Summary of Court Decision Reversing the FCC Sanctions of Comcast

The FCC’s attempt to sanction Comcast for interfering with subscribers’ peer-to-peer traffic absent legitimate network management requirements failed to pass muster with the D.C. Circuit Court of Appeals. [1] This decision severely sidetracks the Commission’s attempt to establish binding network neutrality policies, rules and regulations absent an explicit legislative mandate.
Noting that the Commission invoked no express statutory authority, the court considered whether “barring Comcast from interfering with its customers’ use of peer-to-peer networking applications is ‘reasonably ancillary to the . . . effective performance of its statutorily mandated responsibilities.’” [2] Notwithstanding the Supreme Court’s broad deference to the FCC’s assertion of ancillary jurisdiction in the Brand X case, [3] where the Court affirmed the FCC’s determination that cable modem provided Internet access constitutes a lightly regulated information service, the D.C. Circuit required evidence that the FCC’s regulatory action had a direct link to its statutorily mandated responsibilities. [4] The court vacated the FCC’s sanctioning order of Comcast based on the view that the FCC could only refer to congressional statements of policy which do not provide a precedent for creating such responsibilities and to various section of the Communications Act that the court deemed inapplicable for substantive and procedural reasons.

The D.C. Circuit vacated the Commission’s reprimand of Comcast based on the court’s refusal to accept the Commission’s claim of ancillary jurisdiction. The court referred to the three major cable television cases [5] where the Supreme Court had affirmed the FCC’s ancillary jurisdictional claim “at a time when, as with the Internet today, the Communications Act gave the Commission no express authority to regulate such systems.” [6] As it had done in the case rejecting the FCC’s attempt to require television set manufacturers to build units capable of processing digital right management, “broadcast flags,” the court distilled the precedent for ancillary jurisdiction established by these cases into a two part test whether: “(1) the Commission’s general jurisdictional grant under Title I [of the Communications Act] covers the regulated subject and (2) the regulations are reasonably ancillary to the Commission’s effective performance of its statutorily mandated responsibilities.” [7] The court determined that the FCC had not satisfied the second part of the test. [8]

The court flatly rejected the FCC’s attempt to infer congressional intent for the Commission to extend its regulatory wingspan to include Internet access. In a series of references to provisions of the Communications Act, [9] the Commission expansively read congressional policy as sufficient ground for undertaking regulatory policy:

Instead, the Commission maintains that congressional
policy by itself creates “statutorily mandated responsibilities”
sufficient to support the exercise of section 4(i) ancillary
authority. Not only is this argument flatly inconsistent with
Southwestern Cable, Midwest Video I, Midwest Video II, and
NARUC II, but if accepted it would virtually free the
Commission from its congressional tether. [10]

The court concluded that the FCC could invoke ancillary jurisdiction to apply any number of regulatory requirements to cable modem provided Internet access without explicit congressional authority to do so. [11]

NOTES

[1] Comcast Corp. v. F.C.C., __F.3d __, slip op. (D.C. Cir. April 6, 2010)(No. 08-1291); available at: http://pacer.cadc.uscourts.gov/common/opinions/201004/08-1291-1238302.pdf.

[2] Id. at 3 citing Am.Library Ass’n v. F.C.C., 406 F.3d 689, 692 (D.C. Cir. 2005).

[3] The court does not interpret the Brand X case as precedent for the imposition of plenary authority over any matter involving cable television company provided Internet access. “By leaping from Brand X’s observation that the Commission’s ancillary authority may allow it to impose some kinds of obligations on cable Internet providers to a claim of plenary authority over
such providers, the Commission runs afoul of Southwestern Cable and Midwest Video I.” Id. at 14. “The Commission’s exercise of ancillary authority over Comcast’s network management practices must, to repeat, ‘be independently justified.’” Id. at 16, citing National Ass’n of Regulatory Utility Commissioners v. FCC, 533 F.2d 601, 613 (D.C. Cir. 1976)(rejecting the FCC’s preemption of state and local regulation of two-way, intrastate, non-video cable transmissions).

[4] “The Commission therefore rests its assertion of authority over Comcast’s
network management practices on the broad language of section 4(i) of the Act: “The Commission may perform any and all acts, make such rules and regulations, and issue such
orders, not inconsistent with this chapter, as may be necessary in the execution of its functions,” Id. at 6, citing 47 U.S.C. § 154(i) and In re Formal Compl. of Free Press & Public Knowledge Against Comcast Corp. for Secretly Degrading Peer-to-Peer Applications, 23 F.C.C.R.
13,028, 13,036, (2008).

[5] United States v. Southwestern Cable Co., 392 U.S. 157 (1968), United States v. Midwest Video Corp., 406 U.S. 649 (1972) (Midwest Video I), and FCC v. Midwest Video Corp., 440 U.S. 689 (1979) (Midwest Video II).

[6] Id. at 6.

[7] Id. at 7.

[8] The court noted that Comcast had conceded “ that the Commission’s action here satisfies the first requirement because the company’s Internet service qualifies as “interstate and foreign communication by wire” within the meaning of Title I of the Communications Act.” Id. at 7-8 citing 47 U.S.C. § 152(a). The court also rejected the Commission’s claim that because Comcast had used the existence of FCC jurisdiction in another case the company should be judicially stopped from challenging the Commission’s jurisdiction now. The court interpreted Comcast’s position in the other case as simply acknowledging the FCC’s jurisdiction over wire and radio services, which includes what Comcast offers. “Because Comcast never clearly argued in the
California litigation that the Commission’s assertion of authority over the company’s network management practices would be ‘reasonably ancillary to the Commission’s effective
performance of its statutorily mandated responsibilities’ (American Library’s second requirement), 406 F.3d at 692,that question remains for us to answer.” Id. at 12.

[9] The Commission cited to Secs. 1, 230(b), 706, 257, 201 and 623 of the Communications Act.

[10] Id. at 23.

[11] “Were we to accept that theory of ancillary authority, we see no reason why the Commission would have to stop . . [at imposing regulation of Internet Service Providers’ rates] for we can think of few examples of regulations that apply to Title II common carrier services, Title III broadcast services, or Title VI cable services that the Commission, relying on the
broad policies articulated in section 230(b) and section 1,would be unable to impose upon Internet service providers.” Id. at 23-24.

Trust the Cloud?

By choice and necessity we increasingly use cloud computing to process and store information about us—from pictures to credit card numbers. The worst case scenarios of such reliance include identity theft and fraud. But there are lesser irritants, two of which affected me with no apparent reason or cause.

In the space of a few weeks my most frequent used car rental company “DNRed” me. They decided—or more likely a computer decided—that I was no longer credit worthy. So in one calculation I migrated from an “elite” frequent renter, to a deadbeat. After repeated calls to the company to identify who could correct the mistake, I was reinstated. But absolutely no one could explain how such a thing could have happened.

Cloud confusion event two occurred on a recent trip. A major German airline determined that my wife and I were blind. Okay I get the cosmic message in this, but a representative who unsuccessfully gave us back our sight noted that some human had to have inserted blindness into the record. The cloud would not relent: one each segment my wife and I were invited by name to “pre-board.” We may still be blind.

Trust but attempt to verify what the cloud knows about you.

The National Broadband Plan--A Work in Progress

The National Broadband Plan represents a thoughtful, albeit belated, recognition that the U.S. federal government can stimulate both the broadband supply and demand through stewardship and vision. However, the Plan does not signal a major shift in strategy, the infusion of billions more in subsidies, or a departure from reliance on marketplace forces to allocate most resources to broadband development. The Plan does make the case for many short and long term adjustments in policies, many of which the FCC cannot effectuate unilaterally in light of the need for a legislative mandate, or cooperation with other government agencies and stakeholders. The Plan offers hope that some leaders in the U.S. government now recognize the need to adopt global best practices, many of which require the national government to engage in sophisticated analysis of when to become more involved in broadband development, but also when to remove regulatory underbrush that retards timely and flexible adjustments to the mix of radio spectrum available.

The FCC officially recognizes that broadband means something much faster than 200 kbps. The Plan proposes an ambitious “100 squared” goal of having 100 million households with access to 100 Mbps download service by 2020 with a far less ambitious 4 mbps service of actual download speed available to nearly all residents as soon as possible.

The National Broadband Plan offers scores of thoughtful and probably positive policy changes, but many of them require coordination among federal agencies, newfound zeal in finding ways to use spectrum with greater efficiency, and the need to make changes quickly. Dislodging the status quo will prove daunting, because the Plan offers little new inducements for government agencies to refrain from inefficient spectrum use bordering on hoarding and for incumbent wireline carriers to welcome a shift in universal service funding from narrowband telephone service to broadband.

