Reviling Universal Service Subsidies and then Touting the Results

           Today, the Supreme Court will consider a challenge to the universal service subsidy program established soon after the introduction of telephone service by the AT&T Bell System and later officially adopted by the FCC as mandated by a 1996 law. See https://www.supremecourt.gov/orders/courtorders/112224zr1_7l48.pdf; https://assets.noviams.com/novi-file-uploads/shlbc/PDFs_and_Documents/2025_Filings/24-354_SHLB_et_al__Opening_Brief.pdf. Universal service funding supports access to telephone and broadband service by subscribers in rural locales that commercial ventures will not serve absent a subsidy.  Additional programs reduce the cost of access for low-income subscribers and specific beneficiaries such as schools, clinics, hospitals, and libraries.

          The programs help mitigate what economists consider market failure: the inability of unregulated and unsubsidized markets to achieve socially desirable outcomes. As we recover from the Covid-pandemic, who would ignore the essentialness of “remote access” to government services, social networks, entertainment, etc.?

          After failing in multiple Circuit Courts of Appeal, a well-funded advocacy group convinced a majority of 5^th Circuit judges that FCC exceeded its statutory authority in implementing the subsidy program and assigning administrative tasks to a private venture. See https://www.supremecourt.gov/DocketPDF/24/24-354/336896/20250108184903404_24-354ts_FCC.pdf.

          I participated in the Circuit Court cases as the co-author of a Friend of the Court brief explaining how universal service funding works.  For decades nobody considered the program controversial, or worse yet, yoke, taxing, and confiscatory.  Over time the program has grown into an $8.1 billion subsidy that telecommunications carriers pass through to subscribers by way of a billing line item.  The substantial subsidy increase has resulted from an uncontroversial decision by the FCC to subsidize broadband Internet access in addition to telephone service.

          The Supreme Court today surely will not understand that the Congress used clear language codifying the subsidy and directing the FCC to require regulated carriers to contribute to the fund.  The Court will not understand that the carriers can lawfully elect to pass through the costs to subscribers and also determine what percentage of their services are subject to the subsidy requirement. 

          This flexibility helps the opponents of universal service funding to characterize the program as an unconstitutional tax on consumers, rather than a long-standing program that everyone used to consider essential.

          I have devoted a lot of bandwidth explaining how the program works, its woeful inefficiencies and inequities, and its lawfulness. See, e.g.,  Rob Frieden, Remedies for Universal Service Funding Compassion Fatigue, 39 SANTA CLARA HIGH TECH LAW JOURNAL 395 (2023); https://digitalcommons.law.scu.edu/chtlj/vol39/iss4/2/; Rob Frieden, How to Remedy Post Covid Pandemic Setbacks In Bridging The Digital Divide, 25 NORTH CAROLINA JOURNAL OF LAW AND TECHNOLOGY, Issue 1, 57 (2023); https://ncjolt.org/wp-content/uploads/sites/4/2023/10/Frieden_Final.pdf; Rob Frieden, The Mixed Blessing of a Deregulatory Endpoint for the Public Switched Telephone Network, 37 TELECOMMUNICATIONS POLICY, No. 4-5, 400-412 (May, 2013); https://doi.org/10.1016/j.telpol.2012.05.003; Rob Frieden, Killing With Kindness: Fatal Flaws in the $6.5 Billion Universal Service Funding Mission and What Should be Done to Narrow the Digital Divide, 24 CARDOZO ARTS AND ENTERTAINMENT LAW JOURNAL, No. 2, 447-490 (2006); https://cardozoaelj.com/wp-content/uploads/Journal%20Issues/Volume%2024/Issue%202/Frieden.pdf; Rob Frieden, Lessons From Broadband Development in Canada, Japan, Korea and the United States, 29 TELECOMMUNICATIONS POLICY, No. 8, 595-613 (Sept. 2005); doi:10.1016/j.telpol.2005.06.002.

          It is quite unnerving to see this issue reframed as an assault on consumers and characterized as a tax.  It’s quite humbling to see the efficacy of campaigns to discredit the FCC’s decision to delegate funding collection and disbursement to a private venture, despite the inconvenient truth that if the FCC had to perform these tasks, it would have to employ hundreds more staff.

          Worse yet, it is painful to see elected officials revile the subsidy mechanism, but hold press conferences bragging about the millions of dollars made available to constituents.

