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The free market position on telecom reform has become rather confused of late. Erstwhile conservative Senator Thune is now cosponsoring a version of Senator Rockefeller’s previously proposed video reform bill, bundled into satellite legislation (the Satellite Television Access and Viewer Rights Act or “STAVRA”) that would also include a provision dubbed “Local Choice.” Some free marketeers have defended the bill as a step in the right direction.

Although it looks as if the proposal may be losing steam this Congress, the legislation has been described as a “big and bold idea,” and it’s by no means off the menu. But it should be.

It has been said that politics makes for strange bedfellows. Indeed, people who disagree on just about everything can sometimes unite around a common perceived enemy. Take carriage disputes, for instance. Perhaps because, for some people, a day without The Bachelor is simply a day lost, an unlikely alliance of pro-regulation activists like Public Knowledge and industry stalwarts like Dish has emerged to oppose the ability of copyright holders to withhold content as part of carriage negotiations.

Senator Rockefeller’s Online Video Bill was the catalyst for the Local Choice amendments to STAVRA. Rockefeller’s bill did, well, a lot of terrible things, from imposing certain net neutrality requirements, to overturning the Supreme Court’s Aereo decision, to adding even more complications to the already Byzantine morass of video programming regulations.

But putting Senator Thune’s lipstick on Rockefeller’s pig can’t save the bill, and some of the worst problems from Senator Rockefeller’s original proposal remain.

Among other things, the new bill is designed to weaken the ability of copyright owners to negotiate with distributors, most notably by taking away their ability to withhold content during carriage disputes and by forcing TV stations to sell content on an a la carte basis.

Video distribution issues are complicated — at least under current law. But at root these are just commercial contracts and, like any contracts, they rely on a couple of fundamental principles.

First is the basic property right. The Supreme Court (at least somewhat) settled this for now (in Aereo), by protecting the right of copyright holders to be compensated for carriage of their content. With this baseline, distributors must engage in negotiations to obtain content, rather than employing technological workarounds and exploiting legal loopholes.

Second is the related ability of contracts to govern the terms of trade. A property right isn’t worth much if its owner can’t control how it is used, governed or exchanged.

Finally, and derived from these, is the issue of bargaining power. Good-faith negotiations require both sides not to act strategically by intentionally causing negotiations to break down. But if negotiations do break down, parties need to be able to protect their rights. When content owners are not able to withhold content in carriage disputes, they are put in an untenable bargaining position. This invites bad faith negotiations by distributors.

The STAVRA/Local Choice proposal would undermine the property rights and freedom of contract that bring The Bachelor to your TV, and the proposed bill does real damage by curtailing the scope of the property right in TV programming and restricting the range of contracts available for networks to license their content.

The bill would require that essentially all broadcast stations that elect retrans make their content available a la carte — thus unbundling some of the proverbial sticks that make up the traditional property right. It would also establish MVPD pass-through of each local affiliate. Subscribers would pay a fee determined by the affiliate, and the station must be offered on an unbundled basis, without any minimum tier required – meaning an MVPD has to offer local stations to its customers with no markup, on an a la carte basis, if the station doesn’t elect must-carry. It would also direct the FCC to open a rulemaking to determine whether broadcasters should be prohibited from withholding their content online during a dispute with an MPVD.

“Free market” supporters of the bill assert something like “if we don’t do this to stop blackouts, we won’t be able to stem the tide of regulation of broadcasters.” Presumably this would end blackouts of broadcast programming: If you’re an MVPD subscriber, and you pay the $1.40 (or whatever) for CBS, you get it, period. The broadcaster sets an annual per-subscriber rate; MVPDs pass it on and retransmit only to subscribers who opt in.

But none of this is good for consumers.

When transaction costs are positive, negotiations sometimes break down. If the original right is placed in the wrong hands, then contracting may not assure the most efficient outcome. I think it was Coase who said that.

But taking away the ability of content owners to restrict access to their content during a bargaining dispute effectively places the right to content in the hands of distributors. Obviously, this change in bargaining position will depress the value of content. Placing the rights in the hands of distributors reduces the incentive to create content in the first place; this is why the law protects copyright to begin with. But it also reduces the ability of content owners and distributors to reach innovative agreements and contractual arrangements (like certain promotional deals) that benefit consumers, distributors and content owners alike.

The mandating of a la carte licensing doesn’t benefit consumers, either. Bundling is generally pro-competitive and actually gives consumers more content than they would otherwise have. The bill’s proposal to force programmers to sell content to consumers a la carte may actually lead to higher overall prices for less content. Not much of a bargain.

There are plenty of other ways this is bad for consumers, even if it narrowly “protects” them from blackouts. For example, the bill would prohibit a network from making a deal with an MVPD that provides a discount on a bundle including carriage of both its owned broadcast stations as well as the network’s affiliated cable programming. This is not a worthwhile — or free market — trade-off; it is an ill-advised and economically indefensible attack on vertical distribution arrangements — exactly the same thing that animates many net neutrality defenders.

Just as net neutrality’s meddling in commercial arrangements between ISPs and edge providers will ensure a host of unintended consequences, so will the Rockefeller/Thune bill foreclose a host of welfare-increasing deals. In the end, in exchange for never having to go three days without CBS content, the bill will make that content more expensive, limit the range of programming offered, and lock video distribution into a prescribed business model.

Former FCC Commissioner Rob McDowell sees the same hypocritical connection between net neutrality and broadcast regulation like the Local Choice bill:

According to comments filed with the FCC by Time Warner Cable and the National Cable and Telecommunications Association, broadcasters should not be allowed to take down or withhold the content they produce and own from online distribution even if subscribers have not paid for it—as a matter of federal law. In other words, edge providers should be forced to stream their online content no matter what. Such an overreach, of course, would lay waste to the economics of the Internet. It would also violate the First Amendment’s prohibition against state-mandated, or forced, speech—the flip side of censorship.

It is possible that the cable companies figure that subjecting powerful broadcasters to anti-free speech rules will shift the political momentum in the FCC and among the public away from net neutrality. But cable’s anti-free speech arguments play right into the hands of the net-neutrality crowd. They want to place the entire Internet ecosystem, physical networks, content and apps, in the hands of federal bureaucrats.

While cable providers have generally opposed net neutrality regulation, there is, apparently, some support among them for regulations that would apply to the edge. The Rockefeller/Thune proposal is just a replay of this constraint — this time by forcing programmers to allow retransmission of broadcast content under terms set by Congress. While “what’s good for the goose is good for the gander” sounds appealing in theory, here it is simply doubling down on a terrible idea.

What it reveals most of all is that true neutrality advocates don’t want government control to be limited to ISPs — rather, progressives like Rockefeller (and apparently some conservatives, like Thune) want to subject the whole apparatus — distribution and content alike — to intrusive government oversight in order to “protect” consumers (a point Fred Campbell deftly expands upon here and here).

