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I have a new article on the Comcast/Time Warner Cable merger in the latest edition of the CPI Antitrust Chronicle, which includes several other articles on the merger, as well.

In a recent essay, Allen Grunes & Maurice Stucke (who also have an essay in the CPI issue) pose a thought experiment: If Comcast can acquire TWC, what’s to stop it acquiring all cable companies? The authors’ assertion is that the arguments being put forward to support the merger contain no “limiting principle,” and that the same arguments, if accepted here, would unjustifiably permit further consolidation. But there is a limiting principle: competitive harm. Size doesn’t matter, as courts and economists have repeatedly pointed out.

The article explains why the merger doesn’t give rise to any plausible theory of anticompetitive harm under modern antitrust analysis. Instead, arguments against the merger amount to little more than the usual “big-is-bad” naysaying.

In summary, I make the following points:

Horizontal Concerns

The absence of any reduction in competition should end the inquiry into any potentially anticompetitive effects in consumer markets resulting from the horizontal aspects of the transaction.

  • It’s well understood at this point that Comcast and TWC don’t compete directly for subscribers in any relevant market; in terms of concentration and horizontal effects, the transaction will neither reduce competition nor restrict consumer choice.
  • Even if Comcast were a true monopolist provider of broadband service in certain geographic markets, the DOJ would have to show that the merger would be substantially likely to lessen competition—a difficult showing to make where Comcast and TWC are neither actual nor potential competitors in any of these markets.
  • Whatever market power Comcast may currently possess, the proposed merger simply does nothing to increase it, nor to facilitate its exercise.

Comcast doesn’t currently have substantial bargaining power in its dealings with content providers, and the merger won’t change that. The claim that the combined entity will gain bargaining leverage against content providers from the merger, resulting in lower content prices to programmers, fails for similar reasons.

  • After the transaction, Comcast will serve fewer than 30 percent of total MVPD subscribers in the United States. This share is insufficient to give Comcast market power over sellers of video programming.
  • The FCC has tried to impose a 30 percent cable ownership cap, and twice it has been rejected by the courts. The D.C. Circuit concluded more than a decade ago—in far less competitive conditions than exist today—that the evidence didn’t justify a horizontal ownership limit lower than 60% on the basis of buyer power.
  • The recent exponential growth in OVDs like Google, Netflix, Amazon and Apple gives content providers even more ways to distribute their programming.
  • In fact, greater concentration among cable operators has coincided with an enormous increase in output and quality of video programming
  • Moreover, because the merger doesn’t alter the competitive make-up of any relevant consumer market, Comcast will have no greater ability to threaten to withhold carriage of content in order to extract better terms.
  • Finally, programmers with valuable content have significant bargaining power and have been able to extract the prices to prove it. None of that will change post-merger.

Vertical Concerns

The merger won’t give Comcast the ability (or the incentive) to foreclose competition from other content providers for its NBCUniversal content.

  • Because the merger would represent only 30 percent of the national market (for MVPD services), 70 percent of the market is still available for content distribution.
  • But even this significantly overstates the extent of possible foreclosure. OVD providers increasingly vie for the same content as cable (and satellite).
  • In the past when regulators have considered foreclosure effects for localized content (regional sports networks, primarily)—for example, in the 2005 Adelphia/Comcast/TWC deal, under far less competitive conditions—the FTC found no substantial threat of anticompetitive harm. And while the FCC did identify a potential risk of harm in its review of the Adelphia deal, its solution was to impose arbitration requirements for access to this programming—which are already part of the NBCUniversal deal conditions and which will be extended to the new territory and new programming from TWC.

The argument that the merger will increase Comcast’s incentive and ability to impair access to its users by online video competitors or other edge providers is similarly without merit.

  • Fundamentally, Comcast benefits from providing its users access to edge providers, and it would harm itself if it were to constrain access to these providers.
  • Foreclosure effects would be limited, even if they did arise. On a national level, the combined firm would have only about 40 percent of broadband customers, at most (and considerably less if wireless broadband is included in the market).
  • This leaves at least 60 percent—and quite possibly far more—of customers available to purchase content and support edge providers reaching minimum viable scale, even if Comcast were to attempt to foreclose access.

Some have also argued that because Comcast has a monopoly on access to its customers, transit providers are beholden to it, giving it the ability to degrade or simply block content from companies like Netflix. But these arguments misunderstand the market.

  • The transit market through which edge providers bring their content into the Comcast network is highly competitive. Edge providers can access Comcast’s network through multiple channels, undermining Comcast’s ability to deny access or degrade service to such providers.
  • The transit market is also almost entirely populated by big players engaged in repeat interactions and, despite a large number of transactions over the years, marked by a trivial number of disputes.
  • The recent Comcast/Netflix agreement demonstrates that the sophisticated commercial entities in this market are capable of resolving conflicts—conflicts that appear to affect only the distribution of profits among contracting parties but not raise anticompetitive concerns.
  • If Netflix does end up paying more to access Comcast’s network over time, it won’t be because of market power or this merger. Rather, it’s an indication of the evolving market and the increasing popularity of OTT providers.
  • The Comcast/Netflix deal has procompetitive justifications, as well. Charging Netflix allows Comcast to better distinguish between the high-usage Netflix customers (two percent of Netflix users account for 20 percent of all broadband traffic) and everyone else. This should lower cable bills on average, improve incentives for users, and lead to more efficient infrastructure investments by both Comcast and Netflix.

