Result-Driven Federalism: How the FCC Rationalizes the Lawfulness of Preemption

          

            The current FCC pushes the federal preemption envelope, currently with an initiative to further constrain states and municipalities from regulating and requiring payment for wireless antenna installations on public property.  See https://docs.fcc.gov/public/attachments/DOC-353962A1.pdf.  Once upon a time, Republicans deeply respected the concept of federalism: deference to state rights and reticence to extend the wingspan of federal oversight and interference.  Such regulatory humility evaporates when preemption achieves countervailing goals.  

            For wireless antenna site policy, the FCC majority sees the need to preempt greedy non-federal governments who want to extort money from wireless carriers.  Apparently, the goal of preventing outrageous rent extraction and delays in authorizing national security enhancing 5^th Generation wireless justifies aggressive preemption, despite clear language in the Communications Act mandating shared jurisdiction.

            I can appreciate that some city councils, in particular, might look at wireless tower site authorization as a cash cow.  I can anticipate that some municipalities might try to extort outrageous payments and use the prospect of delay as negotiating leverage.  But I also can see wireless carriers using the FCC as lead blockers to beat municipalities and their citizens into submission.  What’s good for a wireless carrier must be good for society, right?  Tower siting decision making has nothing to do about aesthetics and respecting history and everything to do about ripping off big, bad corporations.

            Antenna siting has become a contentious issue, because of an ever increasing number of needed locations.  The migration to 5^th Generation wireless service will trigger a massive increase in antenna sites, because new technologies have smaller “footprints” requiring more antenna installations.  This matter is all about money, but conflicting interpretations of federalism partially obscure this reality.

            Money and serving different constituencies force FCC regulators to abandon any semblance of jurisprudential consistency.  In this strange time, a political party predisposed to support federalism and reliant on the Federalist Society to vet judicial candidates, has to turn its back on a baseline and fundamental philosophical construct.  Republican FCC Commissioners want largely to preempt states and municipalities from economic regulation of wireless tower sites, but they rallied around the state’s right flag when their Democratic counterparts wanted to preempt state laws prohibiting the installation or expansion of Wi-Fi and other broadband networks.  The Sixth Circuit Court of Appeals accepted the argument that Congress did not sufficiently articulate a federal mandate of supporting broadband technology deployment and preventing laws, regulations and policies that thwart this goal.  See http://www.opn.ca6.uscourts.gov/opinions.pdf/16a0189p-06.pdf.

            Reasonable people can disagree agreeably about the breadth, reach and scope of the FCC’s jurisdiction.  What I can’t tolerate is the sanctimony and righteous indignation of federalist advocates who readily ignore the principle when favored stakeholders knock on their door.

             

8th Circuit Rules VoIP an Information Service

            By a 2-1 vote, the 8^th Circuit Court of Appeals upheld a lower court’s determination that Voice over the Internet Protocol (“VoIP”) telephone service constitutes an information service subject to FCC preemption of state regulation. [1] The court decided to make an explicit determination considering the FCC’s decades long disinclination to do, because an explicit information service classification would jeopardize the Commission’s ability to regulate VoIP service and perhaps also the lawfulness of requiring subscribers to contribute to universal service funding.  On the other hand, the decision bolsters the FCC’s selective assertion of federal preemption to prevent inconsistent and “balkanized” policies when state establish their own regulations.

            The court determined that VoIP falls within the information service classification, because a protocol conversion occurs when calls originate, or terminate on the conventional public switched telephone network, but are transmitted via broadband networks:

            We conclude that the VoIP technology used by Charter Spectrum is an “information service” under the Act. As the district court put it, “the touchstone of the information services inquiry is whether Spectrum Voice acts on the consumer’s information—here a phone call—in such a way as to ‘transform’ that information.” 259 F.Supp.3d at 987; see 47 U.S.C. § 153(24). IP-TDM calls involve just such a transformation. For those calls, because information enters Charter’s network “in one format (either IP or TDM, depending on who originated the call) and leaves in another, its system offers ‘net’ protocol conversion, which the FCC has defined as occurring when ‘an end-user [can] send information into a network in one protocol and have it exit the network in a different protocol.’” [2]

            The court majority opted to consider the explicit language in the definitions of telecommunications service and information service rather than consider the functional equivalency of VoIP with earlier vintage circuit-switched telephony, even though they use different technical protocols.  The court considered the information service category as applicable because VoIP service providers must use software to convert the format of calls from and to legacy wired and wireless telephone networks even though both telecommunications services and information services use telecommunications networks to transmit and deliver traffic:

            Spectrum Voice’s service is an information service because it “mak[es] available information via telecommunications” by providing the capability to transform that information through net protocol conversion. Cf. Nat’l Cable & Telecommunications Ass’n v. Brand X Internet Servs., 545 U.S. 967, 988 (2005) (explaining that “all information-service providers . . . use ‘telecommunications’ to provide consumers with [their] service”). [3]

            The court did not consider VoIP protocol conversion as fitting within three categories where some processing takes place, but not in a significant way that fundamentally changes the nature and composition of the composite service. [4] This view parallels the analysis contained in the FCC’s Restoring Internet Freedom order which reclassified broadband access as an information service thereby removing common carrier regulatory oversight.

            The court quickly rejected as inapplicable each of the three carve-outs that the FCC uses to allow some degree of information processing without converting a basic telecommunications service into information service. The court rejected the first exception, because VoIP connects users of a service and not users with a network.  The second exception was considered inapplicable, because the court emphasized that protocol conversions are necessary for new equipment that VoIP subscribers must use even though more broadly the conversions also promote compatibility and interconnection between users of legacy voice telephone services and newer VoIP options.

