Archives For telecommunications

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Jane Bambauer, (Professor of Law, University of Arizona James E. Rogers College of Law]

The importance of testing and contact tracing to slow the spread of the novel coronavirus and resume normal life is now well established. The difference between the communities that do it and the ones that don’t is disturbingly grim (see, e.g., South Korea versus Italy). In a large population like the U.S., contact tracing and alerts will have to be done in an automated way with the help of mobile service providers’ geolocation data. The intensive use of data in South Korea has led many commenters to claim that the strategy that’s been so effective there cannot be replicated in western countries with strong privacy laws.

Descriptively, it’s probably true that privacy law and instincts in the US and EU will hinder virus surveillance.

The European Commission’s recent guidance on GDPR’s application to the COVID-19 crisis left a hurdle for member states. EU countries would have to introduce new legislation in order to use telecommunications data to do contact tracing, and the legislation would be reviewable by the European Court of Human Rights. No member states have done this, even though nearly all of them have instituted lock-down measures. 

Even Germany, which has announced the rollout of a cellphone tracking and alert app has decided to make the use of the app voluntary. This system will only be effective if enough people opt into it. (One study suggests the minimum participation rate would have to be “near universal,” so this does not bode well.)

And in the U.S., privacy advocacy groups like EPIC are already gearing up to challenge the collection of cellphone data by federal and state governments based on recent Fourth Amendment precedent finding that individuals have a reasonable expectation of privacy in cell phone location data.

And nearly every opinion piece I read from public health experts promoting contact tracing ends with some obligatory handwringing about the privacy and ethical implications. Research universities and units of government that are comfortable advocating for draconian measures of social distancing and isolation find it necessary to stall and consult their IRBs and privacy officers before pursuing options that involve data surveillance.

While ethicists and privacy scholars certainly have something to teach regulators during a pandemic, the Coronavirus has something to teach us in return. It has thrown harsh light on the drawbacks and absurdities of rigid individual control over personal data.

Objections to surveillance lose their moral and logical bearings when the alternatives are out-of-control disease or mass lockdowns. Compared to those, mass surveillance is the most liberty-preserving option. Thus, instead of reflexively trotting out privacy and ethics arguments, we should take the opportunity to understand the order of operations—to know which rights and liberties are more vital than privacy so that we know when and why expectations in privacy need to bend. All but the most privacy-sensitive would count health and the liberty to leave one’s house among the most basic human interests, so the COVID-19 lockdowns are testing some of the practices and assumptions that are baked into our privacy laws.

At the highest level of abstraction, the pandemic should remind us that privacy is, ultimately, an instrumental right. It is meant to achieve certain social goals in fairness, safety, and autonomy. It is not an end in itself.  

When privacy is cloaked in the language of fundamental human rights, its instrumental function is obscured. Like other liberties in movement and commerce, conceiving of privacy as something that is under each individual’s control is a useful rule-of-thumb when it doesn’t conflict too much with other people’s interests. But the COVID-19 crisis shows that there are circumstances under which privacy as an individual right frustrates the very values in fairness, autonomy, and physical security that it is supposed to support. Privacy authorities and experts at every level need to be as clear and blunt as the experts supporting mass lockdowns: the government can do this, it will have to rely on industry, and we will work through the fallout and secondary problems when people stop dying.

At a minimum epidemiologists and cellphone service providers should be able to rely on implied consent to data-sharing, just as the tort system allows doctors to presume consent for emergency surgery when a patient’s wishes cannot be observed in time. Geoffrey Manne suggested this in an earlier TOTM post about the allocation of information and medical resources:

But an individual’s idiosyncratic desire to constrain the sharing of personal data in this context seems manifestly less important than the benefits of, at the very least, a default rule that the relevant data be shared for these purposes.

Indeed, we should go further than this. There is a moral imperative to ignore even express lack of consent when withholding important information that puts others in danger. Just as many states affirmatively require doctors, therapists, teachers, and other fiduciaries to report certain risks even at the expense of their client’s and ward’s privacy (e.g. New York’s requirement that doctors notify their patient’s partners about a positive HIV test if their patient fails to do so), this same logic applies at scale to the collection and analysis of data during a pandemic.

Another reason consent is inappropriate at this time is that it mars quantitative studies with selection bias. Medical reporting on the transmission and mortality of COVID-19 has had to rely much too heavily on data coming out of the Diamond Princess cruise ship because for a long time it was the only random sample—the only time that everybody was screened. 

The United States has done a particularly poor job tracking the spread of the virus because faced with a shortage of tests, the CDC compounded our problems by denying those tests to anybody that didn’t meet specific criteria (a set of symptoms and either recent travel or known exposure to a confirmed case.) These criteria all but guaranteed that our data would suggest coughs and fevers are necessary conditions for coronavirus, and it delayed our recognition of community spread. If we are able to do antibody testing in the near future to understand who has had the virus in the past, that data would be most useful over swaths of people who have not self-selected into a testing facility.

If consent is not an appropriate concept for privacy during a pandemic, might there be a defect in its theory even outside of crisis time? I have argued in the past that privacy should be understood as a collective interest in risk management, like negligence law, rather than a property-style right. The public health response to COVID-19 helps illustrate why this is so. The right to privacy is different from other liberties because it directly conflicts with another fundamental right: namely, the right to access information and knowledge. One person’s objection to contact tracing (or any other collection and distribution of data) necessarily conflicts with another’s interest in knowing who was in that person’s proximity during a critical period.

This puts privacy on very different footing from other rights, like the right to free movement. Generally, my right to travel in public space does not have to interfere with other people’s rights. It may interfere if, for example, I drive on the wrong side of the street, but the conflict is not inevitable. With a few restrictions and rules of coordination, there is ample opportunity for people to enjoy public spaces the way they want without forcing policymakers to decide between competing uses. Thus, when we suspend the right to free movement in unusual times like today, when one person’s movement in public space does cause significant detriment to others, we can have confidence that the liberty can be restored when the threat has subsided.

Privacy, by contrast, is inevitably at odds with a demonstrable desire by another person or firm to access information that they find valuable. Perhaps this is the reason that ethicists and regulators find it difficult to overcome privacy objections: when public health experts insist that privacy is conflicting with valuable information flows, a privacy advocate can say “yes, exactly.”

We can improve on the theoretical underpinnings of privacy law by embracing the fact that privacy is instrumental—a means (sometimes an effective one) to achieve other ends. If we are trying to achieve certain goals through its use—goals in equity, fairness, and autonomy—we should increase our effort to understand what types of uses of data implicate those outcomes. Fortunately, that work is already advancing at a fast clip in debates about socially responsible AI.The next step would be to assess whether individual control tends to support the good uses and reduce the bad uses. If our policies can ensure that machine learning applications are sufficiently “fair,” and if we can agree on what fairness entails, lawmakers can begin the fruitful and necessary work of shifting privacy law away from prohibitions on data collection and sharing and toward limits on its use in the areas where individual control is counter-productive.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Justin “Gus” Hurwitz, (Associate Professor of Law & Co-director, Space, Cyber, and Telecom Law Program, University of Nebraska; Director of Law & Economics Programs, ICLE).]

I’m a big fan of APM Marketplace, including Molly Wood’s tech coverage. But they tend to slip into advocacy mode—I think without realizing it—when it comes to telecom issues. This was on full display earlier this week in a story on widespread decisions by ISPs to lift data caps during the ongoing COVID-19 crisis (available here, the segment runs from 4:30-7:30). 

As background, all major ISPs have lifted data caps on their Internet service offerings. This is in recognition of the fact that most Americans are spending more time at home right now. During this time, many of us are teleworking, so making more intensive use of our Internet connections during the day; many have children at home during the day who are using the Internet for both education and entertainment; and we are going out less in the evening so making more use of services like streaming video for evening entertainment. All of these activities require bandwidth—and, like many businesses around the country, ISPs are taking steps (such as eliminating data caps) that will prevent undue consumer harm as we work to cope with COVID-19.

The Marketplace take on data caps

After introducing the segment, Wood and Marketplace host Kai Ryssdal turn to a misinformation and insinuation-laden discussion of telecommunications policy. Wood asserts that one of the ISPs’ “big arguments against net neutrality regulation” was that they “need [data] caps to prevent congestion on networks.” Ryssdal responds by asking, coyly, “so were they just fibbing? I mean … ya know …”

Wood responds that “there have been times when these arguments were very legitimate,” citing the early days of 4G networks. She then asserts that the United States has “some of the most expensive Internet speeds in the developed world” before jumping to the assertion that advocates will now have the “data to say that [data] caps are unnecessary.” She then goes on to argue—and here she loses any pretense of reporter neutrality—that “we are seeing that the Internet really is a utility” and that “frankly, there’s no, uhm, ongoing economic argument for [data caps].” She even notes that we can “hear [her] trying to be professional” in the discussion.

Unpacking that mess

It’s hard to know where to start with Wood & Ryssdal discussion, such a muddled mess it is. Needless to say, it is unfortunate to see tech reporters doing what tech reporters seem to do best: confusing poor and thinly veiled policy arguments for news.

Let’s start with Wood’s first claim, that ISPs (and, for that matter, others) have long argued that data caps are required to manage congestion and that this has been one of their chief arguments against net neutrality regulations. This is simply not true. 

Consider the 2015 Open Internet Order (OIO)—the net neutrality regulations adopted by the FCC under President Obama. The OIO discusses data caps (“usage allowances”) in paragraphs 151-153. It explains:

The record also reflects differing views over some broadband providers’ practices with respect to usage allowances (also called “data caps”). … Usage allowances may benefit consumers by offering them more choices over a greater range of service options, and, for mobile broadband networks, such plans are the industry norm today, in part reflecting the different capacity issues on mobile networks. Conversely, some commenters have expressed concern that such practices can potentially be used by broadband providers to disadvantage competing over-the-top providers. Given the unresolved debate concerning the benefits and drawbacks of data allowances and usage-based pricing plans,[FN373] we decline to make blanket findings about these practices and will address concerns under the no-unreasonable interference/disadvantage on a case-by-case basis. 

[FN373] Regarding usage-based pricing plans, there is similar disagreement over whether these practices are beneficial or harmful for promoting an open Internet. Compare Bright House Comments at 20 (“Variable pricing can serve as a useful technique for reducing prices for low usage (as Time Warner Cable has done) as well as for fairly apportioning greater costs to the highest users.”) with Public Knowledge Comments at 58 (“Pricing connectivity according to data consumption is like a return to the use of time. Once again, it requires consumers keep meticulous track of what they are doing online. With every new web page, new video, or new app a consumer must consider how close they are to their monthly cap. . . . Inevitably, this type of meter-watching freezes innovation.”), and ICLE & TechFreedom Policy Comments at 32 (“The fact of the matter is that, depending on background conditions, either usage-based pricing or flat-rate pricing could be discriminatory.”). 