You can be sure that, if the GOP supports broadcast a la carte, it will pave the way for Democrats (and moderates like McCain who back a la carte) to expand anti-consumer unbundling requirements to cable next. Nearly every economic analysis has concluded that mandated a la carte pricing of cable programming would be harmful to consumers. There is no reason to think that applying it to broadcast channels would be any different.

What’s more, the logical extension of the bill is to apply unbundling to all MVPD channels and to saddle them with contract restraints, as well — and while we’re at it, why not unbundle House of Cards from Orange is the New Black? The Rockefeller bill may have started in part as an effort to “protect” OVDs, but there’ll be no limiting this camel once its nose is under the tent. Like it or not, channel unbundling is arbitrary — why not unbundle by program, episode, studio, production company, etc.?

There is simply no principled basis for the restraints in this bill, and thus there will be no limit to its reach. Indeed, “free market” defenders of the Rockefeller/Thune approach may well be supporting a bill that ultimately leads to something like compulsory, a la carte licensing of all video programming. As I noted in my testimony last year before the House Commerce Committee on the satellite video bill:

Unless we are prepared to bear the consumer harm from reduced variety, weakened competition and possibly even higher prices (and absolutely higher prices for some content), there is no economic justification for interfering in these business decisions.

So much for property rights — and so much for vibrant video programming.

That there is something wrong with the current system is evident to anyone who looks at it. As Gus Hurwitz noted in recent testimony on Rockefeller’s original bill,

The problems with the existing regulatory regime cannot be understated. It involves multiple statutes implemented by multiple agencies to govern technologies developed in the 60s, 70s, and 80s, according to policy goals from the 50s, 60s, and 70s. We are no longer living in a world where the Rube Goldberg of compulsory licenses, must carry and retransmission consent, financial interest and syndication exclusivity rules, and the panoply of Federal, state, and local regulations makes sense – yet these are the rules that govern the video industry.

While video regulation is in need of reform, this bill is not an improvement. In the short run it may ameliorate some carriage disputes, but it will do so at the expense of continued programming vibrancy and distribution innovations. The better way to effect change would be to abolish the Byzantine regulations that simultaneously attempt to place thumbs of both sides of the scale, and to rely on free market negotiations with a copyright baseline and antitrust review for actual abuses.

But STAVRA/Local Choice is about as far from that as you can get.

The Wall Street Journal dropped an FCC bombshell last week, although I’m not sure anyone noticed. In an article ostensibly about the possible role that MFNs might play in the Comcast/Time-Warner Cable merger, the Journal noted that

The FCC is encouraging big media companies to offer feedback confidentially on Comcast’s $45-billion offer for Time Warner Cable.

Not only is the FCC holding secret meetings, but it is encouraging Comcast’s and TWC’s commercial rivals to hold confidential meetings and to submit information under seal. This is not a normal part of ex parte proceedings at the FCC.

In the typical proceeding of this sort – known as a “permit-but-disclose proceeding” – ex parte communications are subject to a host of disclosure requirements delineated in 47 CFR 1.1206. But section 1.1200(a) of the Commission’s rules permits the FCC, in its discretion, to modify the applicable procedures if the public interest so requires.

If you dig deeply into the Public Notice seeking comments on the merger, you find a single sentence stating that

Requests for exemptions from the disclosure requirements pursuant to section 1.1204(a)(9) may be made to Jonathan Sallet [the FCC's General Counsel] or Hillary Burchuk [who heads the transaction review team].

Similar language appears in the AT&T/DirecTV transaction Public Notice.

This leads to the cited rule exempting certain ex parte presentations from the usual disclosure requirements in such proceedings, including the referenced one that exempts ex partes from disclosure when

The presentation is made pursuant to an express or implied promise of confidentiality to protect an individual from the possibility of reprisal, or there is a reasonable expectation that disclosure would endanger the life or physical safety of an individual

So the FCC is inviting “media companies” to offer confidential feedback and to hold secret meetings that the FCC will hold confidential because of “the possibility of reprisal” based on language intended to protect individuals.

Such deviations from the standard permit-but-disclose procedures are extremely rare. As in non-existent. I guess there might be other examples, but I was unable to find a single one in a quick search. And I’m willing to bet that the language inviting confidential communications in the PN hasn’t appeared before – and certainly not in a transaction review.

It is worth pointing out that the language in 1.1204(a)(9) is remarkably similar to language that appears in the Freedom of Information Act. As the DOJ notes regarding that exemption:

Exemption 7(D) provides protection for “records or information compiled for law enforcement purposes [which] could reasonably be expected to disclose the identity of a confidential source… to ensure that “confidential sources are not lost through retaliation against the sources for past disclosure or because of the sources’ fear of future disclosure.”

Surely the fear-of-reprisal rationale for confidentiality makes sense in that context – but here? And invoked to elicit secret meetings and to keep confidential information from corporations instead of individuals, it makes even less sense (and doesn’t even obviously comply with the rule itself). It is not as though – as far as I know – someone approached the Commission with stated fears and requested it implement a procedure for confidentiality in these particular reviews.

Rather, this is the Commission inviting non-transparent process in the midst of a heated, politicized and heavily-scrutinized transaction review.

The optics are astoundingly bad.

Unfortunately, this kind of behavior seems to be par for the course for the current FCC. As Commissioner Pai has noted on more than one occasion, the minority commissioners have been routinely kept in the dark with respect to important matters at the Commission – not coincidentally, in other highly-politicized proceedings.

What’s particularly troubling is that, for all its faults, the FCC’s process is typically extremely open and transparent. Public comments, endless ex parte meetings, regular Open Commission Meetings are all the norm. And this is as it should be. Particularly when it comes to transactions and other regulated conduct for which the regulated entity bears the burden of proving that its behavior does not offend the public interest, it is obviously necessary to have all of the information – to know what might concern the Commission and to make a case respecting those matters.

The kind of arrogance on display of late, and the seeming abuse of process that goes along with it, hearkens back to the heady days of Kevin Martin’s tenure as FCC Chairman – a tenure described as “dysfunctional” and noted for its abuse of process.

All of which should stand as a warning to the vocal, pro-regulatory minority pushing for the FCC to proclaim enormous power to regulate net neutrality – and broadband generally – under Title II. Just as Chairman Martin tried to manipulate diversity rules to accomplish his pet project of cable channel unbundling, some future Chairman will undoubtedly claim authority under Title II to accomplish some other unintended, but politically expedient, objective — and it may not be one the self-proclaimed consumer advocates like, when it happens.

