirement is actually better for consumers because it reduces investment risk. Tens of billions of dollars are necessary to extend fiber to the neighborhood or to the home. That investment won't happen if new entrants are subjected to monopoly regulation.

    A negotiation requirement, like the one in the Dingell plan, is a waste of time and just increases the likelihood that new video entrants will have to charge higher prices than necessary.

    Technology Daily also repeats an earlier report that "net neutrality" is dead, at least for this session of Congress. There is too little time and the issue strikes many as too complicated.

    Actually, it is quite simple. Clear away the major obstacle to massive investment in local fiber network capacity (the anachronistic local franchise process) and let abundant new bandwidth do away with the need for Quality of Service algorithms.

    February 23, 2006
    Dingell franchise idea could be better, could be worse

    A draft franchise reform proposal authored by Ranking Member John Dingell (D-MI) of the House Energy & Commerce Committee, details of which were reported in today's Communications Daily ($), increases the likelihood that final legislation would:

    • Allow new video entrants to avoid in-kind contributions to cities (currently averaging approx. 3% of gross revenues) on top of the customary 5% (of gross revenues) fee,
    • Would give the new entrants 10 years to provide their service to every household, and
    • Allow the incumbent cable operator to opt in to the streamlined process as soon as the new entrant has a 15% market share.

    Dingell, who has traditionally defended the cities on franchise issues -- and intends to do so again -- reportedly would establish a default national franchise which would kick in if negotiations between a city and a new video entrant fail. The proposal would also establish a 90-day deadline for negotiations, although either side could restart the clock.

    Build-out requirements, although anticompetitive, are defended as necessary to protect consumers. This proposal demonstrates how in fact they are simply a type of negotiating leverage for the cities. If a new entrant chooses to walk away from the negotiations and opt for the default national franchise, it would be stuck with a 10-year build-out requirement while the city would lose any opportunity for in-kind contributions. Clearly, the negotiations are seen as an opportunity for new entrants seeking more favorable build-out terms to contribute to the favorite charities of local officials as a quid pro quo.

    Supporters of this process of give and take pretend that there are no victims, which there are. The contributions will be recovered through higher prices for competitive video services, so the in-kind contributions are properly understood as a hidden tax.

    February 16, 2006
    Franchise reform countdown

    This week's hearing on local franchising in the Senate Commerce Committee was breathtaking. Senator after senator expressed doubts about the wisdom of subjecting new entrants to the cable franchise process. Consumer advocates generally supported the phone companies. The same day, a group of 6 Republicans and Democrats on the committee signed a letter stating that Congress should reform the franchise process.

    "I think the stars are aligned," noted Senator Jay Rockefeller (D-WV).

    One gets the impression that the cable industry hasn't been paying attention for the past 25 years, as they take positions and employ arguments that monopolists have used in the past with little-to-no success (see, e.g., Deal of the Century: The Breakup of AT&T [1987], by Steve Coll).

    Most members of the Senate Commerce Committee are committed to "pro-competition" policy, a result-oriented philosophy that embraces regulation and allows for picking winners and losers. A good example of pro-competition doctrine was the observation made by the Consumer Union's Gene Kimmelman at the hearing, that "a transition always requires some benefits to the new entrant."

    This is also called asymmetric regulation, and it may produce quick results. But those results can be short-lived -- as in the case of CLECs -- since inefficient compeititon is unsustainable in a deregulated market. Both the telephone and cable companies are big enough to take care of themselves, and, like Senator Conrad Burns (R-MT) said, should be subject to the same rule book.

    This week's hearing produced a lot of consensus that a regulatory rule book would stifle competitive entry. Hopefully the committee will draw the logical inference that what is needed now is a deregulatory rule book.

    Memorable comments

    On deregulation:

    "It is ironic that cellphone service is widely available at low cost [in India] because it was regarded as a luxury and therefore left to the market, while electricity is hard to obtain because it has been regarded as a necessity and therefore managed by the government."

    --Former Council of Economic Advisors Chairman Martin Feldstein, writing in the Wall Street Journal, Feb. 16, 2006.

    * * *

    On net neutrality:

    "with or without a new law, the FCC will affect the future in a major way by its approach to the question of broadband's openness. Sometimes called net neutrality, the question of openness is multidimensional. It is hard to define and harder to answer. Chairman Martin and his colleagues have the talent, expertise, and courage to come up with the right answers on this topic."

