Archives For broadband Internet service

The BIF Offers a Good First Step for Broadband, but the Devil Will Be in the Details

Ben Sperry & Kristian Stout —  17 November 2021

Capping months of inter-chamber legislative wrangling, President Joe Biden on Nov. 15 signed the $1 trillion Infrastructure Investment and Jobs Act (also known as the bipartisan infrastructure framework, or BIF), which sets aside $65 billion of federal funding for broadband projects. While there is much to praise about the package’s focus on broadband deployment and adoption, whether that money will be well-spent  depends substantially on how the law is implemented and whether the National Telecommunications and Information Administration (NTIA) adopts adequate safeguards to avoid waste, fraud, and abuse. 

The primary aim of the bill’s broadband provisions is to connect the truly unconnected—what the bill refers to as the “unserved” (those lacking a connection of at least 25/3 Mbps) and “underserved” (lacking a connection of at least 100/20 Mbps). In seeking to realize this goal, it’s important to bear in mind that dynamic analysis demonstrates that the broadband market is overwhelmingly healthy, even in locales with relatively few market participants. According to the Federal Communications Commission’s (FCC) latest Broadband Progress Report, approximately 5% of U.S. consumers have no options for at least 25/3 Mbps broadband, and slightly more than 8% have no options for at least 100/10 Mbps).  

Reaching the truly unserved portions of the country will require targeting subsidies toward areas that are currently uneconomic to reach. Without properly targeted subsidies, there is a risk of dampening incentives for private investment and slowing broadband buildout. These tradeoffs must be considered. As we wrote previously in our Broadband Principles issue brief:

  • To move forward successfully on broadband infrastructure spending, Congress must take seriously the roles of both the government and the private sector in reaching the unserved.
  • Current U.S. broadband infrastructure is robust, as demonstrated by the way it met the unprecedented surge in demand for bandwidth during the recent COVID-19 pandemic.
  • To the extent it is necessary at all, public investment in broadband infrastructure should focus on providing Internet access to those who don’t have it, rather than subsidizing competition in areas that already do.
  • Highly prescriptive mandates—like requiring a particular technology or requiring symmetrical speeds— will be costly and likely to skew infrastructure spending away from those in unserved areas.
  • There may be very limited cases where municipal broadband is an effective and efficient solution to a complete absence of broadband infrastructure, but policymakers must narrowly tailor any such proposals to avoid displacing private investment or undermining competition.
  • Consumer-directed subsidies should incentivize broadband buildout and, where necessary, guarantee the availability of minimum levels of service reasonably comparable to those in competitive markets.
  • Firms that take government funding should be subject to reasonable obligations. Competitive markets should be subject to lighter-touch obligations.

The Good

The BIF’s broadband provisions ended up in a largely positive place, at least as written. There are two primary ways it seeks to achieve its goals of promoting adoption and deploying broadband to unserved/underserved areas. First, it makes permanent the Emergency Broadband Benefit program that had been created to provide temporary aid to households who struggled to afford Internet service during the COVID-19 pandemic, though it does lower the monthly user subsidy from $50 to $30. The renamed Affordable Connectivity Program can be used to pay for broadband on its own, or as part of a bundle of other services (e.g., a package that includes telephone, texting, and the rental fee on equipment).

Relatedly, the bill also subsidizes the cost of equipment by extending a one-time reimbursement of up to $100 to broadband providers when a consumer takes advantage of the provider’s discounted sale of connected devices, such as laptops, desktops, or tablet computers capable of Wi-Fi and video conferencing. 

The decision to make the emergency broadband benefit a permanent program broadly comports with recommendations we have made to employ user subsidies (such as connectivity vouchers) to encourage broadband adoption.

The second and arguably more important of the bill’s broadband provisions is its creation of the $42 billion Broadband Equity, Access and Deployment (BEAD) Program. Under the direction of the NTIA, BEAD will direct grants to state governments to help the states expand access to and use of high-speed broadband.  