The 2017 Restoring Internet Freedom Order (RIFO), which rescinded much of the OIO, offers little discussion of data caps—its approach to them follows that of the OIO, requiring that ISPs are free to adopt but must disclose data cap policies. It does, however, note that small ISPs expressed concern, and provided evidence, that fear of lawsuits had forced small ISPs to abandon policies like data caps, “which would have benefited its customers by lowering its cost of Internet transport.” (See paragraphs 104 and 249.) The 2010 OIO makes no reference to data caps or usage allowances. 

What does this tell us about Wood’s characterization of policy debates about data caps? The only discussion of congestion as a basis for data caps comes in the context of mobile networks. Wood gets this right: data caps have been, and continue to be, important for managing data use on mobile networks. But most people would be hard pressed to argue that these concerns are not still valid: the only people who have not experienced congestion on their mobile devices are those who do not use mobile networks.

But the discussion of data caps on broadband networks has nothing to do with congestion management. The argument against data caps is that they can be used anticompetitively. Cable companies, for instance, could use data caps to harm unaffiliated streaming video providers (that is, Netflix) in order to protect their own video services from competition; or they could exclude preferred services from data caps in order to protect them from competitors.

The argument for data caps, on the other hand, is about the cost of Internet service. Data caps are a way of offering lower priced service to lower-need users. Or, conversely, they are a way of apportioning the cost of those networks in proportion to the intensity of a given user’s usage.  Higher-intensity users are more likely to be Internet enthusiasts; lower-intensity users are more likely to use it for basic tasks, perhaps no more than e-mail or light web browsing. What’s more, if all users faced the same prices regardless of their usage, there would be no marginal cost to incremental usage: users (and content providers) would have no incentive not to use more bandwidth. This does not mean that users would face congestion without data caps—ISPs may, instead, be forced to invest in higher capacity interconnection agreements. (Importantly, interconnection agreements are often priced in terms of aggregate data transfered, not the speeds of those data transfers—that is, they are written in terms of data caps!—so it is entirely possible that an ISP would need to pay for greater interconnection capacity despite not experiencing any congestion on its network!)

In other words, the economic argument for data caps, recognized by the FCC under both the Obama and Trump administrations, is that they allow more people to connect to the Internet by allowing a lower-priced access tier, and that they keep average prices lower by creating incentives not to consume bandwidth merely because you can. In more technical economic terms, they allow potentially beneficial price discrimination and eliminate a potential moral hazard. Contrary to Wood’s snarky, unprofessional, response to Ryssdal’s question, there is emphatically not “no ongoing economic argument” for data caps.

Why lifting data caps during this crisis ain’t no thing

Even if the purpose of data caps were to manage congestion, Wood’s discussion again misses the mark. She argues that the ability to lift caps during the current crisis demonstrates that they are not needed during non-crisis periods. But the usage patterns that we are concerned about facilitating during this period are not normal, and cannot meaningfully be used to make policy decisions relevant to normal periods. 

The reason for this is captured in the below image from a recent Cloudflare discussion of how Internet usage patterns are changing during the crisis:

This image shows US Internet usage as measured by Cloudflare. The red line is the usage on March 13 (the peak is President Trump’s announcement of a state of emergency). The grey lines are the preceding several days of traffic. (The x-axis is UTC time; ET is UCT-4.) Although this image was designed to show the measurable spike in traffic corresponding to the President’s speech, it also shows typical weekday usage patterns. The large “hump” on the left side shows evening hours in the United States. The right side of the graph shows usage throughout the day. (This chart shows nation-wide usage trends, which span multiple time zones. If it were to focus on a single time zone, there would be a clear dip between daytime “business” and evening “home” hours, as can be seen here.)

More important, what this chart demonstrates is that the “peak” in usage occurs in the evening, when everyone is at home watching their Netflix. It does not occur during the daytime hours—the hours during which telecommuters are likely to be video conferencing or VPN’ing in to their work networks, or during which students are likely to be doing homework or conferencing into their meetings. And, to the extent that there will be an increase in daytime usage, it will be somewhat offset by (likely significantly) decreased usage due to coming economic lethargy. (For Kai Ryssdal, lethargy is synonymous with recession; for Aaron Sorkin fans, it is synonymous with bagel). 

This illustrates one of the fundamental challenges with pricing access to networks. Networks are designed to carry their peak load capacity. When they are operating below capacity, the marginal cost of additional usage is extremely low; once they exceed that capacity, the marginal cost of additional usage is extremely high. If you price network access based upon the average usage, you are going to get significant usage during peak hours; if you price access based upon the peak-hour marginal cost, you are going to get significant deadweight loss (under-use) during non-peak hours). 

Data caps are one way to deal with this issue. Since most users making the most intensive use of the network are all doing so at the same time (at peak hour), this incremental cost either discourages this use or provides the revenue necessary to expand capacity to accommodate their use. But data caps do not make sense during non-peak hours, when marginal cost is nearly zero. Indeed, imposing increased costs on users during non-peak hours is regressive. It creates deadweight losses during those hours (and, in principle, also during peak hours: ideally, we would price non-peak-hour usage less than peak-hour usage in order to “shave the peak” (a synonym, I kid you not, for “flatten the curve”)). 

What this all means

During the current crisis, we are seeing a significant increase in usage during non-peak hours. This imposes nearly zero incremental cost on ISPs. Indeed, it is arguably to their benefit to encourage use during this time, to “flatten the curve” of usage in the evening, when networks are, in fact, likely to experience congestion.

But there is a flipside, which we have seen develop over the past few days: how do we manage peak-hour traffic? On Thursday, the EU asked Netflix to reduce the quality of its streaming video in order to avoid congestion. Netflix is the single greatest driver of consumer-focused Internet traffic. And while being able to watch the Great British Bake Off in ultra-high definition 3D HDR 4K may be totally awesome, its value pales in comparison to keeping the American economy functioning.

Wood suggests that ISPs’ decision to lift data caps is of relevance to the network neutrality debate. It isn’t. But the impact of Netflix traffic on competing applications may be. The net neutrality debate created unmitigated hysteria about prioritizing traffic on the Internet. Many ISPs have said outright that they won’t even consider investing in prioritization technologies because of the uncertainty around the regulatory treatment of such technologies. But such technologies clearly have uses today. Video conferencing and Voice over IP protocols should be prioritized over streaming video. Packets to and from government, healthcare, university, and other educational institutions should be prioritized over Netflix traffic. It is hard to take anyone who would disagree with this proposition seriously. Yet the net neutrality debate almost entirely foreclosed development of these technologies. While they may exist, they are not in widespread deployment, and are not familiar to consumers or consumer-facing network engineers.

To the very limited extent that data caps are relevant to net neutrality policy, it is about ensuring that millions of people binge watching Bojack Horseman (seriously, don’t do it!) don’t interfere with children Skyping with their grandparents, a professor giving a lecture to her class, or a sales manager coordinating with his team to try to keep the supply chain moving.

Every 5 years, Congress has to reauthorize the sunsetting provisions of the Satellite Television Extension and Localism Act (STELA). And the deadline for renewing the law is quickly approaching (Dec. 31). While sunsetting is, in the abstract, seemingly a good thing to ensure rules don’t become outdated, there are an interlocking set of interest groups who, generally speaking, only support reauthorizing the law because they are locked in a regulatory stalemate. STELA no longer represents an optimal outcome for many if not most of the affected parties. The time is now for finally allowing STELA to sunset, and using this occasion to further reform the underlying regulatory morass it is built upon.

Since the creation of STELA in 1988, much has changed in the marketplace. At the time of the 1992 Cable Act (the first year data from the FCC’s Video Competition Reports is available), cable providers served 95% of multichannel video subscribers. Now, the power of cable has waned to the extent that 2 of the top 4 multichannel video programming distributors (MVPDs) are satellite providers, without even considering the explosion in competition from online video distributors like Netflix and Amazon Prime.

Given these developments, Congress should reconsider whether STELA is necessary at all, along with the whole complex regulatory structure undergirding it, and consider the relative simplicity with which copyright and antitrust law are capable of adequately facilitating the market for broadcast content negotiations. An approach building upon that contemplated in the bipartisan Modern Television Act of 2019 by Congressman Steve Scalise (R-LA) and Congresswoman Anna Eshoo (D-CA)—which would repeal the compulsory license/retransmission consent regime for both cable and satellite—would be a step in the right direction.

A brief history of STELA

STELA, originally known as the 1988 Satellite Home Viewer Act, was originally justified as necessary to promote satellite competition against incumbent cable networks and to give satellite companies stronger negotiating positions against network broadcasters. In particular, the goal was to give satellite providers the ability to transmit terrestrial network broadcasts to subscribers. To do this, this regulatory structure modified the Communications Act and the Copyright Act. 

With the 1988 Satellite Home Viewer Act, Congress created a compulsory license for satellite retransmissions under Section 119 of the Copyright Act. This compulsory license provision mandated, just as the Cable Act did for cable providers, that satellite would have the right to certain network broadcast content in exchange for a government-set price (despite the fact that local network affiliates don’t necessarily own the copyrights themselves). The retransmission consent provision requires satellite providers (and cable providers under the Cable Act) to negotiate with network broadcasters for the fee to be paid for the right to network broadcast content. 

Alternatively, broadcasters can opt to impose must-carry provisions on cable and satellite  in lieu of retransmission consent negotiations. These provisions require satellite and cable operators to carry many channels from network broadcasters in order to have access to their content. As ICLE President Geoffrey Manne explained to Congress previously:

The must-carry rules require that, for cable providers offering 12 or more channels in their basic tier, at least one-third of these be local broadcast retransmissions. The forced carriage of additional, less-favored local channels results in a “tax on capacity,” and at the margins causes a reduction in quality… In the end, must-carry rules effectively transfer significant programming decisions from cable providers to broadcast stations, to the detriment of consumers… Although the ability of local broadcasters to opt in to retransmission consent in lieu of must-carry permits negotiation between local broadcasters and cable providers over the price of retransmission, must-carry sets a floor on this price, ensuring that payment never flows from broadcasters to cable providers for carriage, even though for some content this is surely the efficient transaction.

The essential question about the reauthorization of STELA regards the following provisions: 

  1. an exemption from retransmission consent requirements for satellite operators for the carriage of distant network signals to “unserved households” while maintaining the compulsory license right for those signals (modification of the compulsory license/retransmission consent regime);
  2. the prohibition on exclusive retransmission consent contracts between MVPDs and network broadcasters (per se ban on a business model); and
  3. the requirement that television broadcast stations and MVPDs negotiate in good faith (nebulous negotiating standard reviewed by FCC).

This regulatory scheme was supposed to sunset after 5 years. Instead of actually sunsetting, Congress has consistently reauthorized STELA ( in 1994, 1999, 2004, 2010, and 2014).

Each time, satellite companies like DirecTV & Dish Network, as well as interest groups representing rural customers who depend heavily on satellite for cable television, strongly supported the renewal of the legislation. Over time, though, the reauthorization has led to amendments supported by major players from each side of the negotiating table and broad support for what is widely considered “must-pass” legislation. In other words, every affected industry found something they liked about the compromise legislation.