Critics have also alleged that the vertically integrated Comcast may withhold its own content from competing MVPDs or OVDs, or deny carriage to unaffiliated programming. In theory, by denying competitors or potential competitors access to popular programming, a vertically integrated MVPD might gain a competitive advantage over its rivals. Similarly, an MVPD that owns cable channels may refuse to carry at least some unaffiliated content to benefit its own channels. But these claims also fall flat.

  • Once again, these issue are not transaction specific.
  • But, regardless, Comcast will not be able to engage in successful foreclosure strategies following the transaction.
  • The merger has no effect on Comcast’s share of national programming. And while it will have a larger share of national distribution post-merger, a 30 percent market share is nonetheless insufficient to confer buyer power in today’s highly competitive MVPD market.
  • Moreover, the programming market is highly dynamic and competitive, and Comcast’s affiliated programming networks face significant competition.
  • Comcast already has no ownership interest in the overwhelming majority of content it distributes. This won’t measurably change post-transaction.

Procompetitive Justifications

While the proposed transaction doesn’t give rise to plausible anticompetitive harms, it should bring well-understood pro-competitive benefits. Most notably:

  • The deal will bring significant scale efficiencies in a marketplace that requires large, fixed-cost investments in network infrastructure and technology.
  • And bringing a more vertical structure to TWC will likely be beneficial, as well. Vertical integration can increase efficiency, and the elimination of double marginalization often leads to lower prices for consumers.

Let’s be clear about the baseline here. Remember all those years ago when Netflix was a mail-order DVD company? Before either Netflix or Comcast even considered using the internet to distribute Netflix’s video content, Comcast invested in the technology and infrastructure that ultimately enabled the Netflix of today. It did so at enormous cost (tens of billions of dollars over the last 20 years) and risk. Absent broadband we’d still be waiting for our Netflix DVDs to be delivered by snail mail, and Netflix would still be spending three-quarters of a billion dollars a year on shipping.

The ability to realize returns—including returns from scale—is essential to incentivizing continued network and other quality investments. The cable industry today operates with a small positive annual return on invested capital (“ROIC”) but it has had cumulative negative ROIC over the entirety of the last decade. In fact, on invested capital of $127 billion between 2000 and 2009, cable has seen economic profits of negative $62 billion and a weighted average ROIC of negative 5 percent. Meanwhile Comcast’s stock has significantly underperformed the S&P 500 over the same period and only outperformed the S&P over the last two years.

Comcast is far from being a rapacious and endlessly profitable monopolist. This merger should help it (and TWC) improve its cable and broadband services, not harm consumers.

No matter how many times Al Franken and Susan Crawford say it, neither the broadband market nor the MVPD market is imperiled by vertical or horizontal integration. The proposed merger won’t create cognizable antitrust harms. Comcast may get bigger, but that simply isn’t enough to thwart the merger.

Today the D.C. Circuit struck down most of the FCC’s 2010 Open Internet Order, rejecting rules that required broadband providers to carry all traffic for edge providers (“anti-blocking”) and prevented providers from negotiating deals for prioritized carriage. However, the appeals court did conclude that the FCC has statutory authority to issue “Net Neutrality” rules under Section 706(a) and let stand the FCC’s requirement that broadband providers clearly disclose their network management practices.

The following statement may be attributed to Geoffrey Manne and Berin Szoka:

The FCC may have lost today’s battle, but it just won the war over regulating the Internet. By recognizing Section 706 as an independent grant of statutory authority, the court has given the FCC near limitless power to regulate not just broadband, but the Internet itself, as Judge Silberman recognized in his dissent.

The court left the door open for the FCC to write new Net Neutrality rules, provided the Commission doesn’t treat broadband providers as common carriers. This means that, even without reclassifying broadband as a Title II service, the FCC could require that any deals between broadband and content providers be reasonable and non-discriminatory, just as it has required wireless carriers to provide data roaming services to their competitors’ customers on that basis. In principle, this might be a sound approach, if the rule resembles antitrust standards. But even that limitation could easily be evaded if the FCC regulates through case-by-case enforcement actions, as it tried to do before issuing the Open Internet Order. Either way, the FCC need only make a colorable argument under Section 706 that its actions are designed to “encourage the deployment… of advanced telecommunications services.” If the FCC’s tenuous “triple cushion shot” argument could satisfy that test, there is little limit to the deference the FCC will receive.

