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.

Response to Questions From Senator Snowe

Following up on the Senate Commerce Committee's hearing on wireless handset policy, Senator Olympia Snowe 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).

New Work in Progress

I have completed a draft of a paper that examines how Internet Service Providers claim First Amendment speaker rights even as they also claim to operate as neutral conduits. By claiming to operate as conduits, ISPs can secure “safe harbor” exemption from tort and copyright liability.

I argue that current media models provide inconsistent and incomplete direction on how to consider ISPs’ joint provision of conduit and content. The paper provides insights on how a hybrid model can address media convergence, and promote First Amendment values while imposing reasonable nondiscrimination responsibilities on ISPs.

Here's the abstract:

Much of the policy debate and scholarly literature on network neutrality has addressed whether the Federal Communications Commission (“FCC”) has statutory authority to require Internet Service Providers (“ISPs”) to operate in a nondiscriminatory manner. Such analysis largely focuses on questions about jurisdiction, the scope of lawful regulation, and the balance of power between stakeholders, generally adverse to government oversight, and government agencies, apparently willing to overcome the same inclination. The public policy debate primarily considers micro-level issues, without much consideration of broader concerns such as First Amendment values.

While professing to support marketplace resource allocation and a regulation-free Internet, the FCC has selectively imposed compulsory duties on ISPs who qualify for classification as largely unregulated information service providers. Such regulation can tilt the competitive playing field, possibly favoring some First Amendment speakers to the detriment of others. Yet the FCC has summarily dismissed any concerns that the Commission’s regulatory regime inhibits First Amendment protected expression.

For their part, ISPs have evidenced inconsistency in how seriously they value and exercise their First Amendment speaker rights. Such reticence stems, in part, from the fact that ISPs combine the provision of conduits, using telecommunications transmission capacity, with content. While not operating as regulated common carriers, the traditional classification of conduit-only providers, ISPs can avoid tort and copyright liability when they refrain from operating as speakers and editors of content. In other instances, the same enterprise becomes an aggressive advocate for First Amendment speaker rights when selecting content, packaging it into a easily accessible and user friendly “walled garden,” and employing increasingly sophisticated information processing techniques to filter, prioritize and inspect digital packets.

Technological and marketplace convergence creates the ability and incentive for ISPs to operate as publishers, editors, content aggregators, and non-neutral conduit providers. No single First Amendment media model (print, broadcast, cable television and telephone), or legislative definition of service (telecommunications, telecommunications service and information service) cover every ISP activity. Despite the lack of single applicable model and the fact that ISPs provide different services, the FCC continues to apply a single, least regulated classification. The inclination to classify everything that an ISPs does into one category promotes administrative convenience, but ignores the complex nature of ISP services and the potential for to harm individuals, groups and First Amendment values absent government oversight. For example, the information service classification enables ISPs to engage in price and quality of service discrimination that network neutrality advocates worry will distort a free marketplace of ideas.

This paper will examine the different First Amendment rights and responsibilities borne by ISPs when they claim to operate solely as conduits and when they combine conduit and content. The paper will show that ISPs face conflicting motivations with light FCC regulation favoring diversification into content management services, like that provided by editors and cable television operators, but with legislatively conferred exemptions from liability available when ISPs avoid managing content. The paper concludes that current media models provide inconsistent and incomplete direction on how to consider ISPs’ joint provision of conduit and content. The paper provides insights on how a hybrid model can address media convergence, and promote First Amendment values while imposing reasonable nondiscrimination responsibilities on ISPs.

You can access the paper at: http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=102928, and http://works.bepress.com/robert_frieden/

Testimony on the Consumer Wireless Experience

The Senate Commerce Committee held a hearing that examined wireless handset exclusivity, as well as limitations on consumers' access to functions available from wireless devices, and downloadable software applications. While no one disputed the likelihood that smart phones will increasingly operate like small personal computers. However, wireless subscribers do not have the same freedom to attach to networks as they do for televisions, conventional personal computers and devices attached to the wired network.