Bad as that risk may be, it is only made more likely by regulatory reviews undertaken in secret. Whatever impelled the Chairman to invite unprecedented secrecy into these transaction reviews, it seems to be of a piece with a deepening politicization and abuse of process at the Commission. It’s both shameful – and deeply worrying.

Microsoft wants you to believe that Google’s business practices stifle competition and harm consumers. Again.

The latest volley in its tiresome and ironic campaign to bludgeon Google with the same regulatory club once used against Microsoft itself is the company’s effort to foment an Android-related antitrust case in Europe.

In a recent polemicMicrosoft consultant (and business school professor) Ben Edelman denounces Google for requiring that, if device manufacturers want to pre-install key Google apps on Android devices, they “must install all the apps Google specifies, with the prominence Google requires, including setting these apps as defaults where Google instructs.” Edelman trots out gasp-worthy “secret” licensing agreements that he claims support his allegation (more on this later).

Similarly, a recent Wall Street Journal article, “Android’s ‘Open’ System Has Limits,” cites Edelman’s claim that limits on the licensing of Google’s proprietary apps mean that the Android operating system isn’t truly open source and comes with “strings attached.”

In fact, along with the Microsoft-funded trade organization FairSearch, Edelman has gone so far as to charge that this “tying” constitutes an antitrust violation. It is this claim that Microsoft and a network of proxies brought to the Commission when their efforts to manufacture a search-neutrality-based competition case against Google failed.

But before getting too caught up in the latest round of anti-Google hysteria, it’s worth noting that the Federal Trade Commission has already reviewed these claims. After a thorough, two-year inquiry, the FTC found the antitrust arguments against Google to be without merit. The South Korea Fair Trade Commission conducted its own two year investigation into Google’s Android business practices and dismissed the claims before it as meritless, as well.

Taking on Edelman and FairSearch with an exhaustive scholarly analysis, German law professor Torsten Koerber recently assessed the nature of competition among mobile operating systems and concluded that:

(T)he (EU) Fairsearch complaint ultimately does not aim to protect competition or consumers, as it pretends to. It rather strives to shelter Microsoft from competition by abusing competition law to attack Google’s business model and subvert competition.

It’s time to take a step back and consider the real issues at play.

In order to argue that Google has an iron grip on Android, Edelman’s analysis relies heavily on ”secret” Google licensing agreements — “MADAs” (Mobile Application Distribution Agreements) — trotted out with such fanfare one might think it was the first time two companies ever had a written contract (or tried to keep it confidential).

For Edelman, these agreements “suppress competition” with “no plausible pro-consumer benefits.” He writes, “I see no way to reconcile the MADA restrictions with [Android openness].”

Conveniently, however, Edelman neglects to cite to Section 2.6 of the MADA:

The parties will create an open environment for the Devices by making all Android Products and Android Application Programming Interfaces available and open on the Devices and will take no action to limit or restrict the Android platform.

Professor Korber’s analysis provides a straight-forward explanation of the relationship between Android and its OEM licensees:

Google offers Android to OEMs on a royalty-free basis. The licensees are free to download, distribute and even modify the Android code as they like. OEMs can create mobile devices that run “pure” Android…or they can apply their own user interfaces (IO) and thereby hide most of the underlying Android system (e.g. Samsung’s “TouchWiz” or HTC’s “Sense”). OEMs make ample use of this option.

The truth is that the Android operating system remains, as ever, definitively open source — but Android’s openness isn’t really what the fuss is about. In this case, the confusion (or obfuscation) stems from the casual confounding of Google Apps with the Android Operating System. As we’ll see, they aren’t the same thing.

Consider Amazon, which pre-loads no Google applications at all on its Kindle Fire and Fire Phone. Amazon’s version of Android uses Microsoft’s Bing as the default search engineNokia provides mapping services, and the app store is Amazon’s own.

Still, Microsoft’s apologists continue to claim that Android licensees can’t choose to opt out of Google’s applications suite — even though, according to a new report from ABI Research, 20 percent of smartphones shipped between May and July 2014 were based on a “Google-less” version of the Android OS. And that number is consistently increasing: Analysts predict that by 2015, 30 percent of Android phones won’t access Google Services.

It’s true that equipment manufacturers who choose the Android operating system have the option to include the suite of integrated, proprietary Google apps and services licensed (royalty-free) under the name Google Mobile Services (GMS). GMS includes Google Search, Maps, Calendar, YouTube and other apps that together define the “Google Android experience” that users know and love.

But Google Android is far from the only Android experience.

Even if a manufacturer chooses to license Google’s apps suite, Google’s terms are not exclusive. Handset makers are free to install competing applications, including other search engines, map applications or app stores.

Although Google requires that Google Search be made easily accessible (hardly a bad thing for consumers, as it is Google Search that finances the development and maintenance of all of the other (free) apps from which Google otherwise earns little to no revenue), OEMs and users alike can (and do) easily install and access other search engines in numerous ways. As Professor Korber notes:

The standard MADA does not entail any exclusivity for Google Search nor does it mandate a search default for the web browser.

Regardless, integrating key Google apps (like Google Search and YouTube) with other apps the company offers (like Gmail and Google+) is an antitrust problem only if it significantly forecloses competitors from these apps’ markets compared to a world without integrated Google apps, and without pro-competitive justification. Neither is true, despite the unsubstantiated claims to the contrary from Edelman, FairSearch and others.

Consumers and developers expect and demand consistency across devices so they know what they’re getting and don’t have to re-learn basic functions or program multiple versions of the same application. Indeed, Apple’s devices are popular in part because Apple’s closed iOS provides a predictable, seamless experience for users and developers.

But making Android competitive with its tightly controlled competitors requires special efforts from Google to maintain a uniform and consistent experience for users. Google has tried to achieve this uniformity by increasingly disentangling its apps from the operating system (the opposite of tying) and giving OEMs the option (but not the requirement) of licensing GMS — a “suite” of technically integrated Google applications (integrated with each other, not the OS).  Devices with these proprietary apps thus ensure that both consumers and developers know what they’re getting.

Unlike Android, Apple prohibits modifications of its operating system by downstream partners and users, and completely controls the pre-installation of apps on iOS devices. It deeply integrates applications into iOS, including Apple Maps, iTunes, Siri, Safari, its App Store and others. Microsoft has copied Apple’s model to a large degree, hard-coding its own applications (including Bing, Windows Store, Skype, Internet Explorer, Bing Maps and Office) into the Windows Phone operating system.

In the service of creating and maintaining a competitive platform, each of these closed OS’s bakes into its operating system significant limitations on which third-party apps can be installed and what they can (and can’t) do. For example, neither platform permits installation of a third-party app store, and neither can be significantly customized. Apple’s iOS also prohibits users from changing default applications — although the soon-to-be released iOS 8 appears to be somewhat more flexible than previous versions.

