An independent, "expert agency," like the FCC, is at its most effective when it is focused on keeping the industries it regulates running smoothly, in the interests of consumers, by filling policy "potholes." On the other hand, nothing incites partisan rancor like addressing "problems" that look a lot more like ideological crusades, rather than good faith efforts to address genuine consumer grievances.
Under Chairman Tom Wheeler, the FCC became a battlefield for "proxy wars" pitting business interests against each other in the name of ideology--that, itself, was a disguise for transparent political favoritism. These battles were fought not by the traditional strength of evidence and argument, but instead through PR campaigns, produced social media outrage, and 3rd party Hessians claiming the "public" or "progressive" interest mantle. This approach has devalued the deliberative process and the role of the majority and minority commissioners in driving consensus at the expert agency.
A Regulatory "Pothole"
A good example of a regulatory "pothole" is the agency's response to rapid adoption of VoIP technology by consumers in the early 2000's. Though VoIP calls were a cheaper substitute for PSTN calls in most respects, because VoIP calls didn't use the PSTN, consumers could not access E911 service.
After some well-publicized tragedies, the FCC quickly focused on this specific issue (out of a larger number of issues) in its already-pending 2004 VoIP NPRM. Acting quickly, and unanimously, the FCC issued an Order in 2005, adopting some interim measures to: 1) better inform consumers of the limits of nomadic VoIP services, and 2) to ensure that "interconnected" VoIP providers quickly became able to offer E911 service to their customers by terminating calls through CLECs.
But, if the VoIP 911 matter was an example of interested stakeholders (carriers and public safety/law enforcement) forthrightly putting their interests on the table, and the FCC balancing those interests to find the best solution for consumers, the FCC's recent Broadband Privacy Order provides a good illustration of the exact opposite type of proceeding.
Broadband Privacy ≠ Internet Privacy
The Commission's classification of broadband Internet access service as a "telecommunications service," in its 2015 Open Internet Order, in turn, allowed the FCC to define what information, with respect to this service, it would define as "customer proprietary network information" ("CPNI") under Section 222 of the Act. Section 222 defines CPNI as, essentially, information that the service provider knows by virtue of providing a telecom service to a customer, and requires the carrier to obtain customer permission before selling the customer's CPNI to a third party.
The Interent Service Providers ("ISPs") argued that consumer Internet usage information is not information uniquely held by the ISP, in the way that CPNI was uniquely in possession of a telecommunications carrier in 1996 (when Congress wrote the law). See, e.g., AT&T Comments pp.9-30. Rather, the primary market for consumers' internet usage information is the online advertising market. , in which the ISPs do not possess sufficient unique, or valuable, consumer information to even possess a measurable share of the market.
The ISPs explained that, despite the FCC's rhetoric in its NPRM about consumer "privacy,"
[n]o matter what the Commission does in this proceeding, major actors in the Internet ecosystem will continue to track and use all of the same information the proposed rules would keep ISPs from efficiently tracking and using.
See, e.g., AT&T Comments at p. 35 (emphasis added). Thus, they argued, the FCC's proposed rules would not enhance consumer privacy, but merely foreclose competition in the online advertising market.
Party Participation vs. Proxy Participation
Given the competitive significance of the FCC's proposed rules, you might think the record in this proceeding would pit edge providers and ISPs against each other, with each side trying to show why the ISPs do/don't possess some unique information about their customers that is worthy of rules protecting its disclosure. If this was your guess, you'd be half right; the ISPs definitely showed up with their best information/arguments.
On the other side, though, neither Google/Alphabet, nor Facebook appears in any search of this docket. Yet, the FCC had no trouble finding support in the record for its contention that it is the ISPs from whom consumers' information needed protection, and not the two dominant firms in the business of collecting and selling that information. If you look through the Order, you'll see that a majority of the support the FCC cites is supplied by parties with ties to Google, Facebook, or other edge providers.
Princeton University Professor, Nick Feamster comments, but doesn't disclose that he has received $1.6 million from Google over the past 5 years. Other Princeton faculty members filed comments similar to Feamster's. And, in May, Princeton's Center for Information Technology Policy, of which Feamster is Acting Director, was a co-sponsor, along with Google-funded Center for Democracy and Technology, of a policy conference on the topic of "broadband privacy." The Google Transparency Projectnotes that 5 of the 7 panelists at the event had received support from Google.
