Archives For telecommunications

Remember when net neutrality wasn’t going to involve rate regulation and it was crazy to say that it would? Or that it wouldn’t lead to regulation of edge providers? Or that it was only about the last mile and not interconnection? Well, if the early petitions and complaints are a preview of more to come, the Open Internet Order may end up having the FCC regulating rates for interconnection and extending the reach of its privacy rules to edge providers.

On Monday, Consumer Watchdog petitioned the FCC to not only apply Customer Proprietary Network Information (CPNI) rules originally meant for telephone companies to ISPs, but to also start a rulemaking to require edge providers to honor Do Not Track requests in order to “promote broadband deployment” under Section 706. Of course, we warned of this possibility in our joint ICLE-TechFreedom legal comments:

For instance, it is not clear why the FCC could not, through Section 706, mandate “network level” copyright enforcement schemes or the DNS blocking that was at the heart of the Stop Online Piracy Act (SOPA). . . Thus, it would appear that Section 706, as re-interpreted by the FCC, would, under the D.C. Circuit’s Verizon decision, allow the FCC sweeping power to regulate the Internet up to and including (but not beyond) the process of “communications” on end-user devices. This could include not only copyright regulation but everything from cybersecurity to privacy to technical standards. (emphasis added).

While the merits of Do Not Track are debatable, it is worth noting that privacy regulation can go too far and actually drastically change the Internet ecosystem. In fact, it is actually a plausible scenario that overregulating data collection online could lead to the greater use of paywalls to access content.  This may actually be a greater threat to Internet Openness than anything ISPs have done.

And then yesterday, the first complaint under the new Open Internet rule was brought against Time Warner Cable by a small streaming video company called Commercial Network Services. According to several news stories, CNS “plans to file a peering complaint against Time Warner Cable under the Federal Communications Commission’s new network-neutrality rules unless the company strikes a free peering deal ASAP.” In other words, CNS is asking for rate regulation for interconnectionshakespeare. Under the Open Internet Order, the FCC can rule on such complaints, but it can only rule on a case-by-case basis. Either TWC assents to free peering, or the FCC intervenes and sets the rate for them, or the FCC dismisses the complaint altogether and pushes such decisions down the road.

This was another predictable development that many critics of the Open Internet Order warned about: there was no way to really avoid rate regulation once the FCC reclassified ISPs. While the FCC could reject this complaint, it is clear that they have the ability to impose de facto rate regulation through case-by-case adjudication. Whether it is rate regulation according to Title II (which the FCC ostensibly didn’t do through forbearance) is beside the point. This will have the same practical economic effects and will be functionally indistinguishable if/when it occurs.

In sum, while neither of these actions were contemplated by the FCC (they claim), such abstract rules are going to lead to random complaints like these, and companies are going to have to use the “ask FCC permission” process to try to figure out beforehand whether they should be investing or whether they’re going to be slammed. As Geoff Manne said in Wired:

That’s right—this new regime, which credits itself with preserving “permissionless innovation,” just put a bullet in its head. It puts innovators on notice, and ensures that the FCC has the authority (if it holds up in court) to enforce its vague rule against whatever it finds objectionable.

I mean, I don’t wanna brag or nothin, but it seems to me that we critics have been right so far. The reclassification of broadband Internet service as Title II has had the (supposedly) unintended consequence of sweeping in far more (both in scope of application and rules) than was supposedly bargained for. Hopefully the FCC rejects the petition and the complaint and reverses this course before it breaks the Internet.

The TCPA is an Antiquated Law

The TCPA is an Antiquated Law

The Telephone Consumer Protection Act (“TCPA”) is back in the news following a letter sent to PayPal from the Enforcement Bureau of the FCC.  At issue are amendments that PayPal intends to introduce into its end user agreement. Specifically, PayPal is planning on including an automated call and text message system with which it would reach out to its users to inform them of account updates, perform quality assurance checks, and provide promotional offers.

Enter the TCPA, which, as the Enforcement Bureau noted in its letter, has been used for over twenty years by the FCC to “protect consumers from harassing, intrusive, and unwanted calls and text messages.” The FCC has two primary concerns in its warning to PayPal. First, there was no formal agreement between PayPal and its users that would satisfy the FCC’s rules and allow PayPal to use an automated call system. And, perhaps most importantly, PayPal is not entitled to simply attach an “automated calls” clause to its user agreement as a condition of providing the PayPal service (as it clearly intends to do with its amendments).

There are a number of things wrong with the TCPA and the FCC’s decision to enforce its provisions against PayPal in the current instance. The FCC has the power to provide for some limited exemptions to the TCPA’s prohibition on automated dialing systems. Most applicable here, the FCC has the discretion to provide exemptions where calls to cell phone users won’t result in those users being billed for the calls. Although most consumers still buy plans that allot minutes for their monthly use, the practical reality for most cell phone users is that they no longer need to count minutes for every call. Users typically have a large number of minutes on their plans, and certainly many of those minutes can go unused. It seems that the progression of technology and the economics of cellphones over the last twenty-five years should warrant a Congressional revisit to the underlying justifications of at least this prohibition in the TCPA.