But that’s just for Net Neutrality. Section 706 covers “advanced telecommunications,” which seems to include any information service, from broadband to the interconnectivity of smart appliances like washing machines and home thermostats. If the court’s ruling on Section 706 is really as broad as it sounds, and as the dissent fears, the FCC just acquired wide authority over these, as well — in short, the entire Internet, including the “Internet of Things.” While the court’s “no common carrier rules” limitation is a real one, the FCC clearly just gained enormous power that it didn’t have before today’s ruling.

Today’s decision essentially rewrites the Communications Act in a way that will, ironically, do the opposite of what the FCC claims: hurt, not help, deployment of new Internet services. Whatever the FCC’s role ought to be, such decisions should be up to our elected representatives, not three unelected FCC Commissioners. So if there’s a silver lining in any of this, it may be that the true implications of today’s decision are so radical that Congress finally writes a new Communications Act — a long-overdue process Congressmen Fred Upton and Greg Walden have recently begun.

Szoka and Manne are available for comment at media@techfreedom.org. Find/share this release on Facebook or Twitter.

The debates over mobile spectrum aggregation and the auction rules for the FCC’s upcoming incentive auction — like all regulatory rent-seeking — can be farcical. One aspect of the debate in particular is worth highlighting, as it puts into stark relief the tendentiousness of self-interested companies making claims about the public interestedness of their preferred policies: The debate over how and whether to limit the buying and aggregating of lower frequency (in this case 600 MHz) spectrum.

A little technical background is in order. At its most basic, a signal carried in higher frequency spectrum doesn’t travel as well as a signal carried in lower frequency spectrum. The higher the frequency, the closer together cell towers need to be to maintain a good signal.

600MHz is relatively low frequency for wireless communications. In rural areas it is helpful in reducing infrastructure costs for wide area coverage because cell towers can be placed further apart and thus fewer towers must be built. But in cities, population density trumps frequency, and propagation range is essentially irrelevant for infrastructure costs. In other words, it doesn’t matter how far your signal will travel if congestion alleviation demands you build cell towers closer together than even the highest frequency spectrum requires anyway. The optimal — nay, the largest usable — cell radius in urban and suburban areas is considerably smaller than the sort of cell radius that low frequency spectrum allows for.

It is important to note, of course, that signal distance isn’t the only propagation characteristic imparting value to lower frequency spectrum; in particular, it is also valuable even in densely populated settings for its ability to travel through building walls. That said, however, the primary arguments made in favor of spreading the 600 MHz wealth — of effectively subsidizing its purchase by smaller carriers — are rooted in its value in offering more efficient coverage in less-populated areas. Thus the FCC has noted that while there may be significant infrastructure cost savings associated with deploying lower frequency networks in rural areas, this lower frequency spectrum provides little cost advantage in urban or suburban areas (even though, as noted, it has building-penetrating value there).

It is primarily because of these possible rural network cost advantages that certain entities (the Department of Justice, Free Press, the Competitive Carriers Association, e.g.) have proposed that AT&T and Verizon (both of whom have significant lower frequency spectrum holdings) should be restricted from winning “too much” spectrum in the FCC’s upcoming 600 MHz incentive auctions. The argument goes that, in order to ensure national competition — that is, to give other companies financial incentive to build out their networks into rural areas — the auction should be structured to favor Sprint and T-Mobile (both of whose spectrum holdings are mostly in the upper frequency bands) as awardees of this low-frequency spectrum, at commensurately lower cost.

Shockingly, T-Mobile and Sprint are on board with this plan.

So, to recap: 600MHz spectrum confers cost savings when used in rural areas. It has much less effect on infrastructure costs in urban and suburban areas. T-Mobile and Sprint don’t have much of it; AT&T and Verizon have lots. If we want T-Mobile and Sprint to create the competing national networks that the government seems dead set on engineering, we need to put a thumb on the scale in the 600MHz auctions. So they can compete in rural areas. Because that’s where 600MHz spectrum offers cost advantages. In rural areas.

So what does T-Mobile plan to do if it wins the spectrum lottery? Certainly not build in rural areas. As Craig Moffett notes, currently “T-Mobile’s U.S. network is fast…but coverage is not its strong suit, particularly outside of metro areas.” And for the future? T-mobile’s breakneck LTE coverage ramp up since the failed merger with AT&T is expected to top out at 225 million people, or the 71% of consumers living in the most-populated areas (it’s currently somewhere over 200 million). “Although sticking to a smaller network, T-Mobile plans to keep increasing the depth of its LTE coverage” (emphasis added). Depth. That means more bandwidth in high-density areas. It does not mean broader coverage. Obviously.

Sprint, meanwhile, is devoting all of its resources to playing LTE catch-up in the most-populated areas; it isn’t going to waste valuable spectrum resources on expanded rural build out anytime soon.

The kicker is that T-Mobile relies on AT&T’s network to provide its urban and suburban customers with coverage (3G) when they do roam into rural areas, taking advantage of a merger break-up provision that gives it roaming access to AT&T’s 3G network. In other words, T-Mobile’s national network is truly “national” only insofar as it piggybacks on AT&T’s broader coverage. And because AT&T will get the blame for congestion when T-Mobile’s customers roam onto its network, the cost to T-Mobile of hamstringing AT&T’s network is low.