The Apple Apps store current offers 30,000 choices compared to the millions available via the web. Major wireless carriers, such as AT&T and Verizon, claim handset exclusivity and access limitations are necessary business decisions that do not harm consumers. I disagree, and in testimony explain how an emphasis on recouping handset subsidies reduces innovation for devices that will become increasingly essential "third screen" alternatives to televisions and larger computers.

My written testimony and a two page summary is available at: http://www.personal.psu.edu/faculty/r/m/rmf5/.

The Commerce Committee link to the Hearing is available at: http://commerce.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=03b81ffd-ba9f-42e6-8331-7c28f6d112b0

Another Work in Progress--Lock Down on the Third Screen: How Wireless Carriers Evade Regulation of Their Video Services

Set out below is the abstract for another work in progress that considers whether wireless carriers should evade regulation of their "third screen" video services. The paper will appear in a future edition of the Berkeley Technology Law Journal; a darft version is available at: http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=102928

Wireless handsets increasingly offer subscribers a new optionfor 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.

Work in Progress-Lies, Damn Lies and Statistics: Developing a Clearer Assessmentof Market Penetration and Broadband Competition in the United States

Set out below is the abstract for a current work in progress on the dodgy world of broadband market penetration data collection. The work will appear in an upcoming edition of the Virginia Journal of Law and Technology. A current draft is available at: http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=102928

Depending on the source one can conclude that United States consumers enjoy access to a robustly competitive and nearly ubiquitous marketplace for inexpensive broadband Internet access, or they suffer the consequences of a tightly concentrated industry offering inferior service at high rates. On one hand, the Federal Communications Commission (“FCC”), the National Telecommunications and Information Administration (“NTIA”) and some sponsored researchers offer a quite sanguine outlook, possibly influenced by their appreciation for the political and public relations dividends in compiling positive results.

On the other hand, other statistical compilations and interpretations show the U.S. behind in terms of market penetration and price, even trailing some nations that have similarly unfavorable geographical and demographic characteristics. In the light of the extraordinary global success achieved by domestic ventures in information and communications technology (“ICT”), it would appear counterintuitive for some current broadband statistics to show the United States lagging other nations in terms of favorable access to next generation networks.

The FCC has used evidence of robust market penetration and competition in broadband markets to support an aggressive deregulatory campaign. Advocates for even more deregulation regularly cite the Commission’s statistics as evidence that the unfettered marketplace can achieve broadband access and affordability goals. Both the Commission and many stakeholders assume the frequently cited statistics present a true picture of the marketplace. A recent NTIA document concludes that the United States has achieved the goal of “universal, affordable access for broadband technology by the year 2007” articulated by President Bush in 2004.

This paper will examine the United States broadband penetration and pricing statistics with a critical eye, in light of other contradictory compilations by credible organizations including the International Telecommunication Union and the Organization for Economic Cooperation and Development. Additionally the paper will compare and contrast 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 FCC and NTIA have 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. Additionally the FCC includes as competition services lacking any true cross-elasticity with other services based on substantial price differences.
The paper concludes that credible calculations, using better calibrated measures, show a mixed outcome based on different geographical focus. Some U.S. residents, particularly in urban locales, enjoy comparatively excellent broadband service, while rural residents may have ample access options, albeit at comparatively high prices in light of limited price competition. The paper concludes that the absence of robust price competition among many facilities-based broadband operators in many areas of the nation challenges many of the assumptions built into recent FCC policy initiatives that seek to abandon consumer safeguards. The paper also concludes that a statutory mandate to promote universal access to advanced telecommunications capability requires the FCC to collect and disseminate credible statistics on next generation network deployment.

Distance Is Not Dead or Cost Free

In 1997, Frances Cairncross wrote a book entitled The Death of Distance (Harvard Business School Press) that heralded the Internet’s ability to transcend and mitigate much of the financial and logistical challenges posed by geography. Certainly the Internet enhances productivity and opportunities, particularly for people in remote places. But what make distance less significant is the product of cost allocation and cost recovery policies and not some new transcendental notion that it has become easier, cheaper or more efficient to serve rural areas.