As it stands, the sunset provision of STELA has meant that it gives each side negotiating leverage during the next round of reauthorization talks, and often concessions are drawn. But rather than simplifying this regulatory morass, STELA reauthorization simply extends rules that have outlived their purpose.

Current marketplace competition undermines the necessity of STELA reauthorization

The marketplace is very different in 2019 than it was when STELA’s predecessors were adopted and reauthorized. No longer is it the case that cable dominates and that satellite and other providers need a leg up just to compete. Moreover, there are now services that didn’t even exist when the STELA framework was first developed. Competition is thriving.

Wikipedia:

RankServiceSubscribersProviderType
1.Xfinity21,986,000ComcastCable
2.DirecTV19,222,000AT&TSatellite
3.Spectrum16,606,000CharterCable
4.Dish9,905,000Dish NetworkSatellite
5.Verizon Fios TV4,451,000VerizonFiber-Optic
6.Cox Cable TV4,015,000Cox EnterprisesCable
7.U-Verse TV3,704,000AT&TFiber-Optic
8.Optimum/Suddenlink3,307,500Altice USACable
9.Sling TV*2,417,000Dish NetworkLive Streaming
10.Hulu with Live TV2,000,000Hulu(Disney, Comcast, AT&T)Live Streaming
11.DirecTV Now1,591,000AT&TLive Streaming
12.YouTube TV1,000,000Google(Alphabet)Live Streaming
13.Frontier FiOS838,000FrontierFiber-Optic
14.Mediacom776,000MediacomCable
15.PlayStation Vue500,000SonyLive Streaming
16.CableOne Cable TV326,423Cable OneCable
17.FuboTV250,000FuboTVLive Streaming

A 2018 accounting of the largest MVPDs by subscribers shows that satellite is 2 of the top 4, and that over-the-top services like Sling TV, Hulu with LiveTV, and YouTube TV are gaining significantly. And this does not even consider (non-live) streaming services such as Netflix (approximately 60 million US subscribers), Hulu (about 28 million US subscribers) and Amazon Prime Video (which has about 40 million users in the US). It is not clear from these numbers that satellite needs special rules in order to compete with cable, or that the complex regulatory regime underlying STELA is necessary anymore.

On the contrary, there seems to be a lot of reason to believe that content is king, and the market for the distribution of that content is thriving. Competition among platforms is intense, not only among MVPDs like Comcast, DirecTV, Charter, and Dish Network, but from streaming services like Netflix, Amazon Prime Video, Hulu, and HBONow. Distribution networks heavily invest in exclusive content to attract consumers. There is no reason to think that we need selective forbearance from the byzantine regulations in this space in order to promote satellite adoption when satellite companies are just as good as any at contracting for high-demand content (for instance DirecTV with NFL Sunday Ticket). 

A better way forward: Streamlined regulation in the form of copyright and antitrust

As Geoffrey Manne said in his Congressional testimony on STELA reauthorization back in 2013: 

behind all these special outdated regulations are laws of general application that govern the rest of the economy: antitrust and copyright. These are better, more resilient rules. They are simple rules for a complex world. They will stand up far better as video technology evolves–and they don’t need to be sunsetted.

Copyright law establishes clearly defined rights, thereby permitting efficient bargaining between content owners and distributors. But under the compulsory license system, the copyright holders’ right to a performance license is fundamentally abridged. Retransmission consent normally requires fees to be paid for the content that MVPDs have available to them. But STELA exempts certain network broadcasts (“distant signals” for “unserved households”) from retransmission consent requirements. This reduces incentives to develop content subject to STELA, which at the margin harms both content creators and viewers. It also gives satellite an unfair advantage vis-a-vis cable in those cases it does not need to pay ever-rising retransmission consent fees. Ironically, it also reduces the incentive for satellite providers (DirecTV, at least) to work to provide local content to some rural consumers. Congress should reform the law to allow copyright holders to have their full rights under the Copyright Act again. Congress should also repeal the compulsory license and must-carry provisions that work at cross-purposes and allow true marketplace negotiations.

The initial allocation of property rights guaranteed under copyright law would allow for MVPDs, including satellite providers, to negotiate with copyright holders for content, and thereby realize a more efficient set of content distribution outcomes than is otherwise possible. Under the compulsory license/retransmission consent regime underlying both STELA and the Cable Act, the outcomes at best approximate those that would occur through pure private ordering but in most cases lead to economically inefficient results because of the thumb on the scale in favor of the broadcasters. 

In a similar way, just as copyright law provides a superior set of bargaining conditions for content negotiation, antitrust law provides a superior mechanism for policing potentially problematic conduct between the firms involved. Under STELA, the FCC polices transactions with a “good faith” standard. In an important sense, this ambiguous regulatory discretion provides little information to prospective buyers and sellers of licenses as to what counts as “good faith” negotiations (aside from the specific practices listed).

By contrast, antitrust law, guided by the consumer welfare standard and decades of case law, is designed both to deter potential anticompetitive foreclosure and also to provide a clear standard for firms engaged in the marketplace. The effect of relying on antitrust law to police competitive harms is — as the name of the standard suggest — a net increase in the welfare of consumers, the ultimate beneficiaries of a well functioning market. 

For instance, consider a hypothetical dispute between a network broadcaster and a satellite provider. Under the FCC’s “good faith” oversight, bargaining disputes, which are increasingly resulting in blackouts, are reviewed for certain negotiating practices deemed to be unfair, 47 CFR § 76.65(b)(1), and by a more general “totality of the circumstances” standard, 47 CFR § 76.65(b)(2). This is both over- and under-inclusive as the negotiating practices listed in (b)(1) may have procompetitive benefits in certain circumstances, and the (b)(2) totality of the circumstances standard is vague and ill-defined. By comparison, antitrust claims would be adjudicated through a foreseeable process with reference to a consumer welfare standard illuminated by economic evidence and case law.

If a satellite provider alleges anticompetitive foreclosure by a refusal to license, its claims would be subject to analysis under the Sherman Act. In order to prove its case, it would need to show that the network broadcaster has power in a properly defined market and is using that market power to foreclose competition by leveraging its ownership over network content to the detriment of consumer welfare. A court would then analyze whether this refusal of a duty to deal is a violation of antitrust law under the Trinko and Aspen Skiing standards. Economic evidence would need to be introduced that supports the allegation. 

And, critically, in this process, the defendants would be entitled to raise evidence in their case — both evidence suggesting that there was no foreclosure, as well as evidence of procompetitive justifications for decisions that otherwise may be considered foreclosure. Ultimately, a court, bound by established, nondiscretionary standards would weigh the evidence and make a determination. It is, of course, possible, that a review for “good faith” conduct could reach the correct result, but there is simply not a similarly rigorous process available to consistently push it in that direction.

The above-mentioned Modern Television Act of 2019 does represent a step in the right direction, as it would repeal the compulsory license/retransmission consent regime applied to both cable and satellite operators. However, it is imperfect as it does leave must carry requirements in place for local content and retains the “good faith” negotiating standard to be enforced by the FCC. 

Expiration is better than the status quo even if fundamental reform is not possible

Some scholars who have written on this issue, and very much agree that fundamental reform is needed, nonetheless argue that STELA should be renewed if more fundamental reforms like those described above can’t be achieved. For instance, George Ford recently wrote that 

With limited days left in the legislative calendar before STELAR expires, there is insufficient time for a sensible solution to this complex issue. Senate Commerce Committee Chairman Roger Wicker (R-Miss.) has offered a “clean” STELAR reauthorization bill to maintain the status quo, which would provide Congress with some much-needed breathing room to begin tackling the gnarly issue of how broadcast signals can be both widely retransmitted and compensated. Congress and the Trump administration should welcome this opportunity.

However, even in a world without more fundamental reform, it is not clear that satellite needs distant signals in order to compete with cable. The number of “short markets”—i.e. those without access to all four local network broadcasts—implicated by the loss of distant signals is relatively few. Regardless of how bad the overall regulatory scheme needs to be updated, it makes no sense to continue to preserve STELA’s provisions that benefit satellite when it is no longer necessary on competition grounds.

Conclusion

Congress should not only let STELA sunset, but it should consider reforming the entire compulsory license/retransmission consent regime as the Modern Television Act of 2019 aims to do. In fact, reformers should look to go even further in repealing must-carry provisions and the good faith negotiating standard enforced by the FCC. Copyright and antitrust law are much better rules for this constantly evolving space than the current sector-specific rules. 

For previous work from ICLE on STELA see The Future of Video Marketplace Regulation (written testimony of ICLE President Geoffrey Manne from June 12, 2013) and Joint Comments of ICLE and TechFreedom, In the Matter of STELA Reauthorization and Video Programming Reform (March 19, 2014). 

The Economists' Hour

John Maynard Keynes wrote in his famous General Theory that “[t]he ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” 

This is true even of those who wish to criticize the effect of economic thinking on society. In his new book, The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society,  New York Times economics reporter Binyamin Appelbaum aims to show that economists have had a detrimental effect on public policy. But the central irony of the Economists’ Hour is that in criticizing the influence of economists over policy, Appelbaum engages in a great deal of economic speculation himself. Appelbaum would discard the opinions of economists in favor of “the lessons of history,” but all he is left with is unsupported economic reasoning. 

Much of The Economists’ Hour is about the history of ideas. To his credit, Appelbaum does a fair job describing Anglo-American economic thought post-New Deal until the start of the 21st century. Part I mainly focuses on macroeconomics, detailing the demise of the Keynesian consensus and the rise of the monetarists and supply-siders. If the author were not so cynical about the influence of economists, he might have represented these changes in dominant economic paradigms as an example of how science progresses over time.  

Interestingly, Appelbaum often makes the case that the insights of economists have been incredibly beneficial. For instance, in the opening chapter, he describes how Milton Friedman (one of the main protagonists/antagonists of the book, depending on your point of view) and a band of economists (including Martin Anderson and Walter Oi) fought the military establishment and ended the draft. For that, I’m sure most of us born in the past fifty years would be thankful. One suspects that group includes Appelbaum, though he tries to find objections, claiming for example that “by making war more efficient and more remote from the lives of most Americans, the end of the draft may also have made war more likely.” 

Appelbaum also notes positively that economists, most prominently Alfred Kahn in the United States, led the charge in a largely beneficial deregulation of the airline and trucking industries in the late 1970s and early 1980s. 

Yet, overall, it is clear that Appelbaum believes the “outsized” influence of economists over policymaking itself fails the cost-benefit analysis. Appelbaum focuses on the costs of listening too much to economists on antitrust law, trade and development, interest rates and currency, the use of cost-benefit analysis in regulation, and the deregulation of the financial services industry. He sees the deregulation of airlines and trucking as the height of the economists’ hour, and its close with the financial crisis of the late-2000s. His thesis is that (his interpretation of) economists’ notions of efficiency, their (alleged) lack of concern about distributional effects, and their (alleged) myopia has harmed society as their influence over policy has grown.

