Last Thursday, the FCC released its Draft Report & Order ("Draft R&O") in the Business Data Services ("BDS") (formerly "Special Access") proceeding. At first glance, the Commission's Draft R&O does a lot of things right; not least of which is finding the needle of rational, targeted rules in a gigantic 15 year old haystack of a public record.
As we've explained previously, then-Commissioner Pai's characterization of the previous Commission's "analysis" in its Tariff Investigations Order/FNPRM in this proceeding as "a trip through the looking-glass" was not wrong. In the Lewis Carroll story, Alice escapes from the looking-glass world by imposing rationality (she grabs and shakes the Red Queen--who she blames for all the chaos of the day--which then places the Red King in "checkmate," thus ending her dream by ending the metaphorical "game"). See Wikipedia summary.
Similarly, Chairman Pai returns the FCC's BDS proceeding to reality by seizing control of a chaotic record and wringing some logic out of the multiplicity of data in the Commission's possession (compiled at great cost to both BDS providers and the Commission). Pai, thereby, places the previous Commission's focus on the preferred outcomes of specific parties in "checkmate," and returns the proceeding to reality. But, what does this mean?
Return to Procedural Integrity/Reliance on Public Record
While many are aware of Adam Smith's observation that, "[p]eople of the same trade seldom meet together . . . but the conversation ends in a conspiracy against the public," few are aware of how the paragraph ends:
But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.
Wealth of Nations, Book I, Ch. 10, Para. 82 (emphasis added). Chairman Tom Wheeler's FCC was arrogantly dismissive of both Smith's initial concern--that competitors' collaborations might harm the public--as well as Smith's admonition that the "law" should not promote, much less condone, such assemblies between competitors.
Thus, Wheeler supported adopting a negotiated proposal between two self-interested parties that would have imposed across-the-board, nationwide price regulation on any service below 50Mbps. Worse still, as we noted then, the Wheeler FCC was actively manipulating procedural rules in order to foreclose public comment (that the Commission's own evidence did not support this privately negotiated outcome). By contrast, the current Commission's Draft R&O focuses entirely on the record evidence and getting its analysis correct.
Eliminates Barriers to 5G Backhaul Investment
The FCC, on its 5G page, acknowledges that the many benefits of the projected speed/capacity advances (10X-100X LTE) of 5G are critically dependent on massive fiber investment to provide backhaul to the many more small cell sites that this technology requires. Even former FCC Chairman, Tom Wheeler, acknowledged the necessity of increased fiber backhaul in this June 2016 speech. See p.6.
Wheeler, however, was prepared to disregard the consensus view of economists that governmental price controls generally have the paradoxical effect of reducing both the quality, and availability, of the product/service subject to price controls. See, e.g., experience w/rent control policies. Instead, Wheeler embraced the idea (of interested parties) that the FCC should set price limits on all services below a certain threshold.
This Multichannel News article from 9 months ago, notes that 50Mbps was considered "table stakes" and likely would have ultimately included even higher capacity services. At this time, speculation about a radical change in regulatory policy was rampant, and it is almost certain that some plans for additional fiber investment were put on hold.
We can see further evidence of the chilling effect of previous threats of price regulation in the FCC's tentative decision (in its Draft R&O) to affirmatively classify certain new competitive services (Ethernet over legacy cable facilities) as "private carriage." In doing so, the FCC rejects the previous Commission's desire to classify--as a predicate to expanded price regulation--all BDS services as common carrier telecommunications services. See Draft R&O, paras 253-273. This classification allows these new entrants to participate in the provision of fiber transport/wireless backhaul without being subject to legacy common carrier regulations, like the obligation to serve all customers on similar terms.
Rationally Protecting Consumers
The measure of good economic regulation is that it works to limit market power where competition does not yet exist. In 2002, AT&T (the CLEC) filed its Petition for Rulemaking because, after only two years, the Commission's 1999 Pricing Flexibility Order allowed widespread deregulation (throughout the entire MSA) on the thinnest of theoretical evidence ("collocation" in a small number of ILEC central offices.)
In the Draft R&O, the FCC fixes this problem in two critical ways. First, it reduces the size of the geographic market over which deregulation is granted. On average, the Commission shows that an MSA is about 7X larger than the county-wide market that the FCC proposes.
Second, the FCC demands real-world proof that effective competition exists in the county, before granting deregulation. At least 50% of the locations in the county that use BDS must be within a half mile of a competitive network, or at least 75% of the census blocks in the county must be served by mass-market cable broadband service.
The Commission estimates that, under present market conditions, most of the 3,100 counties in its initial market test computation (about 63%) will be considered "competitive," and deregulated entirely. See Draft R&O, para 146. Customers still in "non-competitive" counties, however, will now be even better protected by regulation, because the FCC re-imposed the dormant-since-2003 "productivity factor," which allows customers to benefit (in the form of lower rates) from expected ILEC cost declines. See Draft R&O, paras 190-248.
All Things Considered . . .
Chairman Pai deserves a lot of credit for coming close to the ideal of intelligent regulation: rules that are applied on a granular basis where needed, and eliminated entirely in those product/geographic markets where competition is sufficient to provide a superior result than regulation. Not everyone will like the FCC's approach, but, it efficiently solves the problem identified by AT&T in 2002--and late is better than never.
It interesting to note how former FCC Chairman Tom Wheeler passively and aggressively defied the House and Senate post-election requests for the agency to focus "only on matters that require attention under the law." In ignoring that Congressional request, on December 1, 2016, Wheeler ordered the Wireline Competition Bureau to designate 4 carriers as "eligible telecommunications carriers" ("ETC's") for purposes of participating, as broadband providers, in the Commission's "Lifeline" program, which offers a $9.25/month subsidy to carriers serving low-income customers. Then only two days before Chairman Wheeler left the Commission, the Wireline Competition Bureau, without Commissioner input, went ahead and designated 5 additional carriers as broadband ETCs.
To put the Bureau's actions into context, consider that since the FCC first initiated reform of its Lifeline Rules back in March, 2011--it has designated exactly 0 carriers as wireless, or broadband, ETCs. Thus, in more than 6 years the FCC made no ETC designations, despite having applications that have been pending for longer, and from equally--or better--qualified applicants. Oddly, the recent ETC Designation Orders offer no explanation for why these carriers, out of all the pending applications, were chosen for approval.
So, it's against this backdrop, that Chairman Pai took the incredibly wise and unremarkable step to request a pause and take a second look at the two orders, which represented the first agency action on ETC designation in at least 6 years. Nevertheless, that did not hold the Washington Post back from breathlessly issuing a sensational, and misleading headline that the "FCC is stopping 9 companies from providing subsidized broadband to the poor."
By Monday, the story grew only more misleading as activists on the Left amplified it on social media. Against this backdrop (keeping in mind that Chairman Pai's very first policy pronouncement to the FCC's staff prioritized the importance of improving the quality/speed of broadband service available to rural and low income Americans), the Chairman, on Tuesday, personally penned an article on Medium, explaining in detail the Commission's recent decision.
Perhaps concerned that a good fake-news-cum-Twitter-outrage-campaign story was going to die from exposure to the cold hard facts, Gigi Sohn, a former senior advisor to previous FCC Chairman Wheeler, penned her own blog post yesterday--to address a "controversy" resulting from a misleading article (that she probably sourced in the first place). In her post, she argues that Chairman Pai's Medium article "doth protest too much" and that his "arguments fail to mask two clear truths."
While the normal use of the Hamlet line "doth protest too much" means the person protesting actually supports the conclusion they argue against, it's obvious that Sohn does not think that Pai secretly supports the previous FCC's post-election change of policy. Moreover, even though the "clear truths," to which she refers, are both actually "arguments;" let's look at these.