Professor Michael Katz angered some rural advocates when he articulated this concept, perhaps more bluntly: “The notion that we should be helping people who live in rural areas avoid the costs that they impose on society … is misguided from an efficiency point of view and an equity one.” See Howard Berkes, Stimulus Stirs Debate Over Rural Broadband Access, National Public Radio, Morning Edition (Feb. 19, 2009); available at: http://www.npr.org/templates/story/story.php?storyId=100739283.

Professor Katz is quite right that because rural areas have a diffuse, spread out population, the cost of installing a distribution infrastructure is higher than the cost of serving the same number of people located more close together. If government decides to bridge this cost differential—as it did expressly in the Telecommunications Act of 1996—one could infer that universal service has a comparatively high public policy priority. Professor Katz might favor government spending less on broadband and more on subsidizing infant immunizations, but note that the issue becomes one of whether and how to compensate for cost differentials, not that technology somehow has eliminated them.

Rural residents have qualified for a number of public policy initiatives aiming to defray the cost of living in remote locales. “Keeping them happy down on the farm” may have national security benefits, and perhaps the United States does not differ much from China insofar as the consequences of mass migration from rural to urban areas and the congestion costs that would generate.

From my perspective distance surely does matter, both in terms of my out of pocket costs and more broadly “opportunity costs,” i.e., the time, money, effort and foregone options resulting from my residency in a rural locale. While I can blog to my heart’s content and achieve parity with an urban blogger, being out of sight and not a frequent attendee at various Washington, D.C. political/social/educational events means that I am not going to be on decision makers’ radar screens for conference invitations, new employment and life time achievement awards to name a few.

In my case, rural residency came with the decision to accept an academic appointment. Perhaps I could have held out for an urban posting, but it did not turn out that way. Thanks to cost averaging decisions and “All You Can Eat” unmetered monthly Internet access subscriptions—itself another inefficient artifact of the Internet’s long past promotional phase—I can try to compensate for my location. But being “centrally located in the middle of nowhere” has costs that government cannot offset.

Carriers That Can Say No

Recently several press accounts reported that AT&T will allow iPhone subscribers to access Skype’s Voice Over the Internet Protocol (“VoIP”) telephone service via wi-fi, but not using the AT&T wireless network. See, e.g., http://www.usatoday.com/tech/news/2009-04-01-att-skype-iphone_N.htm. Unlike some carriers that disable wi-fi access via cellphones, AT&T could not block Apple’s interest in making handsets operate more like wireless computers. But the financial stakes were too high for AT&T to allow its subscribers to substitute cheap Skype international long distance minutes for quite expensive and quite lucrative AT&T minutes.

Apparently few seem troubled by AT&T’s unilateral decision about what subscribers can and cannot do with their handsets. (But see Skype’s concern: http://digg.com/d1ntP3) So we a carrier that can say no to subscribers when a proposed use threatened revenues despite no credible evidence that such use would cause technical harm to the AT&T network. Perhaps AT&T can base the restriction on contract law and the carrier’s need to recoup the cost of its subsidy for below cost access to the iPhone. However, AT&T retains the restriction even for iPhone subscribers after their two year service term and for subscribers who do not trigger a subsidy in the first place.

The FCC’s passive acceptance of AT&T’s blanket freedom to impose a walled garden access to telephone services, contrasts with what the Commission did when a wireline telephone company blocked DSL access to Skype. Why should this be? If a wire-based telephone company ostensibly provides an information service when provisioning DSL access to the Internet, arguably the FCC has no jurisdiction to mandate interconnection with Skype, or to impose a monetary forfeiture. Yet that is exactly what the Commission did when a rural North Carolina telephone company (Madison River) blocked access to Skype. Now the FCC does nothing when a wireless telephone company, ostensibly providing a similar information service, broadband Internet access, block subscribers from using the carrier’s network.

Can anyone make legal or public policy sense out of this inconsistency?