The upshot is that T-Mobile seems not to need, nor does it intend to deploy, lower frequency spectrum to build out its network in less-populated areas. Defenders say that rigging the auction rules to benefit T-Mobile and Sprint will allow them to build out in rural areas to compete with AT&T’s and Verizon’s broader networks. But this is a red herring. They may get the spectrum, but they won’t use it to extend their coverage in rural areas; they’ll use it to add “depth” to their overloaded urban and suburban networks.

But for AT&T the need for additional spectrum is made more acute by the roaming deal, which requires it to serve its own customers and those of T-Mobile.

This makes clear the reason underlying T‑Mobile’s advocacy for rigging the 600 MHz auction – it is simply so that T‑Mobile can acquire this spectrum on the cheap to use in urban and suburban areas, not so that it can deploy a wide rural network. And the beauty of it is that by hamstringing AT&T’s ability to acquire this spectrum, it becomes more expensive for AT&T to serve T‑Mobile’s own customers!

Two birds, one stone: lower your costs, raise your competitor’s costs.

The lesson is this: If we want 600 MHz spectrum to be used efficiently to provide rural LTE service, we should assume that the highest bidder will make the most valuable use of the spectrum. The experience of the relatively unrestricted 700 MHz auction in 2008 confirms this. The purchase of 700 MHz spectrum by AT&T and Verizon led to the US becoming the world leader in LTE. Why mess with success?

[Cross-posted at RedState]

I have a new post up at TechPolicyDaily.com, excerpted below, in which I discuss the growing body of (surprising uncontroversial) work showing that broadband in the US compares favorably to that in the rest of the world. My conclusion, which is frankly more cynical than I like, is that concern about the US “falling behind” is manufactured debate. It’s a compelling story that the media likes and that plays well for (some) academics.

Before the excerpt, I’d also like to quote one of today’s headlines from Slashdot:

“Google launched the citywide Wi-Fi network with much fanfare in 2006 as a way for Mountain View residents and businesses to connect to the Internet at no cost. It covers most of the Silicon Valley city and worked well until last year, as Slashdot readers may recall, when connectivity got rapidly worse. As a result, Mountain View is installing new Wi-Fi hotspots in parts of the city to supplement the poorly performing network operated by Google. Both the city and Google have blamed the problems on the design of the network. Google, which is involved in several projects to provide Internet access in various parts of the world, said in a statement that it is ‘actively in discussions with the Mountain View city staff to review several options for the future of the network.’”

The added emphasis is mine. It is added to draw attention to the simple point that designing and building networks is hard. Like, really really hard. Folks think that it’s easy, because they have small networks in their homes or offices — so surely they can scale to a nationwide network without much trouble. But all sorts of crazy stuff starts to happen when we substantially increase the scale of IP networks. This is just one of the very many things that should give us pause about calls for the buildout of a government run or sponsored Internet infrastructure.

Another of those things is whether there’s any need for that. Which brings us to my TechPolicyDaily.com post:

In the week or so since TPRC, I’ve found myself dwelling on an observation I made during the conference: how much agreement there was, especially on issues usually thought of as controversial. I want to take a few paragraphs to consider what was probably the most surprisingly non-controversial panel of the conference, the final Internet Policy panel, in which two papers - one by ITIF’s Rob Atkinson and the other by James McConnaughey from NTIA – were presented that showed that broadband Internet service in US (and Canada, though I will focus on the US) compares quite well to that offered in the rest of the world. [...]

But the real question that this panel raised for me was: given how well the US actually compares to other countries, why does concern about the US falling behind dominate so much discourse in this area? When you get technical, economic, legal, and policy experts together in a room – which is what TPRC does – the near consensus seems to be that the “kids are all right”; but when you read the press, or much of the high-profile academic literature, “the sky is falling.”

The gap between these assessments could not be larger. I think that we need to think about why this is. I hate to be cynical or disparaging – especially since I know strong advocates on both sides and believe that their concerns are sincere and efforts earnest. But after this year’s conference, I’m having trouble shaking the feeling that ongoing concern about how US broadband stacks up to the rest of the world is a manufactured debate. It’s a compelling, media- and public-friendly, narrative that supports a powerful political agenda. And the clear incentives, for academics and media alike, are to find problems and raise concerns. [...]

Compare this to the Chicken Little narrative. As I was writing this, I received a message from a friend asking my views on an Economist blog post that shares data from the ITU’s just-released Measuring the Information Society 2013 report. This data shows that the US has some of the highest prices for pre-paid handset-based mobile data around the world. That is, it reports the standard narrative – and it does so without looking at the report’s methodology. [...]

Even more problematic than what the Economist blog reports, however, is what it doesn’t report. [The report contains data showing the US has some of the lowest cost fixed broadband and mobile broadband prices in the world. See the full post at TechPolicyDaily.com for the numbers.]