In his chapter on antitrust, for instance, Appelbaum admits that even though “[w]e live in a new era of giant corporations… there is little evidence consumers are suffering.” Appelbaum argues instead that lax antitrust enforcement has resulted in market concentration harmful to workers, democracy, and innovation. In order to make those arguments, he uncritically cites the work of economists and non-economist legal scholars that make economic claims. A closer inspection of each of these (economic) arguments suggests there is more to the story.

First, recent research questions the narrative that increasing market concentration has resulted in harm to consumers, workers, or society. In their recent paper, “The Industrial Revolution in Services,” Chang-Tai Hsieh of the University of Chicago and Esteban Rossi-Hansberg of Princeton University argue that increasing concentration is primarily due to technological innovation in services, retail, and wholesale sectors. While there has been greater concentration at the national level, this has been accompanied by increased competition locally as national chains expanded to more local markets. Of note, employment has increased in the sectors where national concentration is rising.

The rise in national industry concentration in the US between 1977 and 2013 is driven by a new industrial revolution in three broad non-traded sectors: services, retail, and wholesale. Sectors where national concentration is rising have increased their share of employment, and the expansion is entirely driven by the number of local markets served by firms. Firm employment per market has either increased slightly at the MSA level, or decreased substantially at the county or establishment levels. In industries with increasing concentration, the expansion into more markets is more pronounced for the top 10% firms, but is present for the bottom 90% as well. These trends have not been accompanied by economy-wide concentration. Top U.S. firms are increasingly specialized in sectors with rising industry concentration, but their aggregate employment share has remained roughly stable. We argue that these facts are consistent with the availability of a new set of fixed-cost technologies that enable adopters to produce at lower marginal costs in all markets. We present a simple model of firm size and market entry to describe the menu of new technologies and trace its implications.

In other words, any increase in concentration has been sector-specific and primarily due to more efficient national firms expanding into local markets. This has been associated with lower prices for consumers and more employment opportunities for workers in those sectors.

Appelbaum also looks to Lina Khan’s law journal article, which attacks Amazon for allegedly engaging in predatory pricing, as an example of a new group of young scholars coming to the conclusion that there is a need for more antitrust scrutiny. But, as ICLE scholars Alec Stapp and Kristian Stout have pointed out, there is very little evidence Amazon is actually engaging in predatory pricing. Khan’s article is a challenge to the consensus on how to think about predatory pricing and consumer welfare, but her underlying economic theory is premised on Amazon having such a long time horizon that they can lose money on retail for decades (even though it has been profitable for some time), on the theory that someday down the line they can raise prices after they have run all retail competition out.

Second, Appelbaum argues that mergers and acquisitions in the technology sector, especially acquisitions by Google and Facebook of potential rivals, has decreased innovation. Appelbaum’s belief is that innovation is spurred when government forces dominant players “to make room” for future competition. Here he draws in part on claims by some economists that dominant firms sometimes engage in “killer acquisitions” — acquiring nascent competitors in order to reduce competition, to the detriment of consumer welfare. But a simple model of how that results in reduced competition must be balanced by a recognition that many companies, especially technology startups, are incentivized to innovate in part by the possibility that they will be bought out. As noted by the authors of the leading study on the welfare effects of alleged “killer acquisitions”,

“it is possible that the presence of an acquisition channel also has a positive effect on welfare if the prospect of entrepreneurial exit through acquisition (by an incumbent) spurs ex-ante innovation …. Whereas in our model entrepreneurs are born with a project and thus do not have to exert effort to come up with an idea, it is plausible that the prospect of later acquisition may motivate the origination of entrepreneurial ideas in the first place… If, on the other hand, killer acquisitions do increase ex-ante innovation, this potential welfare gain will have to be weighed against the ex-post efficiency loss due to reduced competition. Whether the former positive or the latter negative effect dominates will depend on the elasticity of the entrepreneur’s innovation response.”

This analysis suggests that a case-by-case review is necessary if antitrust plaintiffs can show evidence that harm to consumers is likely to occur due to a merger.. But shifting the burden to merging entities, as Applebaum seems to suggest, will come with its own costs. In other words, more economics is needed to understand this area, not less.

Third, Appelbaum’s few concrete examples of harm to consumers resulting from “lax antitrust enforcement” in the United States come from airline mergers and telecommunications. In both cases, he sees the increased attention from competition authorities in Europe compared to the U.S. at the explanation for better outcomes. Neither is a clear example of harm to consumers, nor can be used to show superior antitrust frameworks in Europe versus the United States.

In the case of airline mergers, Appelbaum argues the gains from deregulation of the industry have been largely given away due to poor antitrust enforcement and prices stopped falling, leading to a situation where “[f]or the first time since the dawn of aviation, it is generally cheaper to fly in Europe than in the United States.” This is hard to square with the data. 

As explained in a recent blog post on Truth on the Market by ICLE’s chief economist Eric Fruits: 

While the concentration and profits story fits the antitrust populist narrative, other observations run contrary to [this] conclusion. For example, airline prices, as measured by price indexes, show that changes in U.S. and EU airline prices have fairly closely tracked each other until 2014, when U.S. prices began dropping. Sure, airlines have instituted baggage fees, but the CPI includes taxes, fuel surcharges, airport, security, and baggage fees. It’s not obvious that U.S. consumers are worse off in the so-called era of rising concentration. 

In fact, one recent study, titled Are legacy airline mergers pro- or anti-competitive? Evidence from recent U.S. airline mergers takes it a step further. Data from legacy U.S. airline mergers appears to show they have resulted in pro-consumer benefits once quality-adjusted fares are taken into account:

Our main conclusion is simple: The recent legacy carrier mergers have been associated with pro-competitive outcomes. We find that, on average across all three mergers combined, nonstop overlap routes (on which both merging parties were present pre-merger) experienced statistically significant output increases and statistically insignificant nominal fare decreases relative to non-overlap routes. This pattern also holds when we study each of the three mergers individually. We find that nonstop overlap routes experienced statistically significant output and capacity increases following all three legacy airline mergers, with statistically significant nominal fare decreases following Delta/Northwest and American/USAirways mergers, and statistically insignificant nominal fare decreases following the United/Continental merger… 

One implication of our findings is that any fare increases that have been observed since the mergers were very unlikely to have been caused by the mergers. In particular, our results demonstrate pro-competitive output expansions on nonstop overlap routes indicating reductions in quality-adjusted fares and a lack of significant anti-competitive effects on connecting overlaps. Hence ,our results demonstrate consumer welfare gains on overlap routes, without even taking credit for the large benefits on non-overlap routes (due to new online service, improved service networks at airports, fleet reallocation, etc.). While some of our results indicate that passengers on non-overlap routes also benefited from the mergers, we leave the complete exploration of such network effects for future research.

In other words, neither part of Applebaum’s proposition, that Europe has cheaper fares and that concentration has led to worse outcomes for consumers in the United States, appears to be true. Perhaps the influence of economists over antitrust law in the United States has not been so bad after all.

Appelbaum also touts the lower prices for broadband in Europe as an example of better competition policy over telecommunications in Europe versus the United States. While prices are lower on average in Europe for broadband, this obfuscates distribution of prices depending on speed tiers. UPenn Professor Christopher Yoo’s 2014 study titled U.S. vs. European Broadband Deployment: What Do the Data Say? found:

U.S. broadband was cheaper than European broadband for all speed tiers below 12 Mbps. U.S. broadband was more expensive for higher speed tiers, although the higher cost was justified in no small part by the fact that U.S. Internet users on average consumed 50% more bandwidth than their European counterparts.

Population density also helps explain differences between Europe and the United States. The closer people are together, the easier it is to build out infrastructure like broadband Internet. The United States is considerably more rural than most European countries. As a result, consideration of prices and speed need to be adjusted to reflect those differences. For instance, the FCC’s 2018 International Broadband Data Report shows a move in position from 23rd to 14th for the United States compared to 28 (mostly European) other countries once population density and income are taken into consideration for fixed broadband prices (Model 1 to Model 2). The United States climbs even further to 6th out of the 29 countries studied if data usage is included and 7th if quality (i.e. websites available in language) is taken into consideration (Model 4).

Country Model 1 Model 2 Model 3 Model 4
Price Rank Price Rank Price Rank Price Rank
Australia $78.30 28 $82.81 27 $102.63 26 $84.45 23
Austria $48.04 17 $60.59 15 $73.17 11 $74.02 17
Belgium $46.82 16 $66.62 21 $75.29 13 $81.09 22
Canada $69.66 27 $74.99 25 $92.73 24 $76.57 19
Chile $33.42 8 $73.60 23 $83.81 20 $88.97 25
Czech Republic $26.83 3 $49.18 6 $69.91 9 $60.49 6
Denmark $43.46 14 $52.27 8 $69.37 8 $63.85 8
Estonia $30.65 6 $56.91 12 $81.68 19 $69.06 12
Finland $35.00 9 $37.95 1 $57.49 2 $51.61 1
France $30.12 5 $44.04 4 $61.96 4 $54.25 3
Germany $36.00 12 $53.62 10 $75.09 12 $66.06 11
Greece $35.38 10 $64.51 19 $80.72 17 $78.66 21
Iceland $65.78 25 $73.96 24 $94.85 25 $90.39 26
Ireland $56.79 22 $62.37 16 $76.46 14 $64.83 9
Italy $29.62 4 $48.00 5 $68.80 7 $59.00 5
Japan $40.12 13 $53.58 9 $81.47 18 $72.12 15
Latvia $20.29 1 $42.78 3 $63.05 5 $52.20 2
Luxembourg $56.32 21 $54.32 11 $76.83 15 $72.51 16
Mexico $35.58 11 $91.29 29 $120.40 29 $109.64 29
Netherlands $44.39 15 $63.89 18 $89.51 21 $77.88 20
New Zealand $59.51 24 $81.42 26 $90.55 22 $76.25 18
Norway $88.41 29 $71.77 22 $103.98 27 $96.95 27
Portugal $30.82 7 $58.27 13 $72.83 10 $71.15 14
South Korea $25.45 2 $42.07 2 $52.01 1 $56.28 4
Spain $54.95 20 $87.69 28 $115.51 28 $106.53 28
Sweden $52.48 19 $52.16 7 $61.08 3 $70.41 13
Switzerland $66.88 26 $65.01 20 $91.15 23 $84.46 24
United Kingdom $50.77 18 $63.75 17 $79.88 16 $65.44 10
United States $58.00 23 $59.84 14 $64.75 6 $62.94 7
Average $46.55 $61.70 $80.24 $73.73

Model 1: Unadjusted for demographics and content quality

Model 2: Adjusted for demographics but not content quality

Model 3: Adjusted for demographics and data usage

Model 4: Adjusted for demographics and content quality

Furthermore, investment and buildout are other important indicators of how well the United States is doing compared to Europe. Appelbaum fails to consider all of these factors when comparing the European model of telecommunications to the United States’. Yoo’s conclusion is an appropriate response:

The increasing availability of high-quality data has the promise to effect a sea change in broadband policy. Debates that previously relied primarily on anecdotal evidence and personal assertions of visions for the future can increasingly take place on a firmer empirical footing. 