On the bright side, BEAD does appear to be designed to connect the country’s truly unserved regions—which, as noted above, account for about 8% of the nation’s households. The law explicitly requires prioritizing unserved areas before underserved areas. Even where the text references underserved areas as an additional priority, it does so in a way that won’t necessarily distort private investment.  The bill also creates preferences for projects in persistent and high-poverty areas. Thus, the targeted areas are very likely to fall on the “have-not” side of the digital divide.

On its face, the subsidy and grant approach taken in the bill is, all things considered, commendable. As we note in our broadband report, care must be taken to avoid interventions that distort private investment incentives, particularly in a successful industry like broadband. The goal, after all, is more broadband deployment. If policy interventions only replicate private options (usually at higher cost) or, worse, drive private providers from a market, broadband deployment will be slowed or reversed. The approach taken in this bill attempts to line up private incentives with regulatory goals.

As we discuss below, however, the devil is in the details. In particular, BEAD’s structure could theoretically allow enough discretion in execution that a large amount of waste, fraud, and abuse could end up frustrating the program’s goals.

The Bad

While the bill largely keeps the right focus of building out broadband in unserved areas, there are reasons to question some of its preferences and solutions. For instance, the state subgrant process puts for-profit and government-run broadband solutions on an equal playing field for the purposes of receiving funds, even though the two types of entities exist in very different institutional environments with very different incentives. 

There is also a requirement that projects provide broadband of at least 100/20 Mbps speed, even though the bill defines “unserved”as lacking at least 25/3 Mbps. While this is not terribly objectionable, the preference for 100/20 could have downstream effects on the hardest-to-connect areas. It may only be economically feasible to connect some very remote areas with a 25/3 Mbps connection. Requiring higher speeds in such areas may, despite the best intentions, slow deployment and push providers to prioritize areas that are relatively easier to connect.

For comparison, the FCC’s Connect America Fund and Rural Digital Opportunity Fund programs do place greater weight in bidding for providers that can deploy higher-speed connections. But in areas where a lower speed tier is cost-justified, a provider can still bid and win. This sort of approach would have been preferable in the infrastructure bill. 

But the bill’s largest infirmity is not in its terms or aims, but in the potential for mischief in its implementation. In particular, the BEAD grant program lacks the safeguards that have traditionally been applied to this sort of funding at the FCC. 

Typically, an aid program of this sort would be administered by the FCC under rulemaking bound by the Administrative Procedure Act (APA). As cumbersome as that process may sometimes be, APA rulemaking provides a high degree of transparency that results in fairly reliable public accountability. BEAD, by contrast, eschews this process, and instead permits NTIA to work directly with governors and other relevant state officials to dole out the money.  The funds will almost certainly be distributed more quickly, but with significantly less accountability and oversight. 

A large amount of the implementation detail will be driven at the state level. By definition, this will make it more difficult to monitor how well the program’s aims are being met. It also creates a process with far more opportunities for highly interested parties to lobby state officials to direct funding to their individual pet projects. None of this is to say that BEAD funding will necessarily be misdirected, but NTIA will need to be very careful in how it proceeds.

Conclusion: The Opportunity

Although the BIF’s broadband funds are slated to be distributed next year, we may soon be able to see whether there are warning signs that the legitimate goal of broadband deployment is being derailed for political favoritism. BEAD initially grants a flat $100 million to each state; it is only additional monies over that initial amount that need to be sought through the grant program. Thus, it is highly likely that some states will begin to enact legislation and related regulations in the coming year based on that guaranteed money. This early regulatory and legislative activity could provide insight into the pitfalls the full BEAD grantmaking program will face.

The larger point, however, is that the program needs safeguards. Where Congress declined to adopt them, NTIA would do well to implement them. Obviously, this will be something short of full APA rulemaking, but the NTIA will need to make accountability and reliability a top priority to ensure that the digital divide is substantially closed.

