The National Telecommunications Cooperative Association (NTCA) began the process of litigating the Federal Communications Commission's recent Connect America Fund Order on in the U.S. Court of Appeals for the Fourth Circuit Friday.
NTCA, which represents over 570 "locally owned and controlled telecommunications cooperatives and commercial companies throughout rural and small-town America," notes, among other things, that "[p]rovisions [of the Order] mandating an ultimate price of zero for all switched access and reciprocal compensation services, imposing retroactive and dynamically changing caps on USF-supported costs and blurring the lines between regulated and nonregulated operations are inconsistent with law."
What this particular dispute is ultimately about is not whether NTCA's members are entitled to recover their reasonable costs as a matter of law (they certainly are), but whether they should continue to be allowed to shift a significant portion of those costs to the urban and suburban customers of unaffiliated communications providers that are subject to intensive competition. Implemented to ensure reasonably comparable rates throughout the nation, this arrangement has become difficult to justify for many reasons, one of which is that, in many cases, urban and suburban consumers are forced to pay rates that are much higher than the rates charged by small phone companies who receive the subsidies.
According to the Order, two carriers in Iowa and one carrier in Minnesota offer local residential rates below $5 per month (¶235), and approximately 60 percent of small company service territories studied have local residential rates that are below the 2008 national average local rate of $15.62. (¶236). "While individual consumers in those areas may benefit from such low rates," the FCC commendably acknowledges, "when a carrier uses universal service support to subsidize local rates well below those required by the Act, the carrier is spending universal service funds that could potentially be better deployed to the benefit of consumers elsewhere." (fn. 378)
The FCC, to its credit, has acted decisively in adopting a long-overdue "bill-and-keep" framework for both inter- and intrastate telecommunications. "Under bill-and-keep," the commission has explained, "carriers look first to their subscribers to cover the costs of the network, then to explicit universal service support where necessary." (¶34) In other words, providers will no longer charge originating and terminating access fees for inter-exchange (toll) traffic. Bill-and-keep is just like an Internet peering agreement. Telecommunications providers will transition to bill-and-keep within six years for larger (price cap) carriers and nine years for smaller (rate-of-return) carriers.
There are many other wonderful reforms in the Order; unfortunately, the treatment of VoIP traffic is not one of them. The FCC has hesitated for years to rule whether VoIP is a "telecommunications" service that should bear a full measure of the burden of subsidizing legacy networks throughout rural and small-town America. Almost everyone recognizes that taxing a more efficient new technology to subsidize a less efficient legacy technology does not tend to promote innovation.
The commission has imposed subsidy obligations on some VoIP services, but not others. The resulting "lack of clarity," by the FCC's own admission, has led to "significant billing disputes and litigation," including pending disputes in a number of courts and state commissions. (¶937) I recently noted one of these, the case of Southwestern Bell Telephone Company et al. v. IDT Telecom, Inc., et al., here. The FCC further acknowledges that "the current uncertainty and associated disputes are likely deterring innovation and introduction of new IP services to consumers." (¶939)
Here, the FCC has decided to subject "toll" VoIP traffic to interstate switched access fees and local VoIP traffic to lower "reciprocal compensation" fees (note: it is still up in the air whether the VoIP services at issue in IDT Telecom are toll or local; the FCC refuses to say). Although some VoIP services may not currently be fully taxed as if they are telecommunications services (which they are not, since the FCC has declined to rule), and although all traffic, including VoIP, will ultimately be subject to a bill-and-keep framework, the commission has decided to treat VoIP as a telecommunications service for billing purposes during the 6-9 year transition. Why? Politics are politics.
By declining to apply the entire preexisting intercarrier compensation regime to VoIP-PSTN traffic prospectively, we recognize the shortcomings of that regime. At the same time, we are mindful of the need for a measured transition for carriers that receive substantial revenues from intercarrier compensation. (¶935)
Since some VoIP services currently generate less taxes than others, the FCC could have lowered taxes for all VoIP services to the lowest current level (a bill-and-keep framework is the goal, after all). Nope. The commission has resolved some uncertainty (although it has not resolved the IDT Telecom issue), in favor of more interim taxation, not less. This is a politically-driven decision which attempts to generate payoffs for politically-influential "stakeholder" groups for 6-9 years. Tributes for trolls is another way of looking at this.
The FCC's treatment of VoIP services is unsatisfactory. It does not tend to promote innovation; rather, it tends to penalize innovative new approaches for promoting consumer welfare. We now face a new round of litigation. The NTCA lawsuit is the first major challenge, and there may be others.
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.
Federal Communications Commission Chairman Julius Genachowski's criticism of intercarrier compensation in extensive remarks on telephone subsidies last week is a reminder for many states of the need to reform intrastate switched access rates.
Although Congress mandated the elimination of implicit subsidies embedded in the rates for both interstate and intrastate telecommunications services in the Telecommunications Act of 1996, it did not set a deadline. The FCC has substantially reduced interstate switched access rates in recent years, but a considerable amount of hidden subsidies remain in intrastate switched access fees.
In Florida, for example, one telecom service provider charges 5.64 cents per conversation minute for intrastate long distance versus only 1.65 cents for interstate long distance. The difference represents a hidden subsidy component that operates as a form of tax that only residents of Florida pay, since the lower interstate fees apply to calls which cross state lines.
Continue reading "States must reform rates for intrastate switched access" »
Blocking the merger between AT&T + T-Mobile is apropos of this administration's strategy for creating jobs, according to James M. Cole, the deputy attorney general.
The view that this administration has is that through innovation and through competition, we create jobs. Mergers usually reduce jobs through the elimination of redundancies, so we see this as a move that will help protect jobs in the economy, not a move that is going in any way to reduce them.
Remarkably, someone forgot to include that in the complaint filed by the Department of Justice in the District Court for D.C. The complaint itself does not allege that the merger will cost jobs, nor does it suggest that blocking the merger would create or save jobs. As a technical matter, antitrust is not concerned with job protection, although many seek to exploit it for that and other purposes. More on why that is a bad idea in a minute.
Instead, the complaint is focused specifically on the possibility that the combined company may not longer offer T-Mobile's lower-priced data and voice plans to new customers or current customers who upgrade their service.
Yet, the complaint concedes that from a consumer's perspective, local areas may be considered relevant geographic markets for mobile wireless telecommunications services. On the other hand, enterprise and government customers require services that are national in scope, according to the complaint.
Continue reading "Blocking AT&T + T-Mobile merger will not create jobs" »
 Over at Technology Liberation Front, several colleagues and I recently "debated" the proposed merger between AT&T and T-Mobile from a free market perspective. For a skeptical take on the merger, see the item by Milton Mueller. The rest of us are more optimistic.
The AT&T - T-Mobile Merger: Beyond the Arithmetic, by Larry Downes (Apr. 18, 2011)
Why I fear the AT&T-T-Mobile merger, by Milton Mueller (Apr. 18, 2011)
Open minded on the AT&T/T-Mobile merger, by Hance Haney (Apr. 19, 2011)
Information Control, Market Concentration, and the AT&T/T-Mobile Deal, by Ryan Radia (Apr. 20, 2011)
For The Last Time: The Bell System Monopoly Is Not Being Rebuilt, by Steven Titch (Apr. 22, 2011)
Continue reading "AT&T/T-Mobile merger debate" »
Julius Genachowski is in a hurry.
The chairman of the Federal Communications Commission is arguing that the commission must act quickly to "restore the longstanding deregulatory--as opposed to 'no-regulatory' or 'over-regulatory'--compact" that governed broadband Internet access services prior to a recent court decision. Such an approach is urgently needed to "restore the status quo," he claims.
If the FCC cannot regulate the Internet, it may die. The telephone and television industries are declining, whereas communications industries which the FCC monitors to some extent but does not regulate, e.g., the Internet backbone, broadband Internet access and wireless, are thriving.
Genacowski's plan would reclassify broadband as a "telecommunications" service subject to blunt, onerous, industrial-era regulation under Title II of the Communications Act of 1934 -- which governs common carriers -- and then forbear from enforcing most of Title II's heavy-handed provisions.
Broadband services haven't been subject to Title II regulation for several years, so reclassification would not restore the status quo. It would harken back to a bygone era.
Continue reading "Title II for broadband is desperate and ill-conceived" »
Late last week the Federal Communications Commission voted along party lines to open a proceeding to "seek the best legal framework for broadband Internet access," a process that could culminate in the imposition of stifling, telephone utility style regulations on America's privately financed broadband networks pursuant to Title II of the 1934 Communications Act.
A statement by Commissioner Michael J. Copps explains in more detail than the rest why he thinks regulation is necessary for achieving this country's "broadband hopes and dreams."
The FCC has been deregulating communications services in response to increasing competition for years. Copps and others believe it is necessary to reverse course, although in his statement Copps doesn't question the policy of deregulating a competitive market. He questions the facts, arguing that broadband is less competitive than it used to be. This is a misleading argument.
Continue reading "Is regulation better than competition?" »
This week Illinois Gov. Pat Quinn signed Senate Bill 107, which modernizes the Illinois Telecommuncations Act. According to a press release, Investment in broadband and wireless technology is a key to creating better jobs and providing unique educational opportunities across Illinois," said Governor Quinn. "I am proud to sign this law to encourage private investment in these critical technologies, which will put more people to work and protect consumers. Also, Ohio Gov. Ted Strickland signed Senate Bill 162, which updates Ohio's seriously outmoded telephone regulations. According to a statement by the governor, This bill is common sense regulatory reform. It modernizes Ohio's telecommunications laws, even removing more than 50 references to the 'telegraph' in the Ohio Revised Code. By reducing archaic red tape, we are making the state more competitive and sending a clear message to telecommunication businesses that we welcome your investments in Ohio. Georgia Gov. Sonny Perdue signed House Bill 168 on June 4.
Telecom regulatory reform is urgently needed to protect and promote investment, innovation and consumer choice. George Gilder and I have authored several reports (see this, this, this and this) documenting the problem and making several recommendations. The Illinois, Ohio and Georgia legislation include many of the ideas which are needed to spur critical private sector investment in broadband infrastructure which will lead to job creation and retention.
A report by Connected Nation projects a reasonably-achievable 7 percent increase in broadband adoption would produce over 105,000 jobs in Illinois, 96,000 jobs in Ohio and 71,000 jobs in Georgia annually.. These jobs would not only in be communications equipment and services, but also in manufacturing and service industries (especially finance, education and health care).
Continue reading "States update telecom statutes" »
Congress will revisit the Communications Act of 1934 (see this and this) in the aftermath of an appellate court decision limiting the Federal Communications Commission's ability to regulate the Internet.
"Stakeholders" will be invited to participate in a series of bipartisan, issue-focused "meetings" beginning in June, according to the congressional statements.
Hopefully congressional leaders are contemplating a transparent process consisting of public hearings. If they are planning closed-door listening sessions with special interest representatives, that could encourage self-serving agendas and obscure horse-trading which can wind up costing consumers a bundle.
Before it wrote the Telecommunications Act of 1996, the Senate Commerce Committee alone compiled an 817-page hearing record (S. Hrg. 103-599) on the basis of hearings on Feb. 23, Mar. 2 and 17, and May 4, 11, 12, 18, 24 and 25, 1994. The House Energy & Commerce Committee conducted a separate set of extensive hearings.
Telecommunications reform ( HB 168) was amended in the Georgia State Senate to protect the Public Service Commission's authority to resolve consumer complaints against providers of old-fashioned telephone service.
Good politics, perhaps, but PSC jurisdiction for consumer issues is redundant since the Governor's Office of Consumer Affairs already protects consumers. And although it may sound counterintuitive, PSC authority can actually harm consumers by restraining full and fair competition. That's because the PSC only has jurisdiction to resolve consumer complaints affecting wireline telephone service, but not wireless or VoIP services with which they compete. If the PSC isn't careful, it can create unequal marketplace advantages and burdens depending on the type of technology competitors use to deliver their services.
Nevertheless, HB 168 clears away numerous regulatory artifacts which seriously challenge incumbent local exchange carriers from competing and threaten private investment in broadband.
Every resident of Georgia should have access to broadband, which offers new opportunities to get a job or start a business. One study claims that over 70,000 jobs and $3.9 billion in economic impact could be created in Georgia annually from a reasonably-achievable 7 percent increase in broadband adoption. Education, health care and financial services are sectors of the economy which are particularly well-positioned to benefit from increased investment in broadband. Unnecessary and anticompetitive legacy regulation compromises investment by depressing industry valuations.
One of the key features of HB 168 eliminates rural telephone subsidies hidden in the intrastate access charges assessed on long distance calls within the state. The subsidies are unsustainable in a competitive market and must be reduced. HB 168 has been criticized for not moving fast enough. The Atlanta Journal-Constitution, for example, notes that payouts to rural telephone companies will be protected for 20 years in exchange for more PSC oversight. Moreover, the payouts will swell from $1.7 million in 2004 to $31 million per year before ratcheting back down. It should be noted, however, that HB 168 will eventually save Georgia consumers $60 million per year they now pay to subsidize rural telephone service while preventing rate shock in rural areas.
HB 168 is a major improvement compared to the antiquated statutes and regulation Georgia has now. The bill is awaiting concurrence in the House of Representatives and the Governor's signature.
The U.S. Court of Appeals for the D.C. Circuit ruled that the authority the FCC used to regulate Internet access providers is very limited. The ruling is obviously a victory for broadband Internet access providers. But it is also a victory for the rest of us. As the court noted, the legal interpretation the FCC fought to defend "would virtually free the Commission from its congressional tether."
In Comcast v. FCC, the court said it was okay for Comcast to discriminate against peer-to-peer file sharing as necessary to manage scarce network capacity. The opinion was written by Judge David S. Tatel, a Clinton nominee.
The question before the court was whether the FCC has any jurisdiction to regulate Internet access providers' network management practices. The FCC acknowledged it has no express statutory authority, but it argued that section 4(i) of the Communications Act of 1934 (47 U.S.C. § 154(i)) authorizes it to "perform any and all acts, make such rules and regulations, and issue such orders, not inconsistent with this chapter, as may be necessary in the execution of its functions."
Courts have referred to the commission's section 4(i) power as its "ancillary authority." The FCC successfully used this authority in 1968 to restrict the geographic area in which a cable company could operate, even though the Communications Act gave the commission no express authority over cable television at the time. The FCC acted reasonably when it limited the retransmission of distant broadcast signals by cable operators, according to the Supreme Court, because otherwise the commission's ability to fulfill its statutory responsibility for fostering local broadcast service could have been thwarted. The FCC couldn't cite a single statutory responsibility that might justify Internet regulation This and subsequent cases have established the principle that the FCC may exercise its "ancillary" authority only if it demonstrates that its action is "reasonably ancillary to the . . . effective performance of its statutorily mandated responsibilities." In the present case, the FCC couldn't cite a single statutory responsibility impacted as a result of interference with peer-to-peer communications by an Internet access provider.
Comcast v. FCC presents a fairly high hurdle for the FCC to overcome going forward to the extent it seeks to regulate the Internet on the basis of "ancillary" authority.
Public Knowledge is already at work on a backup plan. It recently filed a petition asking the FCC to reclassify high-speed Internet access as a "telecommunications" service subject to common carrier regulation under Title II of the Communications Act -- "the home of some heavy-handed regulation, to be sure," notes Susan Crawford (a former Special Assistant to the President for Science, Technology, and Innovation Policy). She nevertheless supports the idea.
One problem with this approach is the FCC has already taken the position that high-speed Internet access is not a telecommunications service subject to Title II common-carrier regulation. This determination was upheld by the Supreme Court in NCTA v. Brand X (2005). The commission's logic, noted the Supreme Court, was that cable companies do not "offe[r] telecommunications service to the end user, but rather . . . merely us[e] telecommunications to provide end users with cable modem service."
In other words, a product or service does not become "telecommunications" subject to heavy-handed Title II common carrier regulation just because it utilizes telecommunications. Imagine the consequences of taking the opposite approach and saying that if a product or service (insert your own example) includes a telecommunciations component the FCC in its discretion can treat it as "telecommunications."
Public Knowledge's targets don't include any product or service, just broadband Internet access providers. The sweeping power it is urging the FCC to grasp, however, knows no such bounds.
It is fallacy to assume there can be one set of rules for broadband service providers and another set for everyone else. Since they are not monopolies, it will not be possible to relegate broadband Internet service providers to distinct legal categories for monopolies. The courts will have no choice but to ensure that their rights and responsibilities are reasonably consistent with ours, and ours with theirs.