However, exceptions aside, there remains a much larger issue with the TCPA, one that is also rooted in the outdated technological assumptions underlying the law. The TCPA was meant to prevent dedicated telemarketing companies from using the latest in “automated dialing” technology circa 1991 from harassing people. It was not intended to stymie legitimate businesses from experimenting with more efficient methods of contacting their own customers.

The text of the law underscores its technological antiquity:  according to the TCPA, an “automatic telephone dialing system” means equipment which “has the capacity” to sequentially dial random numbers. This is to say, the equipment that was contemplated when the law was written was software-enabled phones that were purpose built to enable telemarketing firms to make blanket cold calls to every number in a given area code. The language clearly doesn’t contemplate phones connected to general purpose computing resources, as most phone systems are today.

The modern phone systems, connected to intelligent computer backends, are designed to flexibly reach out to hundreds or thousands of existing customers at a time, and in a way that efficiently enhances the customer’s experience with the company. Technically, yes, these systems are capable of auto-dialing a large number of random recipients; however, when a company like PayPal uses this technology, its purpose is clearly different than that employed by the equivalent of spammers on the phone system. Not having a nexus between an intent to random-dial and a particular harm experienced by an end user is a major hole in the TCPA. Particularly in this case, it seems fairly absurd that the TCPA could be used to prevent PayPal from interacting with its own customers.

Further, there is a lot at stake for those accused of violating the TCPA. In the PayPal warning letter, the FCC noted that it is empowered to levy a $16,000 fine per call or text message that it finds violates the terms of the TCPA. That’s bad, but it’s nowhere near as bad as it could get. The TCPA also contains a private right of action that was meant to encourage individual consumers to take telemarketers to small claims court in their local state.  Each individual consumer is entitled to receive provable damages or statutory damages of $500.00, whichever is greater. If willfulness can be proven, the damages are trebled, which in effect means that most individual plaintiffs in the know will plead willfulness, and wait for either a settlement conference or trial to sort the particulars out.

However, over the years a cottage industry has built up around class action lawyers aggregating “harmed” plaintiffs who had received unwanted automatic calls or texts, and forcing settlements in the tens of millions of dollars. The math is pretty simple. A large company with lots of customers may be tempted to use an automatic system to send out account information and offer alerts. If it sends out five hundred thousand auto calls or texts, that could result in “damages” in the amount of $250M in a class action suit. A settlement for five or ten million dollars is a deal by comparison. For instance, in 2013 Bank of America entered into a $32M settlement for texts and calls made between 2007 and 2013 to 7.7 million people.  If they had gone to trial and lost, the damages could have been as much as $3.8B!

The purpose of the TCPA was to prevent abusive telemarketers from harassing people, not to defeat the use of an entire technology that can be employed to increase efficiency for businesses and lower costs for consumers. The per call penalties associated with violating the TCPA, along with imprecise and antiquated language in the law, provide a major incentive to use the legal system to punish well-meaning companies that are just operating their non-telemarketing businesses in a reasonable manner. It’s time to seriously revise this law in light of the changes in technology over the past twenty-five years.

Recently, Commissioner Pai praised the introduction of bipartisan legislation to protect joint sales agreements (“JSAs”) between local television stations. He explained that

JSAs are contractual agreements that allow broadcasters to cut down on costs by using the same advertising sales force. The efficiencies created by JSAs have helped broadcasters to offer services that benefit consumers, especially in smaller markets…. JSAs have served communities well and have promoted localism and diversity in broadcasting. Unfortunately, the FCC’s new restrictions on JSAs have already caused some stations to go off the air and other stations to carry less local news.

fccThe “new restrictions” to which Commissioner Pai refers were recently challenged in court by the National Association of Broadcasters (NAB), et. al., and on April 20, the International Center for Law & Economics and a group of law and economics scholars filed an amicus brief with the D.C. Circuit Court of Appeals in support of the petition, asking the court to review the FCC’s local media ownership duopoly rule restricting JSAs.

Much as it did with with net neutrality, the FCC is looking to extend another set of rules with no basis in sound economic theory or established facts.

At issue is the FCC’s decision both to retain the duopoly rule and to extend that rule to certain JSAs, all without completing a legally mandated review of the local media ownership rules, due since 2010 (but last completed in 2007).

The duopoly rule is at odds with sound competition policy because it fails to account for drastic changes in the media market that necessitate redefinition of the market for television advertising. Moreover, its extension will bring a halt to JSAs currently operating (and operating well) in nearly 100 markets.  As the evidence on the FCC rulemaking record shows, many of these JSAs offer public interest benefits and actually foster, rather than stifle, competition in broadcast television markets.

In the world of media mergers generally, competition law hasn’t yet caught up to the obvious truth that new media is competing with old media for eyeballs and advertising dollars in basically every marketplace.

For instance, the FTC has relied on very narrow market definitions to challenge newspaper mergers without recognizing competition from television and the Internet. Similarly, the generally accepted market in which Google’s search conduct has been investigated is something like “online search advertising” — a market definition that excludes traditional marketing channels, despite the fact that advertisers shift their spending between these channels on a regular basis.