In Administrative Law, Broadband, Federal Communications Commission, Telecommunications, Truth on the Market , , , , , , , , ,
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A First Glance at the Biden Executive Order on Competition: The Good and the Bad (Including Much that Looks Ugly)

Alden Abbott —  9 July 2021

The Biden Administration’s July 9 Executive Order on Promoting Competition in the American Economy is very much a mixed bag—some positive aspects, but many negative ones.

It will have some positive effects on economic welfare, to the extent it succeeds in lifting artificial barriers to competition that harm consumers and workers—such as allowing direct sales of hearing aids in drug stores—and helping to eliminate unnecessary occupational licensing restrictions, to name just two of several examples.

But it will likely have substantial negative effects on economic welfare as well. Many aspects of the order appear to emphasize new regulation—such as Net Neutrality requirements that may reduce investment in broadband by internet service providers—and imposing new regulatory requirements on airlines, pharmaceutical companies, digital platforms, banks, railways, shipping, and meat packers, among others. Arbitrarily imposing new rules in these areas, without a cost-beneficial appraisal and a showing of a market failure, threatens to reduce innovation and slow economic growth, hurting producers and consumer. (A careful review of specific regulatory proposals may shed greater light on the justifications for particular regulations.)

Antitrust-related proposals to challenge previously cleared mergers, and to impose new antitrust rulemaking, are likely to raise costly business uncertainty, to the detriment of businesses and consumers. They are a recipe for slower economic growth, not for vibrant competition.

An underlying problem with the order is that it is based on the false premise that competition has diminished significantly in recent decades and that “big is bad.” Economic analysis found in the February 2020 Economic Report of the President, and in other economic studies, debunks this flawed assumption.

In short, the order commits the fundamental mistake of proposing intrusive regulatory solutions for a largely nonexistent problem. Competitive issues are best handled through traditional well-accepted antitrust analysis, which centers on promoting consumer welfare and on weighing procompetitive efficiencies against anticompetitive harm on a case-by-case basis. This approach:

  1. Deals effectively with serious competitive problems; while at the same time
  2. Cabining error costs by taking into account all economically relevant considerations on a case-specific basis.

Rather than using an executive order to direct very specific regulatory approaches without a strong economic and factual basis, the Biden administration would have been better served by raising a host of competitive issues that merit possible study and investigation by expert agencies. Such an approach would have avoided imposing the costs of unwarranted regulation that unfortunately are likely to stem from the new order.

Finally, the order’s call for new regulations and the elimination of various existing legal policies will spawn matter-specific legal challenges, and may, in many cases, not succeed in court. This will impose unnecessary business uncertainty in addition to public and private resources wasted on litigation.

In Administrative Law, Antitrust & Competition, Antitrust Division, Banking, Broadband, Data Privacy & Security, Error Costs, Federal Communications Commission, Federal Trade Commission, Financial Regulation, Health Care, Intellectual Property, Justice Department, Merger Guidelines, Mergers & Acquisitions, Monopolization, Net Neutrality, Pharmaceuticals, Platforms, Regulation, Telecommunications, Truth on the Market , , , , , , , , , , , , , , , , ,
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Build Broadband Better: Focus on Competition, Not Competitors

Geoffrey Manne & Ben Sperry —  28 June 2021

President Joe Biden named his post-COVID-19 agenda “Build Back Better,” but his proposals to prioritize support for government-run broadband service “with less pressure to turn profits” and to “reduce Internet prices for all Americans” will slow broadband deployment and leave taxpayers with an enormous bill.

Policymakers should pay particular heed to this danger, amid news that the Senate is moving forward with considering a $1.2 trillion bipartisan infrastructure package, and that the Federal Communications Commission, the U.S. Commerce Department’s National Telecommunications and Information Administration, and the U.S. Agriculture Department’s Rural Utilities Service will coordinate on spending broadband subsidy dollars.

In order to ensure that broadband subsidies lead to greater buildout and adoption, policymakers must correctly understand the state of competition in broadband and not assume that increasing the number of firms in a market will necessarily lead to better outcomes for consumers or the public.