In particular, these data can resolve the question whether the U.S. is running behind Europe in the broadband race or vice versa. The U.S. and European mapping studies are clear and definitive: These data indicate that the U.S. is ahead of Europe in terms of the availability of Next Generation Access (NGA) networks. The U.S. advantage is even starker in terms of rural NGA coverage and with respect to key technologies such as FTTP and LTE. 

Empirical analysis, both in terms of top-level statistics and in terms of eight country case studies, also sheds light into the key policy debate between facilities-based competition and service-based competition. The evidence again is fairly definitive, confirming that facilities-based competition is more effective in terms of driving broadband investment than service-based competition. 

In other words, Appelbaum relies on bad data to come to his conclusion that listening to economists has been wrong for American telecommunications policy. Perhaps it is his economic assumptions that need to be questioned.

Conclusion

At the end of the day, in antitrust, environmental regulation, and other areas he reviewed, Appelbaum does not believe economic efficiency should be the primary concern anyway.  For instance, he repeats the common historical argument that the purpose of the Sherman Act was to protect small businesses from bigger, and often more efficient, competitors. 

So applying economic analysis to Appelbaum’s claims may itself be an illustration of caring too much about economic models instead of learning “the lessons of history.” But Appelbaum inescapably assumes economic models of its own. And these models appear less grounded in empirical data than those of the economists he derides. There’s no escaping mental models to understand the world. It is just a question of whether we are willing to change our mind if a better way of understanding the world presents itself. As Keynes is purported to have said, “When the facts change, I change my mind. What do you do, sir?”

For all the criticism of economists, there at least appears to be a willingness among them to change their minds, as illustrated by the increasing appreciation for anti-inflationary monetary policy among macroeconomists described in The Economists’ Hour. The question which remains is whether Appelbaum and other critics of the economic way of thinking are as willing to reconsider their strongly held views when they conflict with the evidence.

This guest post is by Jonathan M. Barnett, Torrey H. Webb Professor Law, University of Southern California Gould School of Law.

It has become virtual received wisdom that antitrust law has been subdued by economic analysis into a state of chronic underenforcement. Following this line of thinking, many commentators applauded the Antitrust Division’s unsuccessful campaign to oppose the acquisition of Time-Warner by AT&T and some (unsuccessfully) urged the Division to take stronger action against the acquisition of most of Fox by Disney. The arguments in both cases followed a similar “big is bad” logic. Consolidating control of a large portfolio of creative properties (Fox plus Disney) or integrating content production and distribution capacities (Time-Warner plus AT&T) would exacerbate market concentration, leading to reduced competition and some combination of higher prices and reduced product for consumers. 

Less than 18 months after the closing of both transactions, those concerns seem to have been largely unwarranted. 

Far from precipitating any decline in product output or variety, both transactions have been followed by a vigorous burst of competition in the digital streaming market. In place of the Amazon plus Netflix bottleneck (with Hulu trailing behind), consumers now, or in 2020 will, have a choice of at least four new streaming services with original content, Disney+, AT&T’s “HBO Max”, Apple’s “Apple TV+” and Comcast’s NBCUniversal “Peacock” services. Critically, each service relies on a formidable combination of creative, financing and technological capacities that can only be delivered by a firm of sufficiently large size and scale.  As modern antitrust law has long recognized, it turns out that “big” is sometimes not bad.

Where’s the Harm?

At present, it is hard to see any net consumer harm arising from the concurrence of increased size and increased competition. 

On the supply side, this is just the next episode in the ongoing “Golden Age of Television” in which content producers have enjoyed access to exceptional funding to support high-value productions.  It has been reported that Apple TV+’s new “Morning Show” series will cost $15 million per episode while similar estimates are reported for hit shows such as HBO’s “Game of Thrones” and Netflix’s “The Crown.”  Each of those services is locked in a fierce competition to gain and retain sufficient subscribers to earn a return on those investments, which leads directly to the next happy development.

On the demand side, consumers enjoy a proliferating array of streaming services, ranging from free ad-supported services to subscription ad-free services. Consumers can now easily “cut the cord” and assemble a customized bundle of preferred content from multiple services, each of which is less costly than a traditional cable package and can generally be cancelled at any time.  Current market performance does not plausibly conform to the declining output, limited variety or increasing prices that are the telltale symptoms of a less than competitive market.

Real-World v. Theoretical Markets

The market’s favorable trajectory following these two controversial transactions should not be surprising. When scrutinized against the actual characteristics of real-world digital content markets, rather than stylized theoretical models or antiquated pre-digital content markets, the arguments leveled against these transactions never made much sense. There were two fundamental and related errors. 

Error #1: Content is Scarce

Advocates for antitrust intervention assumed that entry barriers into the content market were high, in which case it followed that the owner of an especially valuable creative portfolio could exert pricing power to consumers’ detriment. Yet, in reality, funding for content production is plentiful and even a service that has an especially popular show is unlikely to have sustained pricing power in the face of a continuous flow of high-value productions being released by formidable competitors. The amounts being spent on content in 2019 by leading streaming services are unprecedented, ranging from a reported $15 billion for Netflix to an estimated $6 billion for Amazon and Apple TV+ to an estimated $3.9 billion for AT&T’s HBO Max. It is also important to note that a hit show is often a mobile asset that a streaming or other video distribution service has licensed from independent production companies and other rights holders. Once the existing deal expires, those rights are available for purchase by the highest bidder. For example, in 2019, Netflix purchased the streaming rights to “Seinfeld”, Viacom purchased the cable rights to “Seinfeld”, and HBO Max purchased the streaming rights to “South Park.” Similarly, the producers behind a hit show are always free to take their talents to competitors once any existing agreement terminates.

Error #2: Home Pay-TV is a “Monopoly”

Advocates of antitrust action were looking at the wrong market—or more precisely, the market as it existed about a decade ago. The theory that AT&T’s acquisition of Time-Warner’s creative portfolio would translate into pricing power in the home pay-TV market mighthave been plausible when consumers had no reasonable alternative to the local cable provider. But this argument makes little sense today when consumers are fleeing bulky home pay-TV bundles for cheaper cord-cutting options that deliver more targeted content packages to a mobile device.  In 2019, a “home” pay-TV market is fast becoming an anachronism and hence a home pay-TV “monopoly” largely reduces to a formalism that, with the possible exception of certain live programming, is unlikely to translate into meaningful pricing power. 

Wait a Second! What About the HBO Blackout?

A skeptical reader might reasonably object that this mostly rosy account of the post-merger home video market is unpersuasive since it does not address the ongoing blackout of HBO (now an AT&T property) on the Dish satellite TV service. Post-merger commentary that remains skeptical of the AT&T/Time-Warner merger has focused on this dispute, arguing that it “proves” that the government was right since AT&T is purportedly leveraging its new ownership of HBO to disadvantage one of its competitors in the pay-TV market. This interpretation tends to miss the forest for the trees (or more precisely, a tree).  

The AT&T/Dish dispute over HBO is only one of over 200 “carriage” disputes resulting in blackouts that have occurred this year, which continues an upward trend since approximately 2011. Some of those include Dish’s dispute with Univision (settled in March 2019 after a nine-month blackout) and AT&T’s dispute (as pay-TV provider) with Nexstar (settled in August 2019 after a nearly two-month blackout). These disputes reflect the fact that the flood of subscriber defections from traditional pay-TV to mobile streaming has made it difficult for pay-TV providers to pass on the fees sought by content owners. As a result, some pay-TV providers adopt the negotiating tactic of choosing to drop certain content until the terms improve, just as AT&T, in its capacity as a pay-TV provider, dropped CBS for three weeks in July and August 2019 pending renegotiation of licensing terms. It is the outward shift in the boundaries of the economically relevant market (from home to home-plus-mobile video delivery), rather than market power concerns, that best accounts for periodic breakdowns in licensing negotiations.  This might even be viewed positively from an antitrust perspective since it suggests that the “over the top” market is putting pressure on the fees that content owners can extract from providers in the traditional pay-TV market.

Concluding Thoughts

It is common to argue today that antitrust law has become excessively concerned about “false positives”– that is, the possibility of blocking a transaction or enjoining a practice that would have benefited consumers. Pending future developments, this early post-mortem on the regulatory and judicial treatment of these two landmark media transactions suggests that there are sometimes good reasons to stay the hand of the court or regulator. This is especially the case when a generational market shift is in progress and any regulator’s or judge’s foresight is likely to be guesswork. Antitrust law’s “failure” to stop these transactions may turn out to have been a ringing success.

On March 19-20, 2020, the University of Nebraska College of Law will be hosting its third annual roundtable on closing the digital divide. UNL is expanding its program this year to include a one-day roundtable that focuses on the work of academics and researchers who are conducting empirical studies of the rural digital divide. 

Academics and researchers interested in having their work featured in this event are now invited to submit pieces for consideration. Submissions should be submitted by November 18th, 2019 using this form. The authors of papers and projects selected for inclusion will be notified by December 9, 2019. Research honoraria of up to $5,000 may be awarded for selected projects.

Example topics include cost studies of rural wireless deployments, comparative studies of the effects of ACAM funding, event studies of legislative interventions such as allowing customers unserved by carriers in their home exchange to request service from carriers in adjoining exchanges, comparative studies of the effectiveness of various federal and state funding mechanisms, and cost studies of different sorts of municipal deployments. This list is far from exhaustive.

Any questions about this event or the request for projects can be directed to Gus Hurwitz at ghurwitz@unl.edu or Elsbeth Magilton at elsbeth@unl.edu.

Advanced broadband networks, including 5G, fiber, and high speed cable, are hot topics, but little attention is paid to the critical investments in infrastructure necessary to make these networks a reality. Each type of network has its own unique set of challenges to solve, both technically and legally. Advanced broadband delivered over cable systems, for example, not only has to incorporate support and upgrades for the physical infrastructure that facilitates modern high-definition television signals and high-speed Internet service, but also needs to be deployed within a regulatory environment that is fragmented across the many thousands of municipalities in the US. Oftentimes, the complexity of managing such a regulatory environment can be just as difficult as managing the actual provision of service. 

The FCC has taken aim at one of these hurdles with its proposed Third Report and Order on the interpretation of Section 621 of the Cable Act, which is on the agenda for the Commission’s open meeting later this week. The most salient (for purposes of this post) feature of the Order is how the FCC intends to shore up the interpretation of the Cable Act’s limitation on cable franchise fees that municipalities are permitted to levy. 