The Plan operates under the flawed presumption that broadband competition exists, or soon will flourish, with particular emphasis on wireless broadband options that currently have failed to match the bitrate deliver speeds of wireline options. Additionally, the Commission appears content with finding new wireless broadband spectrum for incumbent carriers, without considering whether the scope of competition, as well as broadband access and affordability might be enhanced by reserving some newly available spectrum for market entrants. The Plan avoids addressing network interconnection, neutrality and sharing requirements that other nations have adopted with measureable success.

16 Page Summary of the National Broadband Plan and Mission Statement

Having completed the first of many readings of the FCC's National Broadband Plan, I have prepared a relatively short summary of the document. It is available at my web site: http://www.personal.psu.edu/faculty/r/m/rmf5/. Scroll down toward the bottom of the page and under Broadband and Next Generation Network Development, click on the link titled Summary of National Broadband Plan.

Podcast on a Variety of Network Neutrality Issues

You might have an interest in a thoughtful and wide ranging discussion on the legal, regulatory and policy issues raised by network neutrality hosted by Surprisingly Free, a project of the Mercatus Center at George Mason University Law School: http://surprisinglyfree.com/2010/03/01/rob-frieden-on-internet-applications-content-providers-and-net-neutrality/.

Jerry Brito and I prove that reasonable people can disagree on aspects of network neutrality yet have a civilized and informative discussion.

More Available Wireless Spectrum and Higher Market Entry Barriers

The tremendous demand for, and profitability of mobile telephony supports legislative and regulatory efforts to refarm spectrum with an eye toward reallocating as much as possible for wireless telephony and data services. But there is a downside that no one seems to acknowledge.

In light of past FCC practice and the behavior of incumbent wireless carriers I expect two anticompetitive outcomes to occur with the onset of any more spectrum. To maximize current contributions to the national treasury the FCC won’t likely encumber any spectrum with open access requirements much less reserve some of the new spectrum for new bidders. Years ago the FCC removed a spectrum cap on any single carrier ostensibly to enable to improve service and accrue scale economies. We can expect the Big Four incumbent wireless carriers, now sharing over 90% market share, to acquire most of the spectrum.

In the 700 MHz spectrum auction (reallocation of UHF television spectrum) AT&T and Verizon spent $16 billion of the $19.6 billion collected by the U.S. government:

“According to an analysis by The Associated Press, the two telecom companies bid more than $16 billion, constituting the vast majority of the overall $19.6 billion that was bid in the FCC auction. With Verizon Wireless and AT&T dominating the auction so completely, hopes that the auction would allow for the creation of a new nationwide wireless service provider were dashed.” W. David Gardner, Verizon, AT&T Big Winners in 700 MHz Auction, INFORMATIONWEEK (March 20, 2008) available at http://www.informationweek.com/news/mobility/showArticle.jhtml?articleID=206905000; see also, Saul Hansell, Verizon and AT&T Win Big in Auction of Spectrum, THE NEW YORK TIMES (March 21, 2008), available athttp://www.nytimes.com/2008/03/21/technology/21auction.html; FCC, Auction 73, 700 MHz Band, Fact Sheet, available at http://wireless.fcc.gov/auctions/default.htm?job=auction_factsheet&id=73.

Can anyone refute the conclusion that as incumbent carriers control more spectrum, the prospects for market entry and commensurately greater competition wanes? Regardless whether incumbent carriers warehouse the spectrum, or put it to immediate use, their opportunity to consolidate market control grows. Who would have the financial and management resources to take on the incumbents?

So 4 is the highest number of facilities-based carriers we can expect for most markets. If you think a regional carrier or pre-paid reseller can match the expanding service wingspan from the Big Four, think again.

Does Judicial Deference Cleve Along a Deregulation/Expanded Regulation Axis?

By all accounts it appeals that the D.C. Circuit Court of Appeals expressed great skepticism with the FCC’s claimed ancillary jurisdiction to sanction Comcast for meddling with peer-to-peer traffic of its subscribers. I share that concern for two reasons: 1) on administrative law grounds, the FCC should have initiated a notice and comment rulemaking before applying what sure looks like enforced rules; and 2) the FCC stretches the concept of ancillary jurisdiction in Title I of the Communications Act and then justifies the stretch primarily on Title II common carrier regulatory sections that offer a general sense that the FCC should promote access to the Internet and “advanced telecommunications capability.”

The D.C. Circuit surely has ample grounds to reverse the FCC, but if it were to do so what does such action mean in the broader context of judicial deference to the expertise of a regulatory agency and the scope of statutory interpretation accorded these agencies? Bear in mind that a majority of the Supreme Court in the Brand X case (affirming the FCC’s decision to treat cable modem Internet access as an information service) was quite willing to defer to the FCC in terms of its technical expertise and also on so-called Chevron grounds that the FCC reasonably interpreted ambiguous legislation.

So if the D.C. Circuit does not defer, does that mean that at least as to this fact pattern the FCC was unreasonable in its statutory interpretation and no degree of technical expertise can provide a cure? It also just so happens that the Supreme Court deferred to the FCC on a decision that appeared to generate a deregulatory outcome, while the D.C. Circuit’s likely non-deference applies to an expansion of the FCC’s regulatory wingspan.

Measuring Competitiveness in Wireless and Broadband

The FCC, plenty of sponsored researchers, and countless industry players spread the gospel “truth” that the wireless and broadband markets are robustly competitive. But what empirical data confirms this? The usual measures of competitiveness, such as number of operators and market share, do not corroborate the competitiveness conclusion unless you make unreasonable assumptions. I would agree that my local markets are competitive using the FCC’s measure of competitors, but these calculations are totally bogus thanks to creative counting, based on single presence in a zip code and the use of a 200 kilobit per second broadband floor.

So where is the competition? I see wireless competition in advertising, handset options, and claims of superior performance. Do wireless carriers compete on price? Perhaps one way to answer that is to assess just how often these carriers reduce their prices and how many different price points exist for roughly the same service. Using these two criteria, we see that wireless carriers do not change their prices often, don’t offer sales, typically offer the same service package for the same price, and take pains to mask costs by bundling handsets and service.

In broadband we see the same parallel pricing, with few price changes. A fairly well kept secret is the triple digit margins generated by broadband. At a recent national cable television annual conference I heard a Cox Cable Vice President crow about his company’s 100+% margins in offering broadband with no apparent need to drop prices as the market matures, or in light of competition. DSL offers one fourth the bit rate of cable modem service at about one fourth the price. Broadband rates do not typically drop, but in some instances the offered bit rate does rise for the same monthly rate.

So I guess competition, or its appearance depends on the assumptions made and the agenda, sponsor or employer of the analyst.

Something on the Op-Ed Page of the WSJ With Which I Agree

At long last an op-ed piece in the Wall Street Journal makes a statement I endorse: “In the Internet age, transparency is the foundation of trust.” You bet L. Gordon Crovitz (“Climate Change and Open Science,” WSJ 2/22/2010 at A17).

I wonder if Mr. Crovitz would expect the same sort of transparency in the network management disclosure requirements of Internet Service Providers. You see it’s easy for someone to claim that the specifics of network management constitute a trade secret, a “special sauce” for which disclosure would bring financial calamity, or at the very least rob a company of some kind of comparative advantage. Yet transparency is the very thing lacking in ISPs’ decisions whether and how to engage in price and quality of service discrimination.

I readily support many types of QOS and price discrimination provided it is offered on a transparent basis and made available to anyone on the same terms and conditions. I am okay with “better than best efforts” routing sought and paid for by end users and even by content, applications and software providers so long as this option does not guarantee congestion and unusable basic service, or provide the basis to favor ISPs’ corporate affiliates and preferred third parties.

Who would dispute that Comcast was not transparent in its claim that legitimate and lawful network management responsibilities necessitated disrupting peer-to-peer traffic, even in the absence of congestion? So if Comcast was not transparent, how am I and any other Comcast subscriber to trust that the company won’t engage in the wrong kinds of discrimination, i.e., discrimination to provide an boost for corporate affiliates, to favor certain third parties, to discipline subscribers having the temerity to take the company at its word that unmetered service is unmetered?

So Mr. Crovitz climate change advocates surely need to be transparent in their research and statistical compilations and so does the FCC, ISPs and your fellow network neutrality opponents.

Wireless VoIP: Loss Leader or Upselling Strategy?

Verizon Wireless’ decision to allow their subscribers to access Skype (see http://about.skype.com/press/2010/02/verizon.html) raises a question about strategy. Is Verizon leveraging Skype access as an inducement for subscribers to upgrade to smartphones and commit to $30 a month data plans, has the company acknowledged that its future marketplace success lies in data and not voice services, and how will the company prevent a substantial reduction in plain old voice subscriptions priced above the $30 data plan benchmark?

Like many, I have bought the view that voice communications has become a software application that rides on top of any wireline or wireless link. As such, the downward trend line for telephony approaches zero, right? Yes, if subscribers abandon their voice minutes of use plans that start at about $45 for 450 minutes a month. But no if subscribers keep the voice plan and add the $30 or higher data plan.