A recent white paper published by us here at the International Center for Law & Economics makes the case that concentration is a poor predictor of competitiveness, while offering alternative policies for reaching Americans who don’t have access to high-speed Internet service.

The data show that the state of competition in broadband is generally healthy. ISPs routinely invest billions of dollars per year in building, maintaining, and upgrading their networks to be faster, more reliable, and more available to consumers. FCC data show that average speeds available to consumers, as well as the number of competitors providing higher-speed tiers, have increased each year. And prices for broadband, as measured by price-per-Mbps, have fallen precipitously, dropping 98% over the last 20 years. None of this makes sense if the facile narrative about the absence of competition were true.

In our paper, we argue that the real public policy issue for broadband isn’t curbing the pursuit of profits or adopting price controls, but making sure Americans have broadband access and encouraging adoption. In areas where it is very costly to build out broadband networks, like rural areas, there tend to be fewer firms in the market. But having only one or two ISPs available is far less of a problem than having none at all. Understanding the underlying market conditions and how subsidies can both help and hurt the availability and adoption of broadband is an important prerequisite to good policy.

The basic problem is that those who have decried the lack of competition in broadband often look at the number of ISPs in a given market to determine whether a market is competitive. But this is not how economists think of competition. Instead, economists look at competition as a dynamic process where changes in supply and demand factors are constantly pushing the market toward new equilibria.

In general, where a market is “contestable”—that is, where existing firms face potential competition from the threat of new entry—even just a single existing firm may have to act as if it faces vigorous competition. Such markets often have characteristics (e.g., price, quality, and level of innovation) similar or even identical to those with multiple existing competitors. This dynamic competition, driven by changes in technology or consumer preferences, ensures that such markets are regularly disrupted by innovative products and services—a process that does not always favor incumbents.

Proposals focused on increasing the number of firms providing broadband can actually reduce consumer welfare. Whether through overbuilding—by allowing new private entrants to free-ride on the initial investment by incumbent companies—or by going into the Internet business itself through municipal broadband, government subsidies can increase the number of firms providing broadband. But it can’t do so without costs―which include not just the cost of the subsidies themselves, which ultimately come from taxpayers, but also the reduced incentives for unsubsidized private firms to build out broadband in the first place.

If underlying supply and demand conditions in rural areas lead to a situation where only one provider can profitably exist, artificially adding another completely reliant on subsidies will likely just lead to the exit of the unsubsidized provider. Or, where a community already has municipal broadband, it is unlikely that a private ISP will want to enter and compete with a firm that doesn’t have to turn a profit.

A much better alternative for policymakers is to increase the demand for buildout through targeted user subsidies, while reducing regulatory barriers to entry that limit supply.

For instance, policymakers should consider offering connectivity vouchers to unserved households in order to stimulate broadband deployment and consumption. Current subsidy programs rely largely on subsidizing the supply side, but this requires the government to determine the who and where of entry. Connectivity vouchers would put the choice in the hands of consumers, while encouraging more buildout to areas that may currently be uneconomic to reach due to low population density or insufficient demand due to low adoption rates.

Local governments could also facilitate broadband buildout by reducing unnecessary regulatory barriers. Local building codes could adopt more connection-friendly standards. Local governments could also reduce the cost of access to existing poles and other infrastructure. Eligible Telecommunications Carrier (ETC) requirements could also be eliminated, because they deter potential providers from seeking funds for buildout (and don’t offer countervailing benefits).

Albert Einstein once said: “if I were given one hour to save the planet, I would spend 59 minutes defining the problem, and one minute resolving it.” When it comes to encouraging broadband buildout, policymakers should make sure they are solving the right problem. The problem is that the cost of building out broadband to unserved areas is too high or the demand too low—not that there are too few competitors.