The Act was passed and later amended in a way that carefully drew lines around the acceptable scope of local franchising authorities’ de facto monopoly power in granting cable franchises. The thrust of the Act was to encourage competition and build-out by discouraging franchising authorities from viewing cable providers as a captive source of unlimited revenue. It did this while also giving franchising authorities the tools necessary to support public, educational, and governmental programming and enabling them to be fairly compensated for use of the public rights of way. Unfortunately, since the 1984 Cable Act was passed, an increasing number of local and state franchising authorities (“LFAs”) have attempted to work around the Act’s careful balance. In particular, these efforts have created two main problems.

First, LFAs frequently attempt to evade the Act’s limitation on franchise fees to five percent of cable revenues by seeking a variety of in-kind contributions from cable operators that impose costs over and above the statutorily permitted five percent limit. LFAs do this despite the plain language of the statute defining franchise fees quite broadly as including any “tax, fee, or assessment of any kind imposed by a franchising authority or any other governmental entity.”

Although not nominally “fees,” such requirements are indisputably “assessments,” and the costs of such obligations are equivalent to the marginal cost of a cable operator providing those “free” services and facilities, as well as the opportunity cost (i.e., the foregone revenue) of using its fixed assets in the absence of a state or local franchise obligation. Any such costs will, to some extent, be passed on to customers as higher subscription prices, reduced quality, or both. By carefully limiting the ability of LFAs to abuse their bargaining position, Congress ensured that they could not extract disproportionate rents from cable operators (and, ultimately, their subscribers).

Second, LFAs also attempt to circumvent the franchise fee cap of five percent of gross cable revenues by seeking additional fees for non-cable services provided over mixed use networks (i.e. imposing additional franchise fees on the provision of broadband and other non-cable services over cable networks). But the statute is similarly clear that LFAs or other governmental entities cannot regulate non-cable services provided via franchised cable systems.

My colleagues and I at ICLE recently filed an ex parte letter on these issues that analyzes the law and economics of both the underlying statute and the FCC’s proposed rulemaking that would affect the interpretation of cable franchise fees. For a variety of reasons set forth in the letter, we believe that the Commission is on firm legal and economic footing to adopt its proposed Order.  

It should be unavailing – and legally irrelevant – to argue, as many LFAs have, that declining cable franchise revenue leaves municipalities with an insufficient source of funds to finance their activities, and thus that recourse to these other sources is required. Congress intentionally enacted the five percent revenue cap to prevent LFAs from relying on cable franchise fees as an unlimited general revenue source. In order to maintain the proper incentives for network buildout — which are ever more-critical as our economy increasingly relies on high-speed broadband networks — the Commission should adopt the proposed Order.

The Department of Justice announced it has approved the $26 billion T-Mobile/Sprint merger. Once completed, the deal will create a mobile carrier with around 136 million customers in the U.S., putting it just behind Verizon (158 million) and AT&T (156 million).

While all the relevant federal government agencies have now approved the merger, it still faces a legal challenge from state attorneys general. At the very least, this challenge is likely to delay the merger; if successful, it could scupper it. In this blog post, we evaluate the state AG’s claims (and find them wanting).

Four firms good, three firms bad?

The state AG’s opposition to the T-Mobile/Sprint merger is based on a claim that a competitive mobile market requires four national providers, as articulated in their redacted complaint:

The Big Four MNOs [mobile network operators] compete on many dimensions, including price, network quality, network coverage, and features. The aggressive competition between them has resulted in falling prices and improved quality. The competition that currently takes place across those dimensions, and others, among the Big Four MNOs would be negatively impacted if the Merger were consummated. The effects of the harm to competition on consumers will be significant because the Big Four MNOs have wireless service revenues of more than $160 billion.

. . . 

Market consolidation from four to three MNOs would also serve to increase the possibility of tacit collusion in the markets for retail mobile wireless telecommunications services.

But there are no economic grounds for the assertion that a four firm industry is on a competitive tipping point. Four is an arbitrary number, offered up in order to squelch any further concentration in the industry.

A proper assessment of this transaction—as well as any other telecom merger—requires accounting for the specific characteristics of the markets affected by the merger. The accounting would include, most importantly, the dynamic, fast-moving nature of competition and the key role played by high fixed costs of production and economies of scale. This is especially important given the expectation that the merger will facilitate the launch of a competitive, national 5G network.

Opponents claim this merger takes us from four to three national carriers. But Sprint was never a serious participant in the launch of 5G. Thus, in terms of future investment in general, and the roll-out of 5G in particular, a better characterization is that it this deal takes the U.S. from two to three national carriers investing to build out next-generation networks.

In the past, the capital expenditures made by AT&T and Verizon have dwarfed those of T-Mobile and Sprint. But a combined T-Mobile/Sprint would be in a far better position to make the kinds of large-scale investments necessary to develop a nationwide 5G network. As a result, it is likely that both the urban-rural digital divide and the rich-poor digital divide will decline following the merger. And this investment will drive competition with AT&T and Verizon, leading to innovation, improving service and–over time–lowering the cost of access.

Is prepaid a separate market?

The state AGs complain that the merger would disproportionately affect consumers of prepaid plans, which they claim constitutes a separate product market:

There are differences between prepaid and postpaid service, the most notable being that individuals who cannot pass a credit check and/or who do not have a history of bill payment with a MNO may not be eligible for postpaid service. Accordingly, it is informative to look at prepaid mobile wireless telecommunications services as a separate segment of the market for mobile wireless telecommunications services.

Claims that prepaid services constitute a separate market are questionable, at best. While at one time there might have been a fairly distinct divide between pre and postpaid markets, today the line between them is at least blurry, and may not even be a meaningful divide at all.

To begin with, the arguments regarding any expected monopolization in the prepaid market appear to assume that the postpaid market imposes no competitive constraint on the prepaid market. 

But that can’t literally be true. At the very least, postpaid plans put a ceiling on prepaid prices for many prepaid users. To be sure, there are some prepaid consumers who don’t have the credit history required to participate in the postpaid market at all. But these are inframarginal consumers, and they will benefit from the extent of competition at the margins unless operators can effectively price discriminate in ways they have not in the past, and which has not been demonstrated is possible or likely.

One source of this competition will come from Dish, which has been a vocal critic of the T-Mobile/Sprint merger. Under the deal with DOJ, T-Mobile and Sprint must spin-off Sprint’s prepaid businesses to Dish. The divested products include Boost Mobile, Virgin Mobile, and Sprint prepaid. Moreover the deal requires Dish be allowed to use T-Mobile’s network during a seven-year transition period. 

Will the merger harm low-income consumers?

While the states’ complaint alleges that low-income consumers will suffer, it pays little attention to the so-called “digital divide” separating urban and rural consumers. This seems curious given the attention it was given in submissions to the federal agencies. For example, the Communication Workers of America opined:

the data in the Applicants’ Public Interest Statement demonstrates that even six years after a T-Mobile/Sprint merger, “most of New T-Mobile’s rural customers would be forced to settle for a service that has significantly lower performance than the urban and suburban parts of the network.” The “digital divide” is likely to worsen, not improve, post-merger.

This is merely an assertion, and a misleading assertion. To the extent the “digital divide” would grow following the merger, it would be because urban access will improve more rapidly than rural access would improve. 

Indeed, there is no real suggestion that the merger will impede rural access relative to a world in which T-Mobile and Sprint do not merge. 

And yet, in the absence of a merger, Sprint would be less able to utilize its own spectrum in rural areas than would the merged T-Mobile/Sprint, because utilization of that spectrum would require substantial investment in new infrastructure and additional, different spectrum. And much of that infrastructure and spectrum is already owned by T-Mobile. 

It likely that the combined T-Mobile/Sprint will make that investment, given the cost savings that are expected to be realized through the merger. So, while it might be true that urban customers will benefit more from the merger, rural customers will also benefit. It is impossible to know, of course, by exactly how much each group will benefit. But, prima facie, the prospect of improvement in rural access seems a strong argument in favor of the merger from a public interest standpoint.

The merger is also likely to reduce another digital divide: that between wealthier and poorer consumers in more urban areas. The proportion of U.S. households with access to the Internet has for several years been rising faster among those with lower incomes than those with higher incomes, thereby narrowing this divide. Since 2011, access by households earning $25,000 or less has risen from 52% to 62%, while access among the U.S. population as a whole has risen only from 72% to 78%. In part, this has likely resulted from increased mobile access (a greater proportion of Americans now access the Internet from mobile devices than from laptops), which in turn is the result of widely available, low-cost smartphones and the declining cost of mobile data.

Concluding remarks

By enabling the creation of a true, third national mobile (phone and data) network, the merger will almost certainly drive competition and innovation that will lead to better services at lower prices, thereby expanding access for all and, if current trends hold, especially those on lower incomes. Beyond its effect on the “digital divide” per se, the merger is likely to have broadly positive effects on access more generally.

Monday July 22, ICLE filed a regulatory comment arguing the leased access requirements enforced by the FCC are unconstitutional compelled speech that violate the First Amendment. 

When the DC Circuit Court of Appeals last reviewed the constitutionality of leased access rules in Time Warner v. FCC, cable had so-called “bottleneck power” over the marketplace for video programming and, just a few years prior, the Supreme Court had subjected other programming regulations to intermediate scrutiny in Turner v. FCC

Intermediate scrutiny is a lower standard than the strict scrutiny usually required for First Amendment claims. Strict scrutiny requires a regulation of speech to be narrowly tailored to a compelling state interest. Intermediate scrutiny only requires a regulation to further an important or substantial governmental interest unrelated to the suppression of free expression, and the incidental restriction speech must be no greater than is essential to the furtherance of that interest.

But, since the decisions in Time Warner and Turner, there have been dramatic changes in the video marketplace (including the rise of the Internet!) and cable no longer has anything like “bottleneck power.” Independent programmers have many distribution options to get content to consumers. Since the justification for intermediate scrutiny is no longer an accurate depiction of the competitive marketplace, the leased rules should be subject to strict scrutiny.

And, if subject to strict scrutiny, the leased access rules would not survive judicial review. Even accepting that there is a compelling governmental interest, the rules are not narrowly tailored to that end. Not only are they essentially obsolete in the highly competitive video distribution marketplace, but antitrust law would be better suited to handle any anticompetitive abuses of market power by cable operators. There is no basis for compelling the cable operators to lease some of their channels to unaffiliated programmers.

Our full comments are here

[TOTM: The following is the third in a series of posts by TOTM guests and authors on the FTC v. Qualcomm case, currently awaiting decision by Judge Lucy Koh in the Northern District of California. The entire series of posts is available here.

This post is authored by Douglas H. Ginsburg, Professor of Law, Antonin Scalia Law School at George Mason University; Senior Judge, United States Court of Appeals for the District of Columbia Circuit; and former Assistant Attorney General in charge of the Antitrust Division of the U.S. Department of Justice; and Joshua D. Wright, University Professor, Antonin Scalia Law School at George Mason University; Executive Director, Global Antitrust Institute; former U.S. Federal Trade Commissioner from 2013-15; and one of the founding bloggers at Truth on the Market.]