Meanwhile, the FCC like all federal agencies needs a Congressional tether and thanks to the D.C. Circuit Court of Appeals it still has one. If in its wisdom Congress believes it is appropriate for the FCC to have statutory authority to regulate the Internet, it can always supply that.
The National Broadband Plan is going to take a while to digest.
The following recommendations are included in the description of how the FCC plans to subsidize broadband -- which may be necessary if it frightens away private investment with network neutrality regulation which deprives private investors of a fair return on their capital: RECOMMENDATION 8.2: The FCC should create the Connect America Fund (CAF). (p. 145-46)
RECOMMENDATION 8.3: The FCC should create the Mobility Fund. (p. 146)
RECOMMENDATION 8.4: The FCC should design new USF funds in a tax-efficient manner to minimize the size of the gap. (p. 146)
RECOMMENDATION 8.6: The FCC should take action to shift up to $15.5 billion over the next decade from the current high-cost program to broadband through common-sense reforms. (p. 147-48)
RECOMMENDATION 8.15: To accelerate broadband deployment, Congress should consider providing optional public funding to the Connect America Fund, such as a few billion dollars per year over a two to three year period. (p. 151) Does the FCC have the power to do all of these things?
This language makes it sound like the FCC views itself as a mini-Congress with the power to tax and spend.
I cannot imagine this is the sort of thing the Founding Fathers had in mind when they provided that "The Congress shall have Power To lay and collect Taxes," (Art. I, Sec. 8) "All bills for raising Revenue shall originate in the House of Representatives," (Art. I, Sec. 7) and "No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law." (Art. I, Sec. 9)
Tom Tauke, a top Verizon executive: In my view, the current statute is badly out of date. Now is the time to focus on updating the law affecting the Internet. To fulfill broadband's potential it's time for Congress to take a fresh look at our nation's communications policy framework. Tauke's top recommendations include: - A behavioral advertising policy that requires an easy to use process for affirmative consent from a user before that user can be tracked on-line should apply to all players engaged in behavioral advertising, regardless of where they sit in the space and what technology is used.
- Competitive subsidies that are technologically neutral and targeted solely for the benefit of consumers, not corporate intermediaries, would be one alternative to ensuring full national broadband deployment.
- Harm to consumers and competition should not be permitted, from any source. So the level-playing field needs to be big enough to include all of the players.
My own reaction is that the Federal Trade Commission can handle the first item, the Department of Agriculture the second and the Antitrust Division of the Department of Justice the third -- although for Tauke this is beside the point at the present juncture.
Although there are many outstanding people employed at the Federal Communications Commission, we do not need the FCC to accomplish any of these objectives. We could take the $335,794,000 the agency requested for the 2010 fiscal year 2010 for 1,924 full-time equivalents and other expenses and use it to pay for ubiquitous broadband at the fastest speeds or to reduce the deficit.
The most successful industries the FCC regulates are those industries the FCC regulates least, such as cable and wireless. And broadband. As Tauke notes, Broadband providers have invested hundreds of billions of dollars for deployment of broadband networks. Verizon alone has deployed more fiber than all the countries in Europe. The result: today about 96 percent of Americans have access to at least two providers of wireline broadband and as many as three wireless providers, and more than 55 million Americans can connect to a broadband network capable of delivering at least a 50mbps stream. The FCC doesn't produce a single broadband connection. It just produces plans and policies of questionable value.
The Washington Post's reaction to the National Broadband Plan that was deemed approved and issued with fanfare by the FCC this week: BY THE Federal Communications Commission's own account, broadband use in the United States has exploded over the past decade * * * * So it is curious that the FCC's newly released National Broadband Plan faults the market for failing to "bring the power and promise of broadband to us all" -- in reality, some 7 million households unable to get broadband because it is not offered in their areas. Such an assessment -- and the call for government intervention to subsidize service for rural or poor communities -- is premature, at best. * * * * it is hard to see in this field the signs of gross market failure. The FCC did not vote on the plan, according to David Hatch at CongressDaily, to avoid the possibility of a split vote. That could have meant an eye-opening 3-2 vote, if the plan has no Republican support. Which would have been no surprise, since the basic premise that there is a problem in this sphere which government is uniquely suited to fix through "smart" regulation and public subsidies, is wrong.
 Former FCC Chairman Reed E. Hundt Notorious former regulator Reed Hundt admitted he tried to screw telephone companies and broadcasters during a session at Columbia University, according to Harry Jessell at TVNewsCheck.
"In other words, we stole the value from the telephone network and gave it to ... society. When I say we stole it, it was a government rule that produced this outcome."
If this doesn't sound Nixonian, it ought to. It was Nixon who famously said, "If the President does it, it is not illegal." But the president is not above the law, and he was forced to resign.
Also, one cannot steal from a company, although this point is often overlooked. One can only steal from a group of investors, employees and/or consumers. They are the ones who ultimately pay.
While the FCC was stealing from the communities of interest represented by the telephone companies, Hundt said, it also tried to repress broadcasting: "This is a little naughty: We delayed the transition to HDTV and fought a big battle against the whole idea."
Hundt thought his actions all served a higher purpose, i.e., "We decided ... that the Internet ought to be the common medium in the United States and that broadcast should not be," he said. "We also thought the Internet would fundamentally be pro-democracy and that broadcast had become a threat to democracy." Huh?
Continue reading "Hundt confesses" »
We have completed a new paper examining the need for regulatory reform in Illinois for the Illinois Technology Partnership. Illinois was one of the first states to take the first step in permitting competition in the local telephone market. But it failed finish the job. In 1985, the Illinois General Assembly declared that "competition should be pursued as a substitute for regulation," delivering new technologies, improved service quality, choice among telecommunications providers and ultimately lower prices for consumers.
The goal of the 1985 act, which was to open the market to competition, has been achieved, but not the task of ensuring that consumers will reap the full benefits of competition -- which requires eliminating legacy regulation that is no longer necessary to protect consumers, harms competition and that limits the deployment of new technologies by advantaging some providers and disadvantaging others.
Meanwhile, Illinois' neighbors have been busy improving the regulatory climate. Indiana, Michigan and Missouri have updated their telecom statutes, and Ohio and Wisconsin are in the process of updating theirs.
We point out that broadband investment is expected to yield significant benefits, and caution that these benefits are at risk if legacy telepone regulation is not reformed. The predicted benefits are: The state can open up new technological opportunities and economic efficiencies that promise a direct private market economic stimulus of at least $4.6 billion over five years in the form of lower prices for voice services, according to one estimate. According to a report by Connected Nation, Illinois would also experience an additional $6.2 billion in economic impact annually from increased broadband availability and use -- including an estimated 105,622 jobs created or saved per year throughout the state's economy. The often overlooked risk is that telephone companies, cable operators, wireless providers and others are all competing to be #1 in broadband, and each firm is anxious to invest whatever it takes. But first investors must provide the funding. They will decide which, if any, firms can buy the necessary equipment and employ the highly-skilled people who can make it all work.
Investors are sensitive to potential risks and rewards. Vigorous competition, rapidly changing technology and regulation are the principal risks for any investor in broadband. Of all the risks, regulation is the most critical from a state perspective. All things being equal, if Illinois is highly regulatory and Indiana is not, a firm can lower its risk profile by investing more in Indiana and less in Illinois. Thus, if Illinois clings to the past, it risks diverting investment to more dynamic states like Indiana.
The Georgia State Senate approved a sweeping reform of the state's telecommunications laws by a vote of 46 to 4 (see HB 168, as passed by the Senate).
The Senate bill - Eliminates legacy telephone regulation that restricts competiton by creating artificial competitive advantages and disadvantages so that VoIP, wireless and wireline carriers will all have an equal opportunity to compete.
- Reduces inflated intrastate access charges for smaller rural telephone service providers and new entrants to the same level as interstate access charges.
- Sunsets Georgia's Universal Access Fund, after providing a partial replacement of lost access revenues for ILECs who provide high-cost services (subject to a fully contested PSC hearing before allowing any fund distribution).
HB 168 now goes back to the Georgia House of Representatives.
All providers of voice services should be subject to minimum regulation which does not discriminate on the basis of technology or history. This principle isn't novel or unprecedented. In the Southeast region alone, the necessary reforms have been adopted in Alabama and other states are moving in the same direction.
George Gilder and I noted here that a 2007 study projected that Georgia consumers will save $3.3 billion over 5 years in the form of lower prices for voice services as a result of competition (which is at risk if regulation tilts the playing field).
Even more importantly, regulatory reform will reduce risk for investors who will have to finance universal access to the fastest broadband speeds, which the FCC staff estimates could cost $350 billion nationwide.
We cited another recent study which estimates that just a 7 percent increase in broadband adoption in Georgia would lead to the creation of 71,059 jobs and $3.9 billion in economic impact annually. Education, health care and financial services are sectors of the economy which are particularly well-positioned to benefit from increased investment in broadband.
The alternative to regulatory reform is to accept an unnecessary risk of diverting investment to another state with a lower risk profile.
A study by Larry F. Darby, Joseph P. Fuhr, Jr., and Stephen B. Pociask of the American Consumer Institute concludes: Historical data suggest that for every $1 billion in revenue, "core" network companies provided 2,329 jobs, while non-network "edge" companies provided 1,199 (about half as many). This indicates that Net Neutrality rules that reduce revenues and growth for network companies, and transfer benefits (revenue or growth prospects) to non-network companies, are a barrier to job creation. Read the study here.
While the FCC considers whether to impose nondiscrimination and transparency regulation to all forms of broadband Internet access, Public Knowledge is proposing to subject broadband services to the same pervasive, overlapping, heavy-handed regulatory framework as century-old telephone service (see this and this) -- a framework which a former FCC chairman during the Clinton Administration described as a hopeless "morass."
PK is worried the U.S. Court of Appeals for the D.C. Circuit might rule in a pending case that the FCC doesn't have jurisdiction to regulate broadband. The group also is fretting over a recent observation by AT&T that, "with each passing day, more and more communications service migrate to broadband and IP-based services," leaving the public switched telephone network ("PSTN") and plain old telephone service ("POTS") we all grew up with "as relics of a by-gone era."
Continue reading "Broadband for all, or bigger government?" »
Broadband regulation is justified -- according to Lawrence E. Strickling, who is the Assistant Secretary of Commerce for Communications and Information -- because a recent FCC report indicates that "[a]t most 2 providers of fixed broadband services will pass most homes. Furthermore, "50-80% of homes may get speeds they need only from one provider."
Christine A. Varney, the Assistant Attorney General for Antitrust concurs, noting It is premature to predict whether the wireless broadband firms will be able to discipline the behavior of the established wireline providers, but early developments are mildly encouraging. These comments essentially parrot the views of some left-wing advocacy groups who are trying to engineer a revolution in communications policy, such as Free Press and Public Knowledge.
Continue reading "Duopoly shumopoly" »
At Telephony Online, Rich Karpinski notes, In today's carrier networks, IP may not always be hyped or even seen, but it is indeed everywhere -- and in 2010, it's only going deeper and making an even bigger impact. I think this protocol proliferation in the name of IP is the death rattle of the old network. IP is a data protocol so of course it dominated the enterprise market and it is prevalent on the Internet so of course Internet players such as Google want it to be upgraded for so-called Multimedia.
But the message of all the brave talk about "ultimate outcomes that have yet to take hold today" is that once again it is becoming reasonable to predict that cable will win. CableTV is already frankly devoted to the transmission of the high definition interactive video that will comprise 99 percent of network traffic. This is the black hole into which all the plans for sophisticated Rich Communications Suites, guaranteed QoS, Internet Multimedia Services, and all the abortive plan for Long Term Evolution (LTE) will fall.
The companies for the new era will be the hardware enablers of broadband interactive video: graphics and network processors, optical transponders, wavelength division muxing gear, and optical circuit switches for the new TDM circuits that will be crucial for the robust streaming video that will be at the heart of the market.
That's the Henry Gau Telecosm and I'm sticking to it. Upgrading the old networks for video and multimedia, one service at a time, is a non-starter. It will be swept away by truly broadband wavelength circuits optimized for interactive video streams. Within these circuits all other
traffic can flow without significant additional expense.
Security, routing, session management, and switching all will be done on the customer edge and the datacenter, which will comprise the bulk of the server edge.
Unless the telco's grasp that their old circuit model is relevant again, they are going to give way to cable TV players who already get the picture in high definition and are moving ever closer to video teleconferencing.
A must-read from Bret Swanson: Despite the brutal economic downturn, Internet-sector growth has been solid. From the Amazon Kindle and 85,000 iPhone "apps" to Hulu video and broadband health care, Web innovation flourishes. Mr. Genachowski heartily acknowledges these happy industry facts but then pivots to assert the Web is at a "crossroads" and only the FCC can choose the right path.
The events of the last half-decade prove otherwise. Since 2004, bandwidth per capita in the U.S. grew to three megabits per second from just 262 kilobits per second, and monthly Internet traffic increased to two billion gigabytes from 170 million gigabytes--both tenfold leaps.
* * * *
At a time of continued national economic peril, the last thing we need is a new heavy hand weighing down our most promising high-growth sector. Better to maintain the existing open-Web principles and let the Internet evolve.
The Economist has a great special report on mobile phone service in developing countries.
For one thing, "mobile money" is transforming the lives of ordinary people in areas with poorly-developed banking systems. ... a new opportunity beckons: mobile money, which allows cash to travel as quickly as a text message. Across the developing world, corner shops are where people buy vouchers to top up their calling credit. Mobile-money services allow these small retailers to act rather like bank branches. They can take your cash, and (by sending a special kind of text message) credit it to your mobile-money account. You can then transfer money (again, via text message) to other registered users, who can withdraw it by visiting their own local corner shops. You can even send money to people who are not registered users; they receive a text message with a code that can be redeemed for cash. Mobile money could also transform the lives of many people in the developed world who are without bank accounts, haunted by poor credit scores or would just appreciate a convenient alternative and more competition in the financial services sector.
But it look's like we'll have to wait a while. Given all of its benefits, why is mobile money not more widespread? Its progress has been impeded by banks, which fear that mobile operators will eat their lunch, and by regulators, who worry that mobile-money schemes will be abused by fraudsters and money-launderers.
Saul Hansell at the New York Times reports that Verizon has given up on the landline telephone business Speaking to a Goldman Sachs investor conference, Mr. Seidenberg said Verizon was simply no longer concerned with telephones that are connected with wires.
* * * *By converting most of its landline operation to FiOS, Mr. Seidenberg said Verizon had a new opportunity to cut costs sharply. FiOS uses the decentralized structure of the Internet rather than the traditional design of phone systems, which route all traffic through a tree of regional, then local offices.
"We don't look any different than Google," he said. "We can begin to look at eliminating central offices, call centers and garages."
In May, Hansell shrewdly asked What good will it do for the F.C.C. to come up with a spiffy new plan to get faster cheaper broadband to more people if the phone companies fail and millions of people won't be able to dial 911 in an emergency? Copper facilities still deliver the highest fidelity and most reliable voice service. The reason optical fiber-based FiOS is a winner and copper is a loser for Verizon's investors is because fiber is unregulated while copper is trapped in a legacy regulation time warp for the benefit of unions, local and state tax collectors and other reliance interests. Think auto companies.
The Economist predicts If the decline of the landline [telephone] continues at its current rate, the last cord will be cut sometime in 2025. But if the telegraph is a guide, it may be longer than that: Western Union delivered the last telegram in early 2006, more than one hundred years after the telephone -- although the telegraph was nearly irrelevant for most of that period.
Still, the landline network furnishes a livelihood for hundreds of thousands of employees and more retirees than the auto industry. It's a major contributor to nonprofit foundations, a significant source of union dues, a big affirmative action employer, a huge source of campaign contributions and it collects enormous tax revenues which politicians and bureaucrats use to reward their patrons and clients.
All this public spiritedness is baked into the price of landline phone service that now must compete against wireless services which offer more convenience at a consistently declining price and Internet-based voice services which offer considerably more features at a fraction of the cost of landline service.
These powerful constituencies -- which would like to see the landline telephone industry continue to serve their needs and desires as it does today -- oppose deregulation and still have the upper hand.