In Administrative Law, Antitrust & Competition, Barriers to Entry, Broadband, COVID-19, Federal Communications Commission, International Center for Law & Economics, Regulation, Regulatory Reform, Telecommunications, Truth on the Market , , , , , , , , , , , , , , , ,
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Chairman Pai Symposium: Wrap-Up and Thoughts for the Future FCC

Kristian Stout —  3 February 2021

[TOTM: The following is part of a digital symposium by TOTM guests and authors on the legal and regulatory issues that arose during Ajit Pai’s tenure as chairman of the Federal Communications Commission. The entire series of posts is available here.

Kristian Stout is director of innovation policy for the International Center for Law & Economics.]

One of the themes that has run throughout this symposium has been that, throughout his tenure as both a commissioner and as chairman, Ajit Pai has brought consistency and careful analysis to the Federal Communications Commission (McDowell, Wright). The reflections offered by the various authors in this symposium make one thing clear: the next administration would do well to learn from the considered, bipartisan, and transparent approach to policy that characterized Chairman Pai’s tenure at the FCC.

The following are some of the more specific lessons that can be learned from Chairman Pai. In an important sense, he laid the groundwork for his successful chairmanship when he was still a minority commissioner. His thoughtful dissents were rooted in consistent, clear policy arguments—a practice that both charted how he would look at future issues as chairman and would help the public to understand exactly how he would approach new challenges before the FCC (McDowell, Wright).

One of the most public instances of Chairman Pai’s consistency (and, as it turns out, his bravery) was with respect to net neutrality. From his dissent in the Title II Order, through his commission’s Restoring Internet Freedom Order, Chairman Pai focused on the actual welfare of consumers and the factors that drive network growth and adoption. As Brent Skorup noted, “Chairman Pai and the Republican commissioners recognized the threat that Title II posed, not only to free speech, but to the FCC’s goals of expanding telecommunications services and competition.” The result of giving in to the Title II advocates would have been to draw the FCC into a quagmire of mass-media regulation that would ultimately harm free expression and broadband deployment in the United States.

Chairman Pai’s vision worked out (Skorup, May, Manne, Hazlett). Despite prognostications of the “death of the internet” because of the Restoring Internet Freedom Order, available evidence suggests that industry investment grew over Chairman Pai’s term. More Americans are connected to broadband than ever before.

Relatedly, Chairman Pai was a strong supporter of liberalizing media-ownership rules that long had been rooted in 20th century notions of competition (Manne). Such rules systematically make it harder for smaller media outlets to compete with large news aggregators and social-media platforms. As Geoffrey Manne notes: 

Consistent with his unwavering commitment to promote media competition… Chairman Pai put forward a proposal substantially updating the media-ownership rules to reflect the dramatically changed market realities facing traditional broadcasters and newspapers.

This was a bold move for Chairman Pai—in essence, he permitted more local concentration by, e.g., allowing the purchase of a newspaper by a local television station that previously would have been forbidden. By allowing such combinations, the FCC enabled failing local news outlets to shore up their losses and continue to compete against larger, better-resourced organizations. The rule changes are in a case pending before the Supreme Court; should the court find for the FCC, the competitive outlook for local media looks much better thanks to Chairman Pai’s vision.

Chairman Pai’s record on spectrum is likewise impressive (Cooper, Hazlett). The FCC’s auctions under Chairman Pai raised more money and freed more spectrum for higher value uses than any previous commission (Feld, Hazlett). But there is also a lesson in how subsequent administrations can continue what Chairman Pai started. Unlicensed use, for instance, is not free or costless in its maintenance, and Tom Hazlett believes that there is more work to be done in further liberalizing access to the related spectrum—liberalizing in the sense of allowing property rights and market processes to guide spectrum to its highest use:

The basic theme is that regulators do better when they seek to create new rights that enable social coordination and entrepreneurial innovation, rather than enacting rules that specify what they find to be the “best” technologies or business models.

And to a large extent this is the model that Chairman Pai set down, from the issuance of the 12 GHZ NPRM to consider whether those spectrum bands could be opened up for wireless use, to the L-Band Order, where the commission worked hard to reallocate spectrum rights in ways that would facilitate more productive uses.