But the FCC fares even worse here. The FCC’s duopoly rule is premised on an “eight voices” test for local broadcast stations regardless of the market shares of the merging stations. In other words, one entity cannot own FCC licenses to two or more TV stations in the same local market unless there are at least eight independently owned stations in that market, even if their combined share of the audience or of advertising are below the level that could conceivably give rise to any inference of market power.

Such a rule is completely unjustifiable under any sensible understanding of competition law.

Can you even imagine the FTC or DOJ bringing an 8 to 7 merger challenge in any marketplace? The rule is also inconsistent with the contemporary economic learning incorporated into the 2010 Merger Guidelines, which looks at competitive effects rather than just counting competitors.

Not only did the FCC fail to analyze the marketplace to understand how much competition there is between local broadcasters, cable, and online video, but, on top of that, the FCC applied this outdated duopoly rule to JSAs without considering their benefits.

The Commission offers no explanation as to why it now believes that extending the duopoly rule to JSAs, many of which it had previously approved, is suddenly necessary to protect competition or otherwise serve the public interest. Nor does the FCC cite any evidence to support its position. In fact, the record evidence actually points overwhelmingly in the opposite direction.

As a matter of sound regulatory practice, this is bad enough. But Congress directed the FCC in Section 202(h) of the Telecommunications Act of 1996 to review all of its local ownership rules every four years to determine whether they were still “necessary in the public interest as the result of competition,” and to repeal or modify those that weren’t. During this review, the FCC must examine the relevant data and articulate a satisfactory explanation for its decision.

So what did the Commission do? It announced that, instead of completing its statutorily mandated 2010 quadrennial review of its local ownership rules, it would roll that review into a new 2014 quadrennial review (which it has yet to perform). Meanwhile, the Commission decided to retain its duopoly rule pending completion of that review because it had “tentatively” concluded that it was still necessary.

In other words, the FCC hasn’t conducted its mandatory quadrennial review in more than seven years, and won’t, under the new rules, conduct one for another year and a half (at least). Oh, and, as if nothing of relevance has changed in the market since then, it “tentatively” maintains its already suspect duopoly rule in the meantime.

In short, because the FCC didn’t conduct the review mandated by statute, there is no factual support for the 2014 Order. By relying on the outdated findings from its earlier review, the 2014 Order fails to examine the significant changes both in competition policy and in the market for video programming that have occurred since the current form of the rule was first adopted, rendering the rulemaking arbitrary and capricious under well-established case law.

Had the FCC examined the record of the current rulemaking, it would have found substantial evidence that undermines, rather than supports, the FCC’s rule.

Economic studies have shown that JSAs can help small broadcasters compete more effectively with cable and online video in a world where their advertising revenues are drying up and where temporary economies of scale (through limited contractual arrangements like JSAs) can help smaller, local advertising outlets better implement giant, national advertising campaigns. A ban on JSAs will actually make it less likely that competition among local broadcasters can survive, not more.

OfficialPaiCommissioner Pai, in his dissenting statement to the 2014 Order, offered a number of examples of the benefits of JSAs (all of them studiously ignored by the Commission in its Order). In one of these, a JSA enabled two stations in Joplin, Missouri to use their $3.5 million of cost savings from a JSA to upgrade their Doppler radar system, which helped save lives when a devastating tornado hit the town in 2011. But such benefits figure nowhere in the FCC’s “analysis.”

Several econometric studies also provide empirical support for the (also neglected) contention that duopolies and JSAs enable stations to improve the quality and prices of their programming.

One study, by Jeff Eisenach and Kevin Caves, shows that stations operating under these agreements are likely to carry significantly more news, public affairs, and current affairs programming than other stations in their markets. The same study found an 11 percent increase in audience shares for stations acquired through a duopoly. Meanwhile, a study by Hal Singer and Kevin Caves shows that markets with JSAs have advertising prices that are, on average, roughly 16 percent lower than in non-duopoly markets — not higher, as would be expected if JSAs harmed competition.

And again, Commissioner Pai provides several examples of these benefits in his dissenting statement. In one of these, a JSA in Wichita, Kansas enabled one of the two stations to provide Spanish-language HD programming, including news, weather, emergency and community information, in a market where that Spanish-language programming had not previously been available. Again — benefit ignored.

Moreover, in retaining its duopoly rule on the basis of woefully outdated evidence, the FCC completely ignores the continuing evolution in the market for video programming.

In reality, competition from non-broadcast sources of programming has increased dramatically since 1999. Among other things:

  • VideoScreensToday, over 85 percent of American households watch TV over cable or satellite. Most households now have access to nearly 200 cable channels that compete with broadcast TV for programming content and viewers.
  • In 2014, these cable channels attracted twice as many viewers as broadcast channels.
  • Online video services such as Netflix, Amazon Prime, and Hulu have begun to emerge as major new competitors for video programming, leading 179,000 households to “cut the cord” and cancel their cable subscriptions in the third quarter of 2014 alone.
  • Today, 40 percent of U.S. households subscribe to an online streaming service; as a result, cable ratings among adults fell by nine percent in 2014.
  • At the end of 2007, when the FCC completed its last quadrennial review, the iPhone had just been introduced, and the launch of the iPad was still more than two years away. Today, two-thirds of Americans have a smartphone or tablet over which they can receive video content, using technology that didn’t even exist when the FCC last amended its duopoly rule.