            The third exception also was considered inapplicable, but some stakeholder may dispute the court’s rationale that emphasizes the need for protocol conversions to make the required new equipment function on customers’ premises.  The court briefly stated that the required customer premises equipment is not physically a part of the VoIP provider’s network, nor does its protocol conversion occur within a network. By emphasizing the location of the device performing the protocol conversion, the court could ignore that the device provides internetworking between two types of networks that consumers consider functionally equivalent.

            Judge Grasz, in dissent, rejected the majority’s rationale noting that the court overemphasized the location where protocol conversions take place and in so doing possibly provided a way for telecommunications service providers to evade most of the FCC’s regulatory oversight for any service where a device can be installed on consumer premises:

            If performing the conversion from TDM to IP inside a customer’s home is sufficient to convert a telecommunications service into an information service, then AT&T, or any similarly situated provider, could greatly reduce its regulatory burden simply by moving converter boxes inside customers’ homes. A simple change of physical location would transform what used to be telecommunications services to information services. This may explain why the FCC has yet to make categorical pronouncements on protocol conversions. An overarching category for all net protocol conversions would create a potential pathway for every company to escape the heavier telecommunications service regulations. [5]

            Judge Grasz also noted language in the definition of telecommunication service that deemphasizes the type and location of facilities used to provide a telecommunications service. [6] He even rejects the possibility that VoIP protocol conversions can trigger the information service classification, because the broadband service venture provides a telecommunication transmission link and the protocol conversion does not change the nature of voice communications between the caller and call recipient:

If we assume that interconnected VoIP services “provide” “telecommunications” as defined in statute, then we must presume that no “change” occurs between the two phone sets on either end of the interconnected VoIP line. . . . As a result, when addressing the question of whether Charter’s media gateway transforms information, in order to rule in favor of Charter, we would have to conclude that a device that does not change the form or content of information (because it is part of telecommunications) is also a device that transforms information (because it is an information service). See id. § 153(24), (50). The first conclusion forecloses the second one. In short, if Charter’s service provides telecommunications (as defined in statute), then its net protocol conversion cannot be part of an information service, but instead must be part of a telecommunications service. [7]

---

[1]           Charter Advanced Services(MN), LLC v. Lang, No. 17-2290, slip op. (8^th Cir. Sep. 7, 2018); available at: http://media.ca8.uscourts.gov/opndir/18/09/172290P.pdf.

[2]              Id. at 6.

[3]              Id. at 7.

[4]              “The definition of ‘information service’ excludes services that comprise a ‘capability for the management, control, or operation of a telecommunications system or the management of a telecommunications service.’ 47 U.S.C. § 153(24). The FCC has further defined this exception to include ‘(1) services ‘involving communications between an end user and the network itself (e.g., for initiation, routing, and termination of calls) rather than between or among users;’ (2) protocol processing ‘in connection with the introduction of a new basic network technology (which requires protocol conversion to maintain compatibility with existing [CPE])’ and (3) services ‘involving internetworking (conversions taking place solely within the carrier’s network to facilitate provision of a basic network service, that result in no net conversion to the end user).’” Id. at 7-8.

[5]              Judge Grasz dissent at 11.

[6]           “The statute contemplates such transitions because it defines a telecommunications service as ‘offering [] telecommunications for a fee directly to the public . . . regardless of the facilities used.” Id. at 10 citing 47 U.S.C. § 153(53).

[7]              Id. at 12.

Network Neutrality and the Court of Public Opinion

            Ask most people a basic question about Internet neutrality and the clear majority support it.  Who likes biased networks, particularly if the bias appears to subordinate the views and interests of you and like-minded people?

            On the other hand, ask people about what they think Netflix and their broadband carriers ought to do should network congestion bogging down bandwidth intensive video streams.  The likely answer: fix it!  Okay, but what kind of fix constitutes “reasonable network management” vs. something akin to prioritization of traffic?  The former universally qualifies for exemption from mandatory neutrality, but the latter triggers disputes.  ISPs can tier service by bit rate delivery speeds and monthly allotment of data.  Should they also have additional market segmentation opportunities to exempt certain traffic from debiting a data plan, so-called zero rating, or to slow down (throttle) entire categories of content, e.g., video streaming?

            The Court of Public Opinion seems clearly in favor of service arrangements described by words like free and unlimited. Of course, in the wireless world, nothing is free and unlimited does not have the common meaning.  Free comes with upselling to a more expensive service tier, e.g., “free” and “unlimited” streaming of a Direct Broadcast Satellite operator’s content. 

            “Unlimited data” has several fine print exceptions.  Throttling typically reduces bit transmission rate to 2G speed incapable of delivering video streams when a subscriber exceeds a ceiling of 20 or more Gigabytes of data delivery.  Also, wireless subscribers have to make do with video streaming that reduces the video line resolution of all streaming content, presumably a trade-off for a much higher monthly data allowance.

            Does the Court of Public Opinion favor zero rating and even tolerance for less video line resolution?  We may soon find out how California broadband consumers react if such options become illegal.  The legislature there enacted legislation that restores the consumer safeguards created in the FCC’s 2015 Open Internet Order and in several instances reaches further into the Internet marketplace.

            SB-822 current rests on the desk of California Governor Jerry Brown.  Does the Governor sign the legislation that deems illegal zero rating, most types of throttling and possibly even the paid peering arrangement that Netflix and Comcast negotiated to resolve a traffic delivery dispute? If he does we will see just how ticked off California broadband consumers get when state law mandates strict neutrality that forecloses “better than best efforts routing” and other market enhancements available at a premium price.

            For my part, I part company with my network neutrality friends, because I believe elected officials should rarely stand in the way of allowing a maturing Internet ecosystem to delivery different tiers of service at varying price points.