[Ginsburg & Wright: Professor Wright is recused from participation in the FTC litigation against Qualcomm, but has provided counseling advice to Qualcomm concerning other regulatory and competition matters. The views expressed here are our own and neither author received financial support.]

The Department of Justice Antitrust Division (DOJ) and Federal Trade Commission (FTC) have spent a significant amount of time in federal court litigating major cases premised upon an anticompetitive foreclosure theory of harm. Bargaining models, a tool used commonly in foreclosure cases, have been essential to the government’s theory of harm in these cases. In vertical merger or conduct cases, the core theory of harm is usually a variant of the claim that the transaction (or conduct) strengthens the firm’s incentives to engage in anticompetitive strategies that depend on negotiations with input suppliers. Bargaining models are a key element of the agency’s attempt to establish those claims and to predict whether and how firm incentives will affect negotiations with input suppliers, and, ultimately, the impact on equilibrium prices and output. Application of bargaining models played a key role in evaluating the anticompetitive foreclosure theories in the DOJ’s litigation to block the proposed merger of AT&T and Time Warner Cable. A similar model is at the center of the FTC’s antitrust claims against Qualcomm and its patent licensing business model.

Modern antitrust analysis does not condemn business practices as anticompetitive without solid economic evidence of an actual or likely harm to competition. This cautious approach was developed in the courts for two reasons. The first is that the difficulty of distinguishing between procompetitive and anticompetitive explanations for the same conduct suggests there is a high risk of error. The second is that those errors are more likely to be false positives than false negatives because empirical evidence and judicial learning have established that unilateral conduct is usually either procompetitive or competitively neutral. In other words, while the risk of anticompetitive foreclosure is real, courts have sensibly responded by requiring plaintiffs to substantiate their claims with more than just theory or scant evidence that rivals have been harmed.

An economic model can help establish the likelihood and/or magnitude of competitive harm when the model carefully captures the key institutional features of the competition it attempts to explain. Naturally, this tends to mean that the economic theories and models proffered by dueling economic experts to predict competitive effects take center stage in antitrust disputes. The persuasiveness of an economic model turns on the robustness of its assumptions about the underlying market. Model predictions that are inconsistent with actual market evidence give one serious pause before accepting the results as reliable.

For example, many industries are characterized by bargaining between providers and distributors. The Nash bargaining framework can be used to predict the outcomes of bilateral negotiations based upon each party’s bargaining leverage. The model assumes that both parties are better off if an agreement is reached, but that as the utility of one party’s outside option increases relative to the bargain, it will capture an increasing share of the surplus. Courts have had to reconcile these seemingly complicated economic models with prior case law and, in some cases, with direct evidence that is apparently inconsistent with the results of the model.

Indeed, Professor Carl Shapiro recently used bargaining models to analyze harm to competition in two prominent cases alleging anticompetitive foreclosure—one initiated by the DOJ and one by the FTC—in which he served as the government’s expert economist. In United States v. AT&T Inc., Dr. Shapiro testified that the proposed transaction between AT&T and Time Warner would give the vertically integrated company leverage to extract higher prices for content from AT&T’s rival, Dish Network. Soon after, Dr. Shapiro presented a similar bargaining model in FTC v. Qualcomm Inc. He testified that Qualcomm leveraged its monopoly power over chipsets to extract higher royalty rates from smartphone OEMs, such as Apple, wishing to license its standard essential patents (SEPs). In each case, Dr. Shapiro’s models were criticized heavily by the defendants’ expert economists for ignoring market realities that play an important role in determining whether the challenged conduct was likely to harm competition.

Judge Leon’s opinion in AT&T/Time Warner—recently upheld on appeal—concluded that Dr. Shapiro’s application of the bargaining model was significantly flawed, based upon unreliable inputs, and undermined by evidence about actual market performance presented by defendant’s expert, Dr. Dennis Carlton. Dr. Shapiro’s theory of harm posited that the combined company would increase its bargaining leverage and extract greater affiliate fees for Turner content from AT&T’s distributor rivals. The increase in bargaining leverage was made possible by the threat of a post-merger blackout of Turner content for AT&T’s rivals. This theory rested on the assumption that the combined firm would have reduced financial exposure from a long-term blackout of Turner content and would therefore have more leverage to threaten a blackout in content negotiations. The purpose of his bargaining model was to quantify how much AT&T could extract from competitors subjected to a long-term blackout of Turner content.

Judge Leon highlighted a number of reasons for rejecting the DOJ’s argument. First, Dr. Shapiro’s model failed to account for existing long-term affiliate contracts, post-litigation offers of arbitration agreements, and the increasing competitiveness of the video programming and distribution industry. Second, Dr. Carlton had demonstrated persuasively that previous vertical integration in the video programming and distribution industry did not have a significant effect on content prices. Finally, Dr. Shapiro’s model primarily relied upon three inputs: (1) the total number of subscribers the unaffiliated distributor would lose in the event of a long-term blackout of Turner content, (2) the percentage of the distributor’s lost subscribers who would switch to AT&T as a result of the blackout, and (3) the profit margin AT&T would derive from the subscribers it gained from the blackout. Many of Dr. Shapiro’s inputs necessarily relied on critical assumptions and/or third-party sources. Judge Leon considered and discredited each input in turn. 

The parties in Qualcomm are, as of the time of this posting, still awaiting a ruling. Dr. Shapiro’s model in that case attempts to predict the effect of Qualcomm’s alleged “no license, no chips” policy. He compared the gains from trade OEMs receive when they purchase a chip from Qualcomm and pay Qualcomm a FRAND royalty to license its SEPs with the gains from trade OEMs receive when they purchase a chip from a rival manufacturer and pay a “royalty surcharge” to Qualcomm to license its SEPs. In other words, the FTC’s theory of harm is based upon the premise that Qualcomm is charging a supra-FRAND rate for its SEPs (the“royalty surcharge”) that squeezes the margins of OEMs. That margin squeeze, the FTC alleges, prevents rival chipset suppliers from obtaining a sufficient return when negotiating with OEMs. The FTC predicts the end result is a reduction in competition and an increase in the price of devices to consumers.

Qualcomm, like Judge Leon in AT&T, questioned the robustness of Dr. Shapiro’s model and its predictions in light of conflicting market realities. For example, Dr. Shapiro, argued that the

leverage that Qualcomm brought to bear on the chips shifted the licensing negotiations substantially in Qualcomm’s favor and led to a significantly higher royalty than Qualcomm would otherwise have been able to achieve.

Yet, on cross-examination, Dr. Shapiro declined to move from theory to empirics when asked if he had quantified the effects of Qualcomm’s practice on any other chip makers. Instead, Dr. Shapiro responded that he had not, but he had “reason to believe that the royalty surcharge was substantial” and had “inevitable consequences.” Under Dr. Shapiro’s theory, one would predict that royalty rates were higher after Qualcomm obtained market power.

As with Dr. Carlton’s testimony inviting Judge Leon to square the DOJ’s theory with conflicting historical facts in the industry, Qualcomm’s economic expert, Dr. Aviv Nevo, provided an analysis of Qualcomm’s royalty agreements from 1990-2017, confirming that there was no economic and meaningful difference between the royalty rates during the time frame when Qualcomm was alleged to have market power and the royalty rates outside of that time frame. He also presented evidence that ex ante royalty rates did not increase upon implementation of the CDMA standard or the LTE standard. Moreover, Dr.Nevo testified that the industry itself was characterized by declining prices and increasing output and quality.

Dr. Shapiro’s model in Qualcomm appears to suffer from many of the same flaws that ultimately discredited his model in AT&T/Time Warner: It is based upon assumptions that are contrary to real-world evidence and it does not robustly or persuasively identify anticompetitive effects. Some observers, including our Scalia Law School colleague and former FTC Chairman, Tim Muris, would apparently find it sufficient merely to allege a theoretical “ability to manipulate the marketplace.” But antitrust cases require actual evidence of harm. We think Professor Muris instead captured the appropriate standard in his important article rejecting attempts by the FTC to shortcut its requirement of proof in monopolization cases:

This article does reject, however, the FTC’s attempt to make it easier for the government to prevail in Section 2 litigation. Although the case law is hardly a model of clarity, one point that is settled is that injury to competitors by itself is not a sufficient basis to assume injury to competition …. Inferences of competitive injury are, of course, the heart of per se condemnation under the rule of reason. Although long a staple of Section 1, such truncation has never been a part of Section 2. In an economy as dynamic as ours, now is hardly the time to short-circuit Section 2 cases. The long, and often sorry, history of monopolization in the courts reveals far too many mistakes even without truncation.

Timothy J. Muris, The FTC and the Law of Monopolization, 67 Antitrust L. J. 693 (2000)

We agree. Proof of actual anticompetitive effects rather than speculation derived from models that are not robust to market realities are an important safeguard to ensure that Section 2 protects competition and not merely individual competitors.

The future of bargaining models in antitrust remains to be seen. Judge Leon certainly did not question the proposition that they could play an important role in other cases. Judge Leon closely dissected the testimony and models presented by both experts in AT&T/Time Warner. His opinion serves as an important reminder. As complex economic evidence like bargaining models become more common in antitrust litigation, judges must carefully engage with the experts on both sides to determine whether there is direct evidence on the likely competitive effects of the challenged conduct. Where “real-world evidence,” as Judge Leon called it, contradicts the predictions of a bargaining model, judges should reject the model rather than the reality. Bargaining models have many potentially important antitrust applications including horizontal mergers involving a bargaining component – such as hospital mergers, vertical mergers, and licensing disputes. The analysis of those models by the Ninth and D.C. Circuits will have important implications for how they will be deployed by the agencies and parties moving forward.

In the opening seconds of what was surely one of the worst oral arguments in a high-profile case that I have ever heard, Pantelis Michalopoulos, arguing for petitioners against the FCC’s 2018 Restoring Internet Freedom Order (RIFO) expertly captured both why the side he was representing should lose and the overall absurdity of the entire net neutrality debate: “This order is a stab in the heart of the Communications Act. It would literally write ‘telecommunications’ out of the law. It would end the communications agency’s oversight over the main communications service of our time.”

The main communications service of our time is the Internet. The Communications and Telecommunications Acts were written before the advent of the modern Internet, for an era when the telephone was the main communications service of our time. The reality is that technological evolution has written “telecommunications” out of these Acts – the “telecommunications services” they were written to regulate are no longer the important communications services of the day.

The basic question of the net neutrality debate is whether we expect Congress to weigh in on how regulators should respond when an industry undergoes fundamental change, or whether we should instead allow those regulators to redefine the scope of their own authority. In the RIFO case, petitioners (and, more generally, net neutrality proponents) argue that agencies should get to define their own authority. Those on the other side of the issue (including me) argue that that it is up to Congress to provide agencies with guidance in response to changing circumstances – and worry that allowing independent and executive branch agencies broad authority to act without Congressional direction is a recipe for unfettered, unchecked, and fundamentally abusive concentrations of power in the hands of the executive branch.