They portray deregulation as an enemy of consumers of limited or fixed means, but the fact is regulation doesn't ensure the lowest possible price for consumers. Regulation actually guarantees consumers pay higher prices for the benefit of politically-favored constituencies, such as those mentioned above.
The inconvenient truth (for those favored constituencies) is that technological innovation -- which is producing lower-cost alternatives not yet subject to regulation -- is killing landline phone service, and politics won't be able to save it.
Consider the plight of BT (British Telecom): As the Economist also notes BT may not be able to uphold its pension burden without a government bailout.
Regulators ought to let network providers cut costs, select the most efficient technology (frequently not possible under current regulation) and set prices as necessary to remain competitive.
If deregulated, landline service will become cheaper for consumers who can be served at a lower than average cost and more expensive for higher-cost consumers.
Higher-cost consumers have nothing to fear. They will be able to save money by migrating to unregulated -- and more efficient -- wireless and VoIP offerings whose prices are set by a free market as opposed to regulators whose job is to create winners and losers depending on who is more politically-connected.
Deregulation would increase the chances that most consumers could choose between three categories of competitors -- landline, wireless and VoIP. A failure to deregulate could unnecessarily eliminate the landline competitor. Meaning, it could be eliminated by an unnecessary, legacy regulatory burden, and not by full and fair competition in a free market.
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.
Over at Broadband Politics, Brett Glass takes exception to what I have written about special access. Glass and I disagree on a couple factual matters, as well as on the big picture.
One factual disagreement concerns the following observation by Glass: Despite the fact that it's absolutely essential to the provision of many services, prices for it are held in check neither by competition nor by even a minimal amount of oversight. It's thus an area that's ripe for price gouging and anticompetitive tactics, both of which are occurring. In fact, special access pricing is only deregulated in areas where competition exists. In noncompetitive areas, special access prices are still regulated.
Also, Glass and I draw opposite inferences from his contention that The cable TV providers most often rent "special access" lines or dark fiber from point to point as needed. They rarely build their own, and thus are subject to the same price gouging as anyone else who needs "middle mile" connectivity. Glass views this as evidence of "market failure." I view it as cable operators have concluded they can earn a higher return if they invest their capital somewhere else. If there are huge profits in special access, investors would back competitive entry.
What does Glass mean by the term "market failure"? Glass says, - In fact, to get Qwest to carry data 45 miles in my region costs about twice as much as an Internet backbone provider charges to take it to the rest of the world!
- Even in the rare situations in which they could provide such services (either via their own facilities or via rented ones), they often refuse to deal.
- The fact is that this is a real market failure. Combined with the problem of closed backbones (Level3 owns three backbones which run through our area, but will not open any of them up to us at reasonable cost), it creates a huge "middle mile" connectivity problem.
So Glass seems to be saying there is a market failure because there are refusals to deal at all and/or because there are refusals to sell at a reasonable price. I do sympathize with the predicament, if it exists, in which entrepreneurs who are seeking special access circuits but who cannot find or afford them are out of luck.
But it seems to me the alternative would be for government to require competitors to share their facilities at prices low enough to allow others to offer their services at a profit.
Well, what if the government-mandated "reasonable" wholesale price doesn't allow the provider to recover his or her actual cost plus a competitive return for the investors to which they owe a fiduciary responsibility? The competitor would have to mark up other products and services to generate a cross-subsidy for special access.
This hints at the big picture.
Broadband providers aren't earning obscene profits. If they were, it would be reflected in escalating prices for their shares. Stock brokers would be pounding on your door to dump any shares you may have in Google and buy AT&T and Verizon instead. When has that ever happened?
Broadband providers can temporarily overcharge some customers in order to subsidize other customers. But that is an unsustainable strategy. Competitors will target the the exploited customers which will jeopardize the services provided to subsidized customers.
The Supreme Court recently addressed the issue of refusals to deal, and the general rule is that just because someone could provide an input you are looking for doesn't mean they have to. The ruling makes eminent sense, because forced sharing diminishes incentives for investment.
You won't invest in facilities of your own if it is cheaper buy access to someone else's facilities, and they may decide not invest when they consider they will have to share the profits from a successful investment with you but will have to eat the cost of an unsuccessful investment without your help.
Those of us who have been around for a while can remember when the telephone company was a legally-protected monopoly which could undercharge or overcharge with seeming impunity depending on the whims of public policymakers.
Those days are long gone. The nail in the coffin was the Telecommunications Act of 1996.
Today, consumers are ditching their landline service in favor of wireless and/or cable VoIP offerings. The wireline business is imploding, partly because of the persistence of cross-subsidies.
Former Senator Russell Long (D-LA) famously said, "Don't tax you. Don't tax me. Tax that fellow behind the tree." Isn't that really what the advocates of government-mandated reductions in special access pricing are asking?
Aren't they saying: Charge me a low wholesale price so I can earn a retail profit, and recover any loss you incur somewhere else. I deserve it (for whatever reason). Adios.
Glass also claims he has seen no evidence for my claim that the data reported by GAO was incorrect, and I do see reason for Mr. Haney himself to be biased. He seems to work for (and have worked for) organizations which are supported by the very firms which are price gouging for "special access." I used to work for the U.S. Telecom Association and Qwest. I now work for an educational nonprofit. I admit my views are consistent. But setting that aside, I never criticized the GAO report but I do say there is ample evidence the FCC's numbers are a mess.
The best example is a report commissioned by the National Association of Regulatory Utility Commissioners (NARUC), 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 .... This report estimated 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 bottom line here is there is no market failure, just a concerted effort by purchasers to use lobbyists to persuade policymakers to intervene in the market to reallocate profits. In this case, we have a regulator (the FCC) and a history of regulation (of the telecommunications industry) which unfortunately makes that a potentially viable strategy.
Remember this: The gradual deregulation of special access was adopted by the FCC during the Clinton administration. Sorry, but you can't call it right-wing ideology or demonize it as a George W. Bush or Republican legacy.
Related items:
Thoughts on broadband policy
'Special access' shouldn't be fixed
Don't believe 'special access' hype
Deregulate special access rates
Don't re-regulate special access
The FCC received reply comments last week concerning the national broadband plan it is required -- pursuant to the stimulus legislation -- to deliver to Congress by Feb. 17, 2010.
In the attached reply comments of my own, I conclude: - The broadband market is delivering better services at lower prices. There is no evidence of a market failure which would justify additional regulation.
I pointed out that just as the Sherman Act does not "give judges carte blanche to insist that a monopolist alter its way of doing business whenever some other approach might yield greater competition," according to the Supreme Court, the Commission would be wise not to insist that broadband providers alter their way of doing business just because it hopes some other approach might yield more consumer benefits. The pursuit of the "perfect" may prove elusive. Meanwhile, the "good" -- which presently exists in the form of a fast-charging, innovative market -- could be destroyed. - The Commssion should focus on non-regulatory strategies which have proven effective in promoting the adoption of broadband services.
For example, a lot of Americans don't subscribe to broadband because they don't see the need for it or because they are concerned about the price. According to the Pew Research Center, 50 percent of dial-up and non-online users fall into the former category and 19 percent fall into the latter category.
A public-private partnership in Kentucky discovered that the lack of a computer at home ranked even higher than the monthly service fee as a barrier to the adoption of household broadband. In Kentucky, the number of people actually using broadband jumped from 22% to 44% as a result of the partnership's efforts. - Common carrier regulation could interfere with innovation and legitimate network management.
If government mandates that sellers have to charge everyone the same price, that potentially limits returns on investment (because some consumers are willing to pay more than others). If government says sellers can't serve some customers unless they can serve all customers, that potentially limits investment opportunities. Net neutrality regulation would potentially lead to these and perhaps other consequences.
One such consequence might be to prevent network operators from proactively managing the network to reduce congestion and malicious traffic which lead to identity theft and cyber attacks. - There is no compelling evidence of excessive profits which would justify reregulation of the special access market.
Purchasers of these high capacity services allege profiteering, but a more reasonable analysis has found that 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%.
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.
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.
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.
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).
Bret Swanson at Entropy Economics makes some fascinating findings in a new paper: We estimate that by the end of 2008, U.S. consumer bandwidth totaled almost 717 petabits per second. On a per capita basis, U.S. consumers now enjoy almost 2.4 megabits per second of communications power, compared to just over 28 kilobits per second in 2000. The ability of Americans to communicate and capitalize on all of the Internet's proliferating applications and services is thus, on average, about 100 times greater than it was in 2000. It sort of makes you wonder why we need a National Broadband Plan from the government, particularly when you consider the possibility that the government's well-intentioned efforts may backfire. Consider Swanson's observation as to the last time the government tried to improve the telecommunications market: The millennial technology and telecom crash was, in part, a result of this broadband dearth. Thousands of Silicon Valley dot-com business plans had been conceived on the assumption that real broadband would be rapidly deployed and adopted across the nation. More than half a dozen communications companies took advantage of the newly deregulated long-haul transmission market and built nationwide fiber optic networks, boosting intercity bandwidth by several orders of magnitude. But local telecom markets werenʼt similarly deregulated. They were re-regulated. At the FCC and in 51 state utility commissions, in fact, complex rules and price controls grew for DSL and threatened to engulf cable modems as well. Investment ground to a halt. The resulting bandwidth gap, with the crucial last mile falling well short of the market's expectations, helped produce the crash, which lasted through 2002.
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.
In North Carolina, the Utilities Commission Public Staff (an independent agency which represents consumers before the Utilities Commission) sent legislators an email objecting to legislation which would update the state's antiquated telecommunications law. The email contained the following arguments: - CURRENT LAW ALLOWS LOCAL EXCHANGE COMPANIES AMPLE FLEXIBILITY TO COMPETE WITH CABLE AND WIRELESS.
- UNDER THE PROPOSED LEGISLATION, THE COMMISSION WILL NO LONGER BE ABLE TO ENSURE THE AFFORDABILITY OF BASIC LOCAL SERVICE OR ADEQUACY OF SERVICE QUALITY, OR HANDLE COMPLAINTS FOR CONSUMERS ABOUT BILLING OR SERVICE.
The first argument is misleading -- although it is true there is some flexibility, it certainly isn't adequate (let alone ample).
The second argument is technically correct in some respects but is utterly beside the point.
Telecommunications was a monopoly up until the 1980s or so. Today, cable phone service is available to over 100 million homes nationally. Comcast, a cable provider, is the nation's third largest provider of telephone service.
There are now far more cellphones in service (249.2 million) as compared to traditional land lines (158.4 million). In the South, 19.6 percent of adults are living in households with only wireless telephones, according to a study by the National Centers for Disease Control. In these tough economic times, many consumers are dropping their regulated land line service in favor of unregulated wireless offerings which offer mobility and, arguably, greater flexibility and better value.
Don't hesitate to check out a paper I coauthored with George Gilder, which includes references and further analysis.
Current law in North Carolina does provide more flexibility for telecommunications providers to set prices and offer promotions or new services than in the past. But providers are still regulated, and still have to to get Utilities Commission approval when they want -- or are forced by competition -- to modify their business plans. This makes no sense in a competitive industry.
What other competitive enterprise who seeks to set prices or terms or offer services has to contend with lengthy notice and comment at a government agency with full opportunities for its competitors to participate and appeal?
Normally, full procedural safeguards are a good thing. But competition in the telecommunications market is here. The market is one of the most competitive arenas in the global economy. Lengthy government procedure favors competitors and inappropriately harms incumbents. And, yes, consumers suffer the consequences.
Disclosure by the incumbent -- and an opportunity for competitors to obtain sensitive data and lobby the regulator -- means that rivals never have to worry about losing sales because they failed to anticipate a promotional offering or the introduction of a new or improved product or service; a lower price and/or better terms by a competitor. Rivals can wait until they receive formal notice of a competitor's intentions before they lower the price or improve the quality of their own product or service as necessary to avoid losing sales. Or they can even delay it as a result of a timely objection before the Utilities Commission. This can become a dangerous game (for consumers), which reduces the incentives both for the incumbent and the rival to innovate.
As to the Commission's argument that it will no longer be able to ensure the affordability of basic local service or adequacy of service quality: The fact is that a commission is no longer necessary to ensure these things. The availability of voice over Internet and wireless offerings for the vast majority of consumers means that most consumers are now "virtual regulators." By that I mean most consumers can switch providers if they are dissatisfied with the price or quality of service they are currently receiving. When a provider loses customers because it isn't offering a competitive value proposition, it either has to lower its prices or improve its services to avoid losing sales.
Public utility commissions are no longer necessary to protect the vast majority of consumers, who can choose between competing services. This means that commissions can be eliminated entirely (at least for these consumers), freeing scarce public resources for higher prioritiies.
What about rural Americans -- who comprise, perhaps, 5 to 10 percent of telecommunications users -- who do not or will not have competitive options?
Although this is a subject for a separate blog post, competition has been slow to develop in rural areas in large part because current regulation sets prices below costs, thus depriving investors in competitive service offerings of a profit.
The solution to this problem is not to retain a Utilities Commission to regulate the telecommunications services available to rural consumers. The solution is to remove the disincentives to investment in rural areas. This can be done without unduly harming residents in rural areas where well-paying jobs are less common.
In Alabama, HB 478 and SB 373 would protect competitive telecommunications, voice over Internet, cellphone and broadband services from utility regulation.
Competition drives innovation which benefits consumers, as we have seen so often in telecommunications beginning in the 1980's and 90's--when small steps towards free and open competition enabled new services and features.
For example, long distance service used to be fairly expensive. Long distance prices have come down dramatically. They have come down to the point that for many consumers--consumers whose phone service is not subject to regulation by the state Public Service Commission--long distance is a bundled service with unlimited use.
Cellphone service--again not subject to PSC regulation--used to cost 47 cents per minute. Now, with many providers and ample competition, the cost to consumers has dropped to around 6 cents a minute, while new features, innovations, and uses for cell phones have proliferated.
For example, 20 years ago there were no text messages. In 2005 , when the Alabama legislature last amended the state's communication laws, wireless companies nationwide carried 9.8 billion text messages a month. In 2008 that number was 75 billion a month. Why? Consumers demanded it, and technology provided it in a market free to innovate.
We all know that technology and consumer needs and preferences are changing faster now than ever before. The telecommunications market is dramatically different than it was four short years ago. It might surprise you to know that the third largest phone company in the United States today is a cable company, Comcast. Or that in the South, 19.6 percent of adults live in households with only wireless phones, according a survey conducted by the National Centers for Disease Control.
Competition pushed down the rates for bundles of Internet, phone and TV service in 2008 by up to 20 percent, to as low as $80 per month, according to Consumer Reports.
Technology has continued to evolve. The consumer's need for services has changed. Other states have updated their laws.
Don't be misled by those who oppose modernizing outdated laws. Competition is here. Other states are taking advantage of it, and Alabama needs to do so as well. In the 21st century, success in economic development will be determined in part by which states have the technology infrastructure to compete for new, high tech, high paying jobs.
Quality service, fair pricing and new features and services will be determined by which areas have rules that permit full competition among all providers on a level playing field. Voice over Internet, cable phone service, cell phones that far outnumber land lines are benefits of competition that we could not have imagined in the telecommunications world 20 years ago, or even four years ago. Alabama must remain competitive by updating antiquated rules, or risk falling behind in the race to provide good jobs and a rising quality of life for all its citizens.
The Miami Herald worries that phone bills will rise in Florida if legislators reduce the Public Service Commission's authority to regulate land-line phones with "extras" like call-waiting, or caller ID (basic land-line phone service only -- with no extras -- would remain regulated by the PSC). ... Under current rules, phone companies are limited to annual rate hikes pegged at 1 percent above inflation for basic service.
The bills would allow rate hikes to max out at 20 percent on a single day's notice. In fact, the 20 percent cap has been on the books since 1995 (Fla. Stat. §364.051(5)(a)).
Florida has one of the nation's most antiquated statutes for regulating phone services. All of Florida's neighboring states in the Southeastern U.S. have limited traditional utility-type regulation of most telecommunications services. Indiana went even further and deregulated all telecommunications services.
Prices are not going up.
Prices are either going down, features are being added and/or service is being improved because of intense competition from voice over Internet (typically provided by cable companies) and cellphones.
Competition pushed down the rates for bundles of Internet, phone and TV service in 2008 by up to 20 percent, to as low as $80 per month, according to Consumer Reports.
Florida does not need a 20 percent cap, nor any other high-end limit. In a competitive market, providers cannot unreasonably raise rates beyond what is necessary to cover legitimate and prudently-incurred costs. If they do, they will lose sales to an efficient competitor.