           

Lessons in Incivility: Two Frequent and Frustrating Strategies

            My academic post makes it possible for countless hours of reading across the entire political, economic, philosophical and social spectrum.  I recommend you avoid the common practice of seeking only content that confirms preconceptions.  My eclectic pursuit of all sides to the story requires patience and tolerance for hyperbole and deliberate mistruths.

            Two frequently used strategies drive me crazy.  A pox on all houses—left, right and central--where authors personalize a dispute and perpetuate a mischaracterization of truth when they surely know better.

            I recently read an extensive analysis about the refusal of Verizon Wireless in California to waive its contractual right to throttle broadband bit transmission speeds of first responders, including fire fighters.  The author and I share many conclusions, including the confirmation that Verizon reserved the legal right to throttle subscribers who exceed a threshold of data usage, despite having purchased an “unlimited” data plan.  Additionally, the author and I agree that Verizon did not violate any specific prohibition in the now reversed FCC 2015 Open Internet Order.

            Not content to make a convincing and thorough case, the author (I will not identify, or vilify him) relied on two strategies I will not use.  He singled out and maligned an individual who had a major role in shaping the FCC’s 2015 document.  Rather than agree to disagree, the author deviated from substantive discourse and took several opportunities to criticize the person and not her work product.  How does vilifying a person enhance and bolster the critic’s case?

            The other uncivil strategy involves the misrepresentation of a regulatory policy as more intrusive, unnecessary, harmful and atavistic than what is true.  In this case, the author misrepresented the FCC’s common carrier, telecommunications service regulation applied to Internet Service Providers as something appropriate only for “public utilities.”  Surely this author knows wireless carriers, including Verizon Wireless, trigger Title II, common carrier regulatory oversight.  This regulatory status does not convert wireless carriers into public utilities, nor does it impose burdensome regulatory duties. 

            The Telecommunications Act of 1996 authorizes the FCC to streamline and forbear from imposing most common carrier regulatory burdens when a market becomes competitive.  The FCC has largely deregulated the wireless marketplace even as it continues to classify service providers as common carriers.  No one can credibly assert that U.S. wireless carriers bear a costly regulatory burden that has created major disincentives for these carriers to participate in billion dollar spectrum auctions, or to invest billions more in infrastructure.

           

            Characterizing Title II regulation as unnecessary and so “old school” misrepresents the nature, scope and burden of the flexibility the FCC has in applying this legislatively mandated classification.  The author appears to have used this frequent mischaracterization to bolster his argument that network neutrality regulation is unnecessary.  We could have civil and substantive discussion about whether and how the FCC should regulate ISPs, including whether such oversight has any impact on public safety and the broadband speed of first responders’ smartphones.  As well, we could speculate whether the FCC would have backed away from its initial streamlining of ISP regulatory oversight.  Instead, the author uses an inappropriate public utility frame for the nature of the FCC’s previous regulatory regime.  He appears to imply that any sort of common carrier regulation constitutes overreach, even as wireless carriers have thrived under such status, without operating as public utilities, or trying to characterize their regulatory burden as equal to that borne by true public utilities, like electric companies.

            The author distracts his largely on point analysis with two uncivil tactics that have become both common and inappropriate.

Missing the Burning Forest for the Trees-Verizon Throttles California Fire Fighters at the Worst Possible Time, But Few Get the Lesson

            Verizon’s so-called customer care staff made a grievous mistake when they ignored pleas to override automated software that throttled California fire fighters’ broadband connections.  See https://www.sccgov.org/sites/opa/newsroom/Pages/netneutralitylitigation.aspx?utm_campaign=Newsletters&utm_source=sendgrid&utm_medium=email.  Understandably, network neutrality advocates jumped at the opportunity to provide another example of unintended bad consequences from the abandonment of open Internet regulatory safeguards.  Similarly, network neutrality opponents properly chided the company, but again championed a mostly unregulated Internet subject to the consumer protections available from the Federal Trade Commission.

            Both sides miss the main lesson from this unfortunate situation: broadband networks have become such important infrastructure that it makes absolutely no sense now to suggest that industry self-regulation will remedy anything and everything, except for the occasional privacy and data security issues which the FTC can handle.

            Broadband networks, particularly first and last mile access, are essential to effective firefighting as it is for so many other areas of commerce, self-fulfillment, democracy, governance, etc.  Common carriage status would recognize this importance.  Bear in mind that such a legal status does not require ventures to operate as monopolies, to have market power, or to operate essential facilities.  Landlords, hotel owners, competitive airlines and even wireless carriers, currently operate as common carriers.  Do not for a second buy the bogus assertion that such status disincentivizes investment and blunts profitability.  Also, no one can credibly claim that common carrier oversight is “legacy” “utility” regulation, unjustified in this currently competitive environment. Landlords, hotel owners, bus lines, car rental companies, airlines, cable television systems, wireless carriers and a host of other ventures currently comply with nondiscrimination and other common carrier requirements.

            On the other hand, even common carriers can engage in price discrimination.  Verizon most certainly did not violate common carriage law and policy, or the FCC’s 2015 network neutrality rules, by offering different tiers of service (bit rate, allowable monthly data consumption) at different price points.

            That Verizon could have dithered for even one hour on the matter of waiving data rates for fight fighters provides a clear example that too much is at stake to rely solely on the level of common sense and good business judgment of first responding customer service representatives.  The FCC and the California Public Service Commission should have had jurisdiction and the will to act immediately. 

            Who can dispute this outcome?

Publications Announcement

You might have an interest in the following new publications of mine:

Freedom to Discriminate: Assessing the Lawfulness and Utility of Biased Broadband Networks in the Vanderbilt Journal of Entertainment & Technology Law and

The Internet of Platforms and Two-Sided Markets: Implications for Competition and Consumers in the Villanova Law Review.

I try to simplify complex topics and you can ignore the footnotes!