Now, there are possible methodological problems with these rankings, too. My point here isn’t to debate over the relative position of the United States. It’s to ask why the “story” about this report cherry-picks the alarming data, doesn’t consider its methodology, and ignores the data that contradicts its story.

Of course, I answered that question above: It’s a compelling, media- and public-friendly, narrative that supports a powerful political agenda. And the clear incentives, for academics and media alike, are to find problems and raise concerns. Manufacturing debate sells copy and ads, and advances careers.

With Matt Starr, Berin Szoka and Geoffrey Manne

Today’s oral argument in the D.C Circuit over the FCC’s Net Neutrality rules suggests that the case — Verizon v. FCC — is likely to turn on whether the Order impermissibly imposes common carrier regulation on broadband ISPs. If so, the FCC will lose, no matter what the court thinks of the Commission’s sharply contested claims of authority under the Telecommunications Act.

The FCC won last year before the same court when Verizon challenged its order mandating that carriers provide data roaming services to their competitors’ customers. But Judge Tatel, who wrote the Cellco decision is likely to write the court’s opinion overturning the Net neutrality rules — just as he wrote the court’s 2010 Comcast v. FCC opinion, thwarting the FCC’s first attempt at informal net neutrality regulation.

Over an extraordinary two-hour session, Judges Tatel and Silberman asked a barrage of questions that suggest they’ll apply the same test used to uphold the data roaming rule to strike down at least the non-discrimination rule at the heart of the Open Internet Order — and probably, the entire Order.

Common Carrier Analysis

The Communications Act explicitly prohibits treating services that are not regulated under Title II as common carriers. Title II regulates “telecommunications services,” such as landline telephone service, but broadband is an “information service” regulated under Title I of the Act, while wireless is regulated under Title III of the Act (as a “radio transmission”).

In Cellco, the court ruled that the FCC’s data roaming rule did not impermissibly classify mobile providers as common carriers even though it compelled wireless carriers to let other companies’ subscribers roam on their networks. Here, the Open Internet Order effectively forces ISPs to carry traffic of all “edge” providers in an equal, non-discriminatory manner. While these might seem similar, the two mandates differ significantly, and Tatel’s analysis in the data roaming case may lead to precisely the opposite result here.

Tatel’s data roaming opinion rested on a test, derived from decades of case law, for determining what level of regulation constitutes an impermissible imposition of common carrier status:

  1. “If a carrier is forced to offer service indiscriminately and on general terms, then that carrier is being relegated to common carrier status”;

  2. “[T]he Commission has significant latitude to determine the bounds of common carriage in particular cases”;

  3. “[C]ommon carriage is not all or nothing—there is a gray area [between common carrier status and private carrier status] in which although a given regulation might be applied to common carriers, the obligations imposed are not common carriage per se” because they permit carriers to retain sufficient decisionmaking authority over their networks (by retaining programming control and/or the authority to negotiate terms, for example); and

  4. In this gray area, “[the FCC’s] determination that a regulation does or does not confer common carrier status warrants deference” under the Supreme Court’s Chevron decision.

In Cellco, the court determined that the data roaming rule fell into the gray area, and thus deferred to the FCC’s determination that the regulation did not impose common carrier status. The essential distinction, according to the court, was that carriers remained free to “negotiate the terms of their roaming arrangements on an individualized basis,” provided their terms were “commercially reasonable.” Rather than impose a “presumption of reasonableness,” the Commission offered “considerable flexibility for providers to respond to the competitive forces at play in the mobile-data market.” Thus, the court held, the data roaming rule “leaves substantial room for individualized bargaining and discrimination in terms,” and thus “does not amount to a duty to hold out facilities indifferently for public use.”

The Open Internet rules, by contrast, impose a much harsher restriction on what ISPs may do with their broadband networks, barring them from blocking any legal content and prohibiting “unreasonable” discrimination. Judges Tatel and Silberman repeatedly asked questions that suggested that the Order’s reasonable discrimination rule removed the kind of “flexibility” that justified upholding the data roaming rule. By requiring carriers to “offer service indiscriminately and on general terms” and to “hold out facilities indifferently for public use” (to quote the D.C. Circuit’s test), the rule would go beyond the “gray area” in which the FCC gets deference, and fall into the D.C. Circuit’s definition of common carriage. If that’s indeed ultimately where the two judges wind up, it’s game over for the FCC.

The Open Internet Order requires broadband ISPs to make their networks available, and to do so on equal terms that remove pricing flexibility, to any edge provider that wishes to have its content available on an ISP’s network. This seems to be Judge Tatel’s interpretation of ¶ 76 of the Order, which goes on at length about the reasons why “pay for priority” arrangements would “raise significant cause for concern” and then concludes: “In light of each of these concerns, as a general matter, it’s unlikely that pay for priority would satisfy the ‘no unreasonable discrimination’ standard.” So… legal in principle, but effectively banned in practice — a per se rule dressed up as a rule of reason.