Skype Jailbreak and the Unholy Alliance of Wireless Handset Makers and Carriers

News of conditional iPhone Skype access has arrived; see http://gadgetwise.blogs.nytimes.com/2009/01/09/fring-for-the-iphone-all-skype-no-gripe/?pagemode=print. I use the word conditional, because iPhone users can access the service only via a Wi-Fi connection and not via the AT&T network.

This announcement provides both good and bad news. On one hand, Apple the computer manufacturer recognizes the user benefit in constructing a handset that can incorporate many applications, including ones that the wireless carrier may not be thrilled to support. On the other hand, both Apple and AT&T have absolutely no interest in considering the iPhone property owned and controlled by consumers. This means that Apple does not protest when AT&T limits Skype access to Wi-Fi islands of connectivity. Because iPhone users frequently use their phone while moving, AT&T can tolerate the loss of some revenue in the limited instances where non-moving subscribers make Skype calls.

Many iPhone users have undertaken the warranty violating exercise of “jailbreaking” their handsets to add an “illegal” application, i.e., software either Apple or AT&T do not want users to have. Clever users will find ways to make Skype useable over the AT&T networks, but I wonder why handset manufacturers and wireless carriers have the power to condemn such user options as illegal hacking. Surely after paying rates that recoup the handset subsidy don’t iPhone users own their phone?

In a number of different forums and writings I have argued for a wireless Carterfone policy that recognizes the lawfulness of using handsets to access any service, application, software or carrier provided such access causes no technical harm. We expect such attachment freedom when using handsets attached to wired networks, as well as television sets and personal computers. But apparently in our delight with a working wireless connection we accept limitations on handset attachment freedom. Some wireless carriers disable handset Wi-Fi access, so Apple must come across as a consumer advocate of sorts.

Wireless carriers do not have to comply with the wireless Carterfone policy in part because handset manufacturers carriers do not vigorously contest handset limitations imposed by wireless carriers. With only four major carriers controlling most of the market, and locking most subscribers into two year service agreements, in exchange for the privilege to buy a subsidized handset, no handset manufacturer cares to risk its good standing with the carriers. If Nokia had more ways to sell handsets—as occurs in most parts of the world outside the U.S.—it would have far less tolerance for carriers disabling consumer welfare enhancing features like Wi-Fi access.

U.S. wireless carriers have cowed handset manufacturers into submission. With such an unholy alliance limited Wi-Fi-based iPhone access to Skype looks generous.

Unbundling in Canada

It appears that the incumbent wireline carriers in Canda use the same strategy as incumbent carriers in the U.S., i.e., play the investment disincentive card by threatening to delay or abandon infrastructure investment, coupled with a Constitutional claim of property confiscation. The current economic crisis supports an additional adverse impact to employment gambit. See Telecom TV, Can't share. Won't share. Bell Canada has hissy fit (March 18, 2009); available at: http://web20.telecomtv.com/pages/?newsid=44661&id=e9381817-0593-417a-8639-c4c53e2a2a10.

I marvel at how quickly incumbent carriers play the property confiscation argument even as they got billions of dollars in free rights of way. Do these former public utilities have any public interest obligations--no matter how market countervailing--in light of their free access to public and often private property?

Supreme Court Further Limits Antitrust Remedies for Carrier Pricing Complaints

By a unanimous ruling, the Supreme Court has further reduced the opportunity for a carrier competitor of an incumbent to seek an FCC or judicial remedy to pricing strategies arguably designed to eliminate competition by offering wholesale prices below that charged to competitors for similar services. [1] In 2003 several Internet Service Providers (“ISPs”) filed suit against Pacific Bell Telephone Co., contending that this incumbent carrier attempted to monopolized the market for Digital Subscriber Link (“DSL”) broadband Internet access by creating a price squeeze with ISP competitors obligated to pay a higher wholesale price than what Pacific Bell offered on a retail basis.