Greed by Algorithm

            The adage about the stock market applies to both human and machine greediness: Bulls make money and bears make money, but pigs get slaughtered.  I am not suggesting that corporations—or academic entrepreneurs—forego profit maximization, or charging what the market will bear.  But consider the following instances where algorithms overreach and in the process tick people off big time.

            In researching hotel accommodation for my daughter’s “White Coat” ceremony marking the start of her 4 year vet school adventure at Virginia Tech, I quickly identified peak demand conditions for Blacksburg and a 50 mile radius. OK I get this: high, inelastic demand equals high prices even for 2 star motels that usually fetch $50 off peak.  But does Marriott do anything but generate ill will with an algorithm triggering a $968-1069 nightly rate for a Residence Inn?

            Countless so-called behavioral economic experiments prove that we humans do not operate as utility maximizing, cost minimizing, rational actors.  We often forego gains so that cheaters do not share or exceed what rule compliant actors get.  I suspect that many people seeing this kind of price quote from Marriott think less of the company perhaps to the point of avoiding its offerings even when quoted rates are fair and competitive. 

            Way to go Marriott algorithm writers!

            Of course, Marriott does not have a monopoly on foolish algorithmic outcomes.  Amazon has an algorithm that occasionally prices an easily procured book at prices no one would pay.  See Amazon Algorithm Price War Leads to $23.6-Million-Dollar Book Listing, https://www.pcmag.com/article2/0,2817,2384102,00.asp.

            Most times, well-written algorithms manage to squeeze out every last dollar of consumer surplus in a transaction.  So-called surge pricing taught a student of mine how elasticity-based rates work far better than I ever could.  During Spring Break in Florida, an Uber ride to Miami Beach cost a quite reasonable $17.  At 2 a.m. the same ride was quoted in excess of $400       .  The student gutted it out until the rate dropped to $147.

Corporate Welfare, Cronyism and Excess: The AccuWeather Case Study

            Bloomsburg BusinessWeek provides a thorough and distressing account of unsavory business practices originating in my small town.  See https://www.bloomberg.com/news/features/2018-06-14/trump-s-pick-to-lead-weather-agency-spent-30-years-fighting-it.  The article reports how President Trump has nominated Barry Lee Myers, CEO of AccuWeather, to lead the National Oceanic and Atmospheric Administration, which has the National Weather Service (“NWS”) under its aegis.  Might this candidate constitute the proverbial fox guarding the chicken coop? 

            AccuWeather adds value to a taxpayer underwritten, government function.  The company enhances the data it freely acquires.  I have no problem with that.  The company does not participate in a public private partnership, by investing funds in a joint venture with the government.  Instead, it masterfully executes a business strategy of adding human presentation and interpretation of weather data in a graphics-intensive, user friendly format.  So far, the company offers a case study in brilliant execution of a business plan. Bravo.

            Sadly, the company overreaches and has done so for years.  Its lobbying activities and advocacy in Washington, D.C. evidence a campaign to stifle the NWS from doing anything that could reduce the “wingspan” and profitability of the company’s products.  Simply put, AccuWeather wants Congress to restrict public dissemination of NWS-acquired and taxpayer-financed data. 

            Accuweather wants to prevent the NWS from any “retail,” direct-to-public data dissemination and analysis, particularly via direct Internet outlets and indirectly via social networks such as Facebook.  Here the company attempts to bite the hand that feeds it.  The possibility of more scrutiny of its business practices may risk its ability to pay nothing for the data it needs to create profitable products.

            AccuWeather appears unsatisfied with its considerable organic growth over many years.  It perceives the NWS as a competitor who offer content at zero additional cost even as AccuWeather wants payment for somewhat similar products. Already, the public does not see NWS employees on television, or the Internet except for the occasional interview on the Weather Channel and broadcast networks.  Likewise, the NWS web presence lacks the userfriendliness available from AccuWeather. 

            Here’s an example of the rarified product the NWS offers in its Forecaster Discussion section for State College, PA on July 15, 2018:

             "Potent cold front will plow SE through the NW mtns Late Tuesday morning and clear our SE zones late in the day. High PWAT air, increasing deep layer shear and increasingly diffluent flow aloft will set the stage for some strong to potentially severe TSRA depending on the amt of sunshine, CAPE and the exact timing of the cfront."

             They do offer a glossary, but clearly the NWS is no competitor to AccuWeather’s general consumer products.

            The BusinessWeek article shows how Accuweather has undertaken a long term and relentless campaign to limit the scope and reach of NWS work product.  In effect, AccuWeather wants to rely on the NWS for rough data, as evidenced by the dozens of satellite earth stations installed at company headquarters.  AccuWeather receives the data and converts it into something user-friendly and profitable for the company.  In AccuWeathers self-serving mindset, it constitutes rampant socialism and “mission creep” for the NWS to serve the public directly, particularly via the Internet even if a timely Facebook post might save lives.  AccuWeather does not want the risk of liability in being the sole forecaster and outlet for severe weather, but it surely wants social networks and other Internet-based sites as green fields for growth completely free of any government-supplied content.

            AccuWeather’s strategy shows how something smart can become too clever over time as as a company becomes increasingly aggressive in tactics to secure captive markets and growth.  Not content to further mine and extend its well established market presence, the company wants to throttle NWS public outreach.  This does not serve the national interest, because not everyone—even with the widespread use of smartphones—receives forecasts and urgent weather information from value added services like AccuWeather and the Weather Channel. 

            I get my weather forecasts via radio, but not from the fast-paced local inserts originating at the AccuWeather mother ship.  In many locales, the NWS transmits continuously in the Very High Frequency band (around 162 MegaHertz).  I’m sure AccuWeather would like to confiscate my radio, or failing that, to lobby Congress for legislation terminating this option.