If that isn’t, in effect, a requirement that ISPs hold out their networks “indifferently for public use,” it’s hard to imagine what is — as Tatel certainly seemed to think today. Tatel’s use of the term “indiscriminately” in Cellco almost hints that the test was written with the FCC’s “no discrimination” rule in mind.

The FCC tried, but failed, to address such concerns in the Open Internet Order, by arguing that broadband providers remained free to “make individualized decisions” with the only customers that matter: their subscribers. Today, the agency again insisted that restricting, however heavily, a broadband provider’s ability to negotiate with an edge provider (or the backbone providers in between) is irrelevant to the analysis of whether the FCC has illegally imposed common carriage. But if that argument worked, the D.C. Circuit would not have had to analyze whether the data roaming rule afforded sufficient flexibility to carriers in contracting with other carriers to provide data roaming services to their customers.

Similarly, the FCC failed today, and in its briefs, to effectively distinguish this case from Midwest Video II, which was critical to the Cellco decision. here, the Supreme Court court struck down public-access rules imposed on cable companies as impermissible common carrier regulation because they “prohibited [cable operators] from determining or influencing the content of access programming,” and “delimit[ed] what [they could] charge for access and use of equipment.” In other words, the FCC’s rule left no flexibility for negotiations between companies — the same problem as in the Open Internet Order. The FCC attempted to distinguish the two cases by arguing that the FCC was restricting an existing wholesale market for channel carriage, while no such market exists today for prioritized Internet services. But this misses the key point made, emphatically, by Judge Silberman: it is the FCC’s relentless attempt to regulate Net Neutrality that has prevented the development of this market. Nothing better reveals the stasis mentality behind the FCC’s Order

Perhaps the most damning moment of today’s arguments occurred when Verizon’s lawyer responded to questions about what room for negotiation was left under the unreasonable discrimination rule — by pointing to what the FCC itself said in Footnote 240 of the Order. There the FCC quotes, approvingly, comments filed by Sprint: “The unreasonable discrimination standard contained in Section 202(a) of the Act contains the very flexibility the Commission needs to distinguish desirable from improper discrimination.” In other words, the only room for “commercially reasonable negotiation” recognized by the FCC under the nondiscrimination rule is found in the limited discretion traditionally available to common carriers under Section 202(a). Oops. This #LawyerFail will doubtless feature prominently in the court’s discussion of this issue, as the FCC’s perhaps accidental concession that, whatever the agency claims, it’s really imposing common carrier status — analogous to Title II, no less!

Judges Tatel and Silberman seemed to disagree only as to whether the no-blocking rule would also fail under Cellco’s reasoning. Tatel suggested that if the non-discrimination rule didn’t exist, the blocking rule, standing alone, would “leave substantial room for individualized bargaining and discrimination in terms” just as the data roaming rule did. Tatel spent perhaps fifteen minutes trying to draw clear answers from all counsel on this point, but seemed convinced that, at most, the no-blocking rule simply imposed a duty on the broadband provider to allow an edge provider to reach its customers, while still allowing the broadband provider to negotiate for faster carriage on “commercially reasonable terms.” Silberman disagreed, insisting that the blocking rule still imposed a common carrier duty to carry traffic at a zero price.

Severability

Ultimately the distinction between these two rules under Cellco’s common carriage test may not matter. If the court decides that the order is not severable, striking down the nondiscrimination rule as common carriage would cause the entire Order to fall.

The judges got into an interesting, though relatively short, discussion of this point. Verizon’s counsel repeatedly noted that the FCC had never stated any intention that the order should be read as severable either in the Order, in its briefs or even at oral argument. Unlike in MD/DC/DE Broadaster’s Assoc. v. FCC, the Commission did not state in the adopting regulation that it intended to treat the regulation as severable. And, as the DC Circuit has stated, “[s]everance and affirmance of a portion of an administrative regulation is improper if there is ‘substantial doubt’ that the agency would have adopted the severed portion on its own.”

The question, as the Supreme Court held in K Mart Corp. v. Cartier, Inc., is whether the remainder of the regulation could function sensibly without the stricken provision. This isn’t clear. While Judge Tatel seems to suggest that the rule against blocking could function without the nondiscrimination rule, Judge Silberman seems convinced that the two were intended as necessary complements by the FCC. The determination of the no-blocking rule’s severability may come down to Judge Rogers, who didn’t telegraph her view.

So what’s next?

The prediction made by Fred Campbell shortly after the Cellco decision seems like the most likely outcome: Tatel, joined by at least Silberman, could strike down the entire Order as imposing common carriage — while offering the FCC a roadmap to try its hand at Net Neutrality yet again by rewriting the discrimination rule to allow for prioritized or accelerated carriage on commercially reasonable terms.

Or, if the the court decides the order is severable, it could strike down just the nondiscrimination rule — assuming the court could find either direct or ancillary jurisdiction for both the transparency rule and the non-discrimination rule.