In addition to pre-installing a raft of their own apps and limiting installation of other apps, both Apple and Microsoft enable greater functionality for their own apps than they do the third-party apps they allow.

For example, Apple doesn’t make available for other browsers (like Google’s Chrome) all the JavaScript functionality that it does for Safari, and it requires other browsers to use iOS Webkit instead of their own web engines. As a result there are things that Chrome can’t do on iOS that Safari and only Safari can do, and Chrome itself is hamstrung in implementing its own software on iOS. This approach has led Mozilla to refuse to offer its popular Firefox browser for iOS devices (while it has no such reluctance about offering it on Android).

On Windows Phone, meanwhile, Bing is integrated into the OS and can’t be removed. Only in markets where Bing is not supported (and with Microsoft’s prior approval) can OEMs change the default search app from Bing. While it was once possible to change the default search engine that opens in Internet Explorer (although never from the hardware search button), the Windows 8.1 Hardware Development Notes, updated July 22, 2014, state:

By default, the only search provider included on the phone is Bing. The search provider used in the browser is always the same as the one launched by the hardware search button.

Both Apple iOS and Windows Phone tightly control the ability to use non-default apps to open intents sent from other apps and, in Windows especially, often these linkages can’t be changed.

As a result of these sorts of policies, maintaining the integrity — and thus the brand — of the platform is (relatively) easy for closed systems. While plenty of browsers are perfectly capable of answering an intent to open a web page, Windows Phone can better ensure a consistent and reliable experience by forcing Internet Explorer to handle the operation.

By comparison, Android, with or without Google Mobile Services, is dramatically more open, more flexible and customizable, and more amenable to third-party competition. Even the APIs that it uses to integrate its apps are open to all developers, ensuring that there is nothing that Google apps are able to do that non-Google apps with the same functionality are prevented from doing.

In other words, not just Gmail, but any email app is permitted to handle requests from any other app to send emails; not just Google Calendar but any calendar app is permitted to handle requests from any other app to accept invitations.

In no small part because of this openness and flexibility, current reports indicate that Android OS runs 85 percent of mobile devices worldwide. But it is OEM giant Samsung, not Google, that dominates the market, with a 65 percent share of all Android devices. Competition is rife, however, especially in emerging markets. In fact, according to one report, “Chinese and Indian vendors accounted for the majority of smartphone shipments for the first time with a 51% share” in 2Q 2014.

As he has not been in the past, Edelman is at least nominally circumspect in his unsubstantiated legal conclusions about Android’s anticompetitive effect:

Applicable antitrust law can be complicated: Some ties yield useful efficiencies, and not all ties reduce welfare.

Given Edelman’s connections to Microsoft and the realities of the market he is discussing, it could hardly be otherwise. If every integration were an antitrust violation, every element of every operating system — including Apple’s iOS as well as every variant of Microsoft’s Windows — should arguably be the subject of a government investigation.

In truth, Google has done nothing more than ensure that its own suite of apps functions on top of Android to maintain what Google sees as seamless interconnectivity, a high-quality experience for users, and consistency for application developers — while still allowing handset manufacturers room to innovate in a way that is impossible on other platforms. This is the very definition of pro-competitive, and ultimately this is what allows the platform as a whole to compete against its far more vertically integrated alternatives.

Which brings us back to Microsoft. On the conclusion of the FTC investigation in January 2013, a GigaOm exposé on the case had this to say:

Critics who say Google is too powerful have nagged the government for years to regulate the company’s search listings. But today the critics came up dry….

The biggest loser is Microsoft, which funded a long-running cloak-and-dagger lobbying campaign to convince the public and government that its arch-enemy had to be regulated….

The FTC is also a loser because it ran a high profile two-year investigation but came up dry.

EU regulators, take note.

The Federal Trade Commission’s recent enforcement actions against Amazon and Apple raise important questions about the FTC’s consumer protection practices, especially its use of economics. How does the Commission weigh the costs and benefits of its enforcement decisions? How does the agency employ economic analysis in digital consumer protection cases generally?

Join the International Center for Law and Economics and TechFreedom on Thursday, July 31 at the Woolly Mammoth Theatre Company for a lunch and panel discussion on these important issues, featuring FTC Commissioner Joshua Wright, Director of the FTC’s Bureau of Economics Martin Gaynor, and several former FTC officials. RSVP here.

Commissioner Wright will present a keynote address discussing his dissent in Apple and his approach to applying economics in consumer protection cases generally.

Geoffrey Manne, Executive Director of ICLE, will briefly discuss his recent paper on the role of economics in the FTC’s consumer protection enforcement. Berin Szoka, TechFreedom President, will moderate a panel discussion featuring:

  • Martin Gaynor, Director, FTC Bureau of Economics
  • David Balto, Fmr. Deputy Assistant Director for Policy & Coordination, FTC Bureau of Competition
  • Howard Beales, Fmr. Director, FTC Bureau of Consumer Protection
  • James Cooper, Fmr. Acting Director & Fmr. Deputy Director, FTC Office of Policy Planning
  • Pauline Ippolito, Fmr. Acting Director & Fmr. Deputy Director, FTC Bureau of Economics

Background

The FTC recently issued a complaint and consent order against Apple, alleging its in-app purchasing design doesn’t meet the Commission’s standards of fairness. The action and resulting settlement drew a forceful dissent from Commissioner Wright, and sparked a discussion among the Commissioners about balancing economic harms and benefits in Section 5 unfairness jurisprudence. More recently, the FTC brought a similar action against Amazon, which is now pending in federal district court because Amazon refused to settle.

Event Info

The “FTC: Technology and Reform” project brings together a unique collection of experts on the law, economics, and technology of competition and consumer protection to consider challenges facing the FTC in general, and especially regarding its regulation of technology. The Project’s initial report, released in December 2013, identified critical questions facing the agency, Congress, and the courts about the FTC’s future, and proposed a framework for addressing them.

The event will be live streamed here beginning at 12:15pm. Join the conversation on Twitter with the #FTCReform hashtag.

When:

Thursday, July 31
11:45 am – 12:15 pm — Lunch and registration
12:15 pm – 2:00 pm — Keynote address, paper presentation & panel discussion

Where:

Woolly Mammoth Theatre Company – Rehearsal Hall
641 D St NW
Washington, DC 20004

Questions? – Email mail@techfreedom.orgRSVP here.

See ICLE’s and TechFreedom’s other work on FTC reform, including:

  • Geoffrey Manne’s Congressional testimony on the the FTC@100
  • Op-ed by Berin Szoka and Geoffrey Manne, “The Second Century of the Federal Trade Commission”
  • Two posts by Geoffrey Manne on the FTC’s Amazon Complaint, here and here.

About The International Center for Law and Economics:

The International Center for Law and Economics is a non-profit, non-partisan research center aimed at fostering rigorous policy analysis and evidence-based regulation.