 

 

 

 

 

 

Increasingly Unmeasurable Consumer Welfare When Governments Market Meddle

          Currently, both U.S. presidential candidates tout the benefits of having government intervene in commercial markets.  Former President Trump wants to impose tariffs, up to 20%, on foreign goods deemed below cost, so-called predatory pricing and dumping.  Vice President Harris wants price caps on food to foreclose gouging.

           I am skeptical whenever governments try to manage aspects of a market economy even with noble intentions, such as remedying so-called market failures.  Markets rarely fail.  Consumers and elected officials do not like certain market outcomes and unanticipated manipulations. Consumer/voter sentiment considers a market outcome wrong, unfair, or distorted and candidates for elective office better pay attention and “fight” to make thing right.

           Former President Trump wants to level the competitive playing field in a variety of markets, such as steel, solar panels, clothing, and electric vehicles, by imposing a surcharge he asserts will have to be paid by exporting companies that have achieved a lower cost of doing business advance thanks to government subsidies, cheaper labor, and other distortions. Vice President Harris wants to punish greedy corporations that have achieved high profit margins, no longer justified by higher costs and lower demand occurring during the Covid pandemic.

           Curiously, there is little analysis of what constitutes a government-imposed market intervention that can actually remedy a prior intervention (by another government) that has distorted the marketplace and created new winners and losers.  Price dumping companies acquire market share abroad, based on a price discount made possible by a government benefactor. Losers include U.S. companies without access to a government subsidy and their employees who might lose a well-paying job, and opportunity to realize the American Dream.

           Markets get distorted and lots of stakeholders have both legitimate and opportunistic reasons to complain and “vote their pocketbook.” Anyone unemployed, or no longer able to operate a profitable business, can blame imports and the arrival of illegal aliens willing to work for less pay. Anyone looking at the rising cost of food might believe corporations are gouging, despite the economic gospel that above cost pricing encouraging market entry and enhanced competition.

           It looks like there are lots of fallacies, false assumptions, and wishful thinking in play.  I have devoted a career trying to find the truth in telecommunications markets.  What enormous, distorted reality I have seen. I especially loath the gospel truth that all mergers and acquisitions “enhance competition and consumer welfare,” No one seems obligated by courts and the court of public opinion to explain how the marketplace improves.

           The Chicago School advocates point to lower prices, but often one cannot determine actual cost of doing business.  For example, how can one determine the actual cost of providing wireless broadband, when carriers bundle, “at no additional charge” streaming video.  For an industry with very high initial sunk costs, the cost of providing an additional unit of service approaches zero. Accordingly, consumers have no clue whether an attentional text message is properly priced at 5 cents by a reseller, but bundled in with unlimited voice and data.

           If an economic assertion is touted long enough and loud enough by credible speakers, then it becomes true no matter how illogical and bogus.

           For example, what happens when a market consolidation does not trigger market entry and the assumed increase in competition? In telecommunications there are extremely high barriers to market entry in light of the high sunk investment costs and regulatory decisions that often create a scarcity in a mission critical component such as radio spectrum.

           The Chicago School doctrine that mergers can enhance consumer welfare is based on the premise that a concentrated market will not result in higher prices.  But what is the correct price in a concentrated market?  Vice President Harris has generated much pushback, if not contempt, for her foolish economic thinking. Why have Chicago School mandarins avoided similar disdain when new market entry does not occur, prices exceed any measure of ongoing inflation, and there is ample proof that competitive markets in other countries offer consumers a clearly better value proposition?

           Right now, voters are told that tariffs will not raise product costs, governments can identify and sanction price gouging, and mergers are a wonderful event for consumers.

           Do these gospel truths make sense to you?

 

         

Market Forces Preempted by Rising Risk and Regulation?

             This might not be the best time for the U.S. Chamber of Commerce to make the case that rising risk and regulation are harming the marketplace and consumers.  See Public Policy Risks Soar Amid Growing Trend to Regulate Rather than Legislate and Partisan Approach to Lawmaking.  A content analysis of companies' 10-K filings with the Securities and Exchange Commission quantifies a rise in risk disclosures, with increases in key works such as data privacy, immigration issues, labor, and intellectual property.

             The Chamber appears intent on persuading the court of public opinion that life is getting riskier and harder for business. 