Either way, an FCC loss will mean that negotiated arrangements for priority carriage will be governed under something more like a rule of reason. The FCC could try to create its own rule.  Or the matter could simply be left to the antitrust and consumer protection laws enforced by the Department of Justice, the Federal Trade Commission, the states and private plaintiffs. We think the latter’s definitely the best approach. But whether it is or not, it will be the controlling legal authority on the ground the day the FCC loses — unless and until the FCC issues revised rules (or Congress passes a law) that can survive judicial review.

Ultimately, we suspect the FCC will have a hard time letting go. After 79 years, it’s clearly in denial about its growing obsolescence.

On Monday the DC Circuit hears oral argument in Verizon v. FCC – the case challenging the FCC’s Open Internet Order.

Following the oral argument I’ll be participating in two events discussing the case.

The first is a joint production of the International Center for Law & Economics and TechFreedom, a lunchtime debrief on the case featuring:

  • Matt Brill, Latham & Watkins LLP
  • Fred Campbell, Communications Liberty and Innovation Project
  • Markham Erickson, Steptoe & Johnson LLP
  • Robert McDowell, Hudson Institute
  • Sherwin Siy, Public Knowledge
  • Berin Szoka, TechFreedom

I’ll be introducing the event. You can register here.

Then at two o’clock I’ll be leading a Federalist Society “Courthouse Steps Teleforum” on the case entitled, “FCC Regulation of the Internet: Verizon v. FCC.”

Register for the event at the link above.

I suspect we’ll have much more to say about the case here at Truth on the Market, as well. For now, you can find our collected wisdom on the topic of net neutrality at this link.

I hope you’ll join either or both of Monday’s events!

Of Cake and Netflix

Gus Hurwitz —  6 September 2013

My new FSF Perspectives piece, Let Them Eat Cake and Watch Netflix, was published today. This piece explores a tension in Susan Crawford’s recent Wired commentary on Pew’s 2013 Broadband Report.

I excerpt from the piece below. You can (and, I daresay, should!) read the whole thing here.

In her piece, after noting the persistence of the digital divide, Crawford turns to her critique of both Pew’s and the FCC’s definition of “high-speed internet” – 4 Mbps down/1 Mbps up – and the inclusion of mobile Internet access in these measurements. She argues that this definition … is too slow. What if you wanted to watch two HD quality videos at once over a single connection? [...]

But the digital divide isn’t about people today not being able to watch movies on Netflix. And it’s definitely not about people today not being able to use future service that may or may not require the sort of infrastructure Crawford wants the government to build. [...] It’s about the (very real) concern that, as civic and democratic institutions increasingly migrate online, those without basic Internet access or knowledge will be locked out of a vital civic and democratic forum. [...]

None of [applications central to concerns about the digital divide] require bandwidth sufficient to stream high-quality video. Indeed, none of them should require such capacity. Another very real concern related to the digital divide is that various groups with disabilities – the deaf and blind, for instance – are already unable to avail themselves of these online forums because they rely too much on sophisticated multimedia formats to provide basic information. [...]

I would suggest that a better target for Crawford’s efforts – if she is really concerned about lessening the digital divide (and I do fully believe that her convictions are well meaning and sincere) – would be to advocate for government institutions and other civic and democratic forums to develop online applications that do not require high-speed broadband connections. [...]

In a world where consumers perceive a non-zero marginal cost for incremental bandwidth consumption – perhaps, as an example, a world with consumer bandwidth caps – there would be consumer demand for lower-bandwidth versions of websites and other Internet services. Rather than ratcheting bandwidth requirements consistently up – increasing the size of the digital divide – the self-interested decisions of consumers on the fortunate side of that divide could actually help shrink that divide. [...]

The tragic thing (though, to economists, not surprising) about demands that the Internet economy disobey laws of supply and demand, that Internet providers offer consumers a service unconstrained by scarcity, is that such demands create the Internet-equivalent of bread lines. They are, in fact, the wedge that widens the digital divide.

Over at Forbes Berin Szoka and I have a lengthy piece discussing “10 Reasons To Be More Optimistic About Broadband Than Susan Crawford Is.” Crawford has become the unofficial spokesman for a budding campaign to reshape broadband. She sees cable companies monopolizing broadband, charging too much, withholding content and keeping speeds low, all in order to suppress disruptive innovation — and argues for imposing 19th century common carriage regulation on the Internet. Berin and I begin (we expect to contribute much more to this discussion in the future) to explain both why her premises are erroneous and also why her proscription is faulty. Here’s a taste:

Things in the US today are better than Crawford claims. While Crawford claims that broadband is faster and cheaper in other developed countries, her statistics are convincingly disputed. She neglects to mention the significant subsidies used to build out those networks. Crawford’s model is Europe, but as Europeans acknowledge, “beyond 100 Mbps supply will be very difficult and expensive. Western Europe may be forced into a second fibre build out earlier than expected, or will find themselves within the slow lane in 3-5 years time.” And while “blazing fast” broadband might be important for some users, broadband speeds in the US are plenty fast enough to satisfy most users. Consumers are willing to pay for speed, but, apparently, have little interest in paying for the sort of speed Crawford deems essential. This isn’t surprising. As the LSE study cited above notes, “most new activities made possible by broadband are already possible with basic or fast broadband: higher speeds mainly allow the same things to happen faster or with higher quality, while the extra costs of providing higher speeds to everyone are very significant.”