About TechFreedom:

TechFreedom is a non-profit, non-partisan technology policy think tank. We work to chart a path forward for policymakers towards a bright future where technology enhances freedom, and freedom enhances technology.

The International Center for Law & Economics (ICLE) and TechFreedom filed two joint comments with the FCC today, explaining why the FCC has no sound legal basis for micromanaging the Internet and why “net neutrality” regulation would actually prove counter-productive for consumers.

The Policy Comments are available here, and the Legal Comments are here. See our previous post, Net Neutrality Regulation Is Bad for Consumers and Probably Illegal, for a distillation of many of the key points made in the comments.

New regulation is unnecessary. “An open Internet and the idea that companies can make special deals for faster access are not mutually exclusive,” said Geoffrey Manne, Executive Director of ICLE. “If the Internet really is ‘open,’ shouldn’t all companies be free to experiment with new technologies, business models and partnerships?”

“The media frenzy around this issue assumes that no one, apart from broadband companies, could possibly question the need for more regulation,” said Berin Szoka, President of TechFreedom. “In fact, increased regulation of the Internet will incite endless litigation, which will slow both investment and innovation, thus harming consumers and edge providers.”

Title II would be a disaster. The FCC has proposed re-interpreting the Communications Act to classify broadband ISPs under Title II as common carriers. But reinterpretation might unintentionally ensnare edge providers, weighing them down with onerous regulations. “So-called reclassification risks catching other Internet services in the crossfire,” explained Szoka. “The FCC can’t easily forbear from Title II’s most onerous rules because the agency has set a high bar for justifying forbearance. Rationalizing a changed approach would be legally and politically difficult. The FCC would have to simultaneously find the broadband market competitive enough to forbear, yet fragile enough to require net neutrality rules. It would take years to sort out this mess — essentially hitting the pause button on better broadband.”

Section 706 is not a viable option. In 2010, the FCC claimed Section 706 as an independent grant of authority to regulate any form of “communications” not directly barred by the Act, provided only that the Commission assert that regulation would somehow promote broadband. “This is an absurd interpretation,” said Szoka. “This could allow the FCC to essentially invent a new Communications Act as it goes, regulating not just broadband, but edge companies like Google and Facebook, too, and not just neutrality but copyright, cybersecurity and more. The courts will eventually strike down this theory.”

A better approach. “The best policy would be to maintain the ‘Hands off the Net’ approach that has otherwise prevailed for 20 years,” said Manne. “That means a general presumption that innovative business models and other forms of ‘prioritization’ are legal. Innovation could thrive, and regulators could still keep a watchful eye, intervening only where there is clear evidence of actual harm, not just abstract fears.” “If the FCC thinks it can justify regulating the Internet, it should ask Congress to grant such authority through legislation,” added Szoka. “A new communications act is long overdue anyway. The FCC could also convene a multistakeholder process to produce a code enforceable by the Federal Trade Commission,” he continued, noting that the White House has endorsed such processes for setting Internet policy in general.

Manne concluded: “The FCC should focus on doing what Section 706 actually commands: clearing barriers to broadband deployment. Unleashing more investment and competition, not writing more regulation, is the best way to keep the Internet open, innovative and free.”

For some of our other work on net neutrality, see:

“Understanding Net(flix) Neutrality,” an op-ed by Geoffrey Manne in the Detroit News on Netflix’s strategy to confuse interconnection costs with neutrality issues.

“The Feds Lost on Net Neutrality, But Won Control of the Internet,” an op-ed by Berin Szoka and Geoffrey Manne in Wired.com.

“That startup investors’ letter on net neutrality is a revealing look at what the debate is really about,” a post by Geoffrey Manne in Truth on the Market.

Bipartisan Consensus: Rewrite of ‘96 Telecom Act is Long Overdue,” a post on TF’s blog highlighting the key points from TechFreedom and ICLE’s joint comments on updating the Communications Act.

The Net Neutrality Comments are available here:

ICLE/TF Net Neutrality Policy Comments

TF/ICLE Net Neutrality Legal Comments

With Berin Szoka.

TechFreedom and the International Center for Law & Economics will shortly file two joint comments with the FCC, explaining why the FCC has no sound legal basis for micromanaging the Internet—now called “net neutrality regulation”—and why such regulation would be counter-productive as a policy matter. The following summarizes some of the key points from both sets of comments.

No one’s against an open Internet. The notion that anyone can put up a virtual shingle—and that the good ideas will rise to the top—is a bedrock principle with broad support; it has made the Internet essential to modern life. Key to Internet openness is the freedom to innovate. An open Internet and the idea that companies can make special deals for faster access are not mutually exclusive. If the Internet really is “open,” shouldn’t all companies be free to experiment with new technologies, business models and partnerships? Shouldn’t the FCC allow companies to experiment in building the unknown—and unknowable—Internet of the future?

The best approach would be to maintain the “Hands off the Net” approach that has otherwise prevailed for 20 years. That means a general presumption that innovative business models and other forms of “prioritization” are legal. Innovation could thrive, and regulators could still keep a watchful eye, intervening only where there is clear evidence of actual harm, not just abstract fears. And they should start with existing legal tools—like antitrust and consumer protection laws—before imposing prior restraints on innovation.

But net neutrality regulation hurts more than it helps. Counterintuitively, a blanket rule that ISPs treat data equally could actually harm consumers. Consider the innovative business models ISPs are introducing. T-Mobile’s unRadio lets users listen to all the on-demand music and radio they want without taking a hit against their monthly data plan. Yet so-called consumer advocates insist that’s a bad thing because it favors some content providers over others. In fact, “prioritizing” one service when there is congestion frees up data for subscribers to consume even more content—from whatever source. You know regulation may be out of control when a company is demonized for offering its users a freebie.

Treating each bit of data neutrally ignores the reality of how the Internet is designed, and how consumers use it.  Net neutrality proponents insist that all Internet content must be available to consumers neutrally, whether those consumers (or content providers) want it or not. They also argue against usage-based pricing. Together, these restrictions force all users to bear the costs of access for other users’ requests, regardless of who actually consumes the content, as the FCC itself has recognized:

[P]rohibiting tiered or usage-based pricing and requiring all subscribers to pay the same amount for broadband service, regardless of the performance or usage of the service, would force lighter end users of the network to subsidize heavier end users. It would also foreclose practices that may appropriately align incentives to encourage efficient use of networks.

The rules that net neutrality advocates want would hurt startups as well as consumers. Imagine a new entrant, clamoring for market share. Without the budget for a major advertising blitz, the archetypical “next Netflix” might never get the exposure it needs to thrive. But for a relatively small fee, the startup could sign up to participate in a sponsored data program, with its content featured and its customers’ data usage exempted from their data plans. This common business strategy could mean the difference between success and failure for a startup. Yet it would be prohibited by net neutrality rules banning paid prioritization.