What the Justice Department Got Wrong in Opposing the AT&T –Time Warner Merger

            In a previous post, I offered insights on grievous flaws in the court decision rejecting the Department of Justice’s (“DOJ”) opposition to AT&T’s acquisition of Time Warner.  See http://telefrieden.blogspot.com/2018/06/grievous-defects-in-at-warner-court.html  This post will address problems with DOJ’s strategy.

            Both Judge Leon and DOJ largely ignored the impact of market and technological convergence that makes it all but impossible to frame a merger with a completely vertical or completely horizontal designation.  These two types of mergers trigger vastly different assumptions including the view that horizontal mergers require far greater scrutiny based on the comparatively greater potential for harm to competition than vertical transactions among assumed non-competitors.

            Convergence makes the vertical vs. horizontal dichotomy unsustainable.  Even before acquiring Time Warner, AT&T was in the content business in a BIG, BIG way as a content aggregator.  Content aggregators are to content creators as wireless resellers are to facilities-based wireless carriers.  Of course, AT&T was and remains a content purchaser, but it was and remains a content packager fully participating in and affecting the supply and cost of content to consumers.

            Courts have identified conditional First Amendment rights in content packaging and curation (Turner Broad. Sys., Inc. v. FCC, 512 U.S. 622, 636 (1994) (“There can be no disagreement on an initial premise: Cable programmers and cable operators engage in and

transmit speech, and they are entitled to the protection of the speech and press provisions

of the First Amendment.”) (see also Rob Frieden, Invoking And Avoiding The First Amendment: How Internet Service Providers Leverage Their Status as Both Content Creators and Neutral Conduits, 12 U.PA. J. CONST. L. 1279 (2010); available at: https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=1134&context=jcl.

            Even before its acquisition of Time Warner, AT&T operated as a content speaker, through its content aggregation, curation and tiering.  The company seamlessly integrated this content-based function with its content carriage function.  In this convergent time, it made no sense for DoJ to concentrate almost exclusively on AT&T’s upstream activities, as content seller.  By doing so, DoJ made it possible for Judge Leon to embrace the incorrect assumption that the merger would eliminate $352 million in content markup revenues that AT&T would not incur and which the Judge wrongly assumed would completely flow through to consumers.

            DoJ’s second major mistake was to emphasize what AT&T probably would do now that it became fully integrated, i.e., price discriminate by charging downstream competitors higher content prices.  AT&T is far too sophisticated and clever to use such a blunt and readily detected anticompetitive strategy.

            What AT&T can and already has begun to do is strategically exploiting its market dominance, particularly in downstream delivery of content to consumers.  It appears that DoJ did not emphasize that AT&T shares a near duopoly in the ever more important wireless marketplace along with a significant market share in wireline delivery of content. 

            The FCC’s decision to abandon all regulatory safeguards addressing the downstream delivery of content means that AT&T has free reign to use content tiering as a powerful weapon, potentially quite harmful to both consumers and competition.  It starts with seemingly benign, if not consumer friendly, zero rating of content and proliferating bundles of content.  Because consumers love the concept of “free,” even when it isn’t, AT&T can upsell consumers, or at least prevent them from cord shaving with strategic placement of most desired (what some would term “must see”) content.  That’s how DirecTV streams for free now, but only to AT&T subscribers of both wireless and DirecTV. 

            Some of the $352 million in reduced overhead payments will flow through to consumers, particularly those maintaining or increasing their monthly payments to AT&T.  The real harm from the merger with Time Warner lies in the extraction of more revenues by AT&T simply with strategies that reduce, or eliminate consumer surplus. 

            Even as it appears to offer skinny and low cost, small bundles of content, look for AT&T to migrate the “good stuff” to higher and more expensive programming tiers.  AT&T can justify the higher fees and higher tier placement by claiming that even it has to recoup the ever higher program creation costs of its stars, HBO and CNN.  What will be framed as consumer friendly bundling of content masks a strategy of increasing Average Revenue Per User and raising both content licensing fees and subscriber out of pocket costs.

           

            Depending on your political and economic philosophy, that’s smart business strategy, or anticompetitive behavior.  The former emphasizes the need for size and scale to offer one-stop shopping and a competitive response to Netflix, Hulu and Amazon Prime.  The latter emphasizes how much undetectable downstream content meddling AT&T can execute, particularly now that network neutrality safeguards have evaporated.  Bear in mind we still don’t know who or what caused Comcast’s network congestion that slowed and Netflix traffic in 2015.  We do know what the problem ended overnight when Netflix blinked first and agreed to a paid peering arrangement with Comcast.

            Lastly, not forget, long ago, Time Warner vertically integrated with AOL with disastrous consequences.  This time, it might be different, because the marketplace has become far more concentrated, particularly on the downstream side.

Radical, Judicial Activism in a Kavanaugh Dissent

            Starting today, Supreme Court Justice nominee Brett Kavanaugh will start a carefully orchestrated charm offensive highlighting his judicial temperament, respect for the rule of law and humility.  You won’t see that posture in at least one of his prior opinions.

            Take a look at Judge Kavanaugh’s dissent to the decision of the D.C. Circuit Court of Appeals not to hold an en banc re-hearing of the court’s affirmance of the FCC’s network neutrality rules:  https://www.cadc.uscourts.gov/internet/opinions.nsf/06F8BFD079A89E13852581130053C3F8/$file/15-1063-1673357.pdf.

            In his dissent, Judge Kavanaugh elevates Internet Service Providers’(ISPs’) First Amendment rights to neutralize any attempt by the FCC to regulate their economic behavior.  His opinion weaponizes the First Amendment as an unimpeachable right to be free of any government law or regulation that even indirectly affects what they transmit.