             It appears to me that Business America has largely foisted risk onto consumers, and counterintuitively their profit margins have increased despite frequent complaints that regulation raises the cost of doing business, squelches innovation, and reduces employment.

             I cannot find an airfare or hotel booking that permits cancellation without a risk premium doubling the non-refundable rate.  Similarly, if risk is so harmful, how can businesses, in a variety of market segments, find it possible to increase revenues and profit margins?  Even the Wall Street Journal notes this anomaly.  See Why Is Inflation So Sticky? It Could Be Corporate Profits

             I was indoctrinated by my UPenn and UVa training that market forces are largely unimpeachable.  In most cases yes, but just now, even some people at the "Diary of the American Dream" (a former marketing slogan for the Journal) see companies able to game the system.  Apparently, we consumers can become numbed by the constant drumbeat that inflation is unavoidable when markets become disrupted by supply chain and other extraordinary circumstances. The Chamber of Commerce wants to include in the emergency rationale upward price pressure created by added risk and government regulation.

             No one in the Chicago School seems able and willing to concede that sometimes market self-discipline fails.  How can these true believers explain the success achieved in keeping prices and margins extraordinarily high by blaming risk and the government even when the underlying emergency triggers have ended?  Now there are too many truck drivers at west coast ports chasing after declining loads.  No bottleneck in the supply chain anymore.

             Sticky, slimy, unclean, but surely not invisible hands at play.

What Do Juries, Prunes, and Antitrust Policy Have in Common?

Long ago, while a student at University of Virginia School of Law, my Criminal Procedure professor likened optimal jury size with the correct number of prunes to achieve proper effect.  Consistent with the Goldilocks story, juries should not be too large, or too small.

OK, I got that, but advocates for megamergers use the same logic.  They conjure the number at three.  A market—apparently, any market—only needs three competitors to remain robustly competitive.  If there are three, any incumbent should be free to acquire market share and extinguish the seemingly unnecessary competition generated by more than three ventures.

This does not pass my smell test, as corroborated by the U.S. mobile telecommunications and commercial aviation markets.  I cannot understand how market consolidation to three magically stimulates competitive juices making the market “more competitive” than when four or more ventures operated.

From my empirical perspective, I see the cellular carriers bundling video content and never fully disclosed handset subsidies, but never really going head-to-head on net, out of pocket costs.  There are plenty of obscure fees, sponsored advocates attempt to frame as taxes, scrimping on customer service, and lots of commercials that tout anything but lower costs.

Help me out, here: does TMobile offer, net out of pocket rates, significantly below what consumers can get for AT&T and Verizon?  Can consumers opt out of “free” video streaming and secure a lower price?  How much lower are rates, if you already have a smartphone?

Do the Big Three airlines aggressively compete on price, after you factor in all the now ala carte “amenities” that used to constitute part of the base fare? I see a preoccupation with Business Class seat enhancements and creation of a new Premium Economy option, because the margins are spectacular.

A now rarely used term, “conscious parallelism,” describes market behavior where so-called competitors do not seem to compete.  Remarkably the three major airlines offer an identical fare from A to B.  But what about the Low-Cost Carriers, who also want to merge and become better competitors?  Are they truly “functional equivalents” when they only offer a few flights from A to B and engage in “bait and switch” with teaser fares that come close to the legacy carrier rates after including all the ala carte amenities, such as the privilege of bringing a carryon bag aboard?

For a short time, my home airport had a fourth carrier available.  It offered one flight a week to a remote airport in Florida.  While the airport managers self-congratulated themselves, consumers faced a carrier offering no option when, predictably bad weather, flight irregularities, and “Air Traffic Control” issues scrubbed the flight.  Do these passengers have any options other than to cancel their vacations, often with non-refundable booking, or hope for “reaccommodation” (an airline non-word) a week later?  This option, akin to a weekly “charter flight” does not constitute a functional equivalent to the options available from legacy carriers.

Oh, but what a robustly competitive market we have in State College, PA!

Walmart The Price Gouger

When it comes to pricing, the conventional wisdom considers Walmart the regular low price leader, much like Southwest Airlines.  Think again.

These companies are no less willing to exploit gouging opportunities when available.  