Both the District Court and the Ninth Circuit Court of Appeals agreed that the ISPs could present their price squeeze claim, despite the Supreme Court Ruling in Verizon Communications, Inc. v. Law Office of Curtis V. Trinko, LLP, 540 U.S. 398 (2004) that limits antitrust claims against common carrier, telecommunications service providers and further restricts what remedies a court can provide in lieu of what rights the Telecommunications Act of 1996 provides market entrants.

The Court assumed that Pacific Bell had no antitrust duty to deal with any ISPs based on the FCC’s premise that ample facilities-based competition exists. [2] Curiously, Court does not mention that Pacific Bell could avoid a unilateral duty to deal with ISPs based on the FCC’s classification that DSL and presumably its component parts constitute information services and not common carrier-provided telecommunications services.

But for a voluntary concession to secure the FCC’s approval of AT&T’s acquisition of BellSouth the Court noted that Pacific Bell would not even have a duty to provide ISPs with wholesale service. The Court granted certiori to resolve the question whether ISP plaintiffs can bring a price-squeeze claim under Section 2 of the Sherman Act when the defendant carrier has no antitrust-mandated duty to deal with the plaintiffs. The lower courts concluded that the Trinko precedent did not bar such a claim, but the Supreme Court reversed this holding.

On procedural grounds, the Court’s decision chided the ISP plaintiffs for changing the nature of their claim from a price squeeze to one characterizing Pacific Bell’s tactics as predatory pricing. On substantive grounds, the Court noted that a new emphasis on predatory pricing would have require determination whether the retail price was set below cost, [3] a claim the ISPs did not make.

The Court determined that the case did not become moot, because of the change in economic and antitrust arguments. However the decision evidences great skepticism whether the ISPs have any basis for a claim, because in the Court’s reasoning the ISPs failed to make a claim that Pacific Bell’s retail DSL prices were predatory, and the ISPs also failed to refute the Court’s conclusion that Pacific Bell had no duty to deal with the ISPs, i.e., to provide wholesale service. [4]

The Court apparently can ignore the voluntary concession AT&T made that created a duty to deal, because that concession may trigger FCC oversight, but it does not change whether an antitrust duty to deal arises. The Court reads the Trinko case as foreclosing any antitrust claim if no antitrust duty to deal exists. [5]

The Court remanded the case to the District Court to determine whether the ISP plaintiffs have any viable predatory pricing claim. The Court expressed the need for clear antitrust rules and apparently views consumer access to low retail prices—predatory or not—as sufficient reason for courts to refrain from intervening. Remarkably, the Court does not seem troubled even if all ISPs competitors exited the market, an event that surely would the surviving incumbent carrier to raise rates:

For if AT&T can bankrupt the plaintiffs by refusing to deal altogether, the plaintiffs must demonstrate why the law prevents AT&T from putting them out of business by pricing them out of the market. [6]

This case evidences a strong reluctance on the part of the Supreme Court to approve of any sort of judicial review over the pricing strategies of carriers. Presumably the plaintiffs could have petitioned the FCC to review the wholesale prices, but the Commission might just as well have claimed that even the sub-elements of DSL service constitute information services not subject to Title II pricing and nondiscrimination requirements.

[1] Pacific Bell Telephone Co., v. Linkline Communications, Inc., slip op. 555 U.S. ___
(rel. Feb. 25, 1009); available at: http://www.supremecourtus.gov/opinions/08pdf/07-512.pdf.

[2] “DSL now faces robust competition from cable companies and wireless and satellite services.” Id. at 2; see also, id. at 8, n.2.
[3] The Court referenced Brook Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993) that supports the inference that a predatory pricing claim can be established only with proof of below cost pricing coupled with evidence that the defendant can subsequently recoup any lost profits. Id. at 4.

[4] “The challenge here focuses on retail prices—where there is no predatory pricing—and terms of dealing where there is no duty to deal.” Id. at 8. “If there is no duty to deal at the wholesale level and no predatory pricing at the retail level, then a firm is certainly not required to price both of these services in a manner that preserves its rivals’ margins.” Id. at 12.