Even if she’s right, she wildly exaggerates the costs. Using a back-of-the-envelope calculation, Crawford claims that slow downloads (compared to other countries) could cost the U.S. $3 trillion/year in lost productivity from wasted time spent “waiting for a link to load or an app to function on your wireless device.” This intentionally sensationalist claim, however, rests on a purely hypothetical average wait time in the U.S. of 30 seconds (vs. 2 seconds in Japan). Whatever the actual numbers might be, her methodology would still be shaky, not least because time spent waiting for laggy content isn’t necessarily simply wasted. And for most of us, the opportunity cost of waiting for Angry Birds to load on our phones isn’t counted in wages — it’s counted in beers or time on the golf course or other leisure activities. These are important, to be sure, but does anyone seriously believe our GDP would grow 20% if only apps were snappier? Meanwhile, actual econometric studies looking at the productivity effects of faster broadband on businesses have found that higher broadband speeds are not associated with higher productivity.

* * *

So how do we guard against the possibility of consumer harm without making things worse? For us, it’s a mix of promoting both competition and a smarter, subtler role for government.

Despite Crawford’s assertion that the DOJ should have blocked the Comcast-NBCU merger, antitrust and consumer protection laws do operate to constrain corporate conduct, not only through government enforcement but also private rights of action. Antitrust works best in the background, discouraging harmful conduct without anyone ever suing. The same is true for using consumer protection law to punish deception and truly harmful practices (e.g., misleading billing or overstating speeds).

A range of regulatory reforms would also go a long way toward promoting competition. Most importantly, reform local franchising so competitors like Google Fiber can build their own networks. That means giving them “open access” not to existing networks but to the public rights of way under streets. Instead of requiring that franchisees build out to an entire franchise area—which often makes both new entry and service upgrades unprofitable—remove build-out requirements and craft smart subsidies to encourage competition to deliver high-quality universal service, and to deliver superfast broadband to the customers who want it. Rather than controlling prices, offer broadband vouchers to those that can’t afford it. Encourage telcos to build wireline competitors to cable by transitioning their existing telephone networks to all-IP networks, as we’ve urged the FCC to do (here and here). Let wireless reach its potential by opening up spectrum and discouraging municipalities from blocking tower construction. Clear the deadwood of rules that protect incumbents in the video marketplace—a reform with broad bipartisan appeal.

In short, there’s a lot of ground between “do nothing” and “regulate broadband like electricity—or railroads.” Crawford’s arguments simply don’t justify imposing 19th century common carriage regulation on the Internet. But that doesn’t leave us powerless to correct practices that truly harm consumers, should they actually arise.

Read the whole thing here.

By Geoffrey Manne & Berin Szoka

As Democrats insist that income taxes on the 1% must go up in the name of fairness, one Democratic Senator wants to make sure that the 1% of heaviest Internet users pay the same price as the rest of us. It’s ironic how confused social justice gets when the Internet’s involved.

Senator Ron Wyden is beloved by defenders of Internet freedom, most notably for blocking the Protect IP bill—sister to the more infamous SOPA—in the Senate. He’s widely celebrated as one of the most tech-savvy members of Congress. But his latest bill, the “Data Cap Integrity Act,” is a bizarre, reverse-Robin Hood form of price control for broadband. It should offend those who defend Internet freedom just as much as SOPA did.

Wyden worries that “data caps” will discourage Internet use and allow “Internet providers to extract monopoly rents,” quoting a New York Times editorial from July that stirred up a tempest in a teapot. But his fears are straw men, based on four false premises.

First, US ISPs aren’t “capping” anyone’s broadband; they’re experimenting with usage-based pricing—service tiers. If you want more than the basic tier, your usage isn’t capped: you can always pay more for more bandwidth. But few users will actually exceed that basic tier. For example, Comcast’s basic tier, 300 GB/month, is so generous that 98.5% of users will not exceed it. That’s enough for 130 hours of HD video each month (two full-length movies a day) or between 300 and 1000 hours of standard (compressed) video streaming. Continue Reading…

by Larry Downes and Geoffrey A. Manne

Now that the election is over, the Federal Communications Commission is returning to the important but painfully slow business of updating its spectrum management policies for the 21st century. That includes a process the agency started in September to formalize its dangerously unstructured role in reviewing mergers and other large transactions in the communications industry.

This followed growing concern about “mission creep” at the FCC, which, in deals such as those between Comcast and NBCUniversal, AT&T and T-Mobile USA, and Verizon Wireless and SpectrumCo, has repeatedly been caught with its thumb on the scales of what is supposed to be a balance between private markets and what the Communications Act refers to as the “public interest.” Continue Reading…