You Need Not Be Present to Win
The reasons behind some parties' participation doesn't mean that their advocacy/arguments were wrong, but the FCC woud have benefited more from a direct exchange between both sides with first-hand knowledge of the consumer information they track. And, why weren't Google and Facebook in the record, making these points, themselves?
One reason could have been that more information about these firms' dominance in online advertising came out over the summer, including a paper by one of the Princeton academics in this proceeding, noting that Google and Facebook controlled all the top 10 third-party trackers. Another reason for Google's absence may have been that it went back on its self-imposed ban on using consumers' personally-identifiable information in its web tracking, according to this ProPublica report.
Would it have been embarrassing for the leading edge providers to ask the government for protection from competition? Maybe, but consumers deserved the ability to transparently see which side--between two interested parties--the government was choosing, and why.
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The FCC's leadership has been willing to undertake ideological crusades for the sole purpose of advantaging politically-favored firms. The transparent nature of the FCC's actions ensure that they will quickly be undone by a subsequent Commission. The legacy of such leadership leaves only acrimony among the majority of Commissioners trying to put consumers first. Hopefully, the next FCC will learn from history.
Recently, we showed how the broadband market is more competitive than the FCC wants to admit, and we've explained why the Big Media companies have a much greater profit incentive (than ISPs) to see the continuation of the (largely artificial) separation of content delivery into two businesses (subscription TV and broadband Internet access). But, the fact is that broadband Internet access does compete with pay-TV video; the FCC's just wrong about whose side ISPs are on.
Channel Bundling: Consumers (and ISPs/MVPDs) Hate It
Nielsen reports that consumers are buying more channels than ever, yet watch the same number that they always have. The reason: big content companies require MVPDs to buy, and resell, all their channels ("the Bundle") in order to get the few channels that their customers want. The Bundle is so important to media companies that they all use the same restrictive distribution contracts to protect it.
Buzzfeed collected an excellent compendium of quotes about the Bundle late last year. If you click on the article, you'll see that the only ISP/MVPD defending the Bundle was Comcast (who also produces a significant amount of content). Consumers--and their retailers, MVPDs/ISPs--don't like the Bundle.
Cablevision v. Viacom
In 2013, Cablevision filed an antitrust case against Viacom over Viacom's requirement that Cablevision buy, and carry, a package of its least-watched channels in order to be able to buy any of its most-watched channels. See Cablevision statement and Complaint (redacted version). Cablevision's antitrust claim is that the companies' 2012 distribution contract is an illegal tying agreement under Section 1 of the Sherman Act.
Cablevision says that, in order to get access to the 8 Viacom channels it needs to be able to offer, Viacom requires it to purchase (and carry) 14 other channels that Cablevision's customers don't want. The "standalone" price of the 8 channels Cablevision wanted to buy was set high enough to subsume Cablevision's entire programming budget; thus, it's only option was to buy all 22 channels. Complaint ¶ 8, ¶ 28.
Cablevision argues that the capacity it must dedicate to the 14 channels it does not want prevent it from competitively differentiating itself by purchasing better content from Viacom's competitors. As Cablevision explains, its channel capacity is finite;
Cablevision can devote only a portion of its available capacity to channels because Cablevision also offers other bandwidth intensive services (including high-speed Internet access). Cablevision would not reallocate bandwidth from these other services, which consumers increasingly demand, to carry more channels.
Tying agreements are "per se" illegal under the antitrust laws. This means that a plaintiff does not have to demonstrate that the agreement actually had the effect of reducing competition in any market. Instead, the plaintiff need only demonstrate the existence of the agreement, that plaintiff was economically "coerced" to buy the tied product, and that it suffered damages as a result.
Accordingly, last June, a federal district court in Manhattan denied Viacom's motion to dismiss, finding that Cablevision had sufficiently plead a plausible violation of the antitrust laws. Cablevision's claim has moved on to discovery, but its ultimate success is far from guaranteed. However, regardless of Cablevision's ultimate success, it would be a mistake to assume that the converse claim--if Viacom were seeking strict enforcement of all contractual provisions--would be any easier to prove.