The controversial L-Band Order was another example of where Chairman Pai displayed both political acumen as well as an apolitical focus on improving spectrum policy (Cooper). Political opposition was sharp and focused after the commission finalized its order in April 2020. Nonetheless, Chairman Pai was deftly able to shepherd the L-Band Order and guarantee that important spectrum was made available for commercial wireless use.

As a native of Kansas, rural broadband rollout ranked highly in the list of priorities at the Pai FCC, and his work over the last four years is demonstrative of this pride of place (Hurwitz, Wright). As Gus Hurwitz notes, “the commission completed the Connect America Fund Phase II Auction. More importantly, it initiated the Rural Digital Opportunity Fund (RDOF) and the 5G Fund for Rural America, both expressly targeting rural connectivity.”

Further, other work, like the recently completed Rural Digital Opportunity Fund auction and the 5G fund provide the necessary policy framework with which to extend greater connectivity to rural America. As Josh Wright notes, “Ajit has also made sure to keep an eye out for the little guy, and communities that have been historically left behind.” This focus on closing the digital divide yielded gains in connectivity in places outside of traditional rural American settings, such as tribal lands, the U.S. Virgin Islands, and Puerto Rico (Wright).

But perhaps one of Chairman Pai’s best and (hopefully) most lasting contributions will be de-politicizing the FCC and increasing the transparency with which it operated. In contrast to previous administrations, the Pai FCC had an overwhelmingly bipartisan nature, with many bipartisan votes being regularly taken at monthly meetings (Jamison). In important respects, it was this bipartisan (or nonpartisan) nature that was directly implicated by Chairman Pai championing the Office of Economics and Analytics at the commission. As many of the commentators have noted (Jamison, Hazlett, Wright, Ellig) the OEA was a step forward in nonpolitical, careful cost-benefit analysis at the commission. As Wright notes, Chairman Pai was careful to not just hire a bunch of economists, but rather to learn from other agencies that have better integrated economics, and to establish a structure that would enable the commission’s economists to materially contribute to better policy.

We were honored to receive a post from Jerry Ellig just a day before he tragically passed away. As chief economist at the FCC from 2017-2018, he was in a unique position to evaluate past practice and participate in the creation of the OEA. According to Ellig, past practice tended to treat the work of the commission’s economists as a post-hoc gloss on the work of the agency’s attorneys. Once conclusions were reached, economics would often be backfilled in to support those conclusions. With the establishment of the OEA, economics took a front-seat role, with staff of that office becoming a primary source for information and policy analysis before conclusions were reached. As Wright noted, the Federal Trade Commission had adopted this approach. With the FCC moving to do this as well, communications policy in the United States is on much sounder footing thanks to Chairman Pai.

Not only did Chairman Pai push the commission in the direction of nonpolitical, sound economic analysis but, as many commentators note, he significantly improved the process at the commission (Cooper, Jamison, Lyons). Chief among his contributions was making it a practice to publish proposed orders weeks in advance, breaking with past traditions of secrecy around draft orders, and thereby giving the public an opportunity to see what the commission intended to do.

Critics of Chairman Pai’s approach to transparency feared that allowing more public view into the process would chill negotiations between the commissioners behind the scenes. But as Daniel Lyons notes, the chairman’s approach was a smashing success:

The Pai era proved to be the most productive in recent memory, averaging just over six items per month, which is double the average number under Pai’s immediate predecessors. Moreover, deliberations were more bipartisan than in years past: Nathan Leamer notes that 61.4% of the items adopted by the Pai FCC were unanimous and 92.1% were bipartisan compared to 33% and 69.9%, respectively, under Chairman Wheeler.

Other reforms from Chairman Pai helped open the FCC to greater scrutiny and a more transparent process, including limiting editorial privileges on staff on an order’s text, and by introducing the use of a simple “fact sheet” to explain orders (Lyons).