We do not need regulators to tell us when the market is competitive. Cable phone service is presently available to over 100 million homes nationally and growing. Over 95 percent of the U.S. population has a choice between 3 or more providers of mobile telephone service.
One study projects incumbent telecommunications providers like AT&T and Verizon will have a 51-percent marketshare nationwide by 2012. The marketshare of the incumbent is already at or below 50 percent in some metropolitan areas.
The only purpose for retaining a price cap would be to justify some need to employ regulators.
Our recent paper, "Stimulate Broadband and Lower Utility Bills With Regulatory Reform," notes that Florida could open up new technological opportunities and economic efficiencies that promise a direct economic stimulus of at least $7.3 billion over the next five years in the form of lower prices for voice services, plus an additional $7.5 billion in economic impact annually from increased broadband availability and use by simple reforms of outmoded laws.
Reducing the PSC's authority to regulate land-line phones with "extras" like call-waiting, or caller ID is an obvious key step Florida can take to ignite a new spiral of innovation and revival based on new technologies and services tapping into new worldwide webs of glass and light and air.
Government subsidies typically result in waste, fraud and abuse. A recent audit of Georgia's Universal Access Fund contained the hardly surprising findings that one or more small rural telephone companies were reimbursed for a $15,000 dinner, a $20,000 Christmas party, a new roof and the housekeeping expenses for a cabin in North Carolina and other questionable expenses.
Remarkably, the Georgia Universal Access Fund distributed $1.7 million in 2003 to five companies and $10.2 million last year to 15 rural phone companies.
Georgia legislators were quick to react. In the House of Representatives, a bill (HB 168) which would terminate the fund passed by a vote of 124-41. The bill is awaiting its fate in the state senate.
The legislature is considering another bill (HB 376) which would bring the state's high intrastate access rates to parity with the significantly lower interstate access rates on file at the Federal Communications Commission over 10 years.
Small rural phone companies claim their customers will unfairly suffer. But many of these consumers pay lower rates for local service than the statewide average -- under $8 per month in one case.
Generous subsidies for low-priced analog phone service in rural areas cannot be maintained any longer. That's because urban and suburban consumers who underwrite the subsidies can cut the cord. They can give up their fully-taxed analog service in favor of lesser-taxed and far more efficient wireless or voice over Internet substitutes.
Public policy ought to encourage deployment of the most efficient technology in rural areas. But it does just the opposite. Small rural carriers who market wireless and voice over Internet services pay a penalty in the form of lower subsidies.
Allowing the market to set prices would spread the benefits of competition in rural areas.
Our recent paper, "Stimulate Broadband and Lower Utility Bills With Regulatory Reform," notes that Georgia could open up new technological opportunities and economic efficiencies that promise a direct economic stimulus of at least $3.3 billion over the next five years in the form of lower prices for voice services, plus an additional $3.9 billion in economic impact annually from increased broadband availability and use by simple reforms of outmoded laws.
Eliminating outmoded and unsustainable subsidies is an obvious key step Georgia can take to ignite a new spiral of innovation and revival based on new technologies and services tapping into new worldwide webs of glass and light and air.
George Gilder and I have completed a study of legacy telecommunications regulation in Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina and Tennessee. We have previously examined the same types of outdated regulation in Illinois, Indiana, Ohio, Michigan and Wisconsin. In this paper, we update our previous analysis and shift our focus to a different region with its own unique legacy.
The traditional rationale for utility regulation -- i.e., that fixed landline telephone service is a natural monopoly -- is gone. Lawmakers must face the reality that continued reliance on utility regulation is not only unnecessary but will harm consumers by distorting competition.
A survey of the Southeastern states indicates that significant and harmful vestiges of legacy regulation remain. These include: - Tariff filing requirements which give rivals detailed information -- sometimes in advance -- about a competitor's new or improved products and services. This reduces the incentives for all market participants to improve products and services as the only way to avoid competitive surprises which may cause a loss in sales.
- Requirements to offer similar terms to all customers. These rules prevent incumbents from developing customized offerings to retain valuable customers who contribute to the cost of maintaining service for all. Allowing the market to set prices would spread the benefits of competition in both urban and rural areas.
- Rules which impose costs on some providers but not others -- such as the requirement to act as a provider of last resort where the market is competitive and consumers can choose between multiple providers. These obligations are anticompetitive.
- Hidden subsidies intended to hold some prices at or below cost. These subsidies cannot be maintained in a competitive market where competitors can choose to serve profitable customers and ignore everyone else. Reducing hidden subsidies alone could improve the availability of advanced services in rural areas.
- No constitutional or statutory prohibitions on imposing utility regulation on competitive providers. To the extent a utility commission may attempt to assert jurisdiction to regulate competitive services it is a target for commercial rivals seeking a regulatory advantage, activists seeking to promote a policy agenda or even a formerly regulated entity seeking protection.
- The absence of restrictions on utility commissions from intervening in the marketplace to promote broadband deployment. Utility commissions have the wrong set of skills for promoting broadband deployment. Removing unnecessary regulation will spur broadband deployment -- even in smaller, more rural and economically distressed areas, where the benefits of broadband tend to be largest in terms of higher residential property values and more jobs and businesses in the community.
- Utility commission jurisdiction for consumer protection. This is redundant since the attorney general, commerce department or some other state agency already protect consumers. Redundant jurisdiction can lead to different consumer protection rules according to the type of service or provider. This could have anticompetitive implications.
By removing the statewide cobwebs of regulations that afflict telecom, they can open up new technological opportunities and economic efficiencies that promise a direct economic stimulus of at least $24 billion throughout the region over the next five years in the form of lower prices for voice services, plus an additional $25 billion in economic impact annually from increased broadband availability and use.
A report prepared by the staff of the House Energy & Commerce Committee is critical of FCC Chairman Kevin Martin's leadership. Among the findings: "There are instances in which the Chairman manipulated, withheld, or suppressed data, reports, and information ... in an apparent attempt to enable the Commission to regulate cable television companies."
The report mentions that Martin's actions "have certainly undermined the integrity of the staff. Moreover, it was done with the purpose affecting Congressional decision-making..."
Shocking.
Oh, and the report notes that there is some friction between Martin and some or all of his four fellow commissioners. The report concludes that Martin's management style is "heavy-handed, opaque, and non-collegial," and that his leadership has led to "distrust, suspicion, and turmoil among the five current Commissioners."
Martin said in a statement he has merely sought to "enhance choice and competition in the market for video services."
I completely disagree with Martin's policy agenda when it comes to the cable industry.
And I would certainly like to see integrity and collegiality at the FCC.
But my first glance at the report reminded me of a former FCC chairman during the Clinton administration who had the audacity to try to enhance choice and competition in the market for telephone services. His name was Reed E. Hundt. And his telephone policy agenda was as bad as Martin's cable policy agenda.
Like Martin, Hundt had his enemies.
In his memoirs, Hundt recounts the other commissioners told anyone who would listen that I was arrogant, imperious, stubborn, self-righteous, deceitful. They tried numerous forms of embarrassment, ranging from leaking confidential documents to (my favorite) drawing a caricature of me on the wall. Hundt also has this to say about his own efforts to reach out to his colleagues: Despite the contentiousness on the eighth floor, I occasionally made an effort to be a clubbable chairman. To this end, one day that fall, I visited Jim Quello's office. As usual, he was friendly enough; at least he was willing to have me sit down. Of the other two in the Gang of Three, one would rarely meet and the other would never meet with me alone. The purpose of this report is to ensure that the FCC is fair, open and transparent, the implication being that it hasn't been so under Martin.
But, again to be fair, Hundt also tried to ram things through: Almost everyone at the agency thought it was unbearable that Congress had commanded the FCC to conduct specific rulemaking in statutorily set time periods ... The impossible deadlines, in fact, were a stroke of luck. They permitted my team to rush the items past the other commissioners to votes, insisting on our interpretation of law, and brooking no delays ....
To put even more pressure on the other commissioners, I announced that I expected to obtain a unanimous vote on all items. If the Gang of Three could not agree with my team's recommendations, I hoped to invoke memories of the Republican shutdown of government. I wanted the Gang of Three to fear that the public would blame them, as it had the Congress, for failure to produce results. I am not defending everything Martin did as FCC chairman; only pointing out that no one up on the Hill conducted an investigation of Hundt's management style. And there is always a danger these investigations can mask a hidden agenda to personalize policy differences.
Both Hundt and Martin had ambitious agendas which they were or are determined to move. But the FCC is a place where things languish for eternity or are compromised to the point of meaninglessness. If we want to be rid of authoritarian chairmen, we will have to look more deeply into process reforms.
Hawaiian Telcom has entered Chapter 11 bankruptcy (see this and this), FairPoint Communication's CFO is under siege as the company looks for a new CEO and Qwest Communications is cutting another 1,200 jobs as it tells investors not to worry about massive debt repayment deadlines.
Times are tough for a lot of people, of course.
However, phone companies have a special problem: Basic phone service is not profitable. Regulators have matched prices with costs; and they have defined costs narrowly, so as to shift some costs, for accounting purposes, to services which are profitable.
As a result, basic phone service has to be subsidized by overpriced calling features such as voice mail, Caller ID, etc.; Internet access; video or wireless offerings.
That doesn't work anymore. People can cut the cord and make do with a wireless phone or VoIP service from their cable provider. In the case of Hawaiian Telcom, which was recently purchased from Verizon by a private equity firm, Customers initially had complained about poor service. They have steadily abandoned their traditional land lines for other alternatives, like wireless phones and digital phone service offered by the cable company, a trend that is being experienced nationwide.
Hawaiian Telcom, which employs about 1,400 workers, served about 524,000 residential and business phone lines at the end of September, down about 21 percent from the 660,000 lines when Carlyle purchased the company in 2005. Hawaiian Telcom, FairPoint and Qwest have all been trying to make it as land-line companies while expanding their Internet access and video offerings as fast as they can with borrowed money.
AT&T and Verizon, on the other hand, benefit from considerable wireless revenues which make those companies profitable -- to a point -- despite declining land-line revenues.
If we want phone companies to invest in broadband, we have to understand that current regulation will require them to use their broadband profits to subsidize basic phone service. That may give their investors and their lenders pause. The lenders and investors could, for example, instead fund cable network upgrades with no diversion of profits.
Or if we want to decrease wireless phone prices -- such as eliminating Early Termination Fees -- we have to understand that wireless subsidizes basic land-line service.
We could just let the taxpayers subsidize broadband so it can subsidize basic phone service. Or we could free the phone companies to configure and price their basic phone service more efficiently, let them build broadband networks which can compete with the cable companies or anyone else and free taxpayers to rescue someone else.
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.
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."
The conventional Beltway wisdom would be that net neutrality legislation should have a real chance now with the election of President-Elect Obama and strengthened Democratic majorities in the Senate and House.
But there are two recent developments which make the case for net neutrality regulation less compelling.
Free Airwaves
The Federal Communications Commission approved the use of unlicensed wireless devices to operate in broadcast television spectrum on a secondary basis at locations where that spectrum is open, i.e., the television "white spaces."
In other words, a vast amount of spectrum will soon be available to provide broadband data and other services, and the spectrum will be free.
George Mason University Professor Thomas W. Hazlett notes that [S]ome 250 million mobile subscribers in the US paid about $140 billion to make 2 trillion minutes' worth of phone calls in 2007, accessing just 190MHz of radio spectrum. The digital TV band, in contrast, is allocated some 294MHz--and it's more productive bandwidth. Tapping into this mother lode would unleash powerful waves of rivalry and innovation. Most of the television spectrum is either unused or isn't used efficiently. FCC Chairman Kevin Martin expects that devices using the spectrum could be on the market within a year to 18 months.
Hazlett laments that since 90 percent of consumers subscribe to cable service the broadcasters really don't need their assigned frequencies, and suggests that if digital TV frequencies were auctioned off taxpayers could be compensated to the tune of $120 billion. This is a good point. But, as an alternative, the government could also come back later and tax the unlicensed uses of the spectrum. Either way, the money would be collected from the same consumers who are also the taxpayers.
The value of auctions lies in preventing politicians and bureaucrats from awarding spectrum to their friends and relatives or from picking winners and losers, not in sucking money from the private sector. Here, the spectrum is being awarded not to profit-making entities who hired the most gifted lobbyists, but to the public at large.
The real significance of the FCC's decision is consumers who are dissatisfied with the broadband services provided by telephone, cable and cell phone companies or satellite providers will soon have even more options. This fact undermines the case for net neutrality regulation, which is premised on the false notion that most consumers of broadband services are captives of a single phone company and/or a single cable provider. Absent the validity of this false rationale, regulation which tells broadband providers who can use their networks and at what prices is an unjustified restraint on the free speech rights of broadband providers.
Harvard Law Professor Laurence H. Tribe, a First Amendment scholar, addressed the question: "Can broadband providers be forced to act as common carriers"? at a 2007 conference sponsored by the Progress & Freedom Foundation. He concluded that the Supreme Court decision in Hurley v. Irish-American Gay, Lesbian & Bisexual Group of Boston, 515 U.S. 557 (1995) is the decision which "would probably apply here."
In that case, the the Supreme Court upheld the decision of the event's organizers to exclude GLBG from marching in the parade. The Court ruled that a parade is not merely a conduit for the speech of participants.
Alternatively, another Supreme Court precedent which might be applicable is Turner Broadcasting System, Inc. v. FCC, 512 U.S. 622 (1994), which obligated cable operators to retransmit the signals of local broadcasters. But I agree with Tribe that this is less likely because cable franchises at the time conferred what the Supreme Court believed were a "monopolistic opportunity [for the cable operators] to shut out some speakers." This is no longer true. Although the opportunity to exclude certain speakers still exists, cable operators are not monopoly providers. Telephone, cell phone and satellite providers -- and unimagined services utilizing unlicensed white spaces -- offer similar services. Disappointed speakers can seek other platforms.
Therefore, the FCC decision permitting unlicensed uses of television white spaces significantly improves the possibility that net neutrality legislation would be struck down by the courts as unconstitutional.
Verizon Wireless + Google vs. Microsoft
Another recent development are the talks Verizon Wireless is having with Google and Microsoft (see this and this), who are competing for the privilege of having their search bar featured as the default search feature on Verizon Wireless handsets. If Verizon Wireless features a default search bar, subscribers who want to use a competitive search service would have to navigate to the competitor's web site. A lot of times consumers don't bother to do that. Google has claimed in the past that when default search bars are available, they are the starting point for 30 to 50 percent of a user's searches.
Only one search provider gets to be Verizon Wireless's search partner. One search provider gets to sit at the end of a fast lane; the others don't.
"Fast lane" may not be a perfect metaphor, because traffic may not actually be prioritized across the network; but from a consumer perspective there are fewer clicks and the search may seem faster overall. Fast lane is the favorite metaphor of net neutrality proponents, and I suspect it provides a clue as to why Google became such an enthusiastic supporter.
Google is making a massive investment in data centers to deliver faster results, including one in the home state of Sen. Ron Wyden (D-OR), and wanted to make sure its competitors couldn't easily and cheaply duplicate that investment with the help of broadband providers. According to this source, Google has found that for search engines, every millisecond longer it takes to give users their results leads to lower satisfaction. So the speed of light ends up being a constraint, and the company wants to put significant processing power close to all of its users. A former Google executive is quoted as saying "Google wants to raise the barriers to entry by competitors by making the baseline service very expensive."
The purpose of net neutrality regulation is to ensure "equal treatment" for all consumers and businesses. Sen. Wyden, sponsor of one of the earliest net neutrality proposals, reportedly explained he "didn't oppose companies offering different speeds of service at different prices, a practice already undertaken by several major Internet providers, provided that content is treated equally within each level of service."
If Wyden's bill had become law, Verizon Wireless wouldn't be able to provide Microsoft or Yahoo faster access than it offers Google -- even if they need it and are willing to pay for it but Google doesn't and isn't.
Perhaps net neutrality regulation could be drafted more fairly -- like allowing broadband providers to build a fast lane, but guaranteeing that anyone could pay an identical fee for the same fast access. This would mean that broadband providers couldn't build fast lanes unless they could build them big enough to accommodate anyone who might seek to use them. The likely outcome is the fast lanes wouldn't get built at all.
There may be yet other ways a net neutrality regulation could be structured, but they would all create uncertainty, complexity and pitfalls for broadband providers.