The first "clear truth" she argues is that Pai's "actions will make the market for Lifeline broadband services less competitive, limiting choice and keeping prices high." But if you read the two ETC Designation Orders, you will see that the only firms that are already selling their "broadband" services are wireless resellers offering 3G and 4G data as part of overall wireless plans. This is not to impugn these firms' offerings, but to clarify that the same offers were already available to Lifeline consumers from other carriers, e.g., here,--and will remain so, despite Pai's decision to rescind these designations.
Yet, if Sohn felt this strongly about the merits of Lifeline "competition," why didn't she and Chairman Wheeler approve more qualified providers as ETCs, starting at the beginning of his term as Chairman? I, personally, have a client that--during the terms of the last 3 Democratic FCC Chairs--has consistently been rated as the "best," or among the very best, wireless service providers in the country, and which has been waiting over 7 years for ETC Designation.
The second "clear truth," which Ms. Sohn believes Chairman Pai's Medium article exposes, is that "[Pai] and fellow FCC Commissioner Michael O'Rielly, fundamentally disagree with the structure and goals of the Lifeline program and will seek to undermine it in word and deed." This statement is a textbook example of the logical fallacy of ad hominem, in which an argument is rebutted "by attacking the character, motive, or other attribute of the person making the argument, or persons associated with the argument, rather than attacking the substance of the argument itself." Here, Ms. Sohn fails to refute any reason proffered by Chairman Pai for taking a second look at the ETC Designation orders, and simply accuses Pai, and the other Republican FCC Commissioner, for having some broader "evil" motive ["disagree[ing] with the 'structure and goals of the Lifeline program'"] unrelated to this specific dispute.
If there is one thing that Ms. Sohn's blog post does successfully convey, it is to give us a better idea of where the first misleading headline came from, at least in terms of motive. Perhaps if Sohn took less "surprise and delight" in someone else having to defend themselves against misinformation, then she could have advised Chairman Wheeler to take an interest in Lifeline competition before being asked by Congress to focus only on matters "that require attention under the law" prior to the change in presidential administrations.
Wednesday, January 11th, we were treated to what is hopefully the
last instance of Chairman Tom Wheeler's "because-I-said-so" policy-making, when
the FCC released a "Report" from the Wireless Telecommunications Bureau ("WTB
Report") regarding the WTB's "Policy Review" of the sponsored data and
zero-rated offerings of major wireless broadband ISPs. The WTB Report asserts that it is applying
the Commission's "General Conduct Rule" in its 2015 Open Internet Order
to 4 offerings from 3 carriers (AT&T, T-Mobile, and Verizon Wireless).The WTB Report concludes that AT&T's
"Sponsored Data" offering, and Verizon's "FreeBee 360" plan "present significant
risks to consumers and competition in downstream industry sectors because of
network operators' potentially unreasonable discrimination in favor of their
own affiliates."WTB Report at p.1.
Ajit Pai, in a separate statement,
decried the FCC's "midnight regulation of free data." Commissioner Pai also succinctly identifies
one of the major errors in the WTB Report's application of the Commission's
Rules, noting that the plans "are popular among consumers precisely because
they allow more access to online music, videos, and other content free of
charge."Pai statement (emphasis added).
Commissioner Pai implicitly notes, the Commission's "General Conduct Rule" is,
on its face, consumer focused.Yet, the
WTB's analysis ignores the market targeted by the plans, and their
corresponding consumer benefits.
WTB Report Analysis Ignores the Open Internet Order
WTB Report notes that it "expresses no concern with retail zero rating per se." Report at 1. Rather, the report
notes that FCC acknowledged the potential benefits of zero rating in its Open
Internet Order.Specifically, the FCC
evidence in the
record suggests that these business models may in some instances provide
benefits to consumers, with particular reference to their use in the provision of mobile services.
Service providers contend that these business models increase choice and lower costs for consumers.
at para 151 (emphasis added and internal citations omitted).While not explicitly mentioned by the
Commission in its Open Internet Order, the WTB Report argues that "[t]hese benefits
may include increased video competition by facilitating the availability of
over-the-top (OTT) offerings." WTB Report at p.1.
the Commission recognized that a potential benefit of zero-rating, in the
provision of mobile broadband Internet access services, would be greater
competition in the broadband Internet access market.On the other hand, the specific potential benefit
mentioned in the WTB Report is in the increased availability of OTT video
offerings.This difference is important,
because, as noted by Commissioner Pai, the WTB Report does indeed ignore the
benefit of enhanced competition in the primary market: the market for mobile
broadband Internet access.
WTB Report Misapplied the Commission's General Conduct Rule
respect to carrier-specific zero-rated data promotions, the WTB Report focuses
its criticism primarily on AT&T's "Sponsored Data" program.This program allows AT&T Wireless subscribers,
who also purchase AT&T's "DirecTV" or "DirecTV Now" subscription television
services, to watch that video content without accruing data usage charges.
Commission's General Conduct Rule, provides that a broadband ISP "shall not unreasonably interfere with or unreasonably disadvantage"
either, 1) a consumer's ability to access Internet applications/content/services,
or 2) an edge provider's ability to provide any application/content/service to consumers.See Order at para 136 (emphasis added and internal
citations omitted). The
WTB Report notes that among the "guiding factors" identified by the FCC in the
application of this Rule, the WTB chose to focus primarily on "competitive
effects." See Report at 10, and Order at para 140.
the emphasis on the word "unreasonable" in the FCC's General Conduct Rule, one
would expect that any "competitive effects" analysis under the rule would look
a lot like the "Rule of Reason" in antitrust analysis under Section 2 of the
Sherman Act.This analysis looks at the
intent of the conduct in question, as well as its effects, in terms of whether
the conduct increases or restricts consumer welfare (output) in the relevant market.
WTB Report notes that its concern is "that AT&T offers Sponsored Data to
third party content providers at terms and conditions that are effectively less
favorable than those it offers to its affiliate, DIRECTV."WTB Report at 13. This, the WTB argues, will "likely
obstruct competition for video programming services delivered over mobile Internet
platforms and harm consumers by inhibiting unaffiliated edge providers' ability
to provide such service to AT&T's wireless subscribers." Id.
are several problems with the WTB Report's "competitive effects" analysis.First, the WTB Report never defines a market,
much less attempts to assess AT&T's intent in offering the service, or to
determine the actual consequences of AT&T's Sponsored Data program in that
market.Instead, the WTB Report seems to
regard its analysis as more of an exercise in imagination, asking, "Could there
ever be a situation in which future output could be limited as a result of this
Broadband Competition Expands--Rather than Restricts--OTT Video Availability
WTB Report's own description of all carriers' zero rated data plans makes it
clear that the purpose of each plan is to entice mobile broadband Internet
consumers to use their service instead of that of a competitor.This point could not have been made more
clearly by T-Mobile's prompt response to AT&T's Sponsored Data program--in which
it offered AT&T Wireless customers a free year of DirecTV Now.
fact, the original provider of AT&T's Sponsored Data with DirecTV was
competitor Sprint, which offered new DirectTV customers a free year of wireless
service in "celebration" of AT&T's purchase of DirectTV--well over a year
before AT&T came out with its DirecTV/mobile broadband offer.The purpose of sponsored data is obvious in the competitive effect that each
new offer sparks in the marketplace--more access to Internet content at a lower
price--and this is what makes mobile broadband Internet access the relevant market.
what about that hypothetical future OTT service?As every mobile broadband provider has more video
content available--without charge--to its subscribers than ever before, what is
clear is that mobile Internet video content has grown as a result of sponsored data, and not in spite of it.