Consider this rip off.  In June Walmart charged 50 cents for a gallon of spring or drinking water that my wife prefers when traveling.  Apparently, chlorinated water can wreck your bacterial balance among other bad things. A few days ago, Walmart charged 67 cents for this product, a 11+ percent increase reasonably attributable to pandemic costs, etc. 

Now Walmart is charging 98 cents, nearly a 100% increase.  

Walmart would be hard pressed to provide any cost plus basis for such a substantial increase in price in such a short period of time.  Sadly, there appears to be no way the so-called marketplace can discipline and punish such price gouging as insufficient numbers of people will cote with their feet and seek the 80 cent option available at Food Lion.

In this greedy, rip off, make up for lost profits environment, buyer beware,

7+ Examples Where Consumers Don’t Call the Shots

            There are plenty of examples where the marketplace’s invisible hand does not seem to favor consumers.  As much as I want to believe unconditionally in the power of the marketplace, there are too many powerful examples where consumers lack sovereignty.  Here are 7+ examples in the information, communications and entertainment marketplace:

1)         Take it or Leave It Contracts that Include Binding Arbitration Clauses 

            Perhaps you can show me a wireless contract that does not require subscribers to give up their day in court if a carrier cheats them.  There are too many instances where a wireless carrier imposes an unjustified charge, or demands payments for one.  Where is the marketplace punishment when this occurs?  There is none, because consumers cannot vote with their feet and migrate to an alternative service provider that allows subscribers a judicial forum.  Every major carrier in the U.S. has received a sizeable fine from the FCC for unlawful and bogus charges, but I don’t want to rely on a regulatory remedy that could evaporate, or apply only if the politics are right.

2)         The Supreme Court’s Aversion to Class Action Law Suits

                I support tort reform that seeks to eliminate frivolous law suits, but another powerful remedy has evaporated when telecom ventures cheat.  Class action law suits make it possible to remedy a problem that collectively add up to millions of dollars, are not worth the bother for any one victim to sue—assuming they still have that option.

            For example, Verizon collected a cool $52 million in unauthorized data access charges in $1.99 increments.  An individual subscriber could not recover the overcharges given the cost of litigation, or even arbitration.  Verizon continued the practice for over four years, before the FCC made the company stop.

3)         Walled Gardens

            I appreciate that most of us are content to treat the millions of wireless apps as more than enough options.  However, compare what Apple allows versus what the complete and unwalled Internet has to offer.  With the rising importance of wireless data access, some content and app creators already have opted to concentrate on App Store availability in lieu of plain old web access.  A lot of time, money and effort goes in creating different versions of the same content accessible by handsets using different operating systems.

4)         Internet Access From a 7 Inch Screen

            Consumers readily accept an inferior web experience for the opportunity to access it via a mobile device.  Okay, the market has functioned and allocated resources accordingly.  In some places in the world, wireless constitutes the first and only medium that offers an affordable and available option.  Still I lament that consumers may have access to fewer and fewer options via 20 inch, fixed screens.

5)         Throttling

            I find it hard to understand why a wireless carrier would deliberately degrade service to a “power user.”  Why not send them a fruit basket and new service options?  Carriers want the option of upselling, but also to punish users, even ones who have acquired so-called unlimited service.

6)         Tiering When Extra Usage Costs Little

            Unmetered, All You Can Eat (“AYCE”) service is economically inefficient when it stimulates “excessive” consumption and triggers cross-subsidies from low volume users to high volume users.  This can occur when everyone pays the same price, or there are negative consequences resulting from excess use, e.g., the need to build more electric power plants.

            Internet access may have different characteristics, particularly if carriers can provide additional units of service without significant additional cost.  Absent congestion, a broadband service provider incurs little cost if it allows subscribers to binge watch Netflix.  That’s why fixed, wireline broadband consumers have AYCE access, or sizeable monthly data allowances in the 100s of Gigabyte range.

            It probably makes economic sense for wired broadband carriers to tier service based on bit transmission speed, but perhaps not on the basis of download volumes.

7)         Video Access Constraints

            Yes the marketplace has made significant accommodations of consumers’ impatience with access constraints.  Video on demand and television everywhere provides alternatives to “appointment television.”   However do not fool yourself into thinking the consumer can demand unlimited access, anytime, anywhere, via any device and in any presentation format.  There are legitimate copyright and content windowing constraints, and there are plenty of questionable ones.