Verizon's Skinny Bundles
Perhaps this was Verizon's insight, when it announced its new "Custom TV" offers last month, allowing customers to choose their own "customized" channel package that includes more channels they want, and less of those they do not want. For the basic price, Verizon's Custom TV customers get a general selection of popular cable news/entertainment channels, and can choose 2 (out of 7) channel groupings ("skinny bundles"), organized by topic/genre. Customers can add other skinny bundles for $10/bundle/month.
The reaction from the content owners was predictably swift, and angry. Disney, Fox, and NBC were quick to condemn what they perceived as Verizon's reckless disregard for the Bundle. Disney quickly sued Verizon for breach of contract.
Is Verizon Breaching It's Contracts?
Verizon has said repeatedly that it is not breaking its contracts with programmers. Therefore, we have to believe that Verizon is buying all the channels for all the customers it is required to pay for; even if that means every customer. This seems likely, because, while the Custom TV promotion may "break the Bundle," some say it won't save you a bundle.
Other MVPDs have also said that Verizon may be within its rights under the contracts. Cox Communications told Fierce Cable that its agreements typically require the MVPD to buy and deliver channels to 85% of MVPD customers. If the bundles are as valuable to consumers as Disney seems to think, then it's possible that 85% of Verizon's customers are buying ESPN. Still, Disney isn't betting on it.
Will a Court Enforce the Bundle?
The news reports have said that Disney is suing Verizon for breach of contract, and is seeking money damages and an injunction. I haven't seen Disney's complaint (a public version has not yet been filed), but I'm guessing that the injunction would be to prevent Verizon from continuing to sell channel packages that don't conform to the parties' contract.
If Disney is really dead set on preserving the Bundle, or preventing a jailbreak among its distributors, it's going to have to convince a court to order Verizon to 1) transmit content to at least some customers who have said they don't want it, and/or 2) limit customers' ability to decline unwanted content. This is a real longshot.
Courts are very reluctant to award specific performance if money damages will adequately compensate the aggrieved party. Furthermore, courts are reluctant to grant any remedy that would result in "economic waste." If I'm right about the relief Disney wants, it might as well have listed "economic waste" in its prayer for relief.
If Verizon has breached its contracts with Disney, Disney will get money damages for any measurable loss it has suffered. But, an important part of the Bundle is the deadweight loss that channel bundling imposes on MVPDs, and their subscribers, and the protection from competition that it affords programmers. Unless a court finds it worth rescuing, this part of the Bundle may well be gone; and that's a good thing.
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Every time a piece of the Bundle breaks off, consumers benefit and programmers get closer to having to compete on price as well as quality. The fact that Cablevision and Verizon have been motivated to take up for consumers--and take on the Bundle--is another example of the competitive performance of the broadband Internet market. Still, it's a good thing the FCC was spent the same time drafting more pervasive regulations for ISPs--so they wouldn't favor the Bundle . . . just in case?
It's no secret that Net Neutrality pressure group Free Press would like the FCC to revisit the 2002 Cable Modem Order, in which the FCC classified broadband Internet service over cable as an "information service." Nor is it a secret that the largest broadband ISPs oppose such a reclassification.
The ISPs often contend that a reclassification of broadband Internet service as a Title II, or "common carrier" service, would open the door to a range of regulations that could dampen or distort their incentives to invest in network improvements. But, in its comments on the FCC's Net Neutrality NPRM, Free Press intends to conclusively vanquish the "investment fear" arguments of the ISPs once and for all.
Free Press believes it can "debunk" the "myth" that Title II discourages regulated firms from investing in their networks if it can show that the broadband ISPs invested heavily in their networks at a time when the ISPs' broadband services were (pretty much) subject to Title II classification. Free Press relies on revenue and capital expenditures from the annual reports of a cross-section of large, publicly-traded, telecom and cable companies to tell the Commission a fairy tale.
Perhaps everything that could be wrong with Free Press's facts and theory about ISP network investment over the last 20 years is wrong--starting with the theory itself. This blog will focus on the problems with Free Press's theory, and its limited set of "facts" in support of its theory. Tomorrow, we'll explain what really happened (using Free Press's data, along with other relevant historical facts), and why Free Press's narrative is so misleading.