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.
* * *
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.
Earlier this week, I had a post explaining just how far afield the Tariff Investigations Order portion of the FCC's special access, now "business data services" ("BDS"), Tariff Investigations Order and Further Notice of Proposed Rulemaking ("FNPRM")strayed from rational decision-making. Unfortunately, since Chairman Tom Wheeler has taken the helm of the FCC, irregular departures from reasoned--and, more importantly, fair--decision-making have become the norm for this proceeding.
Yesterday, AT&T posted a statement on its public policy blog once again drawing attention to the lack of procedural due process with which AT&T believes the FCC has conducted its BDS inquiry. AT&T's Senior Vice President--Federal Regulatory, Bob Quinn provided a detailed description of the Commission's latest procedural irregularity: the Commission's introduction into the record of this 228 page filing containing previously-unseen revisions/critiques/analyses of the work of the FCC's 3d party economic expert--on the same day that public comments were due. AT&T concludes that,
the [FCC's] lack of due process only reinforces that this agency is driving to reach a pre-ordained outcome.
See, AT&T Public Policy Blog. AT&T's statement was its second this year (previously here).
AT&T's charges deserve more attention than "ordinary" criticisms of adversely-affected parties, because not only do AT&T's complaints refer to procedural fairness (not whether the FCC agrees with AT&T), and its previous complaint about this issue came 2 months before the company suffered an adverse decision. Finally, AT&T's concerns--that the Commission is driving toward a pre-ordained outcome--seem to be supported by independent events (from those cited by AT&T) taking place in the FNPRM proceeding this week.
The INCOMPAS-Verizon Proposal Advances
As mentioned in a previous post, on April 7th, INCOMPAS (the CLEC trade association) and Verizon started combining their BDS regulatory advocacy. Chairman Wheeler lauded the proposal immediately, as did the most politically influential lobbying/interest group here, and the FCC prominently mentioned the proposal in the first paragraph of its pending FNPRM. See Order/FNPRM at para. 159.
Earlier this week, on June 27th, INCOMPAS and Verizon sent in another joint letter ("INCOMPAS-Verizon June 27th Letter")--elaborating on the parties' previous "compromise" proposal. Chairman Wheeler seems unlikely to share Adam Smith's skepticism that,
[p]eople of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.
Thus, we can expect the Commission to take direction from this second, more specific, appeal for greater regulation.
Despite Contradicting the FCC's Own "Findings"
The INCOMPAS-Verizon proposal clearly has traction with the Chairman's Office, at a minimum. This is in no way more apparent than in the fact that the principle point of the letter would require the Commission to immediately renounce one of the "key findings" in its FNPRM--yet, the parties feel no obligation to address, or explain, this apparent inconsistency with the market realities, as seen by the Commission.
In its FNPRM, the FCC lists as one of its "key geographic market findings" the observation that,
[p]otential competition is important, that is, nearby suppliers can constrain BDS prices. For example, we find that fiber-based competitive supply within at least half a mile generally has a material effect on prices of BDS with bandwidths of 50 Mbps or less, even in the presence of nearby UNE-based and HFC-based competition.
See Order/FNPRM at para 161. In other words, the FCC observes that many areas of the country exhibit competitive characteristics, notwithstanding the number of actual competitors offering service in these census blocks. Instead, the Commission observes, the presence of a potential competitor within a half mile of a building will constrain the prices of every other competitor actually serving the building--even for the smallest capacities of bandwidth (50 Mbps and below).
Compare, however, the "compromise" offered by INCOMPAS and Verizon that,
we agree that all Business Data Services at or below a specified threshold should be deemed non-competitive in all census blocks. We agree that the specified threshold should be no lower than 50 Mbps.
See, INCOMPAS-VZ June 27th Letter at p. 2 (point 2). And, in case you're wondering what a "non-competitive" designation means, the parties "support ex ante price regulation for all Business Data Services deemed non-competitive." Id. (point 6).
Thus, while the FCC makes a "key finding" that prices are constrained--even at the lowest capacity levels--without regulation in many parts of the country (notwithstanding the number of actual competitors selling service in these areas), INCOMPAS and Verizon urge the Commission to adopt a nationwide presumption that the opposite is true. Given the apparent influence of these parties with this Commission (and the undisputed clout of those supporting this compromise), I'd be willing to bet that the Commission ends up believing the advocacy of INCOMPAS and Verizon over "its own lyin' eyes."
It's easy to dismiss the protestations of parties that don't prevail in a Commission matter as "sour grapes." But, it's harder to ignore complaints--before a party has even lost--that they won't get a fair chance to be heard, then the integrity of the system is called into question and we should all be interested. Finally, concerns about the FCC moving toward a pre-ordained outcome are worse still when any casual observer can notice that some parties have a map to that pre-ordained destination--and others, including the public, are just along for the ride.
One of my favorite episodes of the TV comedy series "Seinfeld" is called "The Opposite," in which George Costanza reflects on his life, and realizes it is the opposite of what he hoped it would be. At the diner, George tells his friends "that every decision I've ever made, in my entire life, has been wrong." His best friend, Jerry, suggests "[i]f every instinct you have is wrong, then the opposite would have to be right." (quotes from IMDB, episode 5.21) By the end of the episode, after consistently "doing the opposite" of what he would normally do, George's life has corrected itself: he is dating a beautiful woman, has his dream job with the New York Yankees, and is able to move out of his parents' house.
Verizon Training Video
The episode starts with the universal human emotion of regret, and then humorously illustrates common logical fallacies, which are presented as both problem ("every decision I've ever made has been wrong") and solution ("the opposite would have to be right"). And, even though both problem and solution are products of fallacious reasoning . . . hijinks ensue--and problems resolve. But, certainly, no one would actually take this seriously--especially not one of the largest companies in the country--would they?
If its Public Policy Blog is reflective of its corporate mindset, Verizon--based on a couple of recent posts--appears to be willing to give George's zany solution a try. But, are they really "doing the opposite," or have they just changed--as competition forces all firms to do?
A Net-Neutrality Flip?
First, on March 21st, Verizon in the context of net neutrality decides to "make clear what Verizon stands for and what kind of policies we support, regardless of the outcome of [the pending Open Internet Order appeal]." And, as it turns out, the rules/policies that Verizon thinks "are fair, even-handed, good for consumers and essential for us and others to thrive going forward" . . . are pretty much the same rules the Commission adopted in its first Open Internet Order in 2010. In other words, Verizon now endorses the very rules that were vacated as the result of the D.C. Circuit's decision in . . . Verizon v. FCC.
Clearly, Verizon was seized with regret over an appeal it now realizes it could have lived with, but traded for worse rules, and is now "doing the opposite," right? At first glance, it would seem to be the case, but, the blog is quick to explain that this is not a simple case of human regret (or any other human emotion) finding its way into Verizon's corporate offices.
Rather, according to Verizon, it is not the same company it was five years ago, when it appealed the FCC's 2010 Open Internet Order. In the intervening time period, Verizon notes, it has "invested billions in businesses that depend on the ability to reach customers over the networks and platforms of others." Indeed, since 2013, Verizon has built its Digital Media, content and ad delivery, business through the acquisitions of EdgeCast, upLynk, Intel's OnCue ad delivery platform, and AOL.
Thus, Verizon's net neutrality position is not really an example of it doing "the opposite" (though, of course, it would have saved itself and everyone else a lot of hassle and expense had it just recognized this before it appealed the 2010 Open Internet Order). But this isn't Verizon's only, or even best, example of "doing the opposite" in the last month alone.