There was a time when wireless carriers mandated the bundling of a voice plan for the privilege of adding a data plan. Absent such compulsory bundling, Verizon must have confidence that consumers will opt to keep the user friendly voice option. This assumption makes sense particularly if wireless carriers expect to replace unmetered, “all you can eat” data plans with several tiers of monthly throughput baskets.

Cable television operators did not have such confidence that their subscribers would add service tiers rather than cherry pick. By law cable operators must provide subscribers with some “buy through” opportunities.

With a future data dominant, but tiered service environment, users may consider it prudent to keep their voice minutes on a voice plan to conserve their available megabytes for nonvoice services. Under this scenario, efficient pricing plans trump visions of convergence and zero cost voice.

InfoDev (World Bank) Publication on Broadband Development

You might have an interest in the World Bank (InfoDev) study entitled: Building broadband: Strategies and policies for the developing world; available at: http://www.infodev.org/en/Document.756.pdf.

I prepared a comparative study of several developed countries that is woven into the document.

Google’s Broadband Projects

Chances are few U.S. readers have ever heard of something called a “test and demonstration project.” We don’t have a lot of public private partnerships here. Either the mighty marketplace stimulates private entrepreneurial juices, or the government provides subsidies often to the very carriers that did not see the payoff in using their own funds. Test and demonstration projects typically blend government and private venture participants in a project that can test the technological viability of a project and also measure the publics’ interest and willingness to pay for access to the technology.

Google’s broadband projects may provide a third model: a privately funded venture that has little expectation of profit, but which serves public and private goals. Perhaps Google’s ample retained earnings make it easier for the company to afford “lost leaders.” Likewise, Google surely gets ample free press and public relations dividends just by announcing its goodwill endeavor. Maybe Google sponsored projects will show other carriers the merits in enhancing the broadband value proposition by lowering monthly subscription rates, and/or raising delivery speeds. Surely Google does not have to prove that broadband networks can deliver 1 Gigabit per second. They exist, but not in the U.S. of course.

Google might not need to secure federal regulatory authority for any project, but the same cannot be said at the state level. In Pennsylvania, where I live, Verizon secured a right of first refusal by law. I don’t see Verizon objecting to any Google project in Pennsylvania, but I doubt whether Verizon would consider significant any “proof of concept” made by Google.

I believe incumbent carriers, such as Verizon and AT&T, do not yet consider it necessary and cost effective to enhance the value proposition in broadband. The margins are quite generous, but these carriers have more to gain and lose in wireless. Absent far greater competitive necessity --not something any Google project will generate—incumbent broadband providers can make do just fine with often duopolistic markets offering on a global comparative basis mediocre bitrates at relatively high cost.

The Greatest Free-riders of Our Time

Former Southwestern Bell CEO, now General Motors CEO Ed Whitacre famous accused Google of free-riding his network, despite the obvious truth that Google pays for traffic delivery to peering points and ISPs gladly enter into reciprocal peering agreements in lieu of cash transactions that would likely result in a near zero payment as roughly equivalent traffic balances out. Mr. Whiteacre did raise a legitimate question whether there are free riders and I’m see one darling and one unexpected group flying below the radar.

My list of supreme free riders: Apple and cellular radio carriers. Anytime an Apple customer and/or a wireless carrier customer pays for and downloads content via a wi-fi connection, Apple and the carriers avoid having to pay for transport, or providing transport respectively. So Apple can get paid for a book delivered to the iPad without incurring any delivery cost. Such a deal. I have not heard that Apple will pay a gratuity to Starbucks and all the other wi-fi hotspot operators whenever a book gets downloaded “off network.”

Similarly recognize that anytime a wireless carrier subscriber uses wi-fi, in lieu of the carrier’s network, the carrier has avoided having to provide service. Subscribers are not conserving monthly service minutes when they use wi-fi, particularly for data downloads by all you can eat data plan customers.

Some time ago, wireless carriers required cellphone manufacturers such as Nokia to disable wi-fi access in the mistaken perception that the carrier would not benefit when subscribers avoid having to use the carriers’ network. Given the sorry state of these networks in the face of vastly increasing demand, wireless carriers wised up.

Now Apple and the cellular carriers qualify as the greatest free-riders of our time.

Top Ten Insights from the 33rd Annual Conference of the Pacific Telecommunications Council

I have just returned from my annual trek to Honolulu and the PTC Conference; see http://www.ptc.org/ptc10/index.php. Living in a place with extraordinary cloudiness and chill, I look forward to a brief respite despite the frequent airline screw-ups that this time occurred both inbound and outbound (20+ hrs each way plus the unique opportunity to hang out on the tarmac of the Quad Cities airport located in Moline, Il.)

Here are my top ten insights from the conference:

1) Internet-mediated video (particularly 3D) will continue to pump up demand for bandwidth. Both satellite and submarine cable operators talked about offering capacity capable of delivering multiple Terabytes (1000 to the power of 4) capacity.

2) While voice may not offer much revenue prospects as a standalone retail service, consumers still need the application and service providers look to embed it everywhere. It’s possible that in the future we might key in a telephone number in an Internet browser to connect seamlessly. That makes the browser a “universal client.”

3) Ebay may have given up on Skype prematurely. Skype now carries 12% of all international calls, not all of which are free PC-to-PC traffic.

4) Look for further blurring of the line between web-mediated and real time communications with social network sites offering real time messaging coupled with the ability to tag voice to content.

5) The conference emphasis on cloud computing may have been overhyped, but I left convinced that software increasingly will become a service instead of something infrequently installed and updated on one’s hard drive.

6) There is cause for optimism that the “lost” continent of Africa will start to have true broadband access at least on the eastern side. As major markets reach some type of saturation the profit motive makes Africa more attractive even at vastly reduced margins. Bear in mind that wireless operators in Africa have offered service for pennies a minute while generating a respectable profit.

7) As smartphones proliferate look to wireless as the preferred convergence medium for many consumers. Dr. Robert Pepper of Cisco offered an estimate that two thirds of all mobile traffic will be video by 2013. Operators can expect vast demand, but will it come from 4 million customers downloading 50 YouTube videos per month or 2 high definition movies? The aggregate throughput demand is the same—18 petabytes. Speaking of YouTube, I heard that the company is spending up to $2 million a day in Internet capacity to offer its mostly free services.

8) Satellite carriers will have the capacity to offer 100 Gigabits per second service soon and some operators are thinking about installing router functionality on the bird instead of on the ground.

9) There was very little discussion about network neutrality, but a lot about offering differing quality of service performance guarantees.

10) Lastly, it was remarkable to see that most of the major conference sponsors are based outside the U.S. The intellectual, financial and entrepreneurial juice seems more widely distributed as never before. Thanks to financiers’ fees that helped bankrupt the home telephone company, Hawaiian Telcom, the conference had limited local color even as it provided shorter flying times for the dealmakers.

Disintermediation on Steroids?

Technological and marketplace convergence, leading to an IP-centric infrastructure, has the potential to eliminate the middleman--disintermediation in the vernacular. We have begun to see this outcome at the margin as some cable television subscribers terminate their video subscription while retaining their broadband access. My nomadic students have little use of "appointment television," i.e., scheduled broadcasts of content. But they increasingly see little value in having the subscriber right of access to particular content. They have every expectation that the content source will make it available for streaming access, e.g., vbia Hulu, or that someone will illegally make the content readily available.

So who needs cable when consumers have little use for schedules or certain access? Comcast and others recognize the need to accommodate consumers' expectation that if they pay for access it better be available just about any time, via any device. Content distributors and sources balk at accommodating via any format, because of the risk of piracy.

Recently television broadcasters' spectrum has been targeted as a potential source for more mobile wireless bandwidth. In light of the fact that only 9% of the television viewing public relies on the free to air source the spectrum may be in play. If so, would local broadcasters suffer disintermediation, because the networks would not need them to reach consumers, or would local broadcasters strike deals with ISPs and establish their own web sources of content?

One should never underestimate the power of incumbency and efforts by incumbents to safeguard their intermediary status. The National Association of Broadcasters has provided local broadcasters with a public service announcement that emphasizes "free" and "local." Never mind that 91% of the audience rely on a multinational intermediary.

Agency Deference or Strict Statutory Construction—Conflicting Case Precedent

Many observers expect the D.C. Circuit Court of Appeals to vacate the FCC’s attempt at fashioning federal Internet policy when it reprimanded Comcast for the company’s violation of the 4 Internet Freedoms. The Commission did not use a notice and comment rulemaking confident that it has both direct and ancillary jurisdiction to impose a policy statement that it subsequently construes as establishing enforceable rules.