    --Former FCC Chairman Reed Hundt, speaking at George Washington University on the 10th anniversary of the Telecommunications Act, Feb. 6, 2006.

    * * *

    On video franchising:

    "When there was no competition to the telephone and cable companies, local governments could tax and over-regulate both of them and use the extracted revenues for perks and to cross-subsidize consumers or finance unrelated public services. Cable television and phone companies submitted to this over-regulation and over-taxation because their government-sanctioned monopolies meant they could recover their investment by raising prices. Consumers had no choice but to pay. But cable tv and telephone companies are no longer monopolies."

    --Senator Jim DeMint (R-S.C.), at the Senate Commerce Committee hearing on local franchising, Feb. 15, 2006.

    February 8, 2006
    Industry reaffirms commitment to free Internet

    Yesterday the head of the trade association representing most of the nation's telephone companies testified that telephone companies will not block, impair or degrade what consumers and vendors can do on the Internet.

    "Today, I make the same commitment to you that our member companies make to their Internet customers: We will not block, impair, or degrade content, applications, or services. That is the plainest and most direct way I know to address concerns that have been raised about net neutrality."

    --Walter B. McCormick, Jr.
    President and Chief Executive Officer
    United States Telecom Association
    February 7, 2006

    As a practical matter, a voluntary commitment is significant because it is a de facto standard by which the actions of individual companies will be measured by consumers, investors, regulators, legislators, judges and the press. The mistakes and excesses become easier to fix because the range of what is subjectively okay and not okay is significantly narrowed. As if this weren't enough, the FCC has a similar policy. Some argue that the FCC's "ancillary jurisdiction" may limit its freedom of action to enforce the policy. I completely disagree. In 1968, the Supreme Court upheld the FCC's use of ancillary jurisdiction to regulate the cable industry even though Congress had declined to pass a cable act. If the FCC needs to take enforcement action in the future to prevent blocking, impairment or degradation on the Internet, a reviewing court now has a standard as well as precendent to follow.

    To the extent that net neutrality was ever a problem, it has been effectively solved.

    November 16, 2005
    EU Threatens Innovation in Action Against Microsoft

    Microsoft's work group server competitors claim they can't keep up with the complexity of Microsoft's product upgrades.

    "We are, in many fields, ten years behind Microsoft. And the lag is growing with every new step Microsoft takes"

    according to Volker Lendecke of the Samba Users Group, an organization dedicated to free software that anyone can copy.

    Continue reading "EU Threatens Innovation in Action Against Microsoft" »

    October 28, 2005
    Video, Franchising

    Great Wall Street Journal article (sub. req.) demonstrating the absurdity of making telecom companies go through the silly process of local video extortion, er, franchising that cable TV companies had to endure 25 years ago. Here's the lede:

    Last year Verizon Communications Inc. lawyers went to city hall in Tampa, Fla., for permission to offer television service over the phone company's new high-speed network. City officials presented them with a $13 million wish list, including money for an emergency communications network, digital editing equipment and video cameras to film a math-tutoring program for kids.

    Frustrated, Verizon officials suspended their talks and decided to try another tack. The company soon persuaded Temple Terrace, a small neighboring community, to roll out the new technology. It began running radio and newspaper advertisements in Tampa, arguing that if residents want more television choices, they should move to Temple Terrace.

    All over the country, Verizon is squaring off against local governments, as it embarks on a high-stakes upgrade of much of its network. Aiming to offer Internet, phone and television services, Verizon plans to spend up to $20 billion to lay thousands of miles of fiber-optic wires across its East Coast service area from Maine to Florida and into parts of Texas, California and elsewhere.

    This is all too familiar. When I was about six years old, my grandfather and father built the cable TV network in my small Indiana hometown, and I still remember about two years worth of dinner conversations consumed by talk of the "Cable Wars."

    -Bret Swanson

    October 27, 2005
    Video franchise reform gets push from Martin

    "Section 621 of the statute prohibits local authorities from granting exclusive franchises and from unreasonably refusing to award a second franchise."

    FCC Chairman Kevin Martin told a trade group yesterday that the FCC should fulfill Congress’s directive that franchising authorities not grant exclusive franchises or unreasonably refuse to award additional competitive franchises. He has circulated a Notice of Proposed Rulemaking to his colleagues and plans for the Commission to consider the item next month.

    This is exactly the right thing to do, but it will be very controversial. Irrational local officials want to be able to tax IPTV to death and then blame the industry for taking too long to wire their communities.