In the face of this evidence, and without any contrary evidence of its own, the Commission’s action in reversing 25 years of agency practice and extending its duopoly rule to most JSAs is arbitrary and capricious.

The law is pretty clear that the extent of support adduced by the FCC in its 2014 Rule is insufficient. Among other relevant precedent (and there is a lot of it):

The Supreme Court has held that an agency

must examine the relevant data and articulate a satisfactory explanation for its action, including a rational connection between the facts found and the choice made.

In the DC Circuit:

the agency must explain why it decided to act as it did. The agency’s statement must be one of ‘reasoning’; it must not be just a ‘conclusion’; it must ‘articulate a satisfactory explanation’ for its action.

And:

[A]n agency acts arbitrarily and capriciously when it abruptly departs from a position it previously held without satisfactorily explaining its reason for doing so.

Also:

The FCC ‘cannot silently depart from previous policies or ignore precedent’ . . . .”

And most recently in Judge Silberman’s concurrence/dissent in the 2010 Verizon v. FCC Open Internet Order case:

factual determinations that underly [sic] regulations must still be premised on demonstrated — and reasonable — evidential support

None of these standards is met in this case.

It will be noteworthy to see what the DC Circuit does with these arguments given the pending Petitions for Review of the latest Open Internet Order. There, too, the FCC acted without sufficient evidentiary support for its actions. The NAB/Stirk Holdings case may well turn out to be a bellwether for how the court views the FCC’s evidentiary failings in that case, as well.

The scholars joining ICLE on the brief are:

  • Babette E. Boliek, Associate Professor of Law, Pepperdine School of Law
  • Henry N. Butler, George Mason University Foundation Professor of Law and Executive Director of the Law & Economics Center, George Mason University School of Law (and newly appointed dean).
  • Richard Epstein, Laurence A. Tisch Professor of Law, Classical Liberal Institute, New York University School of Law
  • Stan Liebowitz, Ashbel Smith Professor of Economics, University of Texas at Dallas
  • Fred McChesney, de la Cruz-Mentschikoff Endowed Chair in Law and Economics, University of Miami School of Law
  • Paul H. Rubin, Samuel Candler Dobbs Professor of Economics, Emory University
  • Michael E. Sykuta, Associate Professor in the Division of Applied Social Sciences and Director of the Contracting and Organizations Research Institute, University of Missouri

The full amicus brief is available here.

reason-mag-dont-tread-on-my-internetBen Sperry and I have a long piece on net neutrality in the latest issue of Reason Magazine entitled, “How to Break the Internet.” It’s part of a special collection of articles and videos dedicated to the proposition “Don’t Tread on My Internet!”

Reason has put together a great bunch of material, and packaged it in a special retro-designed page that will make you think it’s the 1990s all over again (complete with flaming graphics and dancing Internet babies).

Here’s a taste of our article:

“Net neutrality” sounds like a good idea. It isn’t.

As political slogans go, the phrase net neutrality has been enormously effective, riling up the chattering classes and forcing a sea change in the government’s decades-old hands-off approach to regulating the Internet. But as an organizing principle for the Internet, the concept is dangerously misguided. That is especially true of the particular form of net neutrality regulation proposed in February by Federal Communications Commission (FCC) Chairman Tom Wheeler.

Net neutrality backers traffic in fear. Pushing a suite of suggested interventions, they warn of rapacious cable operators who seek to control online media and other content by “picking winners and losers” on the Internet. They proclaim that regulation is the only way to stave off “fast lanes” that would render your favorite website “invisible” unless it’s one of the corporate-favored. They declare that it will shelter startups, guarantee free expression, and preserve the great, egalitarian “openness” of the Internet.

No decent person, in other words, could be against net neutrality.

In truth, this latest campaign to regulate the Internet is an apt illustration of F.A. Hayek’s famous observation that “the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” Egged on by a bootleggers-and-Baptists coalition of rent-seeking industry groups and corporation-hating progressives (and bolstered by a highly unusual proclamation from the White House), Chairman Wheeler and his staff are attempting to design something they know very little about-not just the sprawling Internet of today, but also the unknowable Internet of tomorrow.

And the rest of the contents of the site are great, as well. Among other things, there’s:

  • “Why are Edward Snowden’s supporters so eager to give the government more control over the Internet?” Matt Welch’s  take on the contradictions in the thinking of net neutrality’s biggest advocates.
  • “The Feds want a back door into your computer. Again.” Declan McCullagh on the eternal return of government attempts to pre-hack your technology.
  • “Uncle Sam wants your Fitbit.” Adam Thierer on the coming clampdown on data coursing through the Internet of Things.
  • Mike Godwin on how net neutrality can hurt developing countries most of all.
  • “How states are planning to grab tax dollars for online sales,” by Veronique de Rugy
  • FCC Commissioner Ajit Pai on why net neutrality is “a solution that won’t work to a problem that simply doesn’t exist.”
  • “8 great libertarian apps that make your world a little freer and a whole lot easier to navigate.”