In many reviews of bold and creative interpretations of the Commission’s statutory authority, courts seem to go out of their way to defer to agency expertise. But in other cases reviewing courts are sticklers for explicit statutory authority. How can one predict which model applies?

A good example of the deference model is Justice Thomas’ majority opinion in National Cable & Telecommunications Ass’n v. Brand X Internet Services, 545 U.S. 967 (2005) where the Supreme Court affirmed the FCC’s classification of cable modem broadband access as an information service. A good example of the strict construction model are the several cases where the FCC sought to allow long distance carriers to withdraw tariffs even in the absence of legislative repeal of the explicit requirement that carriers file tariffs; see MCI Telecommunications Corp. v. FCC, 765 F.2d 1186 (D.C. Cir. 1985); American Tel. & Tel. Co. v. FCC, 978 F.2d 727 (D.C. Cir. 1992); MCI Telecommunications Corp. v. American Tel. & Tel. Co., 512 U.S. 218 (1994).

It’s easy for an uncertain court to defer to agency expertise: what better way to avoid claims that the court has legislated from the bench. But it’s also easy and enticing for a court to rebuke an agency’s bold attempt to expand its regulatory wingspan. The FCC will claim that the Communications Act requires flexibility in light of technological innovation. But it’s predictable that a regulator can perceive the need to protect the public by interpreting a public interest mandate and broad authority to regulate wire and radio services to include the Internet, which we know is an amalgam of networks, but also content, applications and software.

How can a court hold a line or draw one between regulated Internet subjects and unregulated ones? The Commission, with approval by Justice Thomas, creates a sometimes metaphysical difference between carrier offering of telecommunications capabilities as a subordinate aspect of an information service and providing telecommunications services. Justice Thomas got into a war of competing analogies with his usual soul mate Justice Scalia who offered this skeptical assessment of the FCC’s jurisdictional claim: an “experienced agency can (with some assistance from credulous courts) turn statutory constraints into bureaucratic discretions,” reserving, for example, the option of regulating Internet content based on statutes offering absolutely no basis for anything beyond promoting Internet access.

AT&T A Broadband Booster--Who Knew?

AT&T apparently has embraced broadband so much so that it wants out of the dial up, circuit switched telephone business. On it's face we could endorse this belated acknowledgement of a digital future. But no one seems to examine AT&T's motivations which surely lack altruism.

Let's remember that AT&T declined to submit applications for access to some of the $7.2 billion in broadband stimulus funds. To conserve capital, AT&T relies heavily on the copper twisted wire pair to support its current broadband U-Verse service. Now it wants to abandon the local loop---or mabe it's just wants Congress and the FCC to abandon regulation of the local loop.

I see AT&T's well publicized pitch as a gambit for deregulation, no longer based on easily disputed "statistics" about how competitive the telecommunications marketplace is, but now based on the need to expedite the migration from Plain Old Telephone Service ("POTS") to a completely digital broadband infrastructure. The company that won't seek broadband financial support--lest it have to commit to operating a neutral and open network--wants to rid itself of pesky government regulation which apparently has forced it by "regulatory takings," until now, to skim on broadband investment.

Let's briefly consider this deregulatory end game and the apparent lack of residual value in POTS. AT&T wants us to forget the current state of the marketplace, one that has both competitive and uncompetitive segments. But only with a forward looking, deregulatory approach can this nation acclerate the transition to our "digital destiny." How ironic that AT&T would prefer non monetary regulatory "reform" in lieu of direct subsidies.

Speaking of subsidies, recall that the U.S. government so worried about access to free to air broadcast television by 9% of the population that it offered two $40 vouchers for digital to analog converters and launched an aggressive and successful campaign to educate the masses on the DTV conversion. Dial up voice may have declined in both market penetration and revenues, but it won't drop to a 9% penetration any time soon.

So I'll reframe AT&T's ostensibly noble and futuristic campaign as nothing more than a new strand of a familiar gambit to remove government oversight while retaining government conferred benefits. If AT&T abandons its core public utility mission than it should relinquish all of the rights of way it got at below cost or zero expense. AT&T might also check with its tax counsel for advice on what it might lose when it exits the Title II common carrier safe harbor.

Having Its Cake and Eating it Too--Shirking Common Carriage While Retaining Rights of Way Access and Other Benefits

AT&T's new gambit to rid itself of pesky Title II common carrier responsibilities prompts me to ask (and tentatively answer) this question: when, if ever, do Title II carriers lose common carrier/public utility free or below market access to rights of way and other benefits designed to offset the costs of common carriage? Put another way: do information service providers have any rights to public utility upside opportunities.

Some time ago, Comcast decided it wanted to install a mini-refrigerator sized amplifier on my property, ostensibly to "improve" service. For the sake of discussion, let's assume the amplifier had nothing to do with its cable service and its installation would not raise questions about the scope of rights of way available to Title VI regulated cable operators. In other words, the amplifier enhances Title I lightly regulated information services, such as broadband. I took issue with the installation of the eyesore, mostly because Comcast did not see the need to inform me of its "need." I argued that Comcast did not have the legal right to bootstrap its existing cable service right of way to install a new pedestal having not connection to its limited purpose right of way.

Comcast refused to engage me in a dialog, but they did dismantle the mini-refrigerator apparently installing it elsewhere.

The Telecommunications Act of 1996 illogically and probably unintentionally toggles between the use of the term telecommunications provider and telecommunications service provider.when addressing access to rights of way issues. We now know the FCC--with approval by the Supreme Court in Brand X--differentiates the two terms. But for purposes of rights of way, the Commission very well may not differentiate. Bootstraping the same sections of the Act to justify its jurisdiction to make federal Internet policy, the Commission probably would claim that even information service providers need rights of way to promote universal access to advanced telecommunications capabilities (Sec. 706) which in practice includes Internet access and arguably some types of information services.

In a nutshell it seems to me AT&T and others can further shirk its common carrier/public utility obligations while continuing to exploit rights of way access and other benefits.

Such a deal.

New Book Galley Proof Edit Completed

My blogging absence has occurred largely because of teaching, consulting and book manuscript work. I am glad to report completion of the galley proof edits of my new Yale University Press book entitled: Winning the Silicon Sweepstakes--Can the U.S. Compete in Global Telecommunications?

The book asks and answers the following questions:

Why does the United States demonstrate global best practices in some information and communications technology markets, such as software and computing, but woefully lag in others, such as wireless and broadband services?

If the information revolution was supposed to “change everything,” how did more than one trillion dollars in investment largely evaporate in three years?5

How can incumbent telephone companies successfully argue the need for governments to create incentives for investment in next-generation networks and at the same time claim that the existence of robust competition eliminates the need for any other sort of government involvement?

Why have nations failed to bridge the “digital divide”6 despite having created subsidy mechanisms to invest billions annually in never-achieved solutions?7

If the ICE marketplace has become so robustly competitive, where are the usual consumer benefits of lower prices, diverse choices, and responsive customer service?

How can incumbent ventures regularly avoid the adverse consequences of failing to anticipate developing trends and serve new markets by belatedly acquiring or extinguishing most competitive threats through mergers and acquisitions?

Why have some nations, including the United States, lost their comparative and competitive advantage in ICE products and services?

Why does it look as though the next-generation Internet will be less open, less neutral, and less accessible, possibly turning the playing field into “walled gardens” of content and services offered by incumbents keen on disadvantaging newcomers offering “the next best thing”?

The book will be available in the spring.

Summary of FCC's Rulemaking on Net Neutrality and Preserving the Open Internet

Consistent with President Obama’s campaign promise to support network neutrality, the FCC has issued a broad sweeping Notice of Proposed Rulemaking proposing to codify the four Internet principles adopted by the Commission in 2005[1] along with two additional principles requiring nondiscrimination and transparency. [2] With the two Republican Commissioners dissenting in part and concurring in part,[3] the FCC has only started the controversial process for assessing what enforceable rules it should establish for regulating Internet Service Providers (“ISPs”), and possibly applications and content providers in certain instances, [4]independent of additional statutory authority. Because the FCC currently only had articulated a Policy Statement on the topic and because the scope of its jurisdiction conferred by statute remains uncertain, the FCC seeks to establish “rules to preserve an open Internet—the next step in an ongoing and longstanding effort at the Commission.” [5]

The FCC offers “draft rules, including a codification of the existing Internet policy principles, additional principles of nondiscrimination and transparency, [and] an acknowledgement that these principles apply to all forms of broadband Internet access . . .. [6] The Commission also proposes to exclude ‘managed’ or ‘specialized’ services” from network neutrality rules in light of the fact that that services such as IP-enabled ‘cable television, VoIP telephony, and specialized telemedicine [7] may not fit within the Commission’s definition of broadband Internet access [8] in light of the nature of these services and user requirements, i.e., the need for such “mission critical” bits to arrive without delay, possibly triggering prioritized processing which might otherwise constitute a violation of the Commission’s proposed nondiscrimination requirement.