These arguments were central to the DC Circuit’s evaluation of the prior FCC net neutrality order – the Open Internet Order. But rather than consider the core issue of the case, the four hours of oral arguments this past Friday were instead a relitigation of long-ago addressed ephemeral distinctions, padded out with irrelevance and esoterica, and argued with a passion available only to those who believe in faerie tales and monsters under their bed. Perhaps some revelled in hearing counsel for both sides clumsily fumble through strained explanations of the difference between standalone telecommunications services and information services that are by definition integrated with them, or awkward discussions about how ISPs may implement hypothetical prioritization technologies that have not even been developed. These well worn arguments successfully demonstrated, once again, how many angels can dance upon the head of a single pin – only never before have so many angels been so irrelevant.

This time around, petitioners challenging the order were able to scare up some intervenors to make novel arguments on their behalf. Most notably, they were able to scare up a group of public safety officials to argue that the FCC had failed to consider arguments that the RIFO would jeopardize public safety services that rely on communications networks. I keep using the word “scare” because these arguments are based upon incoherent fears peddled by net neutrality advocates in order to find unsophisticated parties to sign on to their policy adventures. The public safety fears are about as legitimate as concerns that the Easter Bunny might one day win the Preakness – and merited as much response from the FCC as a petition from the Racehorse Association of America demanding the FCC regulate rabbits.

In the end, I have no idea how the DC Circuit is going to come down in this case. Public Safety concerns – like declarations of national emergencies – are often given undue and unwise weight. And there is a legitimately puzzling, if fundamentally academic, argument about a provision of the Communications Act (47 USC 257(c)) that Congress repealed after the Order was adopted and that was an noteworthy part of the notice the FCC gave when the Order was proposed that could lead the Court to remand the Order back to the Commission.

In the end, however, this case is unlikely to address the fundamental question of whether the FCC has any business regulating Internet access services. If the FCC loses, we’ll be back here in another year or two; if the FCC wins, we’ll be back here the next time a Democrat is in the White House. And the real tragedy is that every minute the FCC spends on the interminable net neutrality non-debate is a minute not spent on issues like closing the rural digital divide or promoting competitive entry into markets by next generation services.

So much wasted time. So many billable hours. So many angels dancing on the head of a pin. If only they were the better angels of our nature.


Postscript: If I sound angry about the endless fights over net neutrality, it’s because I am. I live in one of the highest-cost, lowest-connectivity states in the country. A state where much of the territory is covered by small rural carriers for whom the cost of just following these debates can mean delaying the replacement of an old switch, upgrading a circuit to fiber, or wiring a street. A state in which if prioritization were to be deployed it would be so that emergency services would be able to work over older infrastructure or so that someone in a rural community could remotely attend classes at the University or consult with a primary care physician (because forget high speed Internet – we have counties without doctors in them). A state in which if paid prioritization were to be developed it would be to help raise capital to build out service to communities that have never had high-speed Internet access.

So yes: the fact that we might be in for another year of rule making followed by more litigation because some firefighters signed up for the wrong wireless service plan and then were duped into believing a technological, economic, and political absurdity about net neutrality ensuring they get free Internet access does make me angry. Worse, unlike the hypothetical harms net neutrality advocates are worried about, the endless discussion of net neutrality causes real, actual, concrete harm to the people net neutrality advocates like to pat themselves on the back as advocating for. We should all be angry about this, and demanding that Congress put this debate out of our misery.

[TOTM: The following is the first in a series of posts by TOTM guests and authors on the FTC v. Qualcomm case, currently awaiting decision by Judge Lucy Koh in the Northern District of California. The entire series of posts is available here. This post originally appeared on the Federalist Society Blog.]

Just days before leaving office, the outgoing Obama FTC left what should have been an unwelcome parting gift for the incoming Commission: an antitrust suit against Qualcomm. This week the FTC — under a new Chairman and with an entirely new set of Commissioners — finished unwrapping its present, and rested its case in the trial begun earlier this month in FTC v Qualcomm.

This complex case is about an overreaching federal agency seeking to set prices and dictate the business model of one of the world’s most innovative technology companies. As soon-to-be Acting FTC Chairwoman, Maureen Ohlhausen, noted in her dissent from the FTC’s decision to bring the case, it is “an enforcement action based on a flawed legal theory… that lacks economic and evidentiary support…, and that, by its mere issuance, will undermine U.S. intellectual property rights… worldwide.”

Implicit in the FTC’s case is the assumption that Qualcomm charges smartphone makers “too much” for its wireless communications patents — patents that are essential to many smartphones. But, as former FTC and DOJ chief economist, Luke Froeb, puts it, “[n]othing is more alien to antitrust than enquiring into the reasonableness of prices.” Even if Qualcomm’s royalty rates could somehow be deemed “too high” (according to whom?), excessive pricing on its own is not an antitrust violation under U.S. law.

Knowing this, the FTC “dances around that essential element” (in Ohlhausen’s words) and offers instead a convoluted argument that Qualcomm’s business model is anticompetitive. Qualcomm both sells wireless communications chipsets used in mobile phones, as well as licenses the technology on which those chips rely. According to the complaint, by licensing its patents only to end-users (mobile device makers) instead of to chip makers further up the supply chain, Qualcomm is able to threaten to withhold the supply of its chipsets to its licensees and thereby extract onerous terms in its patent license agreements.

There are numerous problems with the FTC’s case. Most fundamental among them is the “no duh” problem: Of course Qualcomm conditions the purchase of its chips on the licensing of its intellectual property; how could it be any other way? The alternative would require Qualcomm to actually facilitate the violation of its property rights by forcing it to sell its chips to device makers even if they refuse its patent license terms. In that world, what device maker would ever agree to pay more than a pittance for a patent license? The likely outcome is that Qualcomm charges more for its chips to compensate (or simply stops making them). Great, the FTC says; then competitors can fill the gap and — voila: the market is more competitive, prices will actually fall, and consumers will reap the benefits.

Except it doesn’t work that way. As many economists, including both the current and a prominent former chief economist of the FTC, have demonstrated, forcing royalty rates lower in such situations is at least as likely to harm competition as to benefit it. There is no sound theoretical or empirical basis for concluding that using antitrust to move royalty rates closer to some theoretical ideal will actually increase consumer welfare. All it does for certain is undermine patent holders’ property rights, virtually ensuring there will be less innovation.

In fact, given this inescapable reality, it is unclear why the current Commission is continuing to pursue the case at all. The bottom line is that, if it wins the case, the current FTC will have done more to undermine intellectual property rights than any other administration’s Commission has been able to accomplish.

It is not difficult to identify the frailties of the case that would readily support the agency backing away from pursuing it further. To begin with, the claim that device makers cannot refuse Qualcomm’s terms because the company effectively controls the market’s supply of mobile broadband modem chips is fanciful. While it’s true that Qualcomm is the largest supplier of these chipsets, it’s an absurdity to claim that device makers have no alternatives. In fact, Qualcomm has faced stiff competition from some of the world’s other most successful companies since well before the FTC brought its case. Samsung — the largest maker of Android phones — developed its own chip to replace Qualcomm’s in 2015, for example. More recently, Intel has provided Apple with all of the chips for its 2018 iPhones, and Apple is rumored to be developing its own 5G cellular chips in-house. In any case, the fact that most device makers have preferred to use Qualcomm’s chips in the past says nothing about the ability of other firms to take business from it.

The possibility (and actuality) of entry from competitors like Intel ensures that sophisticated purchasers like Apple have bargaining leverage. Yet, ironically, the FTC points to Apple’s claimthat Qualcomm “forced” it to use Intel modems in its latest iPhones as evidence of Qualcomm’s dominance. Think about that: Qualcomm “forced” a company worth many times its own value to use a competitor’s chips in its new iPhones — and that shows Qualcomm has a stranglehold on the market?

The FTC implies that Qualcomm’s refusal to license its patents to competing chip makers means that competitors cannot reliably supply the market. Yet Qualcomm has never asserted its patents against a competing chip maker, every one of which uses Qualcomm’s technology without paying any royalties to do so. The FTC nevertheless paints the decision to license only to device makers as the aberrant choice of an exploitative, dominant firm. The reality, however, is that device-level licensing is the norm practiced by every company in the industry — and has been since the 1980s.

Not only that, but Qualcomm has not altered its licensing terms or practices since it was decidedly an upstart challenger in the market — indeed, since before it even started producing chips, and thus before it even had the supposed means to leverage its chip sales to extract anticompetitive licensing terms. It would be a remarkable coincidence if precisely the same licensing structure and the exact same royalty rate served the company’s interests both as a struggling startup and as an alleged rapacious monopolist. Yet that is the implication of the FTC’s theory.

When Qualcomm introduced CDMA technology to the mobile phone industry in 1989, it was a promising but unproven new technology in an industry dominated by different standards. Qualcomm happily encouraged chip makers to promote the standard by enabling them to produce compliant components without paying any royalties; and it willingly licensed its patents to device makers based on a percentage of sales of the handsets that incorporated CDMA chips. Qualcomm thus shared both the financial benefits and the financial risk associated with the development and sales of devices implementing its new technology.

Qualcomm’s favorable (to handset makers) licensing terms may have helped CDMA become one of the industry standards for 2G and 3G devices. But it’s an unsupportable assertion to say that those identical terms are suddenly the source of anticompetitive power, particularly as 2G and 3G are rapidly disappearing from the market and as competing patent holders gain prominence with each successive cellular technology standard.

To be sure, successful handset makers like Apple that sell their devices at a significant premium would prefer to share less of their revenue with Qualcomm. But their success was built in large part on Qualcomm’s technology. They may regret the terms of the deal that propelled CDMA technology to prominence, but Apple’s regret is not the basis of a sound antitrust case.

And although it’s unsurprising that manufacturers of premium handsets would like to use antitrust law to extract better terms from their negotiations with standard-essential patent holders, it is astonishing that the current FTC is carrying on the Obama FTC’s willingness to do it for them.

None of this means that Qualcomm is free to charge an unlimited price: standard-essential patents must be licensed on “FRAND” terms, meaning they must be fair, reasonable, and nondiscriminatory. It is difficult to asses what constitutes FRAND, but the most restrictive method is to estimate what negotiated terms would look like before a patent was incorporated into a standard. “[R]oyalties that are or would be negotiated ex ante with full information are a market bench-mark reflecting legitimate return to innovation,” writes Carl Shapiro, the FTC’s own economic expert in the case.

And that is precisely what happened here: We don’t have to guess what the pre-standard terms of trade would look like; we know them, because they are the same terms that Qualcomm offers now.

We don’t know exactly what the consequence would be for consumers, device makers, and competitors if Qualcomm were forced to accede to the FTC’s benighted vision of how the market should operate. But we do know that the market we actually have is thriving, with new entry at every level, enormous investment in R&D, and continuous technological advance. These aren’t generally the characteristics of a typical monopoly market. While the FTC’s effort to “fix” the market may help Apple and Samsung reap a larger share of the benefits, it will undoubtedly end up only hurting consumers.