Verizon's Special Access "Compromise"
Last week Verizon decided to "up" the "opposite," and suggested--along with Chip Pickering, head of INCOMPAS (the rival carrier association formerly known as CompTel)--that the FCC should probably go ahead and regulate "new networks" along with the old special access circuits still subject to FCC regulation. Verizon has long fought against any regulation of its data transmission services and has already received FCC forbearance and been selling its packet, Ethernet, and SONET optical services without regulation for almost 10 years, so this is a clear Costanza-esque flip-flop, right?
Let's take a closer look at the letter that Verizon and INCOMPAS jointly sent the FCC. The letter asks the FCC to: 1) immediately, make all dedicated services--regardless of technology--"subject to Title II of the Communications Act, including Sections 201 and 202;" 2) seek comment on a permanent regulatory framework, which would include ex ante price regulation in "relevant markets" where competition is "insufficient."
When looking at whether Verizon is really "doing the opposite," it helps to keep in mind the "not the same Verizon" caveat. In addition to Verizon's recent digital media investments, the company has been divesting itself of its wireline (telephone + ISP + TV) properties for years, and at an accelerating pace in the wake of the FCC's reclassification of Internet access services.Similarly, based on Verizon's pending XO Communications acquisition, and its reported interest in Yahoo!, Verizon may well see INCOMPAS as more of a future trade association, and less of a regulatory opponent, these days.
Until the terms "relevant market" and "insufficient competition" are defined, it's difficult to say how much of Verizon's future revenues are likely to be affected. Given the Chairman's immediate endorsement of the "compromise," it's doubtful that Verizon is worried about having too much of its future revenues tied up by the regulation it's endorsing. On the other hand, if you are a cable company--or a telecom carrier with some unique routes--Verizon's "compromise" seems more like the good, old-fashioned, Washington-style compromise . . . of someone else's opportunities.
* * *
In his more lucid, less politically-driven, first days on the job, Chairman Wheeler noted that every previous "network revolution" changed the world dramatically, and counseled that "we should not, therefore, be surprised when today's network revolution hurls new realities at us with an ever-increasing velocity." When the velocity of new realities forces a rational economic actor to change positions as dramatically as a TV sitcom actor, it's safe to assume that the industry forcing those new realities is not subject to anything but competitive market forces. So, why is it so hard for Chairman Wheeler to accept that the last thing a dynamically evolving "revolution" needs is more regulation?
Unfortunately for Internet users, the reality is that--on the Internet--privacy is binary; you either have it, or you don't. Moreover, as the Erin Andrews case demonstrates, on the Internet, when your information is lost to one person, it's available to everyone. What is most concerning is not that the Chairman's proposed ISP privacy rules can't deliver on these fantastic promises, but that in the Chairman's Set Top Box NPRM, consumers are actually losing privacy that they used to have.
Your Information Is Already on the Internet
It's no secret that, "your information is the commodity that drives the internet economy." Nor is it any secret that this is the price the largest "free" websites/services charge for their services--such as those provided by Apple, Google, Facebook, and Microsoft.
Likewise, Google is the leading online advertiser because it knows the most about you--and, according to the NY Times it is only getting better at gathering your information. If you're interested, and have a Google account, here's an article with some links that allow you to see how much Google knows about you, based on your self-identified use of its apps. But, these links don't tell you how much "pretty close to personal" data Google has collected on you, or what it has acquired through your use of its Android mobile operating system and mobile apps--which now account for 60% of mobile devices in the U.S.
The firms mentioned above are just the ones that you know have your information. There is a whole industry comprised of firms, the names of which most people wouldn't recognize, called "data brokers." These data brokers also track your Internet usage--and combine that information with other, personal information that they buy from your online merchants--to form a pretty accurate personal profile of all your online activity, which they make available to anyone willing to pay.
ISP Privacy Rules Won't Give You "More" Privacy
Not surprisingly, according to experts, your ISP doesn't have any information about you that isn't already available from multiple other sources. In fact, Professor Peter Swire of Georgia Tech says that, due to consumers' increased use of encryption, multiple connected devices, and proxy services, like VPNs, your ISP may actually know less about your Internet behavior than the websites you visit.
Of course, every expert doesn't agree completely with Prof. Swire's conclusions. In a thorough article presenting the opposing side, Computerworld reports that some experts disagree with Prof. Swire about how much of a consumer's Internet traffic ISPs can see--because encryption isn't always as effective as consumers might think, and even VPNs/DNS proxy services can be configured poorly. Thus, Computerworld counsels readers to assume the worst, and that, "[m]uch like Google, your ISP knows everything about you."
Now you all know everything about me . . .
Said differently, "the Internet" will not know one less fact about me if my ISP stops being the nth company to tell advertisers that I'm the leading YouTube viewer of "Lancelot Link: Secret Chimp" videos. Rather, as Roslyn Layton explains, the effect of the proposed rules will be confined mostly to the ISPs, who must rely on consumers to pay an even larger share of the network costs, and the online advertising market--which needs more competition, not less. But, as for me, I get no "more" privacy than I have now.
Set Top Boxes Aren't Cheaper If You Pay with Your Privacy
Almost 30 years ago, during the politically polarized Senate confirmation hearings on President Reagan's Supreme Court nominee--Judge Robert Bork--some of the Judge's opponents were able to obtain his video rental history from his video store. His opponents didn't find anything embarrassing, but they sparked a bi-partisan public outcry for laws to protect citizens from this type of repulsive invasion of privacy. Here's a contemporary article from the Chicago Tribune.
Congress, though, was in front of the public this time, and Judge Bork's enemies could not have obtained his TV viewing records (if he was even a cable subscriber at the time), because in 1984 Congress had passed the Cable Communications Policy Act, protecting video subscribers' privacy. 47 U.S.C. 631 Since then, the FCC has had rules in place preventing the disclosure of personally-identifiable viewer information to third parties.
In its Set Top Box NPRM, the Commission asserts that it will not totally ignore the requirements of the law, but the proposed rules would require the regulated entity (your cable or satellite MVPD) to send your personally-identifiable information to an unregulated third party providing a video navigation service. The Commission suggests just asking Google and the data brokers to "self-certify" that they are complying with the legal obligations that apply to cable/satellite companies. See, NPRM at paras 73-74, 78.
Putting aside the dubious legality of the FCC's proposal, the Commission is exhibiting an almost-willful disregard for the purpose of the statute--or even worse, the importance of television as a shared medium. The very nature of specific, viewer-tracked, ad delivery--of the kind Google proposes--is invasive. Unless everyone gets the ad for [insert embarrassing product], then only the consumer gets embarrassed--when his friends watching March Madness ask, "why do I only see this ad at your house?"
More than a year before the Chairman's "unlock the box" initiative, the Chairman had a different idea: if the FCC made it easier to become an over-the-top ("OTT") multi-channel video programming distributor ("MVPD"), then more companies would enter the market, and this competition would benefit all subscription video consumers. You might think this would appeal to a new entrant with TV ambitions, like Google.
After all, the subscription TV market is devilishly hard to penetrate even if you can get the capital to build a distribution system. A year ago, Google had 20,000 customers in Kansas City--after 5 years of trying. But, Google wasn't in love with the Chairman's idea. Why not?
The Market Is Internet Advertising . . . on TV Screens
Google is the dominant company in Internet advertising because it sells information about you--that it learns from your use of its applications, and devices--to advertisers. If you're using the Internet, whether on a computer, mobile phone, or tablet, then there's a 70-85% likelihood that you're looking at Google ads (according this WSJ article re: the FTC Bureau of Competition 2012 staff recommendation on Google's abuse of its market power in online advertising).