The FCC proposes the following language as establishing the foundation for Internet neutrality with an emphasis on the wireline or wireless [9] link providing end users with access to the Internet [10]:

1. Subject to reasonable network management, a provider of broadband Internet access service may not prevent any of its users from sending or receiving the lawful content of the user’s choice over the Internet.

2. Subject to reasonable network management, a provider of broadband Internet access service may not prevent any of its users from running the lawful applications or using the lawful services of the user’s choice.

3. Subject to reasonable network management, a provider of broadband Internet access service may not prevent any of its users from connecting to and using on its network the user’s choice of lawful devices that do not harm the network.

4. Subject to reasonable network management, a provider of broadband Internet access service may not deprive any of its users of the user’s entitlement to competition among network providers, application providers, service providers, and content providers. [11]

5. Subject to reasonable network management, a provider of broadband Internet access service must treat lawful content, applications, and services in a nondiscriminatory manner. [12]

6. Subject to reasonable network management, a provider of broadband Internet access service must disclose such information concerning network management and other practices as is reasonably required for users and content, application, and service providers to enjoy the protections specified in this part.[13]

In addition to the exemption for managed and specialized services, the Commission proposes to exempt ISPs from having to comply with the six principles when reasonable network management, [14] law enforcement, [15] and public safety and homeland/national security factors [16] warrant.

The FCC concludes that it has jurisdiction to establish enforceable rules on Internet access notwithstanding the fact that ISPs provide information services explicitly exempt from common carrier regulation established in Title II of the Communications Act. [17] The Commission bases it lawful authority to regulate ISPs on the basis of “ancillary jurisdiction” conferred by Title I of the Communications Act [18]as well as Sections 201(b), 230(b) and 706(a) of the Communications Act.[19] The Commission expects to adjudicate violations on a case-by-case basis and solicits comments on what procedural rules to adopt that could lead to citations and financial penalties for noncompliance.




[1] Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, Policy Statement, 20 F.C.C.R. 14986 (2005) (2005).

[2] Preserving the Open Internet, Notice of Proposed Rulemaking, GN Docket No. 09-191, FCC 09-93 (rel. Oct. 22, 2009); available at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-09-93A1.doc.

[3] Commissioner McDowell stated that “I do not share the majority’s view that the Internet is showing breaks and cracks, nor do I believe that the government is the best tool to fix it. I also disagree with the premise that the Commission has the legal authority to regulate Internet network management as proposed.” Statement of Commissioner Robert M. McDowell Concurring in Part, Dissenting in Part, Id. at 96 (questioning the scope of the FCC’s Title I “ancillary jurisdiction” and whether Sections 230 and 706 of the Communications Act, as amended, provide “the ancillary hook.”

[4] “Although the question of Internet openness at the Commission has traditionally focused on providers of broadband Internet access service, we seek comment on the pros and cons of phrasing one or more of the Internet openness principles as obligations of other entities, in addition to providers of broadband Internet access service.” Id. at ¶101.

[5] Id. at ¶2.

[6] Id. at ¶11. The Commission identified a number of prior proceedings that it implies support the inference that the rulemaking constitutes a logical and lawful extension of previous work: “As this history illustrates, the Commission is not writing on a blank slate in this proceeding. Rather, we are proposing a next step—seeking public input on draft rules—that is based on a substantial record, which includes discussion of nondiscrimination, transparency, and application of Internet openness principles to wireless broadband Internet access service providers.” Id. at ¶46.

[7] See Id. at ¶108.

[8] The Commission proposes to define Broadband Internet access as “Internet Protocol data transmission between an end user and the Internet. For purposes of this definition, dial-up access requiring an end user to initiate a call across the public switched telephone network to establish a connection shall not constitute broadband Internet access.” Id. at p. 65, Appendix A, Draft Proposed Rules for Public Input, Part 8 of Title 47 of the Code of Federal Regulations, §8.3 Definitions.

[9] “As our choices for accessing the Internet continue to increase, and as users connect to the Internet through different technologies, the principles we propose today seek to safeguard its openness for all users. We affirm that the six principles that we propose to codify today would apply to all platforms for broadband Internet access.” Id. at ¶154.

[10] “The rules we propose today address users’ ability to access the Internet and are not intended to regulate the Internet itself or create a different Internet experience from the one that users have come to expect. Instead, our proposals attempt to build on existing policies (discussed below) that have contributed to the Internet’s openness without imposing conditions that might diminish innovation or network investment. We seek to create a balanced framework that gives consumers and providers of Internet access, content, services, and applications the predictability and clarity they need going forward while retaining our ability to respond flexibly to new challenges.” Id. at ¶14.

[11] Rules one through four are set out at Id. ¶92.

[12] Id. at ¶104.

[13] Id. at ¶119.

[14] The FCC proposes to define reasonable network management as: “(a) reasonable practices employed by a provider of broadband Internet access service to (i) reduce or mitigate the effects of congestion on its network or to address quality-of-service concerns; (ii) address traffic that is unwanted by users or harmful; (iii) prevent the transfer of unlawful content; or (iv) prevent the unlawful transfer of content; and (b) other reasonable network management practices.” Id. at ¶135, Appendix A.

[15] “Nothing in this part supersedes any obligation a provider of broadband Internet access service may have—or limits its ability—to address the needs of law enforcement, consistent with applicable law.” Id. at ¶143, Appendix A.

[16] “Nothing in this part supersedes any obligation a provider of broadband Internet access service may have—or limits its ability—to deliver emergency communications, or to address the needs of public safety or national or homeland security authorities, consistent with applicable law.” Id. at ¶146, Appendix A.

[17] “Beginning in 2002, the Commission has classified cable modem service, wireline broadband Internet access service, wireless-enabled broadband Internet access service, and broadband-over-powerline-enabled Internet access service as information services, removing them from potential regulation under Title II of the Communications Act.” Id. at ¶29 (citations omitted).

[18] “We have ancillary jurisdiction over matters not directly addressed in the Act when the subject matter falls within the agency’s general statutory grant of jurisdiction and the regulation is “reasonably ancillary to the effective performance of the Commission’s various responsibilities.” That test is met with respect to broadband Internet access service.”
citing United States v. Southwestern Cable Co., 392 U.S. 157, 172–73 (1968); United States v. Midwest Video Corp., 406 U.S. 649, 662 (1972); Comcast Network Management Practices Order, 23 FCC Rcd at 13033–44, paras. 12–28; and the Commission’s Brief in Comcast v. FCC, No. 08-1291, at 25–50 (filed Sept. 21, 2009), available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-293573A1.pdf.

[19] Section 201(b) authorizes the FCC “to prescribe such rules and regulations as may be necessary in the public interest to carry out the provision of th[e] Act.” 47 U.S.C. §201(b); Section 230(b)(1) states that “It is the policy of the United States-- (1) to promote the continued development of the Internet and other interactive computer services and other interactive media;” 47 U.S.C. §230(b)(1); 706(a) states that the Commission “shall encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans.” 47 U.S.C. §706(a).

New Pub: Lock Down on the Third Screen: How Wireless Carriers Evade Regulation of Their Video Services

The latest Berkeley Technology Law Journal (Vol. 24, No. 2 819-849 Spring, 2009) has published my work on wireless video regulatory issues.

Here's the abstract:

Wireless handsets increasingly offer subscribers a new option for accessing the Internet and video programming. The converging technologies and markets that make this possible present a major regulatory quandary, because the Federal Communications Commission (“FCC” or “Commission”) seeks to maintain mutual exclusivity between regulated telecommunications services and largely unregulated information services.

Many existing and emerging services do not easily fit into one or the other regulatory classification, nor can the FCC determine the appropriate classification by extrapolating from the regulatory model applied to existing or discontinued services. By failing to specify what model applies to services appearing on cellphone screens, the FCC has failed to remove regulatory uncertainty. Cellular telephone service providers may infer from the Commission’s inaction that any convergent service eventually will qualify for the unregulated information service “safe harbor” despite plausible arguments that government oversight remains essential to achieve consumer protection, national security, fair trade practice, and other safeguards.

This article will examine the regulatory status of wireless carrier-delivered video content with an eye toward determining the necessary scope and nature of government oversight. The article reports on instances where the FCC deemed it necessary to promote video programming competition and subscriber access to wired cable television content, and concludes that wireless subscribers deserve similar efforts in light of wireless carriers’ incentives and abilities to blunt competition. The article concludes that the FCC must balance the carriers’ interests in finding new revenue centers to pay for next generation network upgrades with subscribers’ interests in maximizing their freedom to use handsets they own.

WSJ’s Misinformation Agenda

Year after year I read Wall Street Journal editorials and op eds on telecommunications with wonder. How can seemingly intelligent people—who generally write with great confidence bordering on arrogance—make such bold and wrong assertions nearly every time? Is there a News Corp./Murdoch agenda? Do these writers reflectively rail against any governmental intrusion? Are they leading the blocking for major advertisers?