            Why can’t cable subscribers select content on an a la carte basis?  It surely is technically feasible and while the savings depend on the 10-15 channels most consumers would choose, the absence of this options is telling.  ESPN and other very high cost networks understand that they and their cable partners can generate far more revenues by forcing every subscriber to pay for a bundle of channels than by charging even higher rates (above the $6-$7 a month for ESPN) from the smaller base of voluntary subscribers.

            Why can’t consumers access ESPN, HBO and other premium content sources without also subscribing to cable or satellite television?  This access pre-condition constitutes what antirust experts call a tying arrangement. HBO has begun to experiment with alternatives, but until direct access becomes an option, legacy ventures can close ranks and add to consumers’ costs.

            Speaking of costs, how can both content and broadband access providers treat the monthly consumer subscription as just one revenue center?  Does one’s broadband subscription contract contain language allowing the carrier to degrade service to particular upstream content sources unless they agree to pay a surcharge?  Put differently does a broadband carrier have a duty to provide adequate service to its subscribers even if it fails to receive surcharge payments?

            Comcast officials recently claimed that Netflix deliberately caused their content downloads to degrade as a way to improve the odds that the FCC would reject the merger with Time Warner, or impose more burdensome conditions.  I know that Comcast on occasion has intentionally degraded its service, but why would Netflix, particularly given low consumers’ pain thresholds for inferior video?

            Lastly, why do subscribers have to pay the full monthly rate when compensation disputes temporarily block access to “must see” channels?  Where’s my refund?

             

The Lack of Competition in Cable Television Set Top Boxes

            Recently Comcast migrated from offering 2 free digital to analog converters to offering a rental at $1.99 per month.  It got me thinking why cable operators persist in this line of business when other ancillary markets, such as wireless routers and even cable modems have competitive options.  The authors of Wobbling Back to the Fire: Economic Efficiency and the Creation of a Retail Market for Set-Top Boxes offer plenty of answers and economic theories; see http://www.phoenix-center.org/papers/CommLawConspectusSection629.pdf.

            According to T. Randolph Beard, George S. Ford, Lawrence J. Spiwak, and Michael Stern there does not seem to be any financial upside for cable operators, or marketplace harm in sole sourcing and rentals.  So are cable operators simply providing a service that no one else wants to provide?  The authors correctly note that cable operators do not manufacture such devices, but instead contract for the manufacture by unaffiliated companies.  So what’s in it for the cable operators?

            I have a few empirical observations, again generated by personal experience.  First the possibility exists that the rentals of set top boxes, converters and modems represent a unrecognized profit center.  I suspect that the Pace converter that allows cable subscribers to continue using older analog televisions costs less than the devices used to convert off air digital signals into analog.  These more sophisticated devices retail for about $40—50.  So if Comcast can rent the simpler and cheaper mini-converters for $2 a month, the company breaks even in a matter of months even though subscribers might use the device for many years. 

            As to those more expensive set top boxes the time to break even will take longer, but again the length of rental without replacement may span many years.  How many generations of set top boxes have you run through in your years of cable television subscriptions?  Bear in mind that cable operators typically offer one set top box free and then charge $5 or more per month for additional units.

            Second the possibility exists that cable operators believe that their proprietary, non-compatible set top boxes provide greater opportunities to lock in consumers and limit them only to features the cable companies and content providers are willing to offer.  Once upon a time these stakeholders did not want companies like Tivo offering digital video recording opportunities, so interconnection and technical compatibility issues provided a means to thwart and stall competitive options.

             Third, cable operators, their trade associations and their sponsored researchers have expressed opposition to extending the Carterfone policy to television.  Carterfone supports the right of consumers to attach any device that does not cause technical harm.  If applied to cable television, it would enhance consumer freedom by preventing strategies to block or limit access by devices cable operators don’t control.  From my vantage point the lack of progress in cable efforts to promote “true two-way” access by televisions without a converter box means that cable operators see upsides in mandating access only via their soul sourced devices.  Additionally with digital transmissions, subscribers must have a set top box or converter for each and every television set thereby eliminating the previous free option of using a “cable ready” set.

            Also the fact that consumers have not embraced CableCards may reflect their lack of knowing that such an option exists, possibly the product of a strategy by cable operators not to promote such an option.

            My bottom line: the lack of a competitive market for set top boxes probably reflects market failure artificially induced by cable operators.