When you watch TV, however, the ads you see are not targeted at you personally, because they haven't been placed by Google. This is something Google has been trying to fix since shortly after it first announced plans to build a fiber network. Google, through its Google TV, and then Android TV, project makes "smart TVs" (with Google software built into the TV) and "buddy boxes" (set top boxes that work with a cable box/cable remote) available to consumers. But none of these efforts have been particularly successful--leading industry observers to conclude that Google needed "another path to the TV screen."
Then, a year ago, Google decided to try an "experiment" in Kansas City in which it combined its TV customers' content, and viewing history, with its advertising algorithms in order to sell targeted ads on the customers' TV screens. Most likely, Google discovered that the content itself was the secret ingredient that would allow it to integrate the TV screen into its advertising universe.
So why not become an OTT MVPD in the proceeding that Chairman Wheeler had initiated in December of 2014? One obvious problem with this strategy is that MVPDs have long been subject to extremely strict FCC rules about disclosing customers' personally-identifiable information--rules that don't apply to edge providers like Google. The other problem with this approach is that the subscription TV market is devilishly hard to penetrate--just to get access to the customer's video content. Thus, shortly after Google announced its Kansas City TV experiment, it (along with several of its Google TV partners, trade associations, and pressure groups) formed the Consumer Video Choice Coalition ("CVCC") and began lobbying the Commission on a new set of issues.
The FCC Unbundles Video to Create "Device Market" Competition?
On February 18th, after 6 months of intensive lobbying by the CVCC, the FCC voted to require multichannel video programming distributors (hereinafter "MVPDs") to, effectively, "unbundle" the video stream going to and from the customer's television. See, "Set Top Box NPRM". The Commission explains that its proposed rules requiring video stream unbundling are necessary "because MVPDs offer products that directly compete with navigation devices and therefore have an incentive to withhold permission or constrain innovation, which would frustrate Section 629's goal of assuring a commercial market for navigation devices." Set Top Box NPRM at para 12.
The FCC seems to believe that if it can imply that the MVPDs were responsible for the failure of the Commission's CableCARD rules, and that the MVPDs would likely frustrate any future rules to facilitate device interoperability, then it will be justified in implementing full-scale video stream unbundling. So, on the thinnest of grounds--a couple of anecdotes, and a facially absurd theory--the FCC asserts that that MVPDs "offered poor support" for the CableCARD rules, and have the ability and incentive to frustrate the manufacture/sale of navigation devices by third parties. Set Top Box NPRM at paras 7, 12, and 28. The actual answer to the Commission's question was already available--but it wasn't the right answer.
The Commission's theory regarding MVPD's "incentive and ability" to foreclose third party sales of navigation devices has been litigated through trial in two separate consumer class action antitrust cases, and this theory has never been found to be supported by any evidence. See, Jarrett v. Insight Communications Co., (W.D. Ky. July 14, 2014) and Healy v. Cox Enterprises (W.D. Ok. Dec. 15, 2015). If you bother to read either of these cases, you may also be surprised to learn that the device manufacturing market is very competitive--with at least 5 major vendors competing for each cable system.
So, as was the case with the Commission's reclassification of broadband Internet access, a very small number of privileged entities (Google, its partners and pressure groups) benefit from rules designed to address conduct that is not even hypothetically rational--much less, likely. Still, you might think, who cares if the TV providers now have to compete with Google to sell ads to viewers? But, Google won't be competing with your TV provider.
Don't Expect Much New Competition in the Device, or Online Advertising, Markets
One of the issues from the Commission's Net Neutrality Order (currently on appeal) is whether the FCC could, as part of reclassifying broadband Internet access as a "telecommunications service," classify all of an Internet user's formerly non-confidential information (the kind Google sells to advertisers) as "Customer Proprietary Network Information" ("CPNI") under Section 222 of the Act. The statutory definition of CPNI is fairly broad, and includes information "made available to the carrier by the customer solely by virtue of the carrier-customer relationship." 47 USC 222(f)(1).
If the DC Circuit agrees with the FCC that previously non-confidential customer data is now CPNI, as the result of the Commission's change in service definitions, then the FCC could limit the ability of ISPs to provide customer usage information to advertisers. This was exactly the position that was being urged on the Commission by the Eric Schmidt/Google-funded pressure group New America, only a week before Chairman Wheeler put his "unlock the box" editorial on Recode.
Last Wednesday, in a Senate Judiciary Committee Oversight Hearing, FTC chair, Edith Ramirez, was grilled on why the FTC overrode the recommendations of its Bureau of Competition and closed an investigation into Google's abuse of its market dominance in the online advertising market. Not un-ironically, two days later, the FCC released a "fact sheet," describing its proposed rules to prevent ISPs from competing in that market by providing the same kind of ads that Google does--over your computer, mobile, and now, TV screens.
In the last post, we discussed how the broad new regulatory framework that the FCC's Net Neutrality/Broadband Reclassification Order imposes on ISPs is predicated on a few, demonstrably erroneous, presumptions about the incentives of broadband ISPs. Contrary to the FCC's assumptions, the evidence demonstrates that broadband ISPs have a powerful economic incentive to efficiently increase output of their most profitable product--broadband Internet access.
But, incentives--and their impact on how consumers receive content today, vs how consumers would like to receive that same content--could use some further fleshing out. After all, if someone didn't have an incentive to keep your favorite content off the Internet--you wouldn't be paying the same company two fat bills--for TV and broadband Internet--every month, would you?
Internet Consumers Love Content, and ISPs [Don't] Love to Sell It
While consumers love the high quality content that broadband providers offer through their MVPD service, TV distribution is not a profitable service for many broadband ISPs and is not the most profitable service for any broadband ISP. See, e.g., this recent AP article, citing SNL Kagan figures, that cable companies earn 60% cash flow margins on broadband service vs. 17% on video service.
But, even though most wireline ISPs would rather not be in the pay-TV business, there is a strong correlation between consumers that purchase pay-TV service and those that purchase broadband Internet service. In the AP article cited above, Comcast says that about 70% of its video customers also purchase broadband Internet service. For non-incumbent cable companies, the correlation may be much higher. See, e.g., Randall Stephenson, Statement to House Judiciary Committee, June 24 2014, at 3 (More than 97% of AT&T's video customers also purchase another AT&T service.) The fact is that broadband ISPs believe they must offer pay-TV service in order to compete for the best broadband Internet customers.
Big Content Loves Consumers' $$ . . . Just Not Consumers
As noted in the last post, the big content companies do not seem to be as responsive to consumer demand as broadband ISPs. In fact, companies like CBS, Comcast, Disney, Fox, Time Warner, Viacom, and various cable/satellite-owned regional sports networks generally don't make their "linear" (sports, news, and primetime) programming available online at any price, unless the customer is also a TV subscriber.
And, it's not cheap to be a TV subscriber. In its most recent Video Competition Report the FCC notes that, in 2012-2013, the price of the most popular tier of channels increased at a rate 3x the rate of inflation for the same year. 16th Annual Video Competition Report, table 5. (5.1% vs. 1.7% inflation) Comcast recently disclosed that its programming costs increased by almost 7.8% in the past year--almost 10x the inflation rate! According to Nielsen, consumers now purchase an average of 189 channels per month, but watch only 17.
The FCC [Still] Doesn't Understand that Incentives = Profit
It's clear that, despite the evidence, the FCC still believes that, for most ISPs, it's more profitable to distribute programming for "Big Content" than it is to produce and deliver their own broadband Internet access service. That's the only explanation for why Chairman Wheeler would offer this counsel to ISP/MVPDs at NCTA's recent INTX show:
History proves that absent competition a predominant position in the market such as yours creates economic incentives to use that market power to protect your traditional business in a way that is ultimately harmful to consumers. . . . Your challenge will be to overcome the temptation to use your predominant position in broadband to protect your traditional cable business.