I found one of the most interesting insights into the character of Chairman Pai, was his willingness to reverse course and take risks to ensure that the FCC promoted innovation instead of obstructing it by relying on received wisdom (Nachbar). For instance, although he was initially skeptical of the prospects of Space X to introduce broadband through its low-Earth-orbit satellite systems, under Chairman Pai, the Starlink beta program was included in the RDOF auction. It is not clear whether this was a good bet, Thomas Nachbar notes, but it was a statement both of the chairman’s willingness to change his mind, as well as to not allow policy to remain in a comfortable zone that excludes potential innovation.

The next chair has an awfully big pair of shoes (or one oversized coffee mug) to fill. Chairman Pai established an important legacy of transparency and process improvement, as well as commitment to careful, economic analysis in the business of the agency. We will all be well-served if future commissions follow in his footsteps.

In Broadband, Federal Communications Commission, Federal Trade Commission, International Center for Law & Economics, Net Neutrality, Platforms, Regulation, Retrospective on Ajit Pai’s Tenure as FCC Chairman, Supreme Court, Symposia, Telecommunications, Truth on the Market, Wireless , , , , , , , , , , , , , , , , , , ,
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Ajit Pai and Risk-Taking at the FCC

Thomas Nachbar —  25 January 2021

[TOTM: The following is part of a digital symposium by TOTM guests and authors on the legal and regulatory issues that arose during Ajit Pai’s tenure as chairman of the Federal Communications Commission. The entire series of posts is available here.

Thomas B. Nachbar is a professor of law at the University of Virginia School of Law and a senior fellow at the Center for National Security Law.]

It would be impossible to describe Ajit Pai’s tenure as chair of the Federal Communications Commission as ordinary. Whether or not you thought his regulatory style or his policies were innovative, his relationship with the public has been singular for an FCC chair. His Reese’s mug, alone, has occupied more space in the American media landscape than practically any past FCC chair. From his first day, he has attracted consistent, highly visible criticism from a variety of media outlets, although at least John Oliver didn’t describe him as a dingo. Just today, I read that Ajit Pai single handedly ruined the internet, which when I got up this morning seemed to be working pretty much the same way it was four years ago.

I might be biased in my view of Ajit. I’ve known him since we were law school classmates, when he displayed the same zeal and good-humored delight in confronting hard problems that I’ve seen in him at the commission. So I offer my comments not as an academic and student of FCC regulation, but rather as an observer of the communications regulatory ecosystem that Ajit has dominated since his appointment. And while I do not agree with everything he’s done at the commission, I have admired his single-minded determination to pursue policies that he believes will expand access to advanced telecommunications services. One can disagree with how he’s pursued that goal—and many have—but characterizing his time as chair in any other way simply misses the point. Ajit has kept his eye on expanding access, and he has been unwavering in pursuit of that objective, even when doing so has opened him to criticism, which is the definition of taking political risk.

Thus, while I don’t think it’s going to be the most notable policy he’s participated in at the commission, I would like to look at Ajit’s tenure through the lens of one small part of one fairly specific proceeding: the commission’s decision to include SpaceX as a low-latency provider in the Rural Digital Opportunity Fund (RDOF) Auction.

The decision to include SpaceX is at one level unremarkable. SpaceX proposes to offer broadband internet access through low-Earth-orbit satellites, which is the kind of thing that is completely amazing but is becoming increasingly un-amazing as communications technology advances. SpaceX’s decision to use satellites is particularly valuable for initiatives like the RDOF, which specifically seek to provide services where previous (largely terrestrial) services have not. That is, in fact, the whole point of the RDOF, a point that sparked fiery debate over the FCC’s decision to focus the first phase of the RDOF on areas with no service rather than areas with some service. Indeed, if anything typifies the current tenor of the debate (at the center of which Ajit Pai has resided since his confirmation as chair), it is that a policy decision over which kind of under-served areas should receive more than $16 billion in federal funding should spark such strongly held views. In the end, SpaceX was awarded $885.5 million to participate in the RDOF, almost 10% of the first-round funds awarded.