There’s all that, plus enough flaming images and dancing babies to make your eyes bleed. Highly recommended!

By a 3-2 vote, the Federal Communications Commission (FCC) decided on February 26 to preempt state laws in North Carolina and Tennessee that bar municipally-owned broadband providers from providing services beyond their geographic boundaries.  This decision raises substantial legal issues and threatens economic harm to state taxpayers and consumers.

The narrow FCC majority rested its decision on its authority to remove broadband investment barriers, citing Section 706 of the Telecommunications Act of 1996.  Section 706 requires the FCC to encourage the deployment of broadband to all Americans by using “measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment.”  As dissenting Commissioner Ajit Pai pointed out, however, Section 706 contains no specific language empowering it to preempt state laws, and the FCC’s action trenches upon the sovereign power of the states to control their subordinate governmental entities.  Moreover, it is far from clear that authorizing government-owned broadband companies to expand into new territories promotes competition or eliminates broadband investment barriers.  Indeed, the opposite is more likely to be the case.

Simply put, government-owned networks artificially displace market forces and are an affront to a reliance on free competition to provide the goods and services consumers demand – including broadband communications.  Government-owned networks use local taxpayer monies and federal grants (also taxpayer funded, of course) to compete unfairly with existing private sector providers.  Those taxpayer subsidies put privately funded networks at a competitive disadvantage, creating barriers to new private sector entry or expansion, as private businesses decide they cannot fairly compete against government-backed enterprises.  In turn, reduced private sector investment tends to diminish quality and effective consumer choice.

These conclusions are based on hard facts, not mere theory.  There is no evidence that municipal broadband is needed because “market failure” has deterred private sector provision of broadband – indeed, firms such as Verizon, AT&T, and Comcast spend many billions of dollars annually to maintain, upgrade, and expand their broadband networks.  Indeed, far more serious is the risk of “government failure.”  Municipal corporations, free from market discipline and accountability due to their public funding, may be expected to be bureaucratic, inefficient, and slow to react to changing market conditions.  Consistent with this observation, an economic study of government-operated municipal broadband networks reveals failures to achieve universal service in areas that they serve; lack of cost-benefit analysis that has caused costs to outweigh benefits; the inefficient use of scarce resources; the inability to cover costs; anticompetitive behavior fueled by unfair competitive advantages; the inefficient allocation of limited tax revenues that are denied to more essential public services; and the stifling of private firm innovation.  In a time of tight budget constraints, the waste of taxpayer funds and competitive harm stemming from municipal broadband activities is particularly unfortunate.  In short, real world evidence demonstrates that “[i]n a dynamic market such as broadband services, government ownership has proven to be an abject failure.”  What is required is not more government involvement, but, rather, fewer governmental constraints on private sector broadband activities.

Finally, what’s worse, the FCC’s decision has harmful constitutional overtones.  The Chattanooga, Tennessee and Wilson, North Carolina municipal broadband networks that requested FCC preemption impose troublesome speech limitations as conditions of service.  The utility that operates the Chattanooga network may “reject or remove any material residing on or transmitted to or through” the network that violates its “Accepted Use Policy.”  That Policy, among other things, prohibits using the network to send materials that are “threatening, abusive or hateful” or that offend “the privacy, publicity, or other personal rights of others.”  It also bars the posting of messages that are “intended to annoy or harass others.”  In a similar vein, the Wilson network bars transmission of materials that are “harassing, abusive, libelous or obscene” and “activities or actions intended to withhold or cloak any user’s identity or contact information.”  Content-based prohibitions of this type broadly restrict carriage of constitutionally protected speech and, thus, raise serious First Amendment questions.  Other municipal broadband systems may, of course, elect to adopt similarly questionable censorship-based policies.

In short, the FCC’s broadband preemption decision is likely to harm economic welfare and is highly problematic on legal grounds to boot.  The FCC should rescind that decision.  If it fails to do so, and if the courts do not strike the decision down, Congress should consider legislation to bar the FCC from meddling in state oversight of municipal broadband.

Much ink has been spilled (and with good reason) about the excessive and totally unnecessary regulatory burdens associated with the Federal Communications Commission’s (FCC) February 26 “Open Internet Order” (OIO), which imposes public utility regulation on Internet traffic.  For example, as Heritage Foundation Senior Research Fellow James Gattuso recently explained, “[d]evised for the static monopolies, public-utility regulation will be corrosive to today’s dynamic Internet. There’s a reason the phrase ‘innovative public utility’ doesn’t flows easily from the tongue. The hundreds of rules that come with public utility status are geared to keeping monopolies in line, not encouraging new or innovative ways of doing things. . . .  Even worse, by imposing burdens on big and small carriers alike, the new rules may actually stifle chances of increasing competition among broadband providers.”