Remarks of Chairman Tom Wheeler, NCTA-INTX 2015, (as prepared) at 6.
Chairman Wheeler points out that MVPD's spent $26 billion on programming in 2013, but he doesn't mention that as this number grows, MVPD profit declines. Wheeler Speech at 3. According to data relied on by the FCC, programming costs (as a percentage of revenue) were the highest in 2013 that this expense had ever been. 16th Annual Video Competition Report, at ¶ 89. Meanwhile, also in 2013, the same companies invested even more in the means of production for broadband Internet service ($28 billion (according to U.S. Telecom data) vs. >$26 billion (which includes non-ISP DBS firms' spending on content).
If Profit = Incentive, Who Profits from Keeping Content Off the Internet?
Chairman Wheeler is correct in his (implicit) premise--that the parties that benefit most from the status quo do not tend to willingly embrace disruption of the status quo. But, the Chairman is mistaken about who benefits from maintaining the inefficient, and artificial, separation of the function of content delivery into the "MVPD" business and the "broadband Internet." If the FCC ever thought to ask itself why these two businesses were still separate businesses at all, the Commission might want to "follow the money."
The table above compares profit margins (income/sales) of the largest
ISPs and the largest providers of MVPD content over the past 4 years. Looking at the relative profitability of content distribution, versus broadband Internet/MVPD--and recognizing, as noted earlier, that the ISPs would be more profitable without their MVPD businesses--then there's really no question that the group which benefits most from the "traditional cable business" is not the ISPs/MVPDs, but rather, Big Content.
But, even though Chairman Wheeler's assumptions about ISP's incentives are mistaken, he correctly observes that,
The Internet will disrupt your existing business model. It does that to everyone.
Wheeler Speech at 6. But, if you're a big content guy, at least he wasn't talking to you--you still get to distribute your content through the free-from-Internet-competition biosphere of the federally regulated MVPD model. It could be worse, look at Netflix's profit margins . . . The graph above was part of a Seeking Alpha article by Amit Ghate. Of course, the Big Content companies would probably expect to earn much better profit margins than Netflix, because they have more--and better--content. But, still, how much better?
Until now, the Big Content companies have been lucky that the FCC thinks their content needs to be protected from the ISPs. At some point, though, its always possible that the FCC--or Congress--could start questioning whether parts of the existing pay-TV regulatory scheme are insulating content from the disruptive forces of the Internet. If I was a content company, though, I would only get worried when they stop inviting me to secret meetings about MVPD mergers.
On September 4th, in a speech to the startup-focused group, 1776, Chairman Wheeler gave a speech where he discussed consumer broadband deployment and competition. The Chairman seemed to be of two minds about the state of broadband competition.
On the one hand, the Chairman praised the valuable benefits that competition has yielded, in terms of spurring ISPs to deploy new, and upgrade old, networks in order to increase the speed and availability of broadband Internet to more Americans. The White House has previously recognized broadband competition as producing better networks and faster speeds.
However, after recognizing the value of these new last mile networks, Chairman Wheeler also concludes that the present state of competition is simply not adequate to ensure that consumers can realize all the benefits of these networks,
Looking across the broadband landscape, we can only conclude that, while competition has driven broadband deployment, it has not yet done so in a way that necessarily provides competitive choices for most Americans.
Chairman Wheeler began by introducing the graphic below. The chart shows, by percentage of households, the number of providers offering service at not only the FCC's currently-defined "broadband" speed (4Mbps down/1Mbps up), but also 3 additional, speed-defined, categories--10Mbps, 25Mbps, and 50Mbps.
The Chairman explained that 10Mbps was the minimum speed that a household would need to stream one HD movie, and allow for simultaneous Internet use from other devices. Wheeler also proposes changing the definition of "broadband" to 10Mbps downstream for purposes of participation in the Connect America fund.
The Chairman further argued for changing the definition of broadband, because "only wussies use less than 10Mbps/month, and the United States will not subsidize wussy Internet usage."  The 25Mbps and 50Mbps levels of service, Wheeler predicts, will quickly become the standards, as households continue their inexorable march toward dedicated, fully redundant, OCn SONET service.
Wheeler observes that, at the 4Mbps and 10Mbps tiers, most Americans have a choice of no more than 2 service providers. Moreover, the situation only deteriorates at higher speeds, "[a]t 25 Mbps, there is simply no competitive choice for most Americans." Speech at 4 (emphasis added).
The poor picture of broadband competition that the Chairman paints has created situations where "public policy" (read: FCC regulation) must intervene to protect consumers and "innovators" from firms with "unrestrained last mile market power." In these situations, he says, "rules of the road can provide guidance to all players and, by restraining future actions that would harm the public interest, incent more investment and more innovation." Speech at 5.
Title II Just Got Trickier
As most are aware, the FCC is currently evaluating public comments on its "rules-of-the road-for-broadband-ISPs" NPRM, in which the Commission is also considering whether to reclassify broadband Internet service as a "telecommunications service" under Title II. Supporters of reclassification often contend that it would not compel the FCC to impose any obligations on ISPs, beyond the general statutory duties of fair dealing imposed under Sections 201 and 202 of the Act.
Title II Is Different for Dominant Carriers. The obligations of any specific common carrier under Title II, however, depend on that carrier's classification within Title II for the relevant telecommunications service. Consistent with what Title II proponents argue, "non-dominant" carriers have few, if any, company-specific obligations.
On the other hand, carriers classified as "dominant" have to abide by additional obligations that stem from both the statute, as well as a more specific application of the general terms of the statute, because the FCC cannot assume compliance with its general statutory obligations for the dominant carrier service.
Thus, dominant carriers' rates can be regulated by the Commission, and they must file tariffs, subject to FCC review, describing their terms of service. Moreover, dominant carriers have longer review times and more stringent standards for initiating new, and retiring old, service offerings.
Finally, once imposed, dominant carrier regulations are all but impossible to get out from under. At the end of 2012, U.S. Telecom filed a Petition with the FCC, seeking to have its members (holding less than a 50% market share in a declining segment) declared "non-dominant" for voice service. The FCC has still not acted on U.S. Telecom's Petition.
Implications for Cable ISP's Higher Speed Services
The one thing that Chairman Wheeler could not have expressed more clearly is his belief that cable is the only alternative for broadband service at or above 25Mbps. Thus, if the Commission were to reclassify broadband Internet service as a telecommunications service, it would be difficult for the Chairman to explain why the incumbent cable providers are not dominant in the provision of higher speeds of consumer broadband service.
The specific Title II provisions, and Commission rules (such as the Computer Inquiry rules), that would apply to the cable companies' dominant telecommunications services would depend in large part on how the Commission chose to reverse the Cable Modem Order. Although, with respect to the Computer Inquiry rules, in particular, it seems highly unlikely that the Commission would revisit its earlier unwillingness to "in essence create an open access regime for cable Internet service applicable only to some operators." Order at � 46 (emphasis added).
Whither the Dominant Carrier ISP?
If we pause for even a second to consider the Commission's reasoning in refusing to apply Computer II to broadband over cable, it becomes very clear why Title II regulation is not the answer. The easiest way to avoid the incremental hassles that come with being "the firstest with the mostest" is don't be that guy.
What's that, dear broadband network? You could offer the fastest broadband on the market, but because some additional regulation intended to "simulate" competition means you'll earn less than you would on the "slower" speeds? Well, the easy answer would be: don't offer the higher speeds!