The latest investment in telecom snark, The Coming Mobile Meltdown, Oct. 14, 2009 at A21, tries to blame network neutrality advocacy as cause for anticipated bandwidth shortages. Author Holman W. Jenkins, Jr. warns of upcoming usage sensitive pricing, and suggests that the FCC abandon wireless network neutrality policies in favor of allocating more bandwidth for wireless companies whose numbers should drop through mergers.

Let’s get this straight allow the Big 4, which already control 90% of the national market, to become the Biger 3 with 95% of the market. Abandon common carrier regulation of their telecommunications services and refrain from applying network neutrality principles or rules to their information services, including Internet access. Allow the Big 3 to consolidate control further by acquiring most of any new spectrum allocations. Sounds like a recipe for a powerful oligopoly with the incentive and power to operate non neutral networks in discriminatory and anticompetitive ways.

Mr. Jenkins is correct on one issue: wireless carriers will abandon “All You Can Eat” unmetered service and impose incrementally higher rates based on baskets of throughput downloads. But get this Mr. Jenkins and friends: no credible advocate of network neutrality has contended that carriers cannot lawfully do this. Usage based pricing forces more rational consumption of a resources without favoring one content source or application. Network neutrality addresses tactics where a carrier deliberately drops packets of a disfavored and unaffiliated content source ostensibly to achieve network management objectives, but in reality aiming to discipline competitors, including content creators that offer alternatives to what the carrier offers.

Comcast can claim network management objectives, if not obligations, “forced” it to obstruct peer-to-peer traffic (“P2P”), but an ulterior motive cannot be ignored. Might Comcast want to prevent P2P traffic that offers high quality video via Comcast lines, but creates incentives for consumers to abandon cable television subscriptions?

I thought the Wall Street Journal stood for competitive markets, not for cronyism and accommodative government policies that favor less competition and reduced consumer welfare.

The Front-end and Back-End Effects of Spectrum Auction Open Access Commitments

AT&T and others have noted that when a spectrum auction bidder must commit to using the bandwidth for an open and nondiscriminatory network, the bidder reduces its maximum monetary offer. From this discounting, opponents to open access and network neutrality would have you believe that such principles impose quantifiable financial burdens, a kind of regulatory canopy that results in lost revenues and profits for the carrier and lower spectrum auction revenues for the government and taxpayer. Empirically speaking, these opponents can point to the fact that the open access spectrum fetches lower bids as occurred for the C block 700 MHz spectrum made available in the conversion from analog to digital television. The spread might have been even greater had Google not participated, exiting only after the FCC’s reserve price had been met.

So AT&T and others have a point that in the front end, the national treasury loses funds. But might there be off setting benefits and other factors at the back end to justify such intervention? AT&T and others conveniently ignore such countervailing factors.

Even before one gets to the back end, the national treasury immediately starts to lose otherwise accruing tax payments from the winning spectrum bidder. The millions or even billions bid by a carrier qualify as a capital expenditure that offsets income. Winning bidders pay less tax than they otherwise would have to in light of their spectrum investment.

Additionally, we should at least consider whether open networks accrue private and public benefits for non-carriers. Because spectrum bidders insist that they lose revenues in having to operate open networks, it follows that their private loss might be captured by other private players, e.g., content creators and end users. Arguably, when users do not have to incur switching and other transaction costs to depart from a walled garden of content, offered by a carrier operating a closed network, welfare gains can accrue.

Consider the Apple/AT&T walled garden of software applications available to iPhone subscribers. The companies have magnanimously offered 85,000 choices out of the millions available software applications Internet subscribers can use. It is not a stretch in imagination to infer than some of the unavailable applications would benefit iPhone users and the absence of such options forecloses accrual of additional value from the iPhone subscription. Additionally the ability to control the access to working and easily accessed applications makes it possible for AT&T and Apple to capture rents, including higher software download and subscription fees. Has anyone noticed that AT&T charges for some iPhone applications that are freely available via the Internet? A more open network access requirement probably would prevent AT&T and the software vendor from imposing fees that they could not successfully charge on open networks such as the World Wide Web.

So when stakeholders smugly assert that open networks cost the government and taxpayers money, consider the offsetting benefits open networks provide.

The Regulatory Arbitrage Lovefest

My day job, which includes finishing a book, updating a broadband law treatise, and trying to engage undergraduate students in the challenges of telecommunication and Internet policy, prevents me from weighing in each time I see yet another outrageous claim on such issues as network neutrality, broadband market penetration, and the competitiveness of U.S. telecoms markets. But I have to make time for this one.

As I understand from its letter to the FCC, AT&T objects to Google’s interpretation of law, regulation, and policy that qualifies Google Voice as an information service instead of lightly regulated long distance telephone service. This peach from AT&T—dare I say this—conflicts with the company’s previous claims that its wireless text messaging and wireline video services similarly qualify for limited regulation as information services.

So let me get this straight: in AT&T’s self-serving world (it is not a charity after all), the FCC should agree with it that text messaging is not a regulated common carrier, telecommunications service, akin to paging, and the company’s U-verse video program delivery is not a regulated cable service under Title VI of the Communications Act. Yet Google’s software-generated telephone calling service is a common carrier, telecommunications service even though it is not offered on a retail basis and rides on top of DSL, cable modem or other types of Internet access that the FCC and the Supreme Court already have deemed information services.

It is painfully clear to me that companies such as AT&T have a strategy of generating as much dissonance and nonsense as possible, regardless whether the positions pass a simple smell test. AT&T wants to ramp up the Fear, Uncertainty and Doubt level to prevent the FCC from making any definitive ruling on network neutrality.

AT&T has come up with an objection to an unregulated service that can provide something of a competitive alternative to its lightly regulated long distance telephone services. As consumers we want competitive alternatives and there are instances where inconsistent regulation may tilt the competitive playing filed in favor of an insurgent over an incumbent. But this regulatory arbitrage opportunity is both narrow, of limited value, and often short-lived. First AT&T overstates the degree of regulatory burdens it incurs in having to offer its long distance telephone service under regulation. The company does not have much paper work with the FCC and the Commission has forborne from regulating interexchange telephone services. So the scope of burden—financial and logistical-- is limited. Additionally AT&T conveniently forgets that it could have disputed the high call termination charges imposed by rural carriers. Neither AT&T nor Google want to pay extortionate access fees imposed by rural telephone companies when these companies exploit a regulatory arbitrage opportunity: the ability to generate lots of inbound traffic by offering free conference calling while paying carriers like AT&T much lower access charges when AT&T terminates calls originated by customers of the rural carriers.

The bottom line is that AT&T has had plenty of opportunities to avoid regulation based on the gigantic deregulatory safe harbor offered by the information service classification. Now AT&T has the nerve to object to Google’s use of the same opportunity. Now that's "the kettle calling the pot black."

Does the FCC Have Jurisdiction to Regulate Wireless Handsets?

As the FCC launches a number of inquiries into the wireless marketplace, some opponents to such scrutiny have raised the argument that the FCC has no legal basis for regulating wireless handsets, much less interfere with exclusive distribution agreements. This strategy does inject fear, uncertainty and doubt possibly leading to the argument that regulatory uncertainty constitutes the sole basis for any finding of insufficient infrastructure investment. But is there a legal basis to the no jurisdiction argument?

As to the question about general jurisdiction, the FCC surely has a legal basis on grounds that wireless handsets are radiotransceivers. These devices transmit and receive using radio spectrum. The FCC has jurisdiction even over low powered devices that open garages, fly model planes, nuke food, and monitor baby sounds. No manufacturer of such spectrum using equipment can sell any device without certification by the FCC.

The harder question addresses whether the FCC can abrogate contracts between regulated carriers and unregulated ventures, such as Apple, regarding a regulated handset. I don’t have a definitive answer, but I can refer to a recent instance where the FCC did claim lawful authority to abrogate any and all types of exclusive service contracts between real estate owners of multiple dwelling units and a multichannel video program distributor. See Exclusive Service Contracts for Provision of Video Services in Multiple Dwelling Units and Other Real Estate Developments, MB Docket No. 07-51, Report and Order and Further Notice of Proposed Rulemaking, 22 F.C.C. Rcd. 20235 (2007).

Arguably, if the FCC determines that the public interest justifies mandatory non-exclusivity, then the FCC can order the elimination of contracts that established exclusivity. I am sure sponsored researchers, wireless carriers, and handset manufacturers will try to find ways to distinguish video program service from wireless devices. But bear in mind that the FCC also rejects exclusivity for cable operator provided set top boxes, a device, and not a service.