[5] “In this case, as in Trinko, the defendant has no antitrust duty to deal with its rivals at wholesale; any such duty arises only from FCC regulations, not from the Sherman Act.” Id. at 9.

[6] Id. at 16-17.

Can Common Carrier Regulated Telephone Companies Limit Service Plans to Bundled Subscribers?

Several press outlets have disclosed that Verizon may offer very low cost telephone service options available only to subscribers who already have Verizon-provided Internet access. See http://uk.reuters.com/article/rbssTechMediaTelecomNews/idUKN1735246920090217.
One $5 plan would limit outbound calling to 911 emergency and Verizon customer service, while a $10 plan would include some regular outbound calls.

The last time I checked Verizon remained a common carrier telecommunications service provider obligated to file local telephone service tariffs and subject to non-discrimination requirements contained in Title II of the Communications Act. I do not believe Verizon can lawfully offer a telecommunications service limited to a select group of customers who “qualify” to take this service if and only if they also buy Internet access from Verizon.

Perhaps this low cost Verizon service is not circuit switched telephone service, but Voice over the Internet Protocol (“VoIP”) service instead. Arguably Verizon would have no tariff filing obligation, or nondiscrimination obligation for VoIP if classified as an information service. However if the FCC allows Verizon to offer this sort of pre-qualified customer access to VoIP service, the Commission may in effect validate the view that VoIP is not a telecommunications service, something Comcast recently emphasized in response to an FCC letter inquiring whether the company was favoring its VoIP service by exempting it from network management functions that could throttle VoIP offered by competitors. See Letter from Dana R. Shafer, Chief Wireline Competition Bureau and Matthew Berry, General Counsel to Katheryn A. Zachem, Vice President Regulatory Affairs, Comcast Corp. (Jan. 18, 2009); available at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-288047A1.pdf;
Comcast’s response is available at: http://gullfoss2.fcc.gov/prod/ecfs/retrieve.cgi?native_or_pdf=pdf&id_document=6520194593.

Heretofore the FCC has managed to avoid having to make an either/or (telecommunications service vs. information service) classification for retail VoIP. Verizon may not even have anticipated that a marketing tactic to stave off complete wireline customer migration may force the FCC to make an important regulatory call.

The Non-Lesson From Telecom Frauds

Does anyone remember how Worldcom, Qwest, 360 Communications and other telecommunications carriers overstated revenues by booking capacity swaps as current income? Like their Enron counterparts, telecom managers came to understand that there was more bonus money and stock appreciation in creating esoteric capacity swaps then in stimulating demand through enhanced service.

History repeats itself as though we learned nothing from previous frauds. It appears that little difference exists between a creative financial “instrument” that repackages real estate debt and one that repackages telecommunications capacity swaps. The underlying financial transaction—to fund a telecommunications transmission facility such as an overseas fiber optic cable, or to fund home purchases—becomes a long embedded element to a more recent repackaged or re-sliced financial instrument. With such repackaging ventures can prime their financial pumps and profit statements by recycling and reselling.

To my mind little difference exists between the false stimulus of buying, repackaging and reselling real estate debt and telecommunications transmission capacity debt. With each reprocessing of the properties, processors can expand the debt load based on the artificial increase in apparent demand for the financial instruments, never mind that demand for the underlying property may not have changed, or may have been goosed upward on fraudulent grounds.

The non-lesson: if smart people can artificially inflate demand for telecommunications transmission capacity and debt instruments, the same or similarly smart people can do the same thing for real estate.

Regulatory Status of Wireless Information Appliances

News of a slimmed down Amazon Kindle electronic book has triggered this question: what regulatory status applies to devices that use wireless capacity purchased by the appliance vendor and bundled into the cost of both the appliance and downloads? In the United States the FCC has exempted bundlers of telecommunications capacity on grounds that they do not retail a telecommunications service.