    Congress should provide cover for Martin and the FCC -- unless it would rather wade into this mess itself. Fortunately, there is a bipartisan vehicle. S. 1349 by Senator Gordon Smith (R-OR) and Senator Jay Rockefeller (D-WV) would allow telephone companies to deploy competitive video services pursuant to their existing authority to access public rights-of-way and pay fees to a local franchise authority based on their gross revenues from video services.

    Senate Commerce Chairman Ted Stevens (R-AK) has expressed concern that the current franchising morass "could be very costly and, really, ultimately, kill competition ... it’s also going to increase the price considerably to the consumer." He should schedule a hearing on the Smith-Rockefeller bill. Congressional action would send an important signal to local franchising authorities and improve the chances of an FCC fix.

    Ultimately, of course, the solution is to enact the Ensign bill (S. 1504) which, among other things, would outlaw video franchises.

    October 5, 2005
    Net Testimony in Hoosierland

    On Monday morning I testified before the Indiana Joint Committe on Regulatory Flexibility. Sexy, I know. I was joined by Ray Gifford and John Rutledge of the Progress and Freedom Foundation. Some 30 legislators listened as Rutledge expertly surveyed the global economic scene, with emphasis on energy, telecom, and Asian growth. I described the American technology scene and tried to show how a number of recent events -- eBay's purchase of voice-over-IP provider Skype, Google's entry into VoIP and even wireless infrastructure, Yahoo!'s invasion of Hollywood, and the CableCos' and TelCos' invasions of each other's businesses -- make our already antiquated telecom laws and regulations more useless than ever. Ray Gifford then offered a cogent history of telecom law at the federal and state level and explained why state price controls should be abandoned, why universal service is a mess and must be reformed, and why statewide video franchising makes sense.

    Several states have now taken the lead in telecom reform -- Texas, Oklahoma, and Missouri, among them -- and it appears Indiana, which attempted sound legislation in the 2005 session but barely failed, may now be on an exciting track.

    In my testimony, I also critiqued new draft legislation emerging from Washington (the Barton bill) that could stifle this flood of new activity on the Net. Concepts like Net Neutrality, which could morph into a new, additional, deeply intrusive layer of FCC-enforced anti-trust are exactly the type of micromanagement the dynamic Net cannot withstand. The Barton bill also creates new definitions ("broadband video service provider") that may not make sense a few years from now, let alone today. Do we really want to apply cable TV regulations created over a decade ago to the bountiful realm of Internet content? Rep. Barton's and Sen. Ensign's telecom reform bills do have their merits, and the hope is they can be simplified into slim deregulatory efforts.

    The 1996 Telecom Act, which barely mentioned the Internet, can only fairly be judged as a disaster. Ten years later, in 2006, Congress may revise these laws. Let's get it right this time. At least the '96 Act didn't regulate the Net, as some of today's Washington efforts potentially would. We don't want to look back in 2016, as China and India have just enjoyed another decade of pro-technology hyper-growth, and ask what those silly Americans were thinking.

    -Bret Swanson

    August 17, 2005
    Competition and customer service

    The companies delivering voice, video and data services rank low in customer satisfaction, reports the Washington Post. Customer service appears to be the primary culprit. The newspaper quotes the following expert opinion: when there is competition and consumer choice, it does get better.

    Would the cable industry alone have spent almost $100 billion in network upgrades since it was deregulated in 1996 if not to compete against the satellite and phone companies? Competition is here. Customer service may not be as important as it once was, but that's because customers today can also shop for innovative products and competitive pricing.

    Gold-plated customer service existed under regulation, when government controlled price and market entry. AT&T emphasized customer service because it was under rate-of-return regulation, which meant that is was legally entitled to pass along its costs plus earn a profit of approximately 15 percent. AT&T could increase its profit every time it found a way to justify new costs to regulators' and customer service was politically popular. Oh yes, it was easy for regulators to shift the cost to long-distance and business users. That's why it was expensive to make a long-distance call. Innovation also languished. Cell phones had been invented but not deployed. Answering machines were a status symbol.

    Deregulation, though incomplete, has provided more appropriate incentives for telecom companies to strive to offer the best technology at competitive prices along with good customer service, not spend the majority of their time trying to fool regulators.

    August 3, 2005
    Monopoly, RIP

    More evidence of the intense competition selling communications services in the small and medium-sized business market.

    Finally realizing this, the FCC apparently is about to vote on the elimination of the DSL line-sharing rules that have depressed telecom investment in the U.S.

    Dotted Divider Line

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