Google has been a major proponent and -- one suspects -- has provided significant support for the enactment of net neutrality regulation. That the company is now bidding against Microsoft for the right to share some portion of its colossal advertising revenue with Verizon Wireless may indicate that Google thinks it has found a more acceptable way to limit the ability of its competitors to easily and cheaply duplicate its investment in data centers, that it is no longer banking on net neutrality becoming law, or both.
If Google is the successful bidder, it may have less of an incentive to provide support for net neutrality regulation. Even if Google isn't the successful bidder, the negotiations prove that there are mutually-beneficial and pro-competitive partnerships which are nevertheless discriminatory and could be outlawed by net neutrality regulation.
But these partnerships can be beneficial for consumers -- if Verizon Wireless can obtain advertising revenue it may be able to reduce wireless subscription fees. Google CEO Eric Schmidt has even suggested that your mobile phone could be free, subsidized by targeted ads.
Permitting the unlicensed use of white spaces and participating in negotiations with Verizon Wireless to feature a default search bar both had Google's full support.
These two events reduce the likelihood that net neutrality will become the permanent law of the land.
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, Moveon.org 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.
The Federal Communications Commission picks winers and losers, which is why we ought to get rid of it. During the chairmanship of Reed E. Hundt, the losers were incumbent phone companies, whom Hundt considered too Republican. Now it is a cable company, who some consider too Democratic.
The FCC issued an order last week concluding that Comcast acted discriminatorily and arbitrarily to squelch the dynamic benefits of an open and accessible Internet, and that its failure to disclose it's practices to its customers has compounded the harm. Wow. The FCC will require Comcast to end its network management practices and submit a compliance plan, which is code for submitting to bureaucratic micromanagement.
FCC Chairman Kevin Martin recently asked, "Would you be OK with the post office opening your mail, deciding they didn't want to bother delivering it, and hiding that fact by sending it back to you stamped 'address unknown -- return to sender'?"
Martin, who the Wall Street Journal identifies as one of the Bush administration's more questionable personnel picks, lately has become a bit excitable.
Martin is upset with Comcast because it rejects his hypothesis that allowing consumers to pay only for the cable channels they prefer would reduce cable rates.
Martin sided with the commission's two Democrats to slam Comcast for managing its broadband network like a traffic cop who works hard to prevent gridlock.
The issue is whether light users ought to subsidize heavy users, and whether broadband providers should be allowed to receive advertising revenues which they could use to reduce the monthly fees consumers pay for broadband access to the Web.
Verizon and Google are reportedly in talks right now aimed at featuring the Google search bar on Verizon Wireless phones in exchange for Verizon and Google splitting the ad revenues. There is nothing wrong with this. A new revenue stream might allow Verizon Wireless to reduce the price of its wireless service, which would be good for consumers.
But this possibility is not entirely consistent with some of the utopian visions that the Internet has inspired. Believe it or not, there are many who see the Internet as a long-wished for opportunity to turn freedom of speech into a right to be heard, to educate and to arouse the masses to achieve political objectives and to counteract the influence of conservative talk radio.
This doesn't concern Comast and other broadband providers. They merely wish to invest billions of dollars in network upgrades to satisfy their customers. But investors won't support broadband expansion if regulators abscond with the profits.
Martin and others ostensibly worry that if broadband providers are allowed to manage their networks they may block the next Google from distributing an unimagined software application which could change the world.
But popular applications don't threaten broadband providers; they make broadband services more appealing to consumers.
Apple and AT&T allow independent developers to create new applications for the iPhone because they have more to gain if consumers can access new applications they didn't invent than if the IPhone can only be used for a limited number of standard purposes.
In a free market there really is an incentive for suppliers to work to please consumers.
The problem with regulation is that it can be circumvented, exploited for anticompetitive purposes and that it usually leads to unintended consequences like inhibiting inventive ideas, discouraging investment and preserving the status quo.
But the FCC's sanctioning of Comcast may not just be an error of judgment.
Commissioner Robert McDowell claims that "the FCC does not know what Comcast did or did not do. The evidence in the record is thin and conflicting."
If the FCC has based its decision on an erroneous or insubstantial set of facts -- which wouldn't be a first -- the only thing that will have been accomplished is years of litigation.
Meanwhile, investors may look for a safer bet and broadband providers like Comcast will have less to invest in broadband, which would be a tragedy.
Here is a specific example of why we need a strong forbearance procedure to eliminate or modify telecom regulation which is no longer necessary for the protection of consumers, which proposals in the Senate and House of Representatives -- S. 2469 and H.R. 3914 (110th Congress) -- would eviscerate:
The Federal Communications Commission is considering a petition of AT&T seeking forbearance from the requirement to file reports detailing its service quality, customer satisfaction and infrastructure investment.
Opponents of regulatory reform want the Commission to consider whether to eliminate or modify the reporting requirement, if at all, in a normal rulemaking proceeding rather than a forbearance proceeding. The principal difference between a forbearance proceeding and a normal rulemaking proceeding is that a forbearance proceeding has a self-enforcing deadline, whereas a rulemaking proceeding can languish for eternity. the Commission has been considering whether to eliminate the service quality and customer satisfaction reports since 2000. The fact that the Commission has sat on this question for 8 years proves the wisdom of Congress in enacting a forbearance process, which includes a "deemed-granted" clause. The Commission, with all due respect, ignores naked deadlines when it chooses. The Commission has obviously given up on the biennial review process, which is the other procedure Congress included in the Telecommunications Act of 1996 to facilitate deregulation. The Commission conducted the last biennial review in 2002. Therefore, the obvious conclusion is that eliminating the "deemed granted" clause could drive a stake through deregulation. (footnotes omitted.) The FCC's Biennial Review home page is here.
My full comments on the pending forbearance petition filed by AT&T are here.
My colleague George Gilder and I have completed a paper, entitled "More Broadband, Increased Choice and Lower Prices Begin With Regulatory Reform." We examine various shortcomings in telecom regulation in Illinois, Michigan, Ohio and Wisconsin as a result of robust competition. We explain why regulation and competition don't mix, and offer legislators specific ideas for regulatory reform.
The above chart, which appears in the paper, projects the growth in competition from cell phones and Internet Protocol-enabled voice services provided by cable operators. The curve is in the shape of a hockey stick.
Phone competition from cable operators took off beginning in 2004 as a result of the FCC scaling back its wholesale competition rules. Those changes prompted phone companies to enter the video market dominated by cable operators, who in turn accelerated their entry into the voice market dominated by incumbent phone companies.
When the 1996 law passed, several cable operators planned to offer competitive phone services in a venture that included Sprint Corp. But according to Sprint CEO William T. Esrey, the plans were dropped because of the FCC's "pro-competition" policies: "If we provided telephony service over cable, we recognized that they would have to make it available to competitors." Thus, the local competition rules which were intended to speed effective competition actually delayed it.
Consumers also began substituting cell phones for fixed line service in greater numbers beginning in approximately 2004. During the Clinton administration, additional spectrum was auctioned for cell phone services and state regulation was preempted. Service quality steadily improved and prices steadily dropped, both as a result of these policies and technological innovation. Cell phone service -- which was once expensive and unreliable -- is increasingly becomming a compelling alternative to fixed line phone service. Also, at the end of 2003 the FCC mandated wireline-to-wireless number portablility -- enabling you to cancel your fixed line phone service and transfer your wireline phone number to a cell phone.
The point is that it is time to reform telecom regulation. The phone company which Lily Tomlin ("Ernestine") lampooned (e.g., "We're the phone company; we're omnipotent.") on Rowan & Martin's Laugh-In program that aired on NBC from 1968 to 1973 no longer exists.
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.
You should have been there! Telecosm was thrilling. I will list the ways, in chronological order in two or three posts over the next few days. (Below is Part 1.)
1) Lawrence Solomon, author of The Deniers, demonstrated, beyond cavil,
that nearly all the relevant scientists, outside of the government
echo-chambers, completely repudiate the climate panic. He concluded by
pointing to evidence for a cooling trend ahead.
2) After I presented the statistics showing that most of the global
economy is driven by innovation in the Telecosm--teleputers, datacenters,
optical fiber, fiberspeed electronics--Steve Forbes gave a magisterial
tour of the world economy. Relevant to the debates on the Gilder Telecosm
Forum subscriber message board was his assertion that the Fed had been too
loose in the face of a collapse in the demand for dollars caused by the
muddled cheap dollar leadership from the administration. Later in the
conference, in an incandescent speech mostly about the amazing expansion
of freedom and supply side economics in China, John Rutledge maintained
that the Fed had been too tight, measured by the flat monetary base. But
then, as far as I could grasp, Rutledge contradicted himself by showing a
dramatic surge of bank lending to small and midsized businesses. If it was
caused by the collapse of other lending sources, he did not give any
evidence.
3) Nicholas Carr gave a suave and lucid presentation of the themes of his
The Big Switch book, comparing the emergence of cloud computing to the
rise of the centralized power grid. Raising an issue that recurred
throughout the conference, our regnant expert on the power grid, Carver
Mead, dismissed the analogy as simplistic, since one-way power delivery
and two-way information transfer are radically different processes. Bill
Tucker, author of the forthcoming Terrestrial Energy, pointed out in a
compelling speech that Moore's Law is about miniaturization of bits while
the energy industry is better described by a Law of More--more power and
more efficiency. He explained that all the energy in the atom is in the
nucleus and pointed to the immense heat caused by nuclear fission and
fusion within the earth. Then he impugned the venture capitalists'
compulsion to waste arable land and space twiddling with electrons and
photons and presented much evidence that solar energy in all its forms
would never provide adequate power for an ever growing economy. Physicist
Howard Hayden of Energy Advocate enthusiastically confirmed this view.
4) Andy Kessler followed with an uproarious investigation of Who Killed
Bear Stearns?. His answer pointed not to the usual culprits (though he did
politely finger front row auditors me and Bob Metcalfe) but to Bear
Stearns' itself. After preparing a feculent feast of sub-prime pork ("they
knew better than anyone else what was in it"), then packaging it all into
putatively succulent AAA delicacies, they totally lost it and ate their
own sausages.
5) The Exaflood Panel presented Andrew Odlyzko's dour but learned analysis
of Internet traffic, which concluded that the real danger is not too much
traffic but not enough to sustain all the businesses in the sector. Joe
Weinman, a brilliant strategist from ATT, however, confirmed the Exaflood
thesis, and Johna Till Johnson of Nemertes offered compelling evidence
that the best way to examine the issue is from the supply side. If you
don't build it, they definitely will not come. Traffic in the core is
dependent on access from the edge, which still lags in the US, as even
Odlyzko showed rates of usage in Korea and Hong Kong six times US usage
rates. Lane Patterson of Equinix confirmed aggressive estimates of traffic
growth and still more ambitious growth of Equinix datacenters, but said
that patterns of traffic confirm that the core is being starved by
inadequate access on the edge.
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.
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.
George Gilder is getting some well-deserved recognition in Technology Review in an article by Mark Williams entitled "The State of the Global Telecosm - The most notorious promoter of the 1990s telecom boom has been proved right." "I'm a fan of George Gilder, the bubble bursting notwithstanding," Ethernet coÂinventor Bob Metcalfe (a member of Technology Review's board of directors) told me after his San Diego keynote speech, "Toward Terabit Ethernet." Metcalfe had told his audience not only that optical networks would soon deliver 40- and 100-gigabit-per-second Ethernet--standards bodies are now hammering out the technical specifications--but also that 1,000-gigabyte-per-second Ethernet, which Metcalfe dubbed "terabit Ethernet," would emerge around 2015. Why, I asked, did Metcalfe believe this? "Last night, Gilder spoke to 300 of us at an executive forum about his 'Exaflood' paper, in which he predicts a zettabyte of U.S. Internet traffic by the year 2015," Metcalfe said. "Since I admire Gilder, I extrapolated from his prediction."
An exabyte is 1018 bytes of data; a zettabyte is 1021 bytes. Metcalfe pointed to video, new mobile, and embedded systems as the factors driving this rising data flood: "Video is becoming the Internet's dominant traffic, and that's before high definition comes fully online. Mobile Internet just passed a billion new cell phones per year. Then totally new sources of traffic exist, like the 10 billion embedded microcontrollers now shipped annually." Metcalfe also addresses the interesting question of whether there is sufficient capacity in the Internet backbone to accommodate the surging traffic: Did Metcalfe believe that the existing infrastructure--built in the boom years, when great excesses of fiber-optic cable were laid down--could support terabit Ethernet? "That dark fiber laid down then is being lit up, and some routes are now full," he said. "That's the principal pressure to go to 40 and 100 gigabits per second. It seems we can reach those speeds with basically the same fibers, lasers, photodetectors, and 1,500-nanometer wavelengths we have, mostly by means of modulation improvement. But it's doubtful we'll wring another factor of 10 beyond that." Thus, the backbone networks would need to be overhauled and new technologies implemented.
John Dvorak, PCMag.com: In today's world, bandwidth demand is similar to what processing demand was 20 years ago. You just can't get enough speed, no matter how hard you try. Even when you have enough speed on your own end, some other bottleneck is killing you.
This comes to mind as, over the past few months, I've noticed how many YouTube videos essentially come to a grinding halt halfway through playback and display that little spinning timer. Why don't they just put the word "buffering" on the screen?
All too often, it's not the speed of my connection that's at issue--it's the speed of the connection at the other end. It may not even be the connection speed itself; it may simply be the site's ability to deliver content at full speed under heavy demand.
This concerns me, since I'm an advocate of IPTV and other technologies that need lots of speed to work. We seldom consider the fact that if something becomes hyper-popular (like YouTube), user demand on the system is enormous and can easily break the system from the demand side....
Read On Interesting article that misses the chief recent development on the net: the huge advances in the efficiencies of the datacenters that dispense these web pages. The "cloud" computing paradigm, pioneered by Google, is now going mainstream as Nicholas Carr, Telecosm speaker this year (www.TelecosmConference.com), documents in his intriguing book. For example, Jules Urbach--our movie and virtual world renderman and Telecosm star with his Lightstage corporation--can send images from thousands of different "viewports" per second from his graphic processor based OTOY servers, which can scale to millions of users. A company called Azul has developed cheap scalable datacenter technology that delivers terabits per second from its OS neutral Java-based clusters of servers.
The bottleneck is rapidly moving back to where it has long resided: at the last mile, where passive optical networks, such as VZ's FiOS, are increasingly necessary. For IPTV, content delivery networks (CDN) from Akamai and its increasing throng of video rivals using a variety of ingenious delivery algorithms will eclipse the cumbersome BitTorrent mesh model, which shuffles video files through underused personal computers across the network.
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.
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.
Normally when you quote someone extensively but selectively and you're making a different (arguably opposite) point, you acknowledge that.
Stanford Law Professor Lawrence Lessig, who got a chance to lecture a captive Federal Communications Commission during a special public hearing on broadband network management this week, began the lesson quoting from remarks Gerald R. Faulhaber, Professor Emeritus of Business and Public Policy at Wharton, made at Stanford on Dec. 1, 2000 when he was chief economist at the FCC.
I think Prof. Lessig is a gifted and well-intentioned scholar and educator. And Prof. Faulhaber framed the issues well, so it's understandable why Lessig quoted him.
But Faulhaber wasn't on Lessig's page.
A transcript of Faulhaber's full remarks, available on the Stanford Web site, indicates that Faulhaber was merely summarizing arguments made by others and was actually quite skeptical of the "open access" proposal (an ancestor of net neutrality) that was being discussed.
Lessig Thursday credited Faulhaber with observing in 2000 that the "end-to-end" principle (e2e) equals perfect competition:
where does the e2e argument figure into this?
if I translate this into planet economics, that e2e in engineering is the equivalent of the perfect competitive market that economists know and love. But the full quote makes it clear Faulhaber was summarizing the argument of others: Now, where does the e2e argument figure into this? Well, the e2e advocates are essentially arguing, if I translate this into planet economics, that e2e in engineering is the equivalent of the perfect competitive market that economists know and love. Faulhaber made it clear he didn't agree, a fact which Lessig failed to mention: But in fact that's not the way the real world works. It's neither the economist nirvana of perfect competition nor is it the engineers' nirvana of e2e. It doesn't work that way.