Making a Mark in Telecom Policy: The 3PI Rule

With over thirty years experience in trying to influence U.S. federal telecommunications policy making, I can offer insights about the process that have passed the test of time. The 3PI Rule applies equally regardless of presidential administration and political party notwithstanding the wishful thinking of some about a “brand new day.” While I am using trite phrases, I might as well add this one about the rules: “the more things change, the more they remain the same.”

I have found first hand that individuals and groups, embracing and applying the following rules, achieve a comparatively greater impact.

1) Be Provocative!

In the policy making process—and in particular, framing the debate in Congress, the FCC, and in the trade and general circulation press—being provocative matters. Your quotes have a better zing, regardless whether they make sense and have empirical support. You may develop a reputation as a loose cannon, loonie, or true believer, but important decision makers will know about you and your message, partly because of your media quotes.

People like Scott Cleland, Richard Bennett, and Scott Wallsten understand this. They have to develop a thick skin to handle often personal and nasty criticism. Fairly or not, their provocations trigger such reactions. Scott Cleland is a major “go to” guy for insights and juicy quotes on the perils of network neutrality and other current issues. See his blog: http://precursorblog.com/. He recently vilified Google and a prominent economics professor, on leave for a job with the company: “antitrust’s modern day Pinocchio claimed that competition is just ‘one click away,’ now Google is claiming that the notion that scale is important to search competition is ‘bogus.’ Google’s Chief Economist, Hal Varian is pushing a preposterous, self-serving argument . . ..” See http://precursorblog.com/content/google-antitrusts-pinocchio

Richard Bennett offers helpful engineering insights about the Internet, but also meets the provocation test, for example, by claiming that public interest advocacy groups such as Free Press (http://www.freepress.net/) and Public Knowledge (http://www.publicknowledge.org/)
are “working the refs” when claiming that the FCC’s broadband workshops lack fair representation; see http://broadbandpolitics.com/?p=5714. Of course these groups work the refs just as companies like Verizon and AT&T who spend millions annually to do so. With comparatively more funds available, these companies have a much better shot at even influencing the selection of the refs.

Scott Wallsten offers helpful and insightful analysis which I may not always endorse. He too knows the value of provocation when coming up with titles for his work, e.g., Everything You Hear about Broadband in the U.S. is Wrong; see http://www.pff.org/issues-pubs/pops/pop14.13wallstenOECDbroadband.pdf. Scott attempts to show flaws in statistics showing comparatively mediocre broadband penetration in the U.S. However, he uses FCC-compiled data to make his point, despite the fact that many people, including me,
have challenged the FCC’s work product as quite flawed, e.g., using zip codes and a 200 kilobit per second threshold to define broadband; see http://www.vjolt.net/vol14/issue2/v14i2_100%20-%20Frieden.pdf.

2) Be Prolific

It pays to produce work early and often. I marvel at the productivity of people like Greg Sidak, http://www.law.georgetown.edu/faculty/facinfo/tab_faculty.cfm?Status=Faculty&ID=2128;
and Chris Yoo, http://www.law.upenn.edu/cf/faculty/csyoo/. I try to match their work ethic, but my primary job as undergraduate instructor gets in the way. I have needy students requiring lots of care and feeding, and the same applies to the administrative work in a College of Communications. Lacking any research assistant help, I “hand craft” everything.

3) Find a Prestigious Affiliation

This rule follows from rule 2: an affiliation with a law school, or major think tank offers both credibility and greater likelihood for staff support. I know the former matters, because my Penn State affiliation sometimes gets replaced with the University of Pennsylvania. Also it helps when a reporter thinks I am a law professor as occurs in today’s Parade magazine: http://www.parade.com/news/intelligence-report/archive/090830-more-choice-for-cellphone-users.html.

When the FCC sought to secure outside analysis for broadband development, two of the first appointments when to researchers at Harvard and Columbia: see http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-291986A1.pdf; http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-292598A1.pdf.

4) Incumbents Matter Most

Recognize that regardless of who runs the executive branch and which party has a majority in the legislature, incumbents have money, clout, and staying power. During the course of one’s career few incumbents fail, and only a few market entrants eventually acquire incumbency status. In the former category, Western Union did manage to lose its text market dominance and now generates most revenues from money transfers. In the latter category, the Internet has made incumbents of Google, Amazon, and e-Bay. But year in and year out, incumbents such as Verizon, AT&T, Comcast and Time Warner have the resources to sponsor research, appeal unfavorable regulatory decisions, and work the refs better than everyone else.

FCC 30% Cap on Cable Operator Market Penetration Vacated

The D.C. Circuit Court of Appeals has vacated the FCC's 30% cap on national market penetration by a single cable operator. Look for Comcast and Time Warner to acquire more operators and market share. Whether this consolidation will harm consumers depends on the cross-elasticity of alternative services including DBS, IPTV, and telephone company provided video services. It also depends on whether even bigger vertically integrated companies like Comcast do not have clout to "make or break" new content sources.

Reports of problems with access to programming controlled by verticially integrated cable operators challenge the court's optimism. Likewise the court explicitly relies on general antitrust safeguards which don't seem to have much applicability in telecommunications in light of the Trinko case.

Here is my summary of the case:

For the second time, the D.C. Circuit Court of Appeals has rejected the FCC’s decision to cap the national market penetration of a single cable operator at 30%. [1] In what it considered egregious disregard for changed circumstances, such as the onset of substantial competition from Direct Broadcast Satellite operators and fiber optic video providers, the court vacated the rule, rather than remanding to the FCC a requirement that it reconsider the rationale and evidentiary support for the rule.

The court determined that the FCC did not have evidentiary support for the Commission’s assumption that the two largest, vertically integrated cable operators, each having up to 30% national market share, would collude and both refuse to carry programming from new programmers. The Commission’s “open field” analysis assumes that for a competitive video programming marketplace to function, new programmers need to have access to the 40% of the market not controlled by the top two cable operators.

The court also rejected as “feeble” [2] the four “non-empirical” [3] reasons the FCC used for largely ignoring the competitive alternative provided by DBS: 1) high consumer costs in switching to DBS; 2) attractiveness of non-video services, such as broadband Internet access, provided by cable operators; 3) the inability of consumers to know the attractiveness of alternative video programming packages before consuming them; and 4) the inability of DBS to support new programming networks lacking financing. [4] The court noted that 50% of all DBS subscribers previously subscribed to cable television service, and that the Commission did not provide evidence to support the conclusion that offering non-video services confers a competitive advantage to cable operators, particularly in light of the fact that the two DBS operators have partnered with telephone companies to provide bundled services. The court also refused to agree that consumers do not know the nature of the content and new networks offered via DBS.

The court noted the significant increase in the number of cable networks and the fact that the percentage of networks affiliated with, or owned by a vertically integrated cable operator has declined since 1992 when Congress enacted the Cable Television Consumer Protection and Competition Act that authorized FCC-prescribed market penetration caps. [5] The court concluded that:

the Commission has failed to demonstrate that allowing a cable operator to serve more than 30% of all cable subscribers would threaten to reduce either competition or diversity in programming. First, the record is replete with evidence of ever increasing competition among video providers: Satellite and fiber optic video providers have entered the market and grown in market share since the Congress passed the 1992 Act, and particularly in recent years. Cable operators, therefore, no longer have the bottleneck power over programming that concerned the Congress in 1992. Second, over the same period there has been a dramatic increase both in the number of cable networks and in the programming available to subscribers. [6]

In light of the FCC’s “dereliction,” [7] the court eliminated the ownership cap immediately. The court has confidence that competition and the “generally applicable antitrust laws” will provide adequate safeguards. [8]

[1] Comcast Corp. v. FCC, ___ F.3d ___ , slip op. 08-114 (D.C. Cir. Aug. 28, 2009); available at: http://pacer.cadc.uscourts.gov/docs/common/opinions/200908/08-1114-1203454.pdf.

[2] Id. at 12.

[3] Id.

[4] See Id. at 8.

[5] “ The Cable Television Consumer Protection and Competition Act of 1992 directed the FCC, “[i]n order to enhance effective competition,” 47 U.S.C. § 533(f)(1), to prescrib[e] rules and regulations ... [to] ensure that no cable operator or group of cable operators can unfairly impede, either because of the size of any individual operator or because of joint actions by a group of
operators of sufficient size, the flow of video programming from the video programmer to
the consumer. Id. § 533(f)(2)(A).

[6] Id. at 13-14.

[7] Id. at 15.

[8] Id. at 16.

Law Review Article on U.S. Broadband Statistics

Lies, Damn Lies and Statistics: Developing a Clearer Assessment of Market Penetration and Broadband Competition in the United States is available at:
http://www.vjolt.net/vol14/issue2/v14i2_100%20-%20Frieden.pdf.

Here's the abstract:

This paper examines United States broadband penetration and pricing statistics with a critical eye, in light of other contradictory compilations by organizations other than the Federal Communications Commission and the National Telecommunications and Information Administration. The paper also compares and contrasts the FCC’s identification of broadband options in the author’s home zip code with what actual options the author could identify.