But in light of the willingness of the FCC and other national regulatory agencies to oversee some times of information services, might network neutrality and other concepts of nondiscrimination apply? Bear in mind that Kindle buyers apparently do not receive a subsidy that reduces the cost of the information appliance in exchange for locking out competing content and applications. Still the FCC has shown no interest in forcing wireless carriers or manufacturers to comply with the so-called Carterfone nondiscrimination requirements applicable to wireline handsets and carriers. Carterfone requires carriers to interconnect with other carriers and to accept subscriber chosen and loaded applications.

Apple makes great self-congratulatory statements about the wide and open applications available for downloading, but note that the FCC does not require at&t to accept any non-Apple approved and marketed applications, nor does the Commission prohibit Apple from blocking and disabling applications that it unilaterally decides subscribers should not use. So if the FCC could not be bothered with wireless common carriers operating in a discriminatory manner then the Commission probably will have no concerns about a "locked down" Kindle. In light of the Supreme Court's deference to the FCC's "expertise" in the Brand X decision, it appears that the FCC could ignore information appliance discrimination entirely.

Comcast Letter Hints at the Potential Common Carrier Regulation of VoIP Service

While the FCC has classified cable modem and DSL Internet access an information services, the Commission has not specified whether VoIP similarly qualifies. On one hand software applications, riding along a cable modem or DSL link, create VoIPs services. But on the other hand high level FCC managers recently noted that when an Internet Service Provider markets VoIP as a facilities-based service separate from Internet access the service constitutes a common carrier, regulated telecommunications service. [1]

The FCC managers made this nonbinding and nonenforceable conclusion in a letter to Comcast Corporation primarily inquiring about potential discriminatory treatment of competitors’ VoIP services vis a vis Comcast’s offering and the apparent nonpayment of interconnection fees to other telecommunications service providers. Having noted violations of its 2005 Internet Policy Statement, [2] the Commission had required Comcast to file a document showing how the company would comply with the duty to operate in a nondiscriminatory manner. [3] In its response Comcast reported that a subscriber would experience a noticeable deterioration in service, including VoIP service not provided by Comcast whenever a subscriber uses 70% of his or her “provisioned bandwidth” for 15 minutes or more when such use causes congestion in the vicinity, labeled as the Cable Modem Termination System Node by Comcast, for more than 15 minutes. Because Comcast separately provisions its VoIP service, a congestion causing subscriber of Comcast’s cable modem service, who also subscribers to Comcast’s VoIP service, would not experience any degradation of the Comcast VoIP service.

The letter to Comcast seeks an explanation for the disparate treatment of VoIP services, particularly in light of Comcast’s assertion that its VoIP service is “facilities-based.” The letter appears to infer that facilities-based means that Comcast physically partitions its data bandwidth, thereby creating for its VoIP service stand alone links. The letter infers that when Comcast by provisions its VoIP service, separate and apart from broadband access, Comcast may be offering a regulated, retail telecommunications service and a largely unregulated information service. [4] In The Letter requests that Comcast explain why it should be regulated as a telephone company and bear conventional common carrier responsibilities including the duty to compensate other carriers for terminating Comcast generated VoIP traffic.

Most analysts have concentrated on the potential that Comcast may not have fully remedied all instances of Internet access discrimination and whether the company may use network management features to create incentives for subscribers to use Comcast VoIP services over competitors. But perhaps more important is the interpretation whether and how a largely unregulated information service provider triggers conventional common carrier telecommunications service regulation when offering a VoIP service.

[1] Letter from Dana R. Shafer, Chief Wireline Competition Bureau and Matthew Berry, General Counsel to Katheryn A. Zachem, Vice President Regulatory Affairs, Comcast Corp. (Jan. 18, 2009); available at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-288047A1.pdf [hereinafter cited as Comcast VoIP Letter].

[2] Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, CC Docket No. 02-33, Policy Statement, 20 FCC Rcd. 14986 (2005).

[3] See Formal Complaint of Free Press and Public Knowledge Against Comcast Corporation for Secretly Degrading Peer-to-Peer Applications, File No. EB-08-IH-1518, Memorandum Opinion and Order, FCC 08-183 (rel. Aug. 20, 2008); available at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-08-183A1.doc.