Apart from its excessive and unjustifiable economic costs, the OIO has another unfortunate feature which has not yet been widely commented upon – it is an invitation to cronyism, which is an affront to the neutral application of the laws.  As Heritage Foundation President Jim DeMint and Heritage Action President Mike Needham have emphasized, well-connected businesses use lobbying and inside influence to benefit themselves by having government enact special subsidies, bailouts and complex regulations. Those special preferences undermine competition on the merits firms that lack insider status, harming the public.

But what scope is there for cronyism in the FCC’s application of its OIO?  A lotAs I explain in a March 30 Heritage Foundation Daily Signal blog posting, the FCC will provide OIO guidance through “enforcement advisories” and “advisory opinions,” and the Commission’s Enforcement Bureau can request written opinions from outside organizations.  Translating this bureaucratese into English, the FCC is saying that the inherently open-ended language that determines whether an Internet business practice is given a thumbs up or thumbs down will turn on “opinions” that will require the input of high-priced lawyers and advisers.  Smaller and emerging firms that cannot afford to pay for influence may be out of luck.  Moreover, large established companies that are experts at the “Washington game” and engage in administration-approved activities or expenditures (such as politically correct green projects or the right campaign contributions) may be given special consideration when the FCC’s sages decide whether an Internet business practice is “unreasonable” or not.  This means, for example, that firms that are willing to pay more for better Internet access to challenge such powerful firms as Netflix in video services or Google in search activities or Facebook in social networking may be out of luck, if they are less effective at playing the Washington influence game than at competing on the merits.  Those who downplay this risk should recall that the FCC has a long and sad record of using regulations to advantage powerful incumbents (for decades the FCC shielded AT&T from cellular telephony competition and the over-the-air television broadcasters from cable competition).

In short, the benefits to American consumers and the overall American economy generated by a regulation-free Internet—not to mention the ability of entrepreneurs to thrive, free from cronyism—may soon become a thing of the past, unless action is taken by Congress or the courts.  American citizens deserve better than that from their government.

On February 13 an administrative law judge (ALJ) at the California Public Utility Commission (CPUC) issued a proposed decision regarding the Comcast/Time Warner Cable (TWC) merger. The proposed decision recommends that the CPUC approve the merger with conditions.

It’s laudable that the ALJ acknowledges at least some of the competitive merits of the proposed deal. But the set of conditions that the proposed decision would impose on the combined company in order to complete the merger represents a remarkable set of unauthorized regulations that are both inappropriate for the deal and at odds with California’s legislated approach to regulation of the Internet.

According to the proposed decision, every condition it imposes is aimed at mitigating a presumed harm arising from the merger:

The Applicants must meet the conditions adopted herein in order to provide reasonable assurance that the proposed transaction will be in the public interest in accordance with Pub. Util. Code § 854(a) and (c).… We only adopt conditions which mitigate an effect of the merger in order to satisfy the public interest requirements of § 854.

By any reasonable interpretation, this would mean that the CPUC can adopt only those conditions that address specific public interest concerns arising from the deal itself. But most of the conditions in the proposed decision fail this basic test and seem designed to address broader social policy issues that have nothing to do with the alleged competitive effects of the deal.

Instead, without undertaking an analysis of the merger’s competitive effects, the proposed decision effectively accepts that the merger serves the public interest, while also simply accepting the assertions of the merger’s opponents that it doesn’t. In the name of squaring that circle, the proposed decision seeks to permit the merger to proceed, but then seeks to force the post-merger company to conform to the merger’s critics’ rather arbitrary view of their preferred market structure for the provision of cable broadband services in California.

For something — say, a merger — to be in the public interest, it need not further every conceivable public interest goal. This is a perversion of the standard, and it turns “public interest” into an unconstrained license to impose a regulatory wish-list on particular actors, outside of the scope of usual regulatory processes.

While a few people may have no problem with the proposed decision’s expansive vision of Internet access regulation, California governor Jerry Brown and the overwhelming majority of the California state legislature cannot be counted among the supporters of this approach.

In 2012 the state legislature passed by an overwhelming margin — and Governor Brown signed — SB 1161 (codified as Section 710 of the California Public Utilities Code), which expressly prohibits the CPUC from regulating broadband:

The commission shall not exercise regulatory jurisdiction or control over Voice over Internet Protocol and Internet Protocol enabled services except as required or expressly delegated by federal law or expressly directed to do so by statute or as set forth in [certain enumerated exceptions].”

The message is clear: The CPUC should not try to bypass clear state law and all institutional safeguards by misusing the merger clearance process.

While bipartisan majorities in the state house, supported by a Democratic governor, have stopped the CPUC from imposing new regulations on Internet and VoIP services through SB 1161, the proposed decision seeks to impose regulations through merger conditions that go far beyond anything permitted by this state law.