This almost seems like that classic case where rent control regulations have the paradoxical effect of creating artificial shortages for the regulated service, limiting access for the very people the laws were supposed to help. But, I'm sure that could never happen here...
On Monday, 16 Republicans on the House Energy and Commerce Committee sent a letter to FCC Chairman Wheeler, complaining that the Chairman's proposal (described in his blog) to restrict bidding on at least 30MHz of the available spectrum in the upcoming incentive auction "is not how a market-based auction should function; it is how a cartel controls price." The House Republicans hit closer to the mark than you might.
Ironically, the purported reason for the restrictions is to prevent "one or two firms from running away with the auction." Such a result would be only be bad if it led to these "one or two firms" controlling enough spectrum to be able, at a later point in time, to exploit consumers through cartel behavior.
We know that cartels restrict output. If bidding restrictions, likewise, reduce output, then whose cartel tactics are likely to cost the consumer more?
The FCC's Theory on the Competitive Significance of Low-Band Spectrum
In his blog, the Chairman states that spectrum below 1Ghz is really important for commercial success in wireless. He believes this, presumably, because AT&T and Verizon (the two wireless companies with the most customers) also have more low-band spectrum than anyone else. However, correlation is not the same as causation.
Presently, here is how much total "low band" spectrum is available for commercial service:
Note that the chart above does not account for the broadcast spectrum to be auctioned in the upcoming incentive auctions. The FCC had originally speculated that the amount of 600MHz broadcast spectrum tendered for auction could be anywhere from 80MHz to 120MHz. The House Republicans speculated that only 60MHz would be tendered, due to the Chairman's decision to limit auction participation, and the value to broadcasters of surrendering spectrum.
If you want to see how the Chairman's plan will affect specific companies, the table below will give you an idea. This information is based on Table 18 from the FCC's 16th Wireless Competition Report (adjusted to reflect mergers), and it assumes that broadcasters will tender 84MHz to be auctioned. We also assume that the FCC wants to limit the amount of spectrum below 1GHz that any carrier can acquire; here, we use 1/3 of the post-auction total (73 MHz) as the limit.
Note, also, that in the above chart, neither AT&T nor Verizon's low-band spectrum comprises a majority of either company's total spectrum.
How Does the Chairman's Plan to Redistribute Low-Band Spectrum Effect Consumers?
The Chairman's plan is not just to limit the amount of
low-band spectrum held by AT&T and Verizon. No, the plan also is
designed to promote a more "equitable" distribution of low-band
spectrum--at the lowest possible price to competitors of AT&T and Verizon.
These distortions are the primary reason no one expects the auction to recruit 120MHz of new low-band. The result of Chairman's bidding restrictions will be a 50% reduction in spectrum capacity available in this
auction, and a total post-auction capacity restriction of almost 20%
less total low-band spectrum available for U.S. consumers.
last point is incredibly important. Restricting output is what
monopolies do when they want to increase prices. Because consumer
demand is fairly steady in the short term, the only way producers can
move prices quickly is to restrict supply, which changes the equilibrium
price to a point higher up the demand curve.
The Chairman of
the FCC is unmistakably urging the Commission to adopt a plan that he
knows will restrict output. The justification for this output
restriction is ostensibly to prevent the top two firms from restricting
output in some future time period.
What's the Worst That Could Happen?
If we assume the auction takes place with no bidding restrictions, reasonable spectrum screens, and we get active (but not maximum) broadcaster participation, then it seems possible that somewhere around 100MHz-110MHz in broadcast spectrum gets tendered. Moreover, let's assume AT&T and Verizon are allowed to buy as much as 60MHz-70MHz of the 100MHz.
Now, at some point in the future, the concern is that AT&T and Verizon will realize that demand is strong, every other competitor is capacity-constrained, and their opportunity to restrict output has finally arrived. If this day comes, and AT&T and Verizon decide, notwithstanding antitrust laws, that they want to maximize their opportunity, then they might look to the early 1970's OPEC.
As cartels go, early 1970's OPEC wrote the book on cartel coordination meeting exactly the right opportunity. As the world was already producing at maximum capacity, OPEC's 25% output reduction in November of 1973 changed the world.
So, for a worst case, let's assume that AT&T/Verizon will want to cut output by 25%. A 25% output restriction translates into somewhere between 40.5MHz and 43MHz, depending on whether you assume the two companies bought 60MHz or 70MHz of spectrum in this auction (25% of their combined new low-band total of 162MHz-172MHz).
What Does It Cost to Prevent?
This "worst case" outcome is, obviously, more than a little improbable. For the worst to happen, we have to assume: 1) AT&T/VZ would capture most of the profits from an output restriction, 2) both firms would/could disregard/circumvent the antitrust laws, 3) that such a steep restriction makes sense (25% is a lot), and 4) that the firms could effectively monitor and police their levels of capacity in service. Moreover, output "quotas" do not tend to work for very long (even OPEC members cheat on output quotas).
Nonetheless, the "worst case" does serve a purpose. In this case, it gives us some way of valuing the worst harm the Chairman's proposed bidding restrictions are supposed to protect us from.
If we know the economic costs of the worst case, we can assess the probabilities of that worst case, and get an idea of what preventing it is worth. So, here, the worst case is that consumers will face the higher prices that would result from an output restriction of about 40MHz of premium-grade, low-band spectrum.
But this is only a "risk"--it's not a certainty. But, even if you think there's as high as a 30% chance of the worst case happening, then we can assign a value on the worst case. In rough terms, it would be rational to engage in rules/regulations that "cost" up to 12MHz (in spectrum that will never reach the market) in order to prevent the worst outcome (i.e., a 30% chance of the economy losing the benefit of 40MHz of spectrum capacity).
Worth the Cost?
On the other hand, there seems to be a consensus among observers (both for and against the bidding restrictions) that the Chairman's proposed bidding restrictions will result in broadcasters bringing up to 40MHz less spectrum to the auction. But, even if the Chairman's restrictions "only" cause broadcasters to offer 20MHz less spectrum for auction, the loss is real and it is 100% certain.
Insurance is what the Chairman is selling with his proposed bidding restrictions. But, even at a Vegas blackjack table, insurance pays 2:1. At a guaranteed cost to the public of up to 40MHz, the Chairman owes taxpayers an explanation of why his bidding restrictions aren't the bad bet they look like.
This morning, FCC Chairman Wheeler and Commissioner Pai spoke to the House Appropriations Subcommittee on Financial Services and General Government to make a formal request for the agency's FY 2015 budget allocation. View hearing here. Today's hearing was a more formal re-run of the briefing that the Chairman and Commissioner Pai gave the Subcommittee on Tuesday, when the FCC provided information on the agency's request for a $36 million increase in the FCC's allocation in the FY 2015 budget. The Commission's total budget request for 2015 was $375 million.
First among the FCC's budget priorities was securing an additional $10.8 million for USF improvement, directed mostly at policing the Lifeline program (which is intended to provide discounted telephone service for low income Americans). As this Bloomberg BNA article reports on the Tuesday briefing, the Chairman told the Subcommittee,
"We need more muscular enforcement about what is going on in universal service," Wheeler said. "The Lifeline program has been abused. My line from day one is, 'I want heads on pikes' and we need enforcement capability we don't have."
The Chairman's statement that he "want[s] heads on pikes" is a nice, political thing to say, given that the program has been under scrutiny, after ballooning in the wake of the Commission's decision to allow program participation by wireless carriers in 2008. The Commission took major steps to reform the Lifeline program rules in 2012, which led to a decline in total (non-Tribal) Lifeline subsidies from a peak of $2.13 billion in 2012 to $1.77 billion last year. See app. LI07 here.