First, we notice that customers actually don't behave as we would wish them to. They keep insisting on things like "I'd rather buy a bundle. I'd rather buy it from one person. I'd rather not have to worry about solving complexity; I'd rather somebody else solve complexity for me," all of which present enormous profit opportunities for businesses and opportunities to change the technology. And at one level this is what consumers want and this is how it's going to evolve.
I'll give you an example, I'll give you two examples. The first is, and the most obvious, is you should read Dave Clark's and Marjorie Blumenthal's paper, which was supposed to be required reading, which will show you that the principles of e2e tend to get violated essentially when, at least in some of the cases that he mentions, customer demand is pushing them to be there. The couple of issues he raised, one is operating in an untrustworthy world, more demanding aps, less sophisticated users.
One of these we seen and we all sort of pooh-poohed, us, you know, cool Internet guys, is the rise of AOL; right? As they put it, somewhat understating the case, "We're for the people" -- "We're the ISP for the people who go to Jiffy Lube, not the ISP for the people that change their own oil." And we all pooh-pooh this and we call them "newbies," and their market share is huge. There's a market demand for all those nasty things they're doing. And consumers like it. If we think they're newbies, tough. So e2e may very well be violated for reasons which are really lower cost or higher value to customers. Lessig advocates that broadband service provider should obtain permission from regulators before they make any changes in network architecture: Before we allow it to change the burden should be on those who would change its architecture ... show me that innovation won't be harmed from this change. Show me investment won't be choked. Show me competition will continue. And until you show me that don't allow [network architecture] to change. This isn't as reasonable as it sounds. Following the divestiture of AT&T in the early 1980s, this is exactly what we had, and it was a nightmare.
According to Huber, Kellogg and Thorne (Federal Telecommunications Law [1999], 823-830), [The] initial division of the Bell System turned out to be the easy part. It immediately was clear that the Decree's restrictions on the divested local companies were impractical, unnecessarily broad, or simply exceptionally onerous, and a steady stream of requests for relief ensued .... Waivers were filed faster than they were processed, leading to growing backlogs before the Department of Justice and Judge Greene: by 1994, the average age of waivers pending before the DOJ and Judge Greene was two and a half years. This breakdown of Judge Greene's oversight of the telecommunications industry was of serious concern to legislators when they drafted the 1996 Act. Is this what we want in a fast-moving sector of the economy characterized by rapid technological change? Two and a half years? That's an eternity in this industry.
One of the reasons Faulhaber cited for his opposition to open access is the problem of government failure, which Lessig also skipped: Let me address one thing at the last. Now, we've heard something about regulation and that regulators need to step in and fix this problem of open access, and e2e is the touchstone for this. Now, I refer -- the notion here is regulators will come in and fix it. And I would refer to this as the high school civics view of regulation. And since engineers really -- oh, yeah, right -- since engineers usually don't actually get to see how regulation is done, more or less like Bismark sausages, you can be excused for not understanding what this means. But lawyers who actually often take the same view really should -- they see how it's made -- understand what's going to happen.
So we all sort of think what's going to happen is a sensible rule gets made, and everybody says "Oh, yeah, that's very sensible." It's never the way it works. It's not like it -- mostly it doesn't work this way. It never works that way; okay? It's what you got to understand.
First of all, of course, if you put a regulation in, the reason you put a regulation in is 'cause you're making somebody do something they otherwise wouldn't want to do. So they're going to object to that. So the first thing that happens is, you know, fifty lobbyists appear in my office, and they're all over the FCC like a cheap suit. So what you actually started is, you put into place, you know, you've put into training this long process of regulatory judicial and legislative hearings, filings, NOIs, MPRMs, years of essentially the FCC or somebody else sitting in the middle of commercial disputes. The solution here isn't to regulate broadband service providers but to free up more spectrum for broadband competition.
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 $25 million to conduct new audits and investigations for the purpose of preventing and remedying waste, fraud and abuse in the Universal Service Fund.
The forbearance process, which I discussed here, has recently come under some criticism from regulatory enthusiasts who claim it deprives the FCC of the right to set its own agenda (which is code for the right to bury and never vote on proposals for meaningful regulatory reform). The rate-of-return accounting rules are a good example why we need the forbearance process.
(Note: The AT&T petition was filed Jan.25, 2007, and if the FCC stored the entire document in a single place I would have included a hyperlink. But they didn't. The document is divided into multiple files which aren't linked to one another. Brilliant. To see the files, go to: http://fjallfoss.fcc.gov/prod/ecfs/comsrch_v2.cgi and search for documents filed on behalf of AT&T on the date above.)
Communications Daily ($) 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.
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.
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.
 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.
An inconvenient fact (for opponents of network management):
A survey by the Japan Internet Providers Association shows 40% of Japanese ISPs perform network management, according to Yomiuri Shimbun, and the trend is growing.
Of the 276 respondents, 69 companies said they restricted information flow through their lines. A total of 106 companies, including those that rent lines from infrastructure owners, impose such restrictions. Twenty-nine companies said they were planning to take similar measures. This is somewhat ironic because advocates for a centrally-planned national broadband strategy led by bureaucrats cite Japan as one of the successful examples the U.S. should follow. See, e.g., " Down to the Wire," by Thomas Bleha in Foreign Affairs (May/June 2005).
Hat tip: Ken Robinson
Referring to Bret Swanson's and George Gilder's prediction U.S. IP traffic will reach an annual total of 1,000 exabytes, or one million million billion bytes by 2015, Ethernet inventor Robert Metcalfe foresees a terabit-per-second Ethernet, according to Telephony. Although not sure eaxctly when, Metcalfe predicts --
New modulation schemes will be needed for the coming network, he said, as well as "new fiber, new lasers, new everything."
The need to replace existing technologies will create "chaos," Metcalfe said, but also opportunity for equipment vendors.
The Federal Communications Commission conducted a public hearing this week on network management before a group of law students -- as opposed to, say, engineering students who are the ones who study network management -- where lead witness Rep. Ed Markey (D-MA) declared
[T]he Internet is as much mine and yours as it is Verizon's, AT&T's or Comcast's. Please keep front and center in your examination the needs and wishes of the community of users rather than a small coterie of carriers.
As a matter of law, Markey would have flunked if that were an exam question. But of course the government has a right to try to control whatever it wishes one way or another.
The interesting and relevant question is whether and to what degree it's possible to proscribe network management practices which most reasonable people would consider inappropriate without unintentionally preventing network providers from trying to improve their services while earning a competitive return on their investment.
"[C]learly, complicated network architectures, Internet viruses, and capacity limitations raise real-world, complex and valid questions, conceded FCC Commissioner Michael J. Copps. "Our job is to figure out when and where you draw the line between discrimination and reasonable network management."
Copps wants to impose a common carrier obligation on broadband providers so they'll treat everyone's communications equally, which is mostly what they do now on a voluntary basis.
Copps says he would also empower the FCC sit back and conduct a "systematic, expeditious, case-by-case approach for adjudicating claims of discrimination." That way, over time, we would develop a body of case law that would provide clear rules of the road for those who operate on the edge of the network, namely consumers and entrepreneurs, and those who operate the networks. It's an approach that echoes easily off the walls of the nation's oldest law school--because it's in the ancient tradition of the English common law, the tree that grows from the roots up. This is essentially what the FCC already does, although Copps may have in mind clarifying and/or augmenting the existing procedures.
Copps seems to either question whether the FCC's current policy statement on broadband Internet access is enforceable without question or doubt, whether it's too vague, or both.
He appears to want a system where the nondiscrimination rule is so broad that broadband providers would have to secure the votes of 3 of 5 FCC Commissioners in advance to create specific exceptions on a case-by-case basis allowing them to experiment with a particular innovation. It's a variation on the guilty-until-proven-innocent concept. And anytime a broadband provider thinks of a way to "build a better mousetrap," it would have to file a petition with the FCC providing notice not only to the public but also it's competitors. Then the broadband provider would have to wait for the bureaucrats to figure out what to propose to the politicians and how to cover their ass.
This sort of arrangement isn't necessary to protect consumers, only the aspirations of "me too" competitors. The competitors would be asked by the FCC staff what they think (and what is the price for their acquiescence)? They would respond that in order to capture a "reasonable" (read: handsome) profit from the broadband provider's innovation, the competitors would need the right to buy it at an arbitrary discount and resell it at a price that undercuts the broadband provider's cost plus a reasonable profit.
The problem with this approach would be years of heightened uncertainty (if not the likelihood of outright confiscation) just when the U.S. needs broadband providers to invest at least another $100 billion in additional capacity.
But Commissioner Jonathan Adelstein and others fret that the broadband market presently resembles a duopoly which justifies regulation even though he seems to understand this situation is unlikely to persist:
We all have high hopes for the development of alternative technologies like wireless to promote greater competition in the broadband access market. Right now, though, we see a broadband market in which, according to FCC statistics, telephone and cable operators control over 93 percent of the residential market. For many consumers, there is no meaningful choice of providers. Setting aside the fact that the unmistakable emergence of a viable and compelling category of competitors (wireless) completely demolishes the duopoly theory, in the broadband market as it is there are none of the dangers commonly associated with a duopolistic market (rising prices, deteriorating service, etc.).
It isn't like Coke and Pepsi, who compete primarily on the basis of their marketing efforts. Broadband providers are investing billions of dollars to improve their services, something they wouldn't have to do in a noncompetitive market. The most recent evidence is Comcast's announcement that it will deploy a new technology to boost speed and bandwidth:
Stung by the success of phone companies in selling packages of TV and high-speed Internet services, the cable industry is getting close to launching a counteroffensive -- an inexpensive new technology that dramatically boosts Internet connection speeds.
Called Docsis 3.0, the technology will allow the cable industry to compete on a more even footing with telecom giant Verizon Communications Inc., which is aggressively marketing a high-performance fiber-optic network called FiOS that offers much faster Internet connection speeds than cable modems can currently deliver. Whether the cable industry can roll out the new technology fast enough to minimize the damage from FiOS remains to be seen. There are many markets dominated by two competitors. And the rivalrous broadband market demonstrates how they can be good for consumers.
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.
Check out Taylor Frigon's blog post, "A paradigm's shift in the way you get information," which links to a story in the Wall Street Journal by Esther Dyson entitled: "The Coming Ad Revolution." Dyson's column discusses major changes in advertising that have been on their way for years but which few people today even see coming. Frigon writes:
The article outlines an impending paradigm shift in the way people find information, which will have a tremendous impact on the advertising business and those that support it.
But this revolution in the way that people find information will impact more than just the ad industry. We wrote about some of the potential implications in the world of search two months ago in a post entitled, "What is the future of search?" And there are thousands of other ways in which the kinds of changes that Dyson is discussing in this article will impact business and life beyond business.
George Gilder predicted these very same revolutionary forces in his 2000 book Telecosm: How Infinite Bandwidth Will Revolutionize our World. In chapter 18, "The Lifespan Limit," he wrote:
"The supreme time waster, though, is television. Many people still have trouble understanding how egregious a time consumer, how obsolete a business model, how atavistic a technology, and how debauched a cultural force it is. [. . .] For as much as seven hours a day, on average, consuming perhaps two thirds of your disposable time, year after year, all in order to grab your eyeballs for a few minutes of artfully crafted advertising images that you don't want to see, of products that you will never buy.
"[. . .] In the future, no one will be able to tease or trick you into watching an ad. Your time is too precious and you are too powerful. Advertisements will truly add value rather than subtract it (247 - 252)."
The value of your trusted circle of friends, family, colleagues, and various networks to which you belong or with which you associate may become much easier to tap into to help you with decisions than ever before, diminishing the power of old-fashioned advertising as Gilder foresaw years ago and as Dyson describes in today's article.
You may well make purchasing decisions based on these existing networks, as well as based on new networks which arise to provide you with access to what products other consumers like you find valuable.
Based on this outlook, the tremendous valuations for companies like Google, whose revenues are based upon a very primitive version of tying advertisements to what you are looking for, may be something of a house of cards. If the paradigm is truly shifting in the ways that are foreseen by Dyson and Gilder, there are new opportunities few see now, and the companies most dominant today may become examples for future discussions of the topple rate.
 Markey: "The bill contains no requirements for regulations on the Internet whatsoever." The long-awaited network neutrality bill of Rep. Ed Markey (D-MA) was unveiled this week. H.R. 5353 establishes a new broadband policy and requires the Federal Communications Commission to conduct an Internet Freedom Assessment, with public summits and a report to Congress.
Broadband Policy
According to the bill, it would be the policy of the U.S. to: - maintain the freedom to use for lawful purposes broadband telecommunications networks, including the Internet ...
- ensure that the Internet remains a vital force in the United States economy ...
- preserve and promote the open and interconnected nature of broadband networks ...
- safeguard the open marketplace of ideas on the Internet by adopting and enforcing baseline protections to guard against unreasonable discriminatory favoritism for, or degradation of, content by network operators ...
These policies would become part of the Communications Act, but as all lawyers know, Congressional declarations aren't enforceable (although sometimes they may be useful in resolving ambiguous or doubtful provisions of law).
Markey concedes this point: "There are some who may wish to assert that this bill regulates the Internet. It does no such thing. The bill contains no requirements for regulations on the Internet whatsoever. It does, however, suggest that the principles which have guided the Internet's development and expansion are highly worthy of retention, and it seeks to enshrine such principles in the law as guide stars for U.S. broadband policy." When Congress wants to make something happen, it passes a law. It's safe to assume Markey would be proposing a law if he thought he had the votes to pass it.
Internet Freedom Assessment
Markey's bill also directs the FCC to open a proceeding on broadband services and consumer rights, assess whether broadband providers are in compliance with the above policies, conduct at least 8 public broadband summits around the country and submit a report to Congress. But another agency has already done something similar.
Last summer the Federal Trade Commission completed a study, "Broadband Connectivity Competition Policy: A Federal Trade Commission Staff Report," covering the same subject.
The advantages of the Markey net neutrality bill for net neutrality proponents are: (1) the policy statements would have symbolic value which proponents could try to exploit in court rooms, hearing rooms and editorial boards, and (2) another year or two of wasteful and duplicative process at the FCC would keep the net neutrality issue front and center for a while longer.
In preparation for the "Exaflood" paper, I read the November 2007 paper by Nemertes Research -- "The Internet Singularity Delayed: Why Limits in Internet Capacity Will Stifle Innovation on the Web." It is an exemplary supply-side work (low utilization rates signify inadequate bandwidth rather than lack of demand). Failure to invest in infrastructure will produce not a breakdown of the Internet but a breakdown of the innovation culture of the net that brought us YouTube et al.
I recommend the paper to all as a guide to the prospects of our network processor and hollow router paradigms. It contains a number of obvious errors (dates reversed on charts (p.22), confusions between zettabits per second and petabits), and a "What me worry?" approach to huge conflicts between Nemertes and Odlyzko estimates of global capacity in 2000 (Odlyzko 85 pettabytes per month; Nemertes 61 exabytes!). Today global access capacity is around a zettabyte (10 to the 21) per month (2 plus petabits per second), with the U.S. commanding only one seventh of it (300 Tbps) or 14% while our GDP was close to 20% and our market cap 40% (adjusting for dollar doldrums).
Meanwhile, U.S. investment in infrastructure (capex only) was roughly $5B out of a global total of $20B and U.S. investment in access equipment (again capex only) was under $1B or about a fifth of global access investment in capex ($5B plus). But the U.S. out-invests the rest of the world in edge router/switch connectivity for the metro and high-end enterprise. Enterprise IP traffic is estimated to be about 1.5 times Internet IP traffic, but convergence continues.
On page 29, the report contains a breakdown of core and edge router/switch unit growth that is relevant to our network processor paradigm. On the order of 10 to 15 thousand core routers are sold annually, compared to between 30 and 60 thousand edge and metro routers and literally billions of access nodes of all kinds. The NPA is a key product for volume production of NPUs for scale and learning curves.
The other insight is that IPV6 meets the need for addresses but does not respond to the expansion of router tables that will slow the net in coming years if it is not remediated. The conclusion is a large need for CAMs, Knowledge Processors, and other memory and lookup table accelerators.
Nemertes declares that the U.S. confronts a coming bandwidth crunch in 2010, when access constraints will begin seriously to limit investment in Internet service innovation. The argument is that Moore's law increases in capacity will yield rising utilization rate and that traffic is supremely sensitive to utilization rates. In other words, as bandwidth increases we use it more and innovate more. I believe this. Others don't.