[4] “Given that Comcast apparently is maintaining that its VoIP service is a ‘separate facilities-based’ telephone service that is distinct from its broadband service and differs from the service offered by [competing] ‘VoIP providers that reply on delivering calls over the public Internet’ . . . it would appear that Comcast’s VoIP service is a telecommunications service subject to regulation under Title II of the Communications Act of 1934, as amended.” Comcast VoIP Letter at 2.

Top Ten List of FCC Regulatory Reforms—Part Two

4) Fairly Report the State of an Industry When Reporting to Congress

Federal legislation regularly requires the FCC to provide Congress with annual updates on the health and competitiveness of various market sectors. FCC management has assumed the responsibility to provide Congress with the best possible assessment of marketplace conditions as opposed to a realistic one. For example, in the Commission’s assessment of the Commercial Mobile Radio Service, i.e., cellular telephony, the most recent Report to Congress disingenuously identifies a number of spectrum allocations possibly useable by new competitors to the four carriers that control 90+% of the market. Of course the Commission does not acknowledge that such spectrum currently provides no actual competition, nor does the Report notify Congress that incumbents would use litigation, lobbying and other strategies to prevent such possible competition.

The FCC should use Congressional reporting requirements to identify both successes and failures under the currently applicable laws. Arguably Congress should pass legislation more regularly instead of grand, “soup to nuts” reforms that typically need revision soon after enactment.


3) Put an End to Results-Driven Decision Making

Too often an informed observer of the FCC’s machinations can detect exactly where Commission management, or at least the Chairman, wants to go in a notice of inquiry or rulemaking. Under such conditions the Commission simply goes through the motions, ostensibly to promote procedural and substantive due process. The FCC document may contain dozens of questions, but most stakeholders refrain from providing answers (as opposed to assertions) and the Commission’s final policy making document never gets around to examining the questions it previously posed.

Rather than start with an end conclusion firmly in mind, the FCC should start with the humble acknowledgement that maybe—just maybe—it does not know what would serve the public interest. Fair and lawful notice and comment proceedings requires the FCC to create a factual record, by encouraging all interested parties to participate, and to fully and fairly consider that record.

2) Use Peer Review

In the academic world, peer review provides essential quality control by subjecting research and other contributions to close scrutiny by unbiased and unknown outsiders. When I write an academic paper, typically several reviewers consider the rigorousness, legitimacy and significance of my work. Neither author nor reviewer know of the other’s identity.

The FCC rarely uses peer review to subject its work product to outsider review, nor does the Commission use authentic, peer-reviewed research from academics, or consulting firms. The notice and comment pleading process does allow stakeholders to criticize each other’s work, but the material filed with the Commission would never pass muster with peer review in light of financial sponsorship that obligates the creation of a biased document in the first place.

The FCC should finance peer reviewed work to augment its in-house expertise and to provide an unbiased alternative perspective on the biased assertions of stakeholders.

1) Be Skeptical of Stakeholder Assertions of Facts and Findings

Absent peer review, a full opportunity to consider the views of the general public and general open mindedness, the FCC regularly relies on the biased filings of stakeholders. The Commission regularly accepts as the gospel truth nothing more than assertions. If stakeholders make these assertions long enough and finance “rock star” academics to embrace these assertions, then it becomes quite easy for the FCC to accept assertions as fact.

Economists use this process with great success, because they can create unimpeachable “rules” and use math to support them. In telecommunications policy sponsored economics professors have stated with a straight face that regulation constitutes a confiscation of property, that carriers providing interconnection are entitled to retail price compensation including all “opportunity costs,” that just about every telecommunications market sector is robustly competitive and deserving of deregulation and that every merger or acquisition will promote even more competition. In conjunction with results-driven decision making such “research” provides cover and support for the FCC to conclude that the public interest coincides with the assertions of particular stakeholders.

The FCC should have a healthy skepticism that what’s good for a specific stakeholder is also good for the public in general. It might or might not. To determine the truth, the FCC needs to do its homework.