The Commission, however, has yet to complete the most basic part of its Lifeline reform NPRM initiated in 2011--determining the correct subsidy for wireless carriers. Given that the growth in the Fund has come entirely from wireless services, one would think that getting the wireless carrier subsidy correct would be job #1.
The FCC Is Required to Establish Prudent Carrier Reimbursement Costs
The Lifeline program subsidizes consumer discounts through reimbursement payments to the consumers' service providers. The relevant statutory provision that deals with Lifeline provider reimbursement is 47 U.S.C. Section 214(e), which says,
A carrier that receives such support shall use that support only for the provision, maintenance, and upgrading of facilities and services for which the support is intended. Any such support should be explicit and sufficient to achieve the purposes of this section.
(emphasis added). The plain language of the statute indicates that Congress didn't want the FCC to be deliberately spending more than was necessary for the provision of the relevant facilities/services.
This only makes sense. After all, if the subsidy is in excess of wireless carrier costs, then the Commission is not only failing to implement the law, but is (effectively) subsidizing wireless carrier profits rather than merely reimbursing service costs. The distorted incentives that excessive subsidies create also contribute to an even greater need for the enforcement resources the Commission is currently seeking.
Wireless Reimbursement Costs Should Be Lower than Current (Wireline) Subsidies
In this post from several months ago, I explained--with numbers--how the wireless lifeline business is able to make money off "free" service. The 2012 Lifeline Reform Order retained, but simplified, pre-existing average "per customer" reimbursement rates of $9.25--which were originally established to offset costs to serve wireline customers.
As I explained in more detail in the earlier post, the average wireless Lifeline customer will have a direct wholesale cost of $4.875/month to serve. In return, the carrier receives $9.25 from the USAC. If we estimate indirect costs at around $2.00/line (say $1.875/line), we can see that it is not out of the question for a fairly typical wireless Lifeline provider to earn around $2.50 per line served per month ($9.25-$6.75).
How Much Could the FCC Save Consumers by Fixing Wireless Cost Subsidies?
Last year there were about 14 million non-Tribal Lifeline subscribers. See LI08 appendix. About 80% of Lifeline consumers use prepaid wireless service, which amounts to about 11.2 million wireless Lifeline subscribers. If the FCC should be reimbursing these subscribers' carriers $6.75/month instead of $9.25/month, then the USF and its contributors would save $22.4 million/month--or $268 million/year.
In other words, if the FCC simply finished the part of the Lifeline Reform Order that the FCC should have addressed first, the Commission could annually save consumers about 70% of the projected costs to run the entire agency. It goes without saying that the Chairman's next budget briefing would be an easier "ask" if he could assure lawmakers that the Commission is putting most of that number right back into consumers' pockets--while still supporting the vitally important benefits provided by the Lifeline program.
I was hoping that the Chairman would resist the temptation to open a new net neutrality rulemaking after last month's D.C. Circuit decision overturning most of the FCC's 2010 Open Internet Rules--but he didn't. The Open Internet Rules were unnecessary when they were adopted, but more importantly, they were a waste of a significant part of Chairman Genachowski's tenure.
The FCC already has to deal with the devilishly-complex, two stage spectrum incentive auction/reverse-auction. Similarly, the Commission is already lagging the market in considering what regulatory modifications may be appropriate for consumers in an "all-IP" world. The Commission is also likely to spend considerable time and resources reviewing the proposed Comcast-Time Warner Cable merger.
If the FCC really thought about whether net neutrality rules are even useful, much less necessary, it would quickly conclude that the "terminating access" theory (underpinning the arguments of net neutrality advocates) should probably be left back in the MFJ--where it came from. Making rules to thwart hypothetical problems is--at best--a distracting waste of time. But, when the putative rules will affect services that don't presently exist, the danger of real harm becomes much more likely.
Why are net neutrality rules unnecessary, and even potentially harmful to the productivity of the Internet?
1) Contracts. The Internet did not become "open" by accident. With the possible exception of P2P traffic, almost every form of traffic carried on the Internet is delivered pursuant to a contract that specifies a guaranteed level of carriage.
Think about it. Websites use a type of "ISP" called a web host, usually a data center connected to multiple backbone providers. If the website will be serving up a lot of traffic to its customers, the website will frequently use a "content delivery network" (CDN) to ensure that it's traffic is delivered in the fastest manner possible. Many large Internet backbones (like AT&T, Level 3, and Verizon) also provide CDN services.
In fact, most large ISPs also provide significant services (hosting, Internet backbone, CDN, and "cloud services" for large enterprise customers) which depend on the assumption that the consumer's ISP will carry the tendered traffic in a non-discriminatory manner. Any act of website-specific discrimination by an ISP could easily be detected, will likely put that ISP in violation of its peering contracts, and will invite an avalanche of against the offending ISP.
The bottom line is that--even if an ISP had the ability and the short-term economic incentive to discriminate against another carrier's Internet traffic--the consequences of the discrimination are neither predictable nor quantifiable. If economics is to be believed, the ISPs are extracting all the revenue the market will bear--further price increases would only reduce profits.
2) The Success of the Internet of Things Might Depend On Discrimination. Many were surprised when Google paid $3.2 billion last month to acquire smart thermostat company Nest Labs, but this type of service is a critical part of the "Internet of Things." An energy utility could realize significant benefits by receiving real-time consumption data from households. If the energy company could anticipate, and alleviate, peak period demand spikes--perhaps by remotely adjusting appliance demand for those customers willing to participate--the company could reduce its costs for expensive peak capacity.
The value of telemetry depends on the utility getting timely information from a significant number of households, but no one wants to pay for their air conditioner's bandwidth. However, your appliances--and the energy provider--can tolerate data service that is too slow or jittery to support a latency-sensitive application (like VoIP). So, if the bandwidth for appliances was cheap enough, there are probably many "win-win" applications that someone other than the Internet subscriber would be willing to subsidize.
Likewise, those big software updates and gaming patches could be delivered in a way that is cheaper for both the ISP and the consumer, if the provider or the consumer were offered a time of day/de-prioritization option. Discrimination isn't bad if it's just an option. But it's an option that "rules" tend to discourage, if not foreclose.
3) The Consumer Can Always Evade Discrimination. According to Sandvine's data for both the first and second half of 2013, one of the most significant Internet traffic trends over the last year (for fixed and mobile North American networks) has been the growth of "tunneling" traffic. Tunneling refers to customers using VPNs to obscure their content when accessing the Internet.
The VPN encrypts the customer's traffic and routes it to a server which assigns a random, or sometimes shared, IP address. Thus, all of the customer's Internet traffic originates/terminates through an "anonymous" IP address at a server remote from the customer's home computer. To the ISP, it simply looks like the customer is sending and receiving a lot of non-destination-specific traffic to a smaller number of IP addresses.
Prior to concerns over privacy, tunneling was most frequently used by consumers for online banking, and employees working from home to access their company's networks. Whether tunneling will protect your information from the government is unclear, but the existence (and forecasted) growth in tunneling traffic will serve to protect you from hypothetical fears of discrimination by your ISP--even if P2P is your thing.
So Why Are New Rules Needed?
If the content providers are protected by contracts, consumers can protect their traffic from ISP inspection through encrypted VPN tunnels, and new consumer benefits can be realized from efficient, permissive discrimination, then it wouldn't seem that there's a whole lot to be gained from a proceeding to add to the remaining disclosure rule. Given the immense opportunity costs of diluting agency focus at this moment, let's hope the chimerical fears of a few do not capture the public's scarce regulatory resources. The FCC can best protect the Internet by focusing on the IP transition and bringing more wireless spectrum to market.