Investment Itself Is Never an Appropriate Regulatory Goal
Free Press seems to equate periods of rising capital investment as a "good" outcome, and periods of falling investments as a "bad" outcome. However, regardless of whether the investment was efficient or not (it isn't), the FCC should never try to assume the role of central economic planner. The FCC's only interest in investment should be to make sure that consumer interests are served in the manner that least distorts company investment incentives.
CapEx from Financial Statements Doesn't Show What Free Press Thinks It Does
Even if stimulating investment was the right focus for the Commission, the capex information Free Press presents does not prove that Title II is the answer. If Free Press is trying to show that the regulatory classification of consumer broadband service affects how much a firm invests in that service, then aggregate, firm-wide network investment wildly overstates mass-market broadband investment in any period.
In Fig. 1 (Comments p.100), Free Press tracks capex for a number of telecom carriers over time. But, by using aggregate enterprise capex, Free Press is primarily tracking capex for Title II services in all relevant periods. Notwithstanding the regulatory classification of one residential service, the majority of the revenue produced by these firms' networks still comes from Title II services (e.g., both AT&T and CenturyLink reported record numbers of residential broadband customers in 2Q 2014, but this service only comprised ~16.5% of total firm revenues for both firms).
A more accurate estimate of the capex devoted to the Title I service would focus on correlations between significant broadband subscriber growth and increased (decreased) capital investment over the same period of time. For example, CenturyLink has tripled its broadband subscribers (from ~2m to ~6m) over the last 5 years; during this same period, capex has grown at a CAGR of over 60%. See here (figures are from 2013 Annual Report, and the 2Q 2014 Earnings Supp. spreadsheet). A more careful review of the companies' data, however, may not support the story that Free Press wants to tell.
Investment and Revenue Figures from the Late '90s Are Not Entirely Accurate
Even if we accept that "investment" is a worthy regulatory goal, Free Press paints a misleadingly "rosy" picture of the era. Free Press concludes its recasting of the "golden age of investment under Title II" by simply stating that, "the 2001 recession and the economic impact of the September 11th attacks took their toll on the U.S. economy, and the telecom sector wasn't spared." (Comments at 101)
Free Press neglects to mention the devastating accounting scandals that would surface right after 9/11, or the massive layoffs, bankruptcies, and distress sales that would follow, and cascade through the industry over the next two years.
On October 16, 2001, Enron announced it would have to restate its earnings for the prior 2 years. This statement, and the subsequent SEC investigation, would uncover widespread accounting fraud throughout America's largest companies.
When you look at this list of the accounting scandals that were exposed in the 11 months after 9/11, don't focus solely on the telecom and cable companies. Keep in mind that every energy company on this list also owned significant telecom network assets. (See this 2002 study at p. 21/38).
Bandwidth trading. If you're wondering why most of the accounting scandals involved telecom or energy firms, that's because they had a common thread. Most of the telecom-related accounting fraud was related to "bandwidth trading." If you don't know what bandwidth trading is, just listen to Enron explain it.
The idea of bandwidth trading was just a few years ahead of its time. In practice, it would take BitTorrent and The Pirate Bay to make using someone else's capacity while they were sleeping a reality.
Early bandwidth traders, like the modern P2P thieves users, did not actually exchange money. Rather, if you had bandwidth on one route, and another company had capacity on a route you wanted, you could just swap capacity--but that's boring. Instead, each party would "pretend pay" the other for the prevailing value of the capacity (which still seems kind of dull).
The real fun came with the accounting. Both parties could record each other's pretend payment as real revenue, and record the capacity they were giving up as a capital expenditure; winning! For more, see this 2002 Wall Street Journal article. Oh, and when I say "could record," I mean literally; not legally.
As you can see, Free Press makes a number of mistakes in its attempt to prove that their Net Neutrality opponents could never justifiably fear Title II regulation--from trying to prove that a fear of undefined future regulations is unwarranted, to a misunderstanding of what their data actually show. Tomorrow, we'll explain what actually happened in the golden age of Title II and why Free Press's narrative is so deceptively misleading.