The FCC lacks sound legal authority. The FCC is essentially proposing to do what can only properly be done by Congress: invent a new legal regime for broadband. Each of the options the FCC proposes to justify this—Section 706 of the Telecommunications Act and common carrier classification—is deeply problematic.

First, Section 706 isn’t sustainable. Until 2010, the FCC understood Section 706 as a directive to use its other grants of authority to promote broadband deployment. But in its zeal to regulate net neutrality, the FCC reversed itself in 2010, claiming Section 706 as an independent grant of authority. This would allow the FCC to regulate any form of “communications” in any way not directly barred by the Act — not just broadband but “edge” companies like Google and Facebook. This might mean going beyond neutrality to regulate copyright, cybersecurity and more. The FCC need only assert that regulation would somehow promote broadband.

If Section 706 is a grant of authority, it’s almost certainly a power to deregulate. But even if its power is as broad as the FCC claims, the FCC still hasn’t made the case that, on balance, its proposed regulations would actually do what it asserts: promote broadband. The FCC has stubbornly refused to conduct serious economic analysis on the net effects of its neutrality rules.

And Title II would be a disaster. The FCC has asked whether Title II of the Act, which governs “common carriers” like the old monopoly telephone system, is a workable option. It isn’t.

In the first place, regulations that impose design limitations meant for single-function networks simply aren’t appropriate for the constantly evolving Internet. Moreover, if the FCC re-interprets the Communications Act to classify broadband ISPs as common carriers, it risks catching other Internet services in the cross-fire, inadvertently making them common carriers, too. Surely net neutrality proponents can appreciate the harmful effects of treating Skype as a common carrier.

Forbearance can’t clean up the Title II mess. In theory the FCC could “forbear” from Title II’s most onerous rules, promising not to apply them when it determines there’s enough competition in a market to make the rules unnecessary. But the agency has set a high bar for justifying forbearance.

Most recently, in 2012, the Commission refused to grant Qwest forbearance even in the highly competitive telephony market, disregarding competition from wireless providers, and concluding that a cable-telco “duopoly” is inadequate to protect consumers. It’s unclear how the FCC could justify reaching the opposite conclusion about the broadband market—simultaneously finding it competitive enough to forbear, yet fragile enough to require net neutrality rules. Such contradictions would be difficult to explain, even if the FCC generally gets discretion on changing its approach.

But there is another path forward. If the FCC can really make the case for regulation, it should go to Congress, armed with the kind of independent economic and technical expert studies Commissioner Pai has urged, and ask for new authority. A new Communications Act is long overdue anyway. In the meantime, the FCC could convene the kind of multistakeholder process generally endorsed by the White House to produce a code enforceable by the Federal Trade Commission. A consensus is possible — just not inside the FCC, where the policy questions can’t be separated from the intractable legal questions.

Meanwhile, the FCC should focus on doing what Section 706 actually demands: clearing barriers to broadband deployment and competition. The 2010 National Broadband Plan laid out an ambitious pro-deployment agenda. It’s just too bad the FCC was so obsessed with net neutrality that it didn’t focus on the plan. Unleashing more investment and competition, not writing more regulation, is the best way to keep the Internet open, innovative and free.

[Cross-posted at TechFreedom.]

Today the FTC filed its complaint in federal district court in Washington against Amazon, alleging that the company’s in-app purchasing system permits children to make in-app purchases without parental “informed consent” constituting an “unfair practice” under Section 5 of the FTC Act.

As I noted in my previous post on the case, in bringing this case the Commission is doubling down on the rule it introduced in Apple that effectively converts the balancing of harms and benefits required under Section 5 of the FTC Act to a per se rule that deems certain practices to be unfair regardless of countervailing benefits. Similarly, it is attempting to extend the informed consent standard it created in Apple that essentially maintains that only specific, identified practices (essentially, distinct notification at the time of purchase or opening of purchase window, requiring entry of a password to proceed) are permissible under the Act.

Such a standard is inconsistent with the statute, however. The FTC’s approach forecloses the ability of companies like Amazon to engage in meaningful design decisions and disregards their judgment about which user interface designs will, on balance, benefit consumers. The FTC Act does not empower the Commission to disregard the consumer benefits of practices that simply fail to mimic the FTC’s preconceived design preferences. While that sort of approach might be defensible in the face of manifestly harmful practices like cramming, it is wholly inappropriate in the context of app stores like Amazon’s that spend considerable resources to design every aspect of their interaction with consumers—and that seek to attract, not to defraud, consumers.

Today’s complaint occasions a few more observations:

  1. Amazon has a very strong case. Under Section 5 of the FTC Act, the Commission will have to prevail on all three elements required to prove unfairness under Section 5: that there is substantial injury, that consumers can’t reasonably avoid the injury and that any countervailing benefits don’t outweigh the injury. But, consistent with its complaint and consent order in Apple, the Amazon complaint focuses almost entirely on only the first of these. While that may have been enough to induce Apple to settle out of court, the FTC will actually have to make out a case on reasonable avoidance and countervailing benefits at trial. It’s not at all clear that the agency will be able to do so on the facts alleged here.
  2. On reasonable avoidance, over and above Amazon’s general procedures that limit unwanted in-app purchases, the FTC will have a tough time showing that Amazon’s Kindle Free Time doesn’t provide parents with more than enough ability to avoid injury. In fact, the complaint doesn’t mention Free Time at all.
  3. Among other things, the complaint asserts that Amazon knew about issues with in-app purchasing by December of 2011 and claims that “[n]ot until June 2014 did Amazon change its in-app charge framework to obtain account holders’ informed consent for in-app charges on its newer mobile devices.” But Kindle Free Time was introduced in September of 2012. While four FTC Commissioners may believe that Free Time isn’t a sufficient response to the alleged problem, it is clearly a readily available, free and effective (read: reasonable) mechanism for parents to avoid the alleged harms. It may not be what the design mavens at the FTC would have chosen to do, but it seems certain that avoiding unauthorized in-app purchases by children was part of what motivated Amazon’s decision to create and offer Free Time.
  4. On countervailing benefits, as Commissioner Wright discussed in detail in his dissent from the Apple consent order, the Commission seems to think that it can simply assert that there are no countervailing benefits to Amazon’s design choices around in-app purchases. Here the complaint doesn’t mention 1-Click at all, which is core to Amazon’s user interface design and essential to evaluating the balance of harms and benefits required by the statute.
  5. Even if it can show that Amazon’s in-app purchase practices caused harm, the Commission will still have to demonstrate that Amazon’s conscious efforts to minimize the steps required to make purchases doesn’t benefit consumers on balance. In Apple, the FTC majority essentially (and improperly) valued these sorts of user-interface benefits at zero. It implicitly does so again here, but a court will require more than such an assertion.
  6. Given these lapses, there is even a chance that the complaint will be thrown out on a motion to dismiss. It’s a high bar, but if the court agrees that there are insufficient facts in the complaint to make out a plausible case on all three elements, Amazon could well prevail on a motion to dismiss. The FTC’s approach in the Apple consent order effectively maintains that the agency can disregard reasonable avoidance and countervailing benefits in contravention of the statute. By following the same approach here in actual litigation, the FTC may well meet resistance from the courts, which have not yet so cavalierly dispensed with the statute’s requirements.