For instance, the proposed decision seeks to impose arbitrary retail price controls on broadband access:

Comcast shall offer to all customers of the merged companies, for a period of five years following the effective date of the parent company merger, the opportunity to purchase stand-alone broadband Internet service at a price not to exceed the price charged by Time Warner for providing that service to its customers, and at speeds, prices, and terms, at least comparable to that offered by Time Warner prior to the merger’s closing.

And the proposed decision seeks to mandate market structure in other insidious ways, as well, mandating specific broadband speeds, requiring a break-neck geographic expansion of Comcast’s service area, and dictating installation and service times, among other things — all without regard to the actual plausibility (or cost) of implementing such requirements.

But the problem is even more acute. Not only does the proposed decision seek to regulate Internet access issues irrelevant to the merger, it also proposes to impose conditions that would actually undermine competition.

The proposed decision would impose the following conditions on Comcast’s business VoIP and business Internet services:

Comcast shall offer Time Warner’s Business Calling Plan with Stand Alone Internet Access to interested CLECs throughout the combined service territories of the merging companies for a period of five years from the effective date of the parent company merger at existing prices, terms and conditions.

Comcast shall offer Time Warner’s Carrier Ethernet Last Mile Access product to interested CLECs throughout the combined service territories of the merging companies for a period of five years from the effective date of the parent company at the same prices, terms and conditions as offered by Time Warner prior to the merger.

But the proposed decision fails to recognize that Comcast is an also-ran in the business service market. Last year it served a small fraction of the business customers served by AT&T and Verizon, who have long dominated the business services market:

According to a Sept. 2011 ComScore survey, AT&T and Verizon had the largest market shares of all business services ISPs. AT&T held 20% of market share and Verizon held 12%. Comcast ranked 6th, with 5% of market share.

The proposed conditions would hamstring the upstart challenger Comcast by removing both product and pricing flexibility for five years – an eternity in rapidly evolving technology markets. That’s a sure-fire way to minimize competition, not promote it.

The proposed decision reiterates several times its concern that the combined Comcast/Time Warner Cable will serve more than 80% of California households, and “reduce[] the possibilities for content providers to reach the California broadband market.” The alleged concern is that the combined company could exercise anticompetitive market power — imposing artificially high fees for carrying content or degrading service of unaffiliated content and services.

The problem is Comcast and TWC don’t compete anywhere in California today, and they face competition from other providers everywhere they operate. As the decision matter-of-factly states:

Comcast and Time Warner do not compete with one another… [and] Comcast and Time Warner compete with other providers of Internet access services in their respective service territories.

As a result, the merger will actually have no effect on the number of competitive choices in the state; the increase in the statewide market share as a result of the deal is irrelevant. And so these purported competition concerns can’t be the basis for any conditions, let alone the sweeping ones set out in the proposed decision.

The stated concern about content providers finding it difficult to reach Californians is a red herring: the post-merger Comcast geographic footprint will be exactly the same as the combined, pre-merger Comcast/TWC/Charter footprint. Content providers will be able to access just as many Californians (and with greater speeds) as before the merger.

True, content providers that just want to reach some number of random Californians may have to reach more of them through Comcast than they would have before the merger. But what content provider just wants to reach some number of Californians in the first place? Moreover, this fundamentally misstates the way the Internet works: it is users who reach the content they prefer; not the other way around. And, once again, for literally every consumer in the state, the number of available options for doing so won’t change one iota following the merger.

Nothing shows more clearly how the proposed decision has strayed from responding to merger concerns to addressing broader social policy issues than the conditions aimed at expanding low-price broadband offerings for underserved households. Among other things, the proposed conditions dramatically increase the size and scope of Comcast’s Internet Essentials program, converting this laudable effort from a targeted program (that uses a host of tools to connect families where a child is eligible for the National School Lunch Program to the Internet) into one that must serve all low-income adults.

Putting aside the damage this would do to the core Internet Essentials’ mission of connecting school age children by diverting resources from the program’s central purpose, it is manifestly outside the scope of the CPUC’s review. Nothing in the deal affects the number of adults (or children, for that matter) in California without broadband.

It’s possible, of course, that Comcast might implement something like an expanded Internet Essentials program without any prodding; after all, companies implement (and expand) such programs all the time. But why on earth should regulators be able to define such an obligation arbitrarily, and to impose it on whatever ISP happens to be asking for a license transfer? That arbitrariness creates precisely the sort of business uncertainty that SB 1161 was meant to prevent.

The same thing applies to the proposed decision’s requirement regarding school and library broadband connectivity:

Comcast shall connect and/or upgrade Internet infrastructure for K-12 schools and public libraries in unserved and underserved areas in Comcast’s combined California service territory so that it is providing high speed Internet to at least the same proportion of K-12 schools and public libraries in such unserved and underserved areas as it provides to the households in its service territory.

No doubt improving school and library infrastructure is a noble goal — and there’s even a large federal subsidy program (E-Rate) devoted to it. But insisting that Comcast do so — and do so to an extent unsupported by the underlying federal subsidy program already connecting such institutions, and in contravention of existing provider contracts with schools — as a condition of the merger is simple extortion.