            So much for respect for settled law.  Ample case precedent supports the longstanding view that the First Amendment does not insulate ventures, such as common carriers and even hotel operators, from laws and regulations that impose non-discrimination requirements.  Judge Kavanaugh conveniently ignores the fact that ISPs primarily switch, route and deliver content created by other ventures.  No First Amendment right attaches to this conduit function which closely parallels cable television companies’ compulsory carriage of broadcast television signals.

            Moreover, ventures do not even have to be classified and regulated as common carriers to trigger nondiscrimination requirements.  Judge Kavanaugh remarkably fails to see that the Supreme Court’s the cable television must carry cases (FCC v. Midwest Video Corp., 440 U.S. 689 (1979); Turner Broadcasting v. FCC, 512 U.S. 622 (1994) and 520 U.S. 180 (1997)) impose non-discrimination and compulsory carriage on companies that might elsewhere have some First Amendment rights, e.g., how to package and tier content.

            Judge Kavenaugh ignores the open access rights of television broadcasters to cable television subscribers to support his view that the FCC cannot impose any similar duty of access on ISPs.  That’s a radical notion the majority summarily dismissed in both the main opinion and the en banc hearing denial:

            Because “the accessed speech is not edited or controlled by the broadband provider but is directed by the end user . . . the Commission concluded that broadband providers act as “mere conduits for the messages of others, not as agents exercising editorial discretion subject to First Amendment protections. . . . Petitioners provide us with no reason to question those findings.

            Because the rules impose on broadband providers the kind of nondiscrimination and equal access obligations that courts have never considered to raise a First Amendment concern . . . they are permissible.

[U.S. Telecom Ass’n v. FCC at 111; https://www.cadc.uscourts.gov/internet/opinions.nsf/3F95E49183E6F8AF85257FD200505A3A/$file/15-1063-1619173.pdf]

           

Wall Street Journal Fact Checking Quiz

Today's Wall Street Journal  (July 6, 2018) includes the following sentences in a editorial about the departure of EPA Administrator:

               
Press dispatches have suggested that he misused private air travel, sent staff on
personal errands and bought $1560 pens, among dozens of other allegations.  Mr.Pruitt says most of this was false or exaggerated, and no doubt much of it was. (my emphasis.

Pop Quiz

The Wall Street Journal's above statements are:

A)  The gospel truth notwithstanding its reporting to the contrary;             
B)  A rare case of fake news from a trusted source;
C)  A white lie to state a more important truth; or
D)  A "pants on fire" lie to reinvent the facts for doctrinal purposes.

You be the judge.

Comcast Sneaks in Another Billing Line Item and “Earns” an Additional $1 Billion

            My Comcast bill arrived today with a sneaky new $2.68 charge, $2.50 for leasing one (and only one) set top box and $0.18 for the remote.  This new billing line item, like the many others Comcast has introduced, adds to its bottom line with no additional capital expenditure.  It shows how resisting the obligation to return to accepting set top box free, “cable ready” sets was a smart strategy. Now Comcast can charge for a device rental that it used to provide free of charge (for the first one), because consumers cannot access its service without one.

            Remarkably, the FCC never got around to replacing its CableCard “solution” with a viable, consumer-friendly update.  For their part, cable operators never followed through on a “commitment” to offering “true two-way” consumer access using increasingly versatile and intelligent television sets to handle rather simple upstream commands to the cable operators’ Headends.

            Of course, Comcast subscribers now can use their own set top boxes, such as a Roku, but the company has a perfect, profit maximizing strategy for that as well: charge $9.50 a month and rebate $2.50 for “subscriber supplied equipment.” Brilliant and incredibly greedy at the same time.

            I am well overdue for a return to Over the Air Reception (“OTAR”) of broadcast television even in my quite rural locale, centrally located in the middle of nowhere: State College, PA.  Comcast all but wants me to do this, so it can concentrate on its transition to being a vertically integrated broadband venture combining its owned content and conduit.  Besides, broadband has far greater profit margins, none of which have to be shared with content providers through retransmission consent.  Actually, revenues flow the other way as when Netflix agreed to compensate Comcast for content carriage.

            Subscribers of Comcast should revolt, but I suspect few will even notice the increase.  What’s a few dollars more, especially after Comcast’s now $8.00 “Broadcast TV Fee,” some of which flows to the company’s NBC stations?  Comcast also has a “technology fee” that most high definition television subscribers have to pay.  I guess the company can justify this recurring line item as helping it recoup the costs for upgrading networks to handle high definition signals. 

            You really should examine the line items in cable television bills.  Few companies can quantify and foist onto customers their estimate of having to comply with government regulations and pay local governments franchise fees.  But my bills has line items entitled Franchise Fee and FCC Regulatory Fee.  I call these costs overhead, but Comcast frames them as “fees” that they can pass through to customers.

            Finally, I have reached the tipping point where gouging nudges—makes that pushes—me to old school technology. I expect Neighborhood Homeowners Association opposition to my outdoor antenna. Maybe I can assert a First Amendment right.

Life in the Antitrust Wonderland: Suspension of Disbelief and the TMobile-Sprint Merger

            Counsel for TMobile has filed a provocative and downright remarkable  Description of Transaction, Public Interest Statement, and Related Demonstrations with the FCC; available at: https://newtmobile.com/content/uploads/2018/06/T-Mobile-Sprint-Public-Interest-Statement.pdf.

The nearly 700 page document reads like an extended Wall Street Journal op-ed that distorts reality and encourages readers to embrace quite radical and questionable assumptions about the Internet ecosystem, the rule of antitrust law and what a New TMobile can and will do to make life better for wireless consumers and the nation.