The Wall Street Journal reports this morning that Amazon is getting — and fighting — the “Apple treatment” from the FTC for its design of its in-app purchases:

Amazon.com Inc. is bucking a request from the Federal Trade Commission that it tighten its policies for purchases made by children while using mobile applications.

In a letter to the FTC Tuesday, Amazon said it was prepared to “defend our approach in court,” rather than agree to fines and additional record keeping and disclosure requirements over the next 20 years, according to documents reviewed by The Wall Street Journal.

According to the documents, Amazon is facing a potential lawsuit by the FTC, which wants the Seattle retailer to accept terms similar to those that Apple Inc. agreed to earlier this year regarding so-called in-app purchases.

From what I can tell, the Commission has voted to issue a complaint, and Amazon has informed the Commission that it will not accept its proposed settlement.

I am thrilled that Amazon seems to have decided to fight the latest effort by a majority of the FTC to bring every large tech company under 20-year consent decree. I should say: I’m disappointed in the FTC, sorry for Amazon, but thrilled for consumers and the free marketplace that Amazon is choosing to fight rather than acquiesce.

As I wrote earlier this year about the FTC’s case against Apple in testimony before the House Commerce Committee:

What’s particularly notable about the Apple case – and presumably will be in future technology enforcement actions predicated on unfairness – is the unique relevance of the attributes of the conduct at issue to its product. Unlike past, allegedly similar, cases, Apple’s conduct was not aimed at deceiving consumers, nor was it incidental to its product offering. But by challenging the practice, particularly without the balancing of harms required by Section 5, the FTC majority failed to act with restraint and substituted its own judgment, not about some manifestly despicable conduct, but about the very design of Apple’s products. This is the sort of area where regulatory humility is more — not less — important.

In failing to observe common sense limits in Apple, the FTC set a dangerous precedent that, given the agency’s enormous regulatory scope and the nature of technologically advanced products, could cause significant harm to consumers.

Here that failure is even more egregious. Amazon has built its entire business around the “1-click” concept — which consumers love — and implemented a host of notification and security processes hewing as much as possible to that design choice, but nevertheless taking account of the sorts of issues raised by in-app purchases. Moreover — and perhaps most significantly — it has implemented an innovative and comprehensive parental control regime (including the ability to turn off all in-app purchases) — Kindle Free Time — that arguably goes well beyond anything the FTC required in its Apple consent order. I use Kindle Free Time with my kids and have repeatedly claimed to anyone who will listen that it is the greatest thing since sliced bread. Other consumers must feel similarly. Finally, regardless of all of that, Amazon has nevertheless voluntarily implemented additional notification procedures intended to comply with the Apple settlement, even though it didn’t apply to Amazon.

If the FTC asserts, in the face of all of that, that it’s own vision of what “appropriate” in-app purchase protections must look like is the only one that suffices to meet the standard required by Section 5’s Unfairness language, it is either being egregiously disingenuous, horrifically vain, just plain obtuse, or some combination of the three.

As I wrote in my testimony:

The application of Section 5’s “unfair acts and practices” prong (the statute at issue in Apple) is circumscribed by Section 45(n) of the FTC Act, which, among other things, proscribes enforcement where injury is “not outweighed by countervailing benefits to consumers or to competition.”

And as Commissioner Wright noted in his dissent in the Apple case,

[T]he Commission effectively rejects an analysis of tradeoffs between the benefits of additional guidance and potential harm to some consumers or to competition from mandating guidance…. I respectfully disagree. These assumptions adopt too cramped a view of consumer benefits under the Unfairness Statement and, without more rigorous analysis to justify their application, are insufficient to establish the Commission’s burden.

We won’t know until we see the complaint whether the FTC has failed to undertake the balancing it neglected to perform in Apple and that it is required to perform under the statute. But it’s hard to believe that it could mount a case against Amazon in light of the facts if it did perform such a balancing. There’s no question that Amazon has implemented conscious and consumer-welfare-enhancing design choices here. The FTC’s effort to nevertheless mandate a different design (and put Amazon under a 20 year consent decree) based on a claim that Amazon’s choices impose greater harms than benefits on consumers seems manifestly unsupportable.

Such a claim almost certainly represents an abuse of the agency’s discretion, and I expect Amazon to trounce the FTC if this case goes to trial.

UPDATE: I’ve been reliably informed that Vint Cerf coined the term “permissionless innovation,” and, thus, that he did so with the sorts of private impediments discussed below in mind rather than government regulation. So consider the title of this post changed to “Permissionless innovation SHOULD not mean ‘no contracts required,'” and I’ll happily accept that my version is the “bastardized” version of the term. Which just means that the original conception was wrong and thank god for disruptive innovation in policy memes!

Can we dispense with the bastardization of the “permissionless innovation” concept (best developed by Adam Thierer) to mean “no contracts required”? I’ve been seeing this more and more, but it’s been around for a while. Some examples from among the innumerable ones out there:

Vint Cerf on net neutrality in 2009:

We believe that the vast numbers of innovative Internet applications over the last decade are a direct consequence of an open and freely accessible Internet. Many now-successful companies have deployed their services on the Internet without the need to negotiate special arrangements with Internet Service Providers, and it’s crucial that future innovators have the same opportunity. We are advocates for “permissionless innovation” that does not impede entrepreneurial enterprise.

Net neutrality is replete with this sort of idea — that any impediment to edge providers (not networks, of course) doing whatever they want to do at a zero price is a threat to innovation.

Chet Kanojia (Aereo CEO) following the Aereo decision:

It is troubling that the Court states in its decision that, ‘to the extent commercial actors or other interested entities may be concerned with the relationship between the development and use of such technologies and the Copyright Act, they are of course free to seek action from Congress.’ (Majority, page 17)That begs the question: Are we moving towards a permission-based system for technology innovation?

At least he puts it in the context of the Court’s suggestion that Congress pass a law, but what he really wants is to not have to ask “permission” of content providers to use their content.

Mike Masnick on copyright in 2010:

But, of course, the problem with all of this is that it goes back to creating permission culture, rather than a culture where people freely create. You won’t be able to use these popular or useful tools to build on the works of others — which, contrary to the claims of today’s copyright defenders, is a key component in almost all creativity you see out there — without first getting permission.