The CPUC is treating the proposed merger like a free-for-all, imposing in the name of the “public interest” a set of conditions that it would never be permitted to impose absent the gun-to-the-head of merger approval. Moreover, it seeks to remake California’s broadband access landscape in a fashion that would likely never materialize in the natural course of competition: If the merger doesn’t go through, none of the conditions in the proposed decision and alleged to be necessary to protect the public interest will exist.

Far from trying to ensure that Comcast’s merger with TWC doesn’t erode competitive forces to the detriment of the public, the proposed decision is trying to micromanage the market, simply asserting that the public interest demands imposition of it’s subjective and arbitrary laundry list of preferred items. This isn’t sensible regulation, it isn’t compliant with state law, and it doesn’t serve the people of California.

It’s easy to look at the net neutrality debate and assume that everyone is acting in their self-interest and against consumer welfare. Thus, many on the left denounce all opposition to Title II as essentially “Comcast-funded,” aimed at undermining the Open Internet to further nefarious, hidden agendas. No matter how often opponents make the economic argument that Title II would reduce incentives to invest in the network, many will not listen because they have convinced themselves that it is simply special-interest pleading.

But whatever you think of ISPs’ incentives to oppose Title II, the incentive for the tech companies (like Cisco, Qualcomm, Nokia and IBM) that design and build key elements of network infrastructure and the devices that connect to it (i.e., essential input providers) is to build out networks and increase adoption (i.e., to expand output). These companies’ fundamental incentive with respect to regulation of the Internet is the adoption of rules that favor investment. They operate in highly competitive markets, they don’t offer competing content and they don’t stand as alleged “gatekeepers” seeking monopoly returns from, or control over, what crosses over the Interwebs.

Thus, it is no small thing that 60 tech companies — including some of the world’s largest, based both in the US and abroad — that are heavily invested in the buildout of networks and devices, as well as more than 100 manufacturing firms that are increasingly building the products and devices that make up the “Internet of Things,” have written letters strongly opposing the reclassification of broadband under Title II.

There is probably no more objective evidence that Title II reclassification will harm broadband deployment than the opposition of these informed market participants.

These companies have the most to lose from reduced buildout, and no reasonable nefarious plots can be constructed to impugn their opposition to reclassification as consumer-harming self-interest in disguise. Their self-interest is on their sleeves: More broadband deployment and adoption — which is exactly what the Open Internet proceedings are supposed to accomplish.

If the FCC chooses the reclassification route, it will most assuredly end up in litigation. And when it does, the opposition of these companies to Title II should be Exhibit A in the effort to debunk the FCC’s purported basis for its rules: the “virtuous circle” theory that says that strong net neutrality rules are necessary to drive broadband investment and deployment.

Access to all the wonderful content the Internet has brought us is not possible without the billions of dollars that have been invested in building the networks and devices themselves. Let’s not kill the goose that lays the golden eggs.

In March 2014, the U.S. Government’s National Telecommunications and Information Administration (NTIA, the Executive Branch’s telecommunications policy agency) abruptly announced that it did not plan to renew its contract with the Internet Corporation for Assigned Names and Numbers (ICANN) to maintain core functions of the Internet. ICANN oversees the Internet domain name system through its subordinate agency, the Internet Assigned Numbers Authority (IANA). In its March statement, NTIA proposed that ICANN consult with “global stakeholders” to agree on an alternative to the “current role played by NTIA in the coordination of the Internet’s [domain name system].”

In recent months Heritage Foundation scholars have discussed concerns stemming from this vaguely-defined NTIA initiative (see, for example, here, here, here, here, here, and here). These concerns include fears that eliminating the U.S. Government’s role in Internet governance could embolden other nations and international organizations (especially the International Telecommunications Union, an arm of the United Nations) to seek to regulate the Internet and limit speech, and create leeway for ICANN to expand beyond its core activities and trench upon Internet freedoms.

Although NTIA has testified that its transition plan would preclude such undesirable outcomes, the reaction to these assurances should be “trust but verify” (especially given the recent Administration endorsement of burdensome Internet common carrier regulation, which appears to be at odds with the spirit if not the letter of NTIA’s assurances).

Reflecting the “trust but verify” spirit, the just-introduced “Defending Internet Freedom Act of 2014” requires that NTIA maintain its existing Internet oversight functions, unless the NTIA Administrator certifies in writing that certain specified assurances have been met regarding Internet governance. Those assurances include findings that the management of the Internet domain name system will not be exercised by foreign governmental or intergovernmental bodies; that ICANN’s bylaws will be amended to uphold First Amendment-type freedoms of speech, assembly, and association; that a four-fifths supermajority will be required for changes in ICANN’s bylaws or fees for services; that an independent process for resolving disputes between ICANN and third parties be established; and that a host of other requirements aimed at protecting Internet freedoms and ensuring ICANN and IANA accountability be instituted.

Legislative initiatives of this sort, while no panacea, play a valuable role in signaling Congress’s intent to hold the Administration accountable for seeing to it that key Internet freedoms (including the avoidance of onerous regulation and deleterious restrictions on speech and content) are maintained. They merit thoughtful consideration.

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.