            The authors of the document are banking on convincing a possibly all too easily persuaded federal government that it should ignore common sense, empirical evidence, the rule of law and basic economics.  TMobile and Sprint want to convince the world to ignore a basic smell test for a massive $26 billion horizontal merger of competitors that would further concentrate an already oligopolistic market.  Wising up from a failed attempt to merger in 2011, the companies’ strategists offer a false world view that things are different now, so much so that the future of U.S. competitiveness in next generation wireless technology is at stake and only a newly bolstered TMobile can save the day.

            The document insults the intelligence of both telecommunications professionals and everyday wireless subscribers.  Forget about AT&T and Verizon’s financial resources and industry leadership: New TMobile—and only New TMobile- can “leapfrog” technology and sustain U.S. global leadership.  The authors urge the FCC to “Keep America Great” by approving the merger even though the document fails to explain how TMobile will install and operate any new and innovative 6^th generation of wireless that only it can deploy.

It will be interesting to see whether AT&T and Verizon respond to the insult, or keep their power dry and say nothing, knowing that an even more concentrated industry will relieve competitive pressure.

            Robert Bork wrote a law review article and book that help support the view that antirust courts and regulators should use a consumer welfare template for assessing mergers, rather than consider market share.  In the Antitrust Paradox, he warned that government could harm consumers by protecting inefficient ventures from competition based on what he considered a misreading of congressional intent.  Seizing on the view that the government should ignore the market concentrating consequences of the merger, the document authors emphasize how consumers stand to benefit even as one existing competitor exits the market and contributes its market share to another.  Apparently TMobile can refute clear evidence of the merger’s anticompetitive consequences simply by making a series of unenforceable promises about how it will enhance its value proposition for consumers.

            In this alternative reality, merging the third and fourth players in a vastly concentrated market creates a new venture able to do consumer welfare enhancing things the two companies could not do individually.  Does that make sense to you?  The merged company will promote competition, save consumers money, employ more people than the two standalone companies, sustain national technological leadership, bolster TMobile’s innovative “uncarrier” credentials, leapfrog technology and provide salvation to long underserved rural residents. What an impressive list of promised and unenforceable deliverables!

            Let us consider each in sequence with an eye toward assessing whether and how  consumers will receive these gifts.      

The Enhanced Competition Gambit

            The TMobile advocacy document makes the assertion that combining two weaklings in a market will create one muscular competitor able to mix it up with the two dominant carriers AT&T Mobility and Verizon.  This has some plausibility until one asks exactly what could TMobile and Sprint not do as separate companies that they can collectively.  TMobile answers by claiming that Sprint is on the brink of becoming a failed venture notwithstanding massive investment by Softbank of Japan and historically low interest rates.  For its part, TMobile conveniently fails to acknowledge that Deutsche Telkom—reluctantly perhaps--surely has the financial wherewithal to underwrite any necessary investment in infrastructure, including competing in auctions for spectrum.

            The conventional antitrust economic literature, based on empirical evidence, warns that increases in market concentrate creates additional incentive for so-called competitors to engage in “consciously parallel” conduct.  In plain English, this means that ventures would rather not spend sleepless afternoons competing when they can implicitly agree on nearly identical terms, conditions and prices.  Haven’t we seen that outcome before?

            TMobile became the uncarrier after it realized a merger strategy was not viable.  The company innovated and singularly introduced most of the consumer welfare enhancements we like such as carry over of minutes into the next month of use, fair roaming charges even in foreign countries, lower rates for subscribers bringing their own devices, multi-line discounts, etc.  If it got merger authority in 2012, do you think TMobile would have the same zeal to avoid incentives to “go along” with an industry “consensus” on rates?  Bear in mind that for years, all four major wireless carriers had nearly identical price points and competed, if at all, on the availability of handsets and the subsidies offered for them.

            Perhaps airline concentration offers some insights on real world consequences of mergers.  We see nearly identical fares, a reduced value proposition for economy customers, unbundling of services into new profit centers, and an emphasis on attracting higher margin business customers.  Even Southwestern, the uncarrier in commercial aviation, has largely adopted consciously parallel terms and conditions.  It still offers free baggage carriage, but no longer regularly offers the lowest price, particularly when it has the highest market share in a specific airport.

Increased Investment in Infrastructure, Particularly in Rural Areas

            Even after all the lawyer and financial advisor fees, New TMobile promises it will have more funds available for capital expenditures.  So pre-merger, the company might have scrimped, despite having to convince consumers that its network offered the same coverage and reliability as the Big Two carriers.  Post-merger, the company will have two foreign benefactors apparently willing to “double-down” on their already sizeable wireless investment in the United States. It comes across as ironic that in this time of heightened scrutiny about trade and foreign ventures exploiting access to the U.S. market, the federal government will consider a merger that surely will accrue financial benefits that Softbank and Deutsche Telekom will expatriate to their foreign countries. 

            Not all mergers trigger a new burst in capital expenditures.  The acquiring company typically has to see a bargain, “diamond in the rough” that holds promise for future success. Otherwise mergers trigger aggressive cost cutting, ostensibly to accrue synergies and efficiency gains.

            On the matter of rural investment, TMobile conveniently ignores the reality that 5G will have two substantially different characteristics in urban versus rural areas.  One will require substantially more investment, operate on far higher frequencies, require vastly more antennas and will use cutting edge technology.  The other type will require much less investment, may not even meet baseline business case requirements for deployment in lots of areas, will operate on lower frequencies to improve signal coverage and will use less sophisticated technology providing comparatively slower bit transmission speeds while operating in locations having no spectrum scarcity.  So much for the much hyped “leapfrogging” technology.  By the way, which carrier do you think has more patents and a vastly higher research and development budget? It’s not TMobile, or Sprint.

Trickle Down Employment Stimulus

            Can you think of a horizontal merger where the acquiring venture does not declare redundant any existing employees, but instead hires more?  No., I can’t either.  Who knew?