Fair use is, by definition, supposed to be “permissionless.” But the concept is hardly limited to fair use, is used to justify unlimited expansion of fair use, and is extended by advocates to nearly all of copyright (see, e.g., Mike Masnick again), which otherwise requires those pernicious licenses (i.e., permission) from others.

The point is, when we talk about permissionless innovation for Tesla, Uber, Airbnb, commercial drones, online data and the like, we’re talking (or should be) about ex ante government restrictions on these things — the “permission” at issue is permission from the government, it’s the “permission” required to get around regulatory roadblocks imposed via rent-seeking and baseless paternalism. As Gordon Crovitz writes, quoting Thierer:

“The central fault line in technology policy debates today can be thought of as ‘the permission question,'” Mr. Thierer writes. “Must the creators of new technologies seek the blessing of public officials before they develop and deploy their innovations?”

But it isn’t (or shouldn’t be) about private contracts.

Just about all human (commercial) activity requires interaction with others, and that means contracts and licenses. You don’t see anyone complaining about the “permission” required to rent space from a landlord. But that some form of “permission” may be required to use someone else’s creative works or other property (including broadband networks) is no different. And, in fact, it is these sorts of contracts (and, yes, the revenue that may come with them) that facilitates people engaging with other commercial actors to produce things of value in the first place. The same can’t be said of government permission.

Don’t get me wrong – there may be some net welfare-enhancing regulatory limits that might require forms of government permission. But the real concern is the pervasive abuse of these limits, imposed without anything approaching a rigorous welfare determination. There might even be instances where private permission, imposed, say, by a true monopolist, might be problematic.

But this idea that any contractual obligation amounts to a problematic impediment to innovation is absurd, and, in fact, precisely backward. Which is why net neutrality is so misguided. Instead of identifying actual, problematic impediments to innovation, it simply assumes that networks threaten edge innovation, without any corresponding benefit and with such certainty (although no actual evidence) that ex ante common carrier regulations are required.

“Permissionless innovation” is a great phrase and, well developed (as Adam Thierer has done), a useful concept. But its bastardization to justify interference with private contracts is unsupported and pernicious.

Earlier this week the New Jersey Assembly unanimously passed a bill to allow direct sales of Tesla cars in New Jersey. (H/T Marina Lao). The bill

Allows a manufacturer (“franchisor,” as defined in P.L.1985, c.361 (C.56:10-26 et seq.)) to directly buy from or sell to consumers a zero emission vehicle (ZEV) at a maximum of four locations in New Jersey.  In addition, the bill requires a manufacturer to own or operate at least one retail facility in New Jersey for the servicing of its vehicles. The manufacturer’s direct sale locations are not required to also serve as a retail service facility.

The bill amends current law to allow any ZEV manufacturer to directly or indirectly buy from and directly sell, offer to sell, or deal to a consumer a ZEV if the manufacturer was licensed by the New Jersey Motor Vehicle Commission (MVC) on or prior to January 1, 2014.  This bill provides that ZEVs may be directly sold by certain manufacturers, like Tesla Motors, and preempts any rule or regulation that restricts sales exclusively to franchised dealerships.  The provisions of the bill would not prevent a licensed franchisor from operating under an existing license issued by the MVC.

At first cut, it seems good that the legislature is responding to the lunacy of the Christie administration’s previous decision to enforce a rule prohibiting direct sales of automobiles in New Jersey. We have previously discussed that decision at length in previous posts here, here, here and here. And Thom and Mike have taken on a similar rule in their home state of Missouri here and here.

In response to New Jersey’s decision to prohibit direct sales, the International Center for Law & Economics organized an open letter to Governor Christie based in large part on Dan Crane’s writings on the topic here at TOTM and discussing the faulty economics of such a ban. The letter was signed by more than 70 law professors and economists.

But it turns out that the legislative response is nearly as bad as the underlying ban itself.

First, a quick recap.

In our letter we noted that

The Motor Vehicle Commission’s regulation was aimed specifically at stopping one company, Tesla Motors, from directly distributing its electric cars. But the regulation would apply equally to any other innovative manufacturer trying to bring a new automobile to market, as well. There is no justification on any rational economic or public policy grounds for such a restraint of commerce. Rather, the upshot of the regulation is to reduce competition in New Jersey’s automobile market for the benefit of its auto dealers and to the detriment of its consumers. It is protectionism for auto dealers, pure and simple.

While enforcement of the New Jersey ban was clearly aimed directly at Tesla, it has broader effects. And, of course, its underlying logic is simply indefensible, regardless of which particular manufacturer it affects. The letter explains at length the economics of retail distribution and the misguided, anti-consumer logic of the regulation, and concludes by noting that

In sum, we have not heard a single argument for a direct distribution ban that makes any sense. To the contrary, these arguments simply bolster our belief that the regulations in question are motivated by economic protectionism that favors dealers at the expense of consumers and innovative technologies. It is discouraging to see this ban being used to block a company that is bringing dynamic and environmentally friendly products to market. We strongly encourage you to repeal it, by new legislation if necessary.

Thus it seems heartening that the legislature did, indeed, take up our challenge to repeal the ban.

Except that, in doing so, the legislature managed to write a bill that reflects no understanding whatever of the underlying economic issues at stake. Instead, the legislative response appears largely to be the product of rent seeking,pure and simple, offering only a limited response to Tesla’s squeaky wheel (no pun intended) and leaving the core defects of the ban completely undisturbed.

Instead of acknowledging the underlying absurdity of the limit on direct sales, the bill keeps the ban in place and simply offers a limited exception for Tesla (or other zero emission cars). While the innovative and beneficial nature of Tesla’s cars was an additional reason to oppose banning their direct sale, the specific characteristics of the cars is a minor and ancillary reason to oppose the ban. But the New Jersey legislative response is all about the cars’ emissions characteristics, and in no way does it reflect an appreciation for the fundamental economic defects of the underlying rule.

Moreover, the bill permits direct sales at only four locations (why four? No good reason whatever — presumably it was a political compromise, never the stuff of economic reason) and requires Tesla to operate a service center for its cars in the state. In other words, the regulators are still arbitrarily dictating aspects of car manufacturers’ business organization from on high.

Even worse, however, the bill is constructed to be nothing more than a payoff for a specific firm’s lobbying efforts, thus ensuring that the next (non-zero-emission) Tesla to come along will have to undertake the same efforts to pander to the state.

Far from addressing the serious concerns with the direct sales ban, the bill just perpetuates the culture of political rent seeking such regulations create.

Perhaps it’s better than nothing. Certainly it’s better than nothing for Tesla. But overall, I’d say it’s about the worst possible sort of response, short of nothing.