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.
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.
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.
The NFL will show many of its own live games on its own cable channel (sub. req.) next year. No doubt games on its own Internet "channel" aren't far behind. What's a network or cable system to do?
Yesterday at a Senate hearing on media decency FCC Chairman Kevin Martin announced his support for "a la carte" cable TV pricing. In other words, pay for and receive only those channels you watch. Don't waste money on unwatched content. Choose only family-friendly channels and block violence and sex. Or vice versa, for some, I suppose. Who could oppose such common sense?
Martin's a la carte endorsement reverses former chairman Michael Powell's view that a la carte pricing economics wouldn't work for cable TV companies and that it might actually hurt consumers by raising their cable bills. Martin, previewing a new, revised FCC study, offers some compelling evidence that last year's FCC study was wrong about the economics and the impact on consumer bills.
But all of this is beside the point. In a market moving as fast as communications in general (and video in particular), is there really any reason to believe one set of FCC economists who say consumer bills will rise 2% versus other FCC economists who say bills will fall 2%?
At least two surging forces moot this debate: First, the Bell telephone companies have begun offering video services over new fiber networks and over the next five years will invest many tens of billions of dollars to stretch optical nets into homes and businesses across the country. A third major video service provider will thus have entered the market, adding further competitive pressure to the already fierce battle between cable and satellite. Prices will go down. Performance and value will increase.
The second major shift affecting this debate is a little thing called the Internet. Chairman Martin and other policymakers say they want consumers to have choice. The Internet has more choices than any medium in history. You get what you want, when you want it. There aren't 500 channels, but millions of content options, which increasingly will be not just words but rich video entertainment, sports, news, and education. Anything you can dream up. The Internet is a la carte.
Moreover, because of the Net's digital nature, blocking technologies used to keep children from the Net's admittedly large pool of rot and filth will continue to advance in sophistication and effectiveness, and will be far more dynamic in adapting to the Net than a rigid mandate from Washington.
The cable industry has reacted with predictable hesitation, saying Martin's new study is wrong. The cable industry is right to oppose any government efforts to mandate new business models or technologies in this arena. Congressional "fixes" are only likely to cement in place cable's current dedicated channel line-up and retard new business models based on the explosion of digital content and the new reality of abundant, rather than scarce, bandwidth. Cable is wrong, however, to take a reactionary stance in some naive view that they can perpetuate the current business plan for too much longer. The Internet and the new Bell optical nets are going to force major change on the cable business model long before Congress or the FCC get around to legislative or regulatory mandates. Cable should get ahead of the curve and leverage (1) its massive lead in broadband infrastructure (a gigabit running into 85% of American homes, today) and (2) its customer relationships, before it is bowled over by Yahoo!, GoogleVideo, Movielink, NFL.com, tens of thousands of digital content producers around the globe, and big new Bell bandwidth.
One more point: Just because the Internet is in general a la carte does not mean there won't be all sorts of bundled services on the Net. Whether old economy or new, bundling and unbundling products and features, and deciding what and how to price those offerings, are some of the most fundamental decisions any business makes. They are complex choices and not always obvious. Maybe I would like to pay only for the sports section of the newspaper, but Washington does not mandate that option. Similarly, I pay for a whole subscription to The Wall Street Journal online edition, even though I might not use all its features or read all its stories. The Internet will increase the possibilities for more granular transactions, but there will still be many bundles. Business executives have enough trouble deciding what their actual products and prices are. Policymakers who pretend they can do it better are in way over their heads.
Spectrum auctions were justified as a way for the “public” to receive a “fair portion” of the value of the public spectrum resource. But spectrum auctions are really just another tax which has transferred billions of dollars from the pockets of consumers to the coffers of government. The cost of spectrum licenses is fully reflected in the cost structure, and thus the pricing, of mobile phone service – as it should be. The affordability and availability of mobile phone service suffers as a result. The tendency of some politicians to view spectrum primarily as a tool for balancing the budget is a huge obstacle to affordable and universal broadband.
What’s the point? When Congress reconvenes next week, it faces the task of extending the FCC’s spectrum auction authority and, hopefully, setting a hard deadline for the return of analog broadcast spectrum. It will consider how to structure the auctions to maximize bidding, how to defray the cost of digital-to-analog converter boxes for the 19% of all households which still rely exclusively on free over-the-air television, and how to steer consumers who wish to purchase a new TV set to pay extra for a digital model. But all of this assumes that the politically-powerful broadcasters are willing to part with the spectrum.
One thing Congress will not consider is giving the spectrum to the broadcasters, letting them sell it and pay taxes on the proceeds. Some people would get rich(er), but it would be a whole lot easier
Holman Jenkins writes in today's WSJ that IPTV faces death in the need for Bells to win 33,000 separate cable franchise approvals in order to provide the service. The bad news is that there is another hurdle that could prove equally if not more constraining: Section 104 of the 1996 Telecom Act, which bars electronic redlining, a term Jenkins wrongly attributes to cable lobbyists. Actually, the NAACP coined it in the early 1990s. In the event, sec. 104 inserts "without discrimination on the basis of race, color, religion, national origin, or sex" after the phrase "to all the people of the United States" in section 1 of the original 1934 Communications Act. Read literally this means Baptists must get service at the same pace as Muslims, etc. The language is idiotic, but made it into the 1996 law because no one wanted to be called racist for opposing it.
Economically rational deployment could thus be stymied if someone sues to enforce this provision, and the Supreme Court defers to the Congress and tells them to fix it (as it should do in such event, strictly from a legal standpoint). The Supremes could help by putting "judicial gloss" on the provision, for which only redundant explanatory text exists in the Conference Report, to the effect that Congress could not have intended to preclude deployment by interpreting this provision in defiance of real-world network deployment economics. Or else the provision can sit unused, with regulators tacitly recognizing its absurdity.