"If we build it, they will come," is the underlying assumption of Nemertes and me. People laugh but it is true over any run longer than a year or so.
Reforming the system of heavy subsidies for rural telephone service, which dates back to the Great Depression, has long been a topic of discussion for telecom policy wonks. The Universal Service program is proof-positive that subsidies grow like weeds. Universal Service has spawned a constituency of more than 1,000 small telephone companies who've waged a Jihad to preserve their entitlement.
Politicians have always found it expedient to look the other way. This may be changing. In recent years, wireless companies have set up shop in rural areas. Although their costs are generally far less than those of the incumbent wireline providers, one of the FCC's brilliant "pro-competitive" policies bestows a subsidy for wireless service which is identical to the subsidy for wireline service that's more expensive to provide. Cable companies who provide telephone service are also entitled to identical support. So guess what? As competing providers have demanded their fair share, the overall cost of Universal Service has exploded. Even some politicians are finding the size of the fund harder to ignore.
If it ever went to court, there could be a problem. Universal Service is really a tax, although it's still officially classified as a user fee. The distinction is critical. Agencies can't levy taxes. They must originate in the House of Representatives -- and tax legislation is referred to the House Ways & Means Committee, which has never played an active role in telecom policy. (Note: To influence the Ways & Means Committee, you would need a different set of lobbyists -- a scary prospect for many.)
FCC Chairman Kevin Martin has long advocated taking action, and now the FCC has issued three notices of proposed rulemaking for reforming this mess.
Identical Support
The Identical Support NPRM seeks public comment on basing every carrier's subsidy on their own costs. Obviously, a good idea. Anna-Maria Kovacs, one of the best regulatory analysts, claims the idea appears to have the support of all five FCC commissioners. Unfortunately, the FCC may have torpedoed this initiative by loading the NPRM with questions about how to determine support. Actual costs? Forward-looking costs? There's a rich history of telecom companies exaggerating their costs and regulators choosing to ignore legitimate costs for the purpose of reducing rates or limiting increases. This NPRM will be a slugfest.
Reverse Auctions
The Reverse Auction NPRM seeks comment on the idea of letting competing providers bid for the subsidy. The low bidder could get the entire subsidy for a particular serving-area. Wireline providers fear that wireless providers, with their inherent cost advantage, would capture the subsidy and put them out of business. They will write to their members of Congress.
There's an obvious solution here: Wireless and cable telephony, excellent though they are, still don't quite match the reliability of wireline service. In a power outage, for example, your wireline phone service still works because it's powered out of the central office which has batteries and even generators. So let reverse auctions kick in as soon as competitors match the reliability of wireline service.
A third NPRM deals with other issues. One is to broaden the base of contributors. Right now, the FCC manages only the taxation of interstate services. Some would like it to be able to tax intrastate services, as well. (Never mind that intrastate services are already heavily taxed at the state level.) One fear I and others have is that "broadening the base" could lead to the taxation of Internet traffic. Another is to step up FCC audits so as to reduce waste, fraud and abuse. You might wonder: Don't they do that already (what do we have the FCC for if it isn't to conduct audits)? But FCC oversight, while successful on occasion, has been a farce overall.
Bret Swanson and George Gilder predict that the U.S. Internet of 2015 will be at least 50 times larger than it was in 2006. Their report, "Estimating the Exaflood: The Impact of Video and Rich Media on the Internet -- A 'zettabyte' by 2015?," estimates that annual totals for various categories of U.S. IP traffic in the year 2015. It projects: - Movie downloads and P2P file sharing of 100 exabytes
- Internet video, gaming and virtual worlds of 200 exabytes
- Non-internet IPTV of 100 exabytes, and possibly much more
- Business IP Traffic of 100 exabytes
Gilder notes that an exabyte is equal to one billion gigabytes, or approximately 50,000 times the contents of the U.S. Library of Congress.
This report expands on Swanson's article "The Coming Exaflood," which was published in the Wall Street Journal on January 20, 2007.
Let Technology Revive the Economy
Swanson and Gilder point out that the network isn't currently designed to handle this increase. Internet growth at these levels will require a dramatic expansion of bandwidth, storage, and traffic management capabilities in core, edge, metro, and access networks. A recent Nemertes Research study estimates that these changes will entail a total new investment of some $137 billion in the worldwide Internet infrastructure by 2010. In the U.S., currently lagging Asia, the total new network investments will exceed $100 billion by 2012. Wow, this is roughly comparable to the projected cost of the economic stimulus bill now winding its way through Congress ($146 billion). But I'll bet no one's thought of empowering the telephone and cable companies to revive the economy. That would mean scrapping welfare for Silicon Valley ( aka network neutrality legislation) and eliminating discriminatory taxation of communications services. Nah, not as long as they can contribute boatloads of cash for politicians through their political action committees. Swanson and Gilder correctly point to a fact that's lost on the political class: Technology remains the key engine of U.S. economic growth and its competitive edge. Policies that encourage investment and innovation in our digital and communications sectors should be among America's highest national priorities.
Rep. John D. Dingell (D-MI), the House Energy & Commerce committee chairman, is complaining that the FCC isn't fair, open or transparent. Exasperated political partisans frequently complain about process out of frustration when there is insufficient popular support for their point of view to prevail on the merits. That's what's happening here.
Overlooking the many unfortunate attempts lately to re-regulate the cable industry and a few other lapses, the FCC has been extraordinarily successful in terms of removing unnecessary regulation, and Martin deserves much of the credit. In the telecom space, network operators Verizon and AT&T are investing billions upgrading their networks to provide competitive video services as a result of the fact the Bush FCC allowed the Regional Bell Operating Companies into the long-distance market, deregulated last-mile fiber facilities, put DSL and cable modem services on the same deregulatory footing and prohibited cable franchising authorities from unreasonably refusing to award competitive franchises for the provision of cable services. As AT&T and Verizon attempt to capture video market share, the cable operators are ramping up their investment in competitive voice services.
Now Martin is backing a timid proposal to allow someone who owns a newspaper in one of the 20 largest cities in the country to purchase a broadcast TV or radio station in the same market if it isn't one of the top four TV stations in the community. That's going too far for a New Dealer like Commissioner Michael Copps.
The commission ought to eliminate all media ownership restrictions now that it's clear to any reasonable observer that the traditional "scarcity rationale" (i.e., limited spectrum availability) 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. But if the FCC can't or won't do it, I am confident the courts soon will.
Dingell sent a well-publicized letter to Kevin Martin this month accusing the FCC chairman of stifling reasoned analysis and debate. No one nit-picks over procedure if it is seen as leading to the correct outcome. But procedure is always a convenient scapegoat for policy differences.
Dingell makes the following specific complaints:
the Commission does not put the text of proposed rules out for notice and comment; there is little public notice of certain Commission actions; and Commissioners are often not informed of the details of draft items until it is too late to provide the necessary scrutiny and analysis that is so important to reasoned decision-making.
Although Dingell doesn't mention it, fairness, openness and transparency would also seem to require that the FCC abolish the practice of circulating written items for approval. GAO found that of 240 recent rules, only 101 were likely adopted at a public meeting while the other 139 appear to have been adopted in secret via circulation.
I would wholeheartedly support more transparency at the FCC. The FCC is a Soviet-style bureaucracy -- it is secretive, insider-driven and produces decisions consisting of mind-numbing detail which frequently conceal goodies for friends and associates. But let's be clear: that's not Martin's fault.
The FCC is unwieldy because of its mini-legislative structure. There are five commissioners appointed by the president and confirmed by the Senate, all of whom see themself as a significant public official entitled to celebrity treatment in Hollywood or Wall Street.
If Martin is trying herd the cats, it isn't anything new. Former FCC Chairman Reed E. Hundt was criticized for acting like a CEO to marshal the full resources of the FCC to overwhelm the "tiny" personal staffs of his four colleagues.
Fairness, openness, and transparency, as envisioned by Dingell, would grind the FCC to a halt for the remainder of the Bush presidency. But that would be a small price to pay if the changes would apply with equal force to future chairmen -- say, a Michael Copps, for example.
What about it, Mr. Dingell? If you will change the law to ensure fairness, openness, and transparency at the FCC, I would certainly support you; as would many other free-market advocates, I suspect.
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.
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.
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.
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.
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.
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.Â
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.   Â
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.Â
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.  Â
 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
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.
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.
Policy makers should recognize information technology as the centerpiece of economic policy and develop their plans accordingly, concludes the Digital Prosperity study published this week by the Information Technology and Innovation Foundation.
"In the new global economy information and communications technology (IT) is the major driver, not just of improved quality of life, but also of economic growth," writes Foundation president, Dr. Robert D. Atkinson, author of the study.
Atkinson is a widely respected economist who formerly served as project director of the Congressional Office of Technology Assessment, and is the former director of the Progressive Policy Institute's Technology and New Economy Project of the centrist Democratic Leadership Council.
Based on reviews of other studies, and Atkinson's own research, the report maintains, "IT was responsible for two-thirds of total factor growth in productivity between 1995 and 2002 and virtually all of the growth in labor productivity" in the United States.
Continue reading "Digital Prosperity Report Concludes IT Investment Critical" »
Patients, adept at using the internet to schedule travel, conduct business, and access information with the click of a mouse, are now driving changes in the way state and federal policymakers address health care reform.
"Health IT" is the new buzzword for health care, and information technology proposals for healthcare reform are sprouting like daffodils in April!
Tennessee Gov. Phil Bredesen
So far this year, the National Governor's Association has announced the creation of the State Alliance for E-Health, co-chaired by Tennessee Gov. Phil Bredesen and Vermont Gov. Jim Douglas. Their purpose is to bring together office holders and policy experts to, "address state-level health information technology (HIT) issues and challenges to enabling appropriate, interoperable, electronic health information exchange (HIE)".
As quoted in the National Journal's coverage of the event, Gov. Bredesen explained, "...the states can move much more quickly....I don't trust the federal government to actually do anything on my watch."
Continue reading "Health IT Creating a Buzz" »
Fred Fielding, the new White House counsel, was also Ronald Reagan's counsel and comes from Wiley, Rein & Fielding. The Washington Wire notes that the law firm
"is well-known for its telecom practice, which is led by FCC Chairman for Life Dick Wiley. One of his many protégés, current FCC Chairman Kevin Martin, has stocked the independent agency with former Wiley Rein lawyers and the two men remain close."
Fielding will probably spend much of his time answering subpoenas from Henry Waxman, but I would bet he's more tuned into the telecom market than was Harriet Miers. Could this move marginally heighten the White House's interest in telecom and technology, which to this point has been less than intense?
-Bret Swanson
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" »
Hance, thanks for your legal analysis of the FCC merger vote. You're absolutely right. I don't see any reason why McDowell should not vote. In fact, I think you make clear that, for reasons of both law and propriety, he has to vote.
The conflict-of-interest rules presumably are in place to prevent government officials from favoring friends or punishing enemies. But if McDowell chose not to vote in this case -- pretending to cite the conflict rules -- he would be doing just that: favoring friends and punishing old enemies. As you've shown, it probably is not within the letter of the law. But such an apparently cynical manipulation absolutely cannot be within the spirit of the law. It turns the whole point of conflict rules inside-out. And, as you've also shown, it would not be in keeping with the letter or spirit of his confirmation statement either.
Surely, such an action -- or a delay until next June as you have heard -- would not only hurt the completely rational and innocuous AT&T-BellSouth merger, but it could poison much of the important work the FCC has to do on other important telecom issues.
I hope McDowell is instead just giving everyone time to have their say and let the back-and-forth between Congress and the FCC general counsel play out before he does the right thing, and votes.
-Bret Swanson
Scott Leith of the Atlanta Journal-Constitution reports it's "highly unlikely" the FCC will be able to vote Dec. 20 to approve the AT&T/BellSouth merger. Two Democrats who are set to lead the House Energy & Commerce Committee and the subcommittee responsible for telecommunications are trying to push the merger into next year, when they expect to have far more leverage and can damand some consideration for letting the deal go through.
- Dingell, don't forget, opposes eliminating video franchising, which is an impediment to competition but which mayors see as an important source of revenue and corporate contributions to civic causes.
- Markey wants to construct a net neutrality regime that includes a "fifth principle of non-discrimination" (see my recent post for more on this matter). Markey's a dreamer, who sees the Internet as a tool for empowerment if managed like the postal or highway systems. He pushed the "Open Video System" provision in the 1996 Telecom Act, which was also intended to give consumers access to many sources of content by regulating the world wide web like a public utility. The thing is, OVS didn't attract a penny in investment. So even though it was the product of good intentions and appeared like it could become a giant engine for social justice and equality, OVS actually harmed consumers by delaying competitive entry in the video market. But the dream never dies, does it?
The new House of Representatives convenes Jan. 4, so the FCC has a few precious weeks to free the Telecosm, by enacting video franchise reform and approving the AT&T/BellSouth merger, before Dingell and Markey can overwhelm the Republican commissioners with information requests, oversight hearings, media sensationalism and other intimidation. The FCC would be in a far better position to act now, while it still has the chance.
Continue reading "Free the Telecosm" »
Why didn't the Baby Bells compete with one another when Congress ended their exclusive franchises in 1996? Each possessed the necessary expertise and vast resources. The FCC was most eager to help. Did the Baby Bells conspire to carve up their territories in order to maintain their respective monopolies?
In Bell Atlantic Corp. v. Twombly, counsel for Twombly allege that they did, though they can't cite any direct evidence. The Supreme Court heard oral arguments yesterday. Counsel for Twombly are alleging, for now, that a conspiracy can be inferred. Their logic is it would have been in the Bells' self-interest to compete. And they even told Congress they would. But they didn't. Each fought to get in the long-distance market while ignoring the local market. This common behavior, or "parallel course of conduct," doesn't make any sense, the argument goes, unless there was a conspiracy to protect each other. Well, yes it could.
JUSTICE GINSBURG: ... You say ... they were acting against their self- interest ... and I'm questioning that by saying that they might have seen this whole area as not the best place to invest their money.
As I have noted before, the Baby Bells targeted the long-distance market, because regulation allowed fat profit margins despite declining costs. They avoided local competition because regulation kept prices below cost or because the UNE-P regulation made facilities investment uneconomical and it was legally unsustainable (the courts repeatedly struck it down, see, e.g., USTA v. FCC (2004)).
Assistant Attorney General for Antitrust Thomas G. Barnett pointed out that parallel conduct is "ubiquitous in our economy" but "conscious parallelism" is not an agreement within the meaning of Section 1 of the Sherman Act. Counsel for Twombly are hoping to get a court's permission to examine documents and question executives of the Baby Bells in order to come up with more compelling evidence. Think of the billable hours!
Conscious parallelism is hypothetically possible, of course, but imagine trying to define it for purposes of antitrust enforcement?
CHIEF JUSTICE ROBERTS: ... would it state an antitrust violation if you had a grocery store on one corner of the block and a pet store on the other corner of the block and you say, well, the grocery store is not selling pet supplies and they could make money if they did, therefore that's an antitrust violation?
The danger of relying on inferences of agreement to convict under the Sherman Act is placing bureaucrats and judges in the posibition of having to second-guess a potentially wide range of business decisions.
JUSTICE BREYER: I thought the law to date was that the Department of Justice is not given by the Sherman Act the authority to remake the entire American economy. But if we accept your view I guess it is.
The marketplace constantly defies the expectations of professional managers and investors, and no one has ever shown that public officials can do a better job.
JUSTICE SCALIA: I used to work in the field of telecommunications and if the criterion is [what] Congress expected to happen when it passed its law, your case is very weak.
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Transcript of the Oral Argument (Nov. 27, 2006)
Brief for Petitioners Bell Atlantic Corp et al. (Aug. 25, 2006)
Brief for Respondents Twombly et al. (Oct. 13, 2006)
The once and future chairman of the House Energy & Commerce Committee, John Dingell, recently supported strong net neutrality regulation (to prevent "private taxation of the Internet") and opposed cable franchise reform. Now he has warned the FCC that it ought to postpone consideration of the AT&T-BellSouth merger until next year. These positions suggest Dingell believes there are benefits of regulation.
Perhaps he does. Yet, this is the same man who forcefully advocated deregulation when Congress debated the Telecommunications Act of 1996. During the floor debate on Aug. 2, 1995, Dingell noted:
... the rates of AT&T, MCI, and Sprint fly in perfect formation. They fly like the formation of the nuts and bolts in an aircraft, all tied together by invisible forces, which has led to a situation where they all make money and nobody gets into that because of the behavior of Judge Green and his law clerks and a gaggle of Justice Department lawyers and three floors of AT&T lawyers, who have been foreclosing the participation of any other person in or outside of the telecommunications industry.