Answer: a small set of the usual sponsored researchers.  Their studies would not pass muster using the traditional peer review process, for a number of potential procedural and ethical factors, the latter including the frequent failure to disclose financial sponsorship in the first place.

            Ignoring such a blatant conflict of interest, these studies attempt to refute common sense.  Horizontal mergers often include a premium above the current market capitalization of the acquired company.  The acquiring company justifies the higher offer based on the combination of physical assets, intellectual property and a catch all factor typically called goodwill reflecting the value of the brand and other positive factors about the acquired company.  Another irony in the document: TMobile devotes significant space telling the world what a not so great company Sprint is.  They’re going to make Sprint great again, or for the first time as New TMobile.

            Apparently, TMobile will unearth undetected value in the Sprint employee population.  Alternatively, TMobile will find many new ways to compensate for the reduction in employee numbers at various strip malls and kiosks throughout America.  Lots of pump priming according to the sponsored researchers.  Bear in mind that they can predict anything and the company can promise anything with impunity.  The federal government surely will not unwind an approved merger, because the acquiring company kinda, sorta overstated promises and under- delivered with performance.  Of course, its heart and that of its sponsored researchers was always well intentioned.

The Appeal to Patriotism and National Pride: Maintaining America’s Greatness in Next Generation, 5G Wireless and the Internet of Things

            One could admire the creativity in the document and its pretension in claiming that absent approval of the merger America is going to lose its technological superiority in wireless. Apparently Sprint will continue to be a failing concern and TMobile will have no way to help sustain American technological leadership unless it adds Sprint to its asset base. All those resellers of facilities-based carrier capacity can support the argument that a robustly competitive marketplace exists, but that will not sustain global best practices.

            I cannot help but ask what—if anything—prevented any of the four national carriers in the U.S. from sustaining global best practices?  Just how does the merger affect whether and how AT&T Mobility and Verizon can sustain global leadership?  Bear in mind that the Big Two already have test and demonstration projects for both 5G and the Internet of Things.  The merger would have no significant effect on their access to capital and their incentives to innovate.  Apparently even now (pre-merger) the Big Two see the need to continue acquiring more spectrum and to install new technology.  This would occur regardless whether TMobile and Sprint merge and it is foolhardy to think New TMobile can leapfrog the Big Two and threaten their technological leadership.

Competitive Necessity Either to Beat the 8-9 Major Players, or to Bolster the Uncarrier Strategy

            In addition to its promoting competition assertion, TMobile claims the merger will make it a more viable competitor in a crowded market.  The authors get to “8 or 9” competitors by counting so-called Mobile Virtual Network Operators (“MVNOs”) such as Tracfone and adding Dish Network that current faces a “use or lose” deadline for spectrum it acquired, but has not built any infrastructure to use.  Add Voodoo Math to the Voodoo Economics.

            MVNOs survive in the wireless marketplace if and only if facilities-based carriers allow them to do so.  MVNOs need an arbitrage margin between what they pay for capacity provided by a carrier with an operating network and what they can charge subscribers. TMobile and Sprint serve the vast majority of so-called pre-paid customers who subscribe to month-to-month service free of any longer term contractual commitment.  Will New TMobile retain the margin opportunity for resellers?

            Let me briefly raise the level of snark to this blog.  I try not to sink to the predominantly scummy level on many sites, but cannot help but pose this question: Will TMobile CEO John Legere maintain his “Bad Boy” posture, or get a haircut and develop a new affinity to Kansas City barbeque?  Economists pay close attention to incentives and even quasi-human corporations display predictable patterns.  The more concentrated a market, the greater the opportunity for so-called competitors to agree not to compete, or to do so in largely symbolic ways.  New TMobile promises a major consumer dividend by way of lower costs, higher data rates and better customer service.  I’ll be pleasantly surprised if they deliver on these promises and Mr. Legere keeps his long hair.

            In a prior blockbuster, vertical merger, Comcast did not even bother asserting that consumers would see lower subscription rates after the company acquires NBC-Universal.  Cable television rates kept right on rising well in excess of a general measure of consumer prices.  Recently, the Judge approving the AT&T acquisition of Time Warner assumed that consumers would gain $352 million in savings thanks to the removal of the markup flowing to Time Warner that it would no longer charge AT&T.  What are the odds that AT&T broadband rates will decline one dime thanks to the merger, and what are the odds that New TMobile will pass through any of its synergistic, efficiency gains by way of lower prices?  For that matter when was the last time any of us saw a wireless carrier offer a sale?

            What we will see is crafty use of tiering and pricing flexibility now that network neutrality rules do not apply.  As long as a wireless carrier kinda, sorta discloses a zero rating offer, then it can try to upsell subscribers with more service options, including “free” (unmetered) content.  Economists term that non-price competition and that is the best we can expect, even as it distorts the marketplace for content by forcing consumers to trade off higher preferences for less desirable, but subsidized content.  Of course New TMobile will have greater financial wherewithal to offer compelling alternative content to what the Big Two have available.

A Further Relaxation in Antitrust Enforcement in an Age of Technological and Marketplace Convergence

            TMobile and Sprint are banking on the FCC and Justice Department ignoring even more massive market concentration on the promise of great things only a merged company can offer consumers.  The Justice Department embraced the Herfindahl-Hirschman Index as a quantifiable measure of market concentration based on empirical evidence that concentrated industries typically operate less competitively.  Yes, of course, there are exceptions, but do you think the wireless industry will deviate from what we see in commercial aviation and other extremely concentrated industries?

            TMobile expects the FCC and Justice Department to cave out of exhaustion and repetitive “Mother May I” requests.  The company has increased its investment in sponsored researchers, lobbyists and other professionals able to make a plausible argument based on unenforceable promises and theoretical possibilities. 

            Why not stick with empirical data and a well-honed smell test?