But on a different level, the decision to include SpaceX is extremely remarkable. Elon Musk, SpaceX’s pot-smoking CEO, does not exactly fit regulatory stereotypes. (Disclaimer: I personally trust Elon Musk enough to drive my children around in one of his cars.) Even more significantly, SpaceX’s Starlink broadband service doesn’t actually exist as a commercial product. If you go to Starlink’s website, you won’t find a set of splashy webpages featuring products, services, testimonials, and a variety of service plans eager for a monthly assignation with your credit card or bank account. You will be greeted with a page asking for your email and service address in case you’d like to participate in Starlink’s beta program. In the case of my address, which is approximately 100 miles from the building where the FCC awarded SpaceX over $885 million to participate in the RDOF, Starlink is not yet available. I will, however, “be notified via email when service becomes available in your area,” which is reassuring but doesn’t get me any closer to watching cat videos.

That is perhaps why Chairman Pai was initially opposed to including SpaceX in the low-latency portion of the RDOF. SpaceX was offering unproven technology and previous satellite offerings had been high-latency, which is good for some uses but not others.

But then, an even more remarkable thing happened, at least in Washington: a regulator at the center of a controversial issue changed his mind and—even more remarkably—admitted his decision might not work out. When the final order was released, SpaceX was allowed to bid for low-latency RDOF funds even though the commission was “skeptical” of SpaceX’s ability to deliver on its low-latency promise. Many doubted that SpaceX would be able to effectively compete for funds, but as we now know, that decision led to SpaceX receiving a large share of the Phase I funds. Of course, that means that if SpaceX doesn’t deliver on its latency promises, a substantial part of the RDOF Phase I funds will fail to achieve their purpose, and the FCC will have backed the wrong horse.

I think we are unlikely to see such regulatory risk-taking, both technically and politically, in what will almost certainly be a more politically attuned commission in the coming years. Even less likely will be acknowledgments of uncertainty in the commission’s policies. Given the political climate and the popular attention policies like network neutrality have attracted, I would expect the next chair’s views about topics like network neutrality to exhibit more unwavering certainty than curiosity and more resolve than risk-taking. The most defining characteristic of modern communications technology and markets is change. We are all better off with a commission in which the other things that can change are minds.

In Broadband, Credit Cards, Federal Communications Commission, Financial Regulation, Net Neutrality, Regulatory Reform, Retrospective on Ajit Pai’s Tenure as FCC Chairman, Symposia, Telecommunications, Truth on the Market, Wireless , , , , , , , , , , , ,
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A Reflection on Commissioner Pai, Chairman Pai, and Public Service

Josh Wright —  21 January 2021

[TOTM: The following is part of a digital symposium by TOTM guests and authors on the legal and regulatory issues that arose during Ajit Pai’s tenure as chairman of the Federal Communications Commission. The entire series of posts is available here.

Joshua D. Wright is university professor and executive director of the Global Antitrust Institute at George Mason University’s Scalia Law School. He served as a commissioner of the Federal Trade Commission from 2013 through 2015.]

Much of this symposium celebrates Ajit’s contributions as chairman of the Federal Communications Commission and his accomplishments and leadership in that role. And rightly so. But Commissioner Pai, not just Chairman Pai, should also be recognized.

I first met Ajit when we were both minority commissioners at our respective agencies: the FCC and Federal Trade Commission. Ajit had started several months before I was confirmed. I watched his performance in the minority with great admiration. He reached new heights when he shifted from minority commissioner to chairman, and the accolades he will receive for that work are quite appropriate. But I want to touch on his time as a minority commissioner at the FCC and how that should inform the retrospective of his tenure.

Let me not bury the lead: Ajit Pai has been, in my view, the most successful, impactful minority commissioner in the history of the modern regulatory state. And it is that success that has led him to become the most successful and impactful chairman, too.

I must admit all of this success makes me insanely jealous. My tenure as a minority commissioner ran in parallel with Ajit. We joked together about our fierce duel to be the reigning king of regulatory dissents. We worked together fighting against net neutrality. We compared notes on dissenting