Regulation, although meant to benefit consumers, was exploited by the regualted entities to maintain higher prices even though computers and fiber optics were driving down the cost of providing service.
Then, when the FCC decided to try to jump start local competition through cost-based unbundling and other gimmicks under former chairmen Reed E. Hundt and William E. Kennard, Dingell went ballistic. For example, here is what Dingell told one trade group on Mar. 2, 1998:
Continue reading "Dingell in the middle" »
Ken Robinson provides a much needed response to the crazy proposition that telephone networks were paid for by the ratepayer, not investors; ergo, they are public property; ergo, they should be subject to net neutrality mandates and every other conceivable regulation. "We, the people, paid for these networks, not the phone companies, and we, not the phone companies, should decide on the policies of these utilities," is how Bruce Kushnick phrased it in The $200 Billion Scandal. Robinson points out that nowhere does the purchaser of a product or service thereby acquire an equity position. And he notes that the public property argument -- repeated by Kushnick in his book -- is actually a more extreme view than Socialism or Communism:
Under Socialism, remember, the government bought the companies they're now running. So, when the public's representatives say thus-and-such should be done, in a sense they're just exercising the same right of direction that shareowners do under our system.
Under Communism, the assets may have been seized -- often without compensation. But the state, remember, is also assuming the risk, isn't it? If things don't work, state and enterprise both get blamed.
See: "Let's Hear It for Capitalism, Again!" by Ken Robinson, published in Telecommunications Policy Review on Jul. 31, 2006 and posted on the KMB Video Journal web site.
The competitive local exchange carriers are always looking for another shot in the arm by peddling their familiar "pro-competitive" theory of antitrust that would require the government to pick winners and losers and would have a chilling effect on investment. Yesterday they renewed their effort to force Verizon and AT&T to divest all network fiber they acquired in last year's mergers if it overlaps what they already had.
Under the merger conditions approved by the Department of Justice, Verizon and AT&T will divest fiber only to office buildings that were left without a competitive alternative following the merger -- if, judging by the distance and likely demand, it would be uneconomical for competitors to lay their own connections to those buildings. But CLEC attorney Gary Reback argued that Verizon and AT&T are sitting on a lot of redundant fiber couldn't be sold and isn't being used. Jonathan Lee added that if CLECs could buy it cheap (my words) the dark fiber would really help them offer more large enterprise customers a one-stop shop, particularly when the customer does business in multiple locations. None of those potential customers showed up yesterday in support of these arguments, let alone the notion that there isn't enough competition.
The Tunney Act requires that a federal court enter antitrust settlements. A court has virtually unlimited discretion in how it carries out the proceeding. Former Washington Post Managing Editor Steve Coll, who authored a book about the breakup of Ma Bell, wrote that the Tunney Act review of that settlement lasted more than seven months and was "laborious and contentious." He also described it as "a field day for Washington communications lawyers." It led to the continuing oversight of the Baby Bells by former Judge Harold Greene which created gridlock and blocked significant innovation.
Well, pursuant to the Tunney Act, U.S. District Court Judge Emmet Sullivan must now find that the mergers are in the public interest. The simple test -- although you won't find it in any statute -- is: If competitors are unhappy, a merger must be pro-customer. If competitors are happy, it isn't. Courts used to be able to pass on antitrust settlements without getting too involved. But in 2004, Congress altered the process the courts must follow.
Then-Senate Judiciary Chairman Orrin Hatch (R-UT) explained the need for the changes in the following floor statement:
This legislation also amends the Tunney Act to end what some have seen as courts simply "rubber-stamping'' antitrust settlements reached with the Justice Department without providing meaningful review. As I have stated, while I agree with the principle behind this proposal, I had significant concerns with the specific language that was reported out of the Judiciary Committee. After several months of discussions, I am happy to say that the current language appears to have answered most, if not all, of the principal concerns that were raised regarding the amendments to the Tunney Act.
Verizon attorney John Thorne pointed out this legislative history during his oral arguments before Judge Sullivan.
The amendments to the Tunney Act started out with language that, in all cases, could have been read to require, at a minimum, an evidentiary hearing and an opportunity for interested parties to intervene, whereas the final language left it all up the court's discretion.
Here are excerpts from the original amendment, as reported out of committee:
Before entering any consent judgment proposed by the United States under this section, the court may shall independently determine that the entry of such judgment is in the public interest.
....The Court shall not enter any consent judgment proposed by the United States under this section unless it finds that there is reasonable belief, based on substantial evidence and reasoned analysis, to support the United States' conclusion that the consent judgment is in the public interest. In making its determination as to whether entry of the consent judgment is in the public interest, the Court shall not be limited to examining only the factors set forth in this subsection, but may consider any other factor relevant to the competitive impact of the judgment.'.
Now compare that to the final amendment, as substituted on the floor:
Before entering any consent judgment proposed by the United States under this section, the court may shall determine that the entry of such judgment is in the public interest.
....Nothing in this section shall be construed to require the court to conduct an evidentiary hearing or to require the court to permit anyone to intervene.
Judge Sullivan is looking for an efficient means of evaluating the public interest benefits of the merger, while the CLECs have every incentive to draw the process out in the hope that Verizon and AT&T will settle their concerns for the sake of expediency. If the courts start routinely conducting extensive inquiries, the additional process alone will make future mergers more costly because competitors will get another bite of the apple and the merger applicants will have less incentive to reach a settlement with the Department of Justice.
The best advice Judge Sullivan received yesterday came from Wilma Lewis, representing AT&T, who recommended "something between a 'rubber stamp' and de novo review." A de novo review would place the court in the position of having to second-guess each one of the Department of Justice's conclusions. The legislative history demonstrates that Congress rejected the idea of requiring courts to do this. However, the pre-existing language of the Tunney Act permits them to do it. If Judge Sullivan wanted to be the next Judge Greene, he could decide to do that.
Even if he does not, there is still the danger of a "Pandora's Box" here if the court decides to require new evidence or permit new arguments on a limited basis. It would take active management and determination to contain the proceeding given the $take$ for the CLECs and other potential intervenors, not to mention Verizon and AT&T.
The member of the European Commission in charge of telecom, Viviane Reding, admits that these are "times of convergence where we can access music, emails and media content using different terminals and networks and where also the borders between fixed-line and wireless are disappearing." She has therefore initiated a review of the EU telecom rules -- with a focus on opening up more spectrum, regulating less in markets "where competition is
already effective" and achieving "competition and investment."
On the positive side, Reding advocates phasing out ex-ante sector-specific regulation -- leaving control with competition law and authorities -- and reducing the variety of regulatory approaches in recognition that "neither technology nor economic interest nor consumer behavior know national borders anymore."
According to Reding, many telecom industry officials are urging her to follow the U.S. model. She believes they are referring to the breakup of Ma Bell in 1984. Some people see divestiture as the sine qua non of competition in telecom. In fact, competition pre-dates divestiture, which was mainly an effort to identify and prevent hypothetical anticompetitive machinations. This is not an insignificant distinction. Competition arose when new technology -- microwave transmission -- slashed the cost of transport, not as a result of regulators' clairvoyance.
Still, Reding is right in observing that consumers in the U.S. have "true choice" in broadband access. But we wouldn't be where we are today if we had adopted structural separation -- i.e., ripping apart the wholesale and retail functions of a telecom carrier into separate entities so new entrants can free ride on the carrier's network investments -- or if we hadn't allowed cable operators to invest $100 billion in broadband networks free of regulation and then deregulated DSL.
We debated these schemes for years, and most observers concluded that they tend to diminish the incentives of incumbents and new entrants alike to invest in new services, and -- in the words of Justice Stephen Breyer -- create "not competition but pervasive regulation, for the regulators, not the marketplace, would set the relevant terms."
Reding, unfortunately, is hoping that the EU will impose structural separation and she is critical of Germany for not mandating "bit-stream access" -- Euro-jargon for net neutrality.
In the U.S., nearly every time Congress or the FCC have attempted to update telecom law or regulation, they have created more new regulation than they have eliminated. The best example is the 1996 Act, which former FCC Chairman Reed Hundt admitted earlier this year that some believe demonstrates that lawmakers and regulators cannot predict the results of their actions, "and so should do nothing." I expected Hundt to argue that this would lead to the end of civilization. But what he said was, "By this reasoning, few of us would get out of bed in the morning."
To see the full set of remarks, go to: Review 2006 of EU Telecom rules: Strengthening Competition and Completing the Internal Market
Local officials act as if eliminating cable franchising will be the end of civilization -- er, "livable" communities -- but a new paper demonstrates the link between increased competition in video programming, increased consumption and increased local franchising receipts, which local officials can use to raise teacher salaries and expand Medicaid benefits. The study, by Robert W. Crandall and Robert Litan, estimates that if Congress eliminates franchising, local franchise fee receipts would increase by between $249 million and $413 million per year. (See "The Benefits of New Wireline Video Competition for Consumers and Local Government Finances," available at Criterion Economics, LLP.)
Local officials claim they're not opposed to competition -- they embrace it! -- of course. But franchises are an unnecessary transaction cost that continue to exist only for the purpose of tending to preserve an important source of local government revenue, inkind contributions and occasional goodies for city leaders.
The telecom reform proposal under consideration in the Senate Commerce Committee would create a $500 million account as part of the Universal Service Fund to subsidize broadband deployment in rural areas. The anecdotal evidence for some time has been that rural areas actually are not far behind urban areas as it is. Part of the reason that there is not much of a lag is small rural telcos have been able to finance broadband upgrades with USF.
In a paper released Friday, the Congressional Budget Office sheds some much-needed light on the rumors. CBO claims that broadband is in fact permeating rural areas at a "rapid pace," and cites a finding from the Pew Internet and American Life Project that "rural areas are only about two years behind urban areas in their broadband subscription rates." (See "Factors That May Increase Future Spending from the Universal Service Fund," Jun. 2006.)
CBO confirms that USF is in fact already subsidizing broadband deployment, since current telephone equipment eligible for the subsidies is capable of providing voice and data services.
The proposal in the Senate to expand USF may be bad for innovation, since new technology could be forced to subsidize obsolete technology. The CBO study provides evidence that the popular notion of a rural broadband divide is actually a myth, and not a justification for expanding USF.
Sen. Ted Stevens (R-AK) rightly worries that current universal service mechanisms are unsustainable as consumers migrate to Internet phone services that are lightly taxed and regulated (these services clearly should contribute their fair share). Stevens and others also believe that rural America won't get broadband services without subsidies (we can't know this for sure, because we have never tried the alternative approach of removing all of the barriers to competition and investment).
Anyway, while Internet content and conduit providers obsess over net neutrality, something equally harmful is lurking in the shadows. A little noticed provision in the Senate's "staff working draft" designed to expand the universal service funding base could have profound consequences.
Currently, consumers of "telecommunications" services contribute billions of dollars to subsidize telephone service in rural areas. "Telecommunications" include telephone, cell phone and, for the moment, DSL services. DSL has been deregulated, and the requirement that it contribute to universal service is temporary. VoIP contributes a small amount, but nothing like a fair share. The Senate staff draft expands the category of contributors and ensures that they all pay equally. Its true that the Internet backbone would not contribute to universal service, but so what? Everything that travels to or from the public Internet would pay.
Here's how this looks:
''(1) CONTRIBUTION MECHANISM.--
''(A) IN GENERAL.--Each communications service provider shall contribute as provided in this subsection to support universal service."
''COMMUNICATIONS SERVICE.--The term 'communications service' means telecommunications service, broadband service, or IP-enabled voice service (whether offered separately or as part of a bundle of services)."
''(A) BROADBAND SERVICE.--The term 'broadband service' means any service used for transmission of information of a user's choosing with a transmission speed of at least 200 kilobits per second in at least 1 direction, regardless of the transmission medium or technology employed, that connects to the public Internet for a fee directly--
''(i) to the public; or
''(ii) to such classes of users as to be effectively available directly to the public."
Setting aside the issue of VoIP -- whose free ride should clearly end -- advocates of expanding the funding base sound like tax collectors when they argue that spreading the burden will lower the individual contributions. Contributions that are set low initially are, of course, much easier to raise in the future. And that will happpen, because there are no limits on the growth of most of the universal service funding mechanisms.
This week Senate Commerce Chairman Ted Stevens (R-AK) introduced comprehensive telecom reform legislation which, as Adam Thierer notes, is a 135-page monster, represents a counterproductive obsession on the part of some policymakers over the smallest details of communications policy and doesn't tear down any of the old regulatory paradigms that it sould.
That said, the proposal would move the country in a positive direction in several respects.
- Net Neutrality
-- Unlike the House bill, which grants the FCC specific new authority to enforce the commission's net neutrality principles -- and which is guaranteed to lead to questionable enforcement proceedings and perhaps litigation between grasping and delusional competitors -- the Stevens bill wisely requires the FCC to merely keep a watchful eye on industry practices and issue annual reports for 5 years. The reports may contain recommendations, but the commission may not recommend new rulemaking authority for itself. Unfortunately, the commission shall report on peering and other business arrangements that are appropriate objects for antitrust -- if egregious -- but not for an agency which is not governed by a clear and principled competition standard which emphasizes consumer welfare, as Randy May and the Regulatory Framework Working Group have outlined. It is unnecessary to include any provision regarding net neutrality in telecom reform legislation, as I have argued here, for example. However, Senator Stevens has the best net neutrality proposal so far.
- Video Franchising -- The proposal encourages negotiations between cities and competitive entrants, but establishes a 30-day shot clock and eliminates the ability of the cities to extort in-kind contributions (beyond 1% of gross revenues for Public, Educational and Governmental channels) or set anticompetitive buildout requirements. It also ensures comparable treatment for cable operators who face competition from a new entrant. Unfortunately, the proposal preserves almost all of the existing video regulations -- such as must-carry, PEG and I-Nets -- even though the market is competitive and all vendors need to be able to raise vast sums of capital to deliver broadband speeds of 50 mbps to 100 mbps.
- Universal Service -- On the distribution side, the bill would require periodic audits of universal service recipients and would set up a review process to prevent waste, fraud and abuse. That Senator Stevens, one of the strongest defenders of universal service, acknowledges the potential for waste, fraud and abuse in what is nothing more or less than an entitlement program is welcome and significant. Although this is a great start, ways must be found to ensure that the size of the fund declines as technology reduces the cost of services. One way to do this is to mandate price caps on all recipients. Another way is to auction the loans and/or subsidies for broadband services to the providers and the technologies that can offer the service at the lowest cost.
On the contribution side, the bill would authorize the FCC to expand the contribution base in virtually any conceivable way and would hide everything from the Congressional budget process. Sinces taxes and regulation go hand-in-hand, Senator Stevens' proposal raises the worrisome possibility that not only taxes but also regulation may be coming to the Internet. I'm not sure which is worse: that taxes and regulation could ruin the Internet, or that the Internet might provide potentially limitless opportunities for taxes and regulation to stifle everything else. At a minimum, Congress should cap the fund if its going to give the FCC virtually unlimited authority to collect "fees."
- Video and Audio Flag -- The bill would preserve the brodcasting business model by withholding content from the Internet. This is protectionist and anti-consumer. Congress should not pick winners and losers.
- Sports Freedom -- The bill would outlaw exclusive contracts with programming vendors for sporting events. In a free market, exclusive contracts can benefit producers and consumers. Government, as a general matter, should not interfere with private contractual arrangements. On the other hand, these particular arrangements are not the product of a competitive marketplace and have the potential to retard competitive entry. A permanent prohibition is heavy-handed and could be damaging, but some kind of transitional relief seems appropriate.
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.
"So often we legislate in these areas when something is evolving [and] we legislate wrongly. The technology just goes around it. My view is, let's wait and see. Let's make sure there's a problem before we legislate."
Senator Gordon H. Smith (R-OR), on the absence of a net neutrality provision in telecom legislation he plans to introduce for Senate consideration
"As a very small content provider (editor of Politech), I'd presumably benefit in the short run from Net neutrality. But I spent over a decade in Washington, DC, more than enough time to realize that government failure is more of a problem than market failure, and to become healthily skeptical of giving the FCC new powers to regulate the Internet."
Declan McCullagh, on net neutrality
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