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.