The paper concludes that the U.S. government has overstated broadband penetration and affordability by using an overly generous and unrealistic definition of what qualifies as broadband service, by using zip codes as the primary geographic unit of measure, and by misinterpreting available statistics.

The paper concludes that credible calculations, using better-calibrated measures, show a mixed outcome based on a more granular geographical and cost focus. The paper provides suggestions on how the FCC could stimulate next generation network deployment.

Some Unsolicited Advice for AT&T re Google Voice

The FCC has posed a number of provocative questions to AT&T regarding the fact that iPhone subscribers cannot download and use the Google Voice application. See http://www.nytimes.com/2009/08/01/technology/companies/01google.html AT&T should stifle every motivation to play cute or clever with the FCC. Apple adopted such a strategy when it suggested to the Library of Congress and others that it would be curtains for the free world if iPhone owners could hack, jailbreak, tether, and otherwise use their handsets without fear of violating the prohibition on circumventing copyright laws contained in the Digital Millennium Copyright Act. See http://www.wired.com/threatlevel/2009/07/jailbreak/.
Apparently the ability to treat an iPhone as the equivalent to a mobile computer risks opening the AT&T network to terroristic damage.

AT&T already has implied that it has nothing to do with applications Apple decides to make available, so one could infer that AT&T had nothing to do with the Google Voice decision. Yeah, right. AT&T stands to lose millions of dollars if captive subscribers can avoid paying dollars or tens of cents for calls that Google and Skype otherwise would charge pennies.

This “pass the buck” strategy will come to haunt AT&T if the FCC does its job. By claiming that it has no involvement in content and software decisions AT&T may back itself squarely into wireless common carriage, a regulatory classification that should apply to the company in its capacity as a wireless telephone company, but which typically gets ignored. In its capacity as a provider of wireless radio transmission capacity, AT&T operates as a provider of a regulated telecommunications service.

AT&T usually wants to emphasize its information processing and content access function that deflects its regulated, common carrier status and also positions the company to be more than the purveyor of a commodity: airtime.

When AT&T claims that it operates merely as a neutral conduit, it confers upon Apple the information processing functions leaving AT&T to offer nothing more than the commodity of transmission time.

Revealing the Inner Geek: E Layer Skip

During a tortuous 10 hour family drive the ionosphere sparkled. More specifically a layer of the ionosphere became more agitated and dense than usual—matching my mental state. With density this part of the atmosphere, approximately 65 miles above earth, reflected certain radio signals that normally pass through it.

The FM radio band became active with distant signals coming in strong from up to 1000 miles away. Normally FM radio signals dissipate quickly making it possible for reuse of the same frequency only a few dozen miles away. As I drove through central Pennsylvania I heard signals from Nebraska, Kansas, Minnesota and Iowa. Utter magic for me.

When I explained this phenomenon to my kids, I received the “big woop” response.

The Google Telephone Company?

Google has undertaken a beta-test of a telephony platform that includes the opportunity to route incoming calls to multiple devices and telephone numbers as well as free domestic long distance service. See http://www.google.com/googlevoice/about.html.

Google offers a service that fits somewhere between computer-to-computer, Internet telephony and Voice over the Internet Protocol telephony with access to and from the public switched telephone network. These service categories present polar opposites for U.S. regulatory purposes. The FCC’s Declaratory Ruling in Pulver.com clearly states that computer-mediated voice communications constitutes a largely unregulated information service. Without stating that PSTN accessible VoIP constitutes a regulated telecommunications service, the FCC has increasingly treated is as such. Using its elastic “ancillary jurisdiction,” provided under Title I of the Communications Act, the Commission has opted to apply Title II, common carrier duties on PSTN accessible VoIP service providers. These duties reduce the competitive advantages of VoIP as they impose significant costs including: financial contributions to universal service funding, wiretapping cooperation with law enforcement officials, emergency 911access, number portability to and from VoIP telephone numbers, and accessibility for people with disabilities.

Most recently the FCC specified that interconnected VoIP service providers must comply with Sec. 214 of the Communications Act that requires common carriers to file applications with the FCC and state public utility commissions before discontinuing any service. See IP Enabled Services, Report and Order, WC Dkt 04-36 (FCC 09-40 May 13, 2009); available at http://www.qsiconsulting.com/pdf/FCC_VoIP_order_5-13-09.pdf.

Does the launch of Google Voice create the potential for the company to become a major regulated telephone company? On one hand, the service clearly provides access to and from the PSTN. But on the other hand, Google Voice requires subscribers to launch an Internet browser and to enter instructions using a Web interface. Does computer-initiated voice communications migrate the service into the “computer-to-computer” Internet telephony classification, despite the PSTN link? Eventually at stake will be millions and possibly billions of dollars in revenues and universal service funding.

Response to Questions from Senator Udall

Following up on the Senate Commerce Committee's hearing on wireless handset policy, Senator Tom Udall posed additional questions. My answers are available at: http://www.personal.psu.edu/faculty/r/m/rmf5/ (in the section entitled Testimony on the Consumer Wireless Experience).

Why Is Your Smart Phone Is So Stupid?

Brian Caulfield of Forbes magazine wrote a short piece posing the question: Why Is Your Smart Phone Is So Stupid? See http://www.forbes.com/2009/07/08/iphone-ericsson-mobile-intelligent-technology-iphone.html?partner=telecom_newsletter. He answers the question by reporting that the carriers disable the handsets in an attempt to prevent revenue drainage which would occur, for example, if iPhone subscribers could use Skype outside of the islands of Wi-Fi access.

Mr. Caulfield also suggests that handset lock downs and lock outs constitute the price we pay for subsidized handsets. Okay so far. But he concludes with the view that consumers simply will not pay for unsubsidized handsets and as a result insufficient numbers of such devices exist to encourage applications engineers to write programs for them.

First, make no mistake about it: wireless subscribers surely do pay for their handsets. Wireless carriers do not operate as charities and price their services so that they recoup the subsidy. As I have noted previously, one cannot get discounted service even when using unsubsidized handsets. Second, wireless carriers recognize that they can reduce churn and price sensitivity when they lock subscribers in for two years by offering a “sweet” deal for the latest and greatest handset. Better yet, these new devices have features that might generate additional revenues.

At best wireless carriers are co-dependent, facilitators of Mr. Caulfield’s observation that no one will pay “full price” for a smart phone. At worse, these carriers deliberately dumb down the wireless experience to reduce expectations of what such networks can offer and what handsets can do.

Anyone who has traveled to Asia marvels at the digital divide in handset functionality. Might the lack of features and functionality adversely affect national productivity, or are we just better off for not having many of the standard features Asian handsets offer?

WSJ Editorial on Wireless Handset Exclusivity

The Wall Street Journal has extended its record for knee jerk corporate boosterism and extreme snarkiness, this time rejecting any need to scrutinize the wireless industry. See
http://online.wsj.com/article/SB124692981354203419.html. The Journal waxes poetic about the competitiveness and innovativeness of the industry, but surprisingly reports in its editorial that the top four wireless carriers in the U.S. control 87.4% of the market.

Down here at the consumer level, we know that the Big Four mimic each other in prices, terms, conditions, and even in their advertisements. As the wireless market reaches maturity, the carriers still pitch how reliable their service has become and the niftiness of their exclusive handsets.

Innovative? The Big Four—and for that matter the entire industry, except for resellers-- apply a single business model that ties wireless service with subsidized wireless handset sales. Consumers may think they are getting a great deal, but in reality they pay more for the handset through higher monthly rates than if they simply had bought the handset without the subsidy. No carrier offers lower rates for new or existing subscribers who use unsubsidized handsets. The handset tie-in reduces churn and guarantees the subsidy pay back and more thanks to the two year service lock in.

What I do not understand is why consumers do not push back more strongly. On the front page of the Journal was an article about how a teenage has hacked the iPhone 3GS to accept unauthorized software. So some consumers can resort to self help. For everyone else, the allure of 30,000—count ‘em—software applications appears plenty. But if I asked most personal computer users if they would tolerate Dell or Comcast specifying the type and number of applications consumers could download, I think the response would be different. Smartphones have become handheld personal computers. Users of wireless handsets should have the same freedom to access software and services, limited only by a “harm to the network” and technical compatibility standard.

Currently, wireless manufacturers, such as Nokia, only have two major sales outlets: 1) the wireless carriers, which sell 60+% of all handsets; and 2) Big Box stores such as Best Buy and Walmart, which sell about 25% of all handsets. Think of the incentives to innovate and diversify if consumers could buy wireless devices through the many different channels available for wirebased devices. When the FCC forty years ago decoupled wireline services from handsets, a substantial boost in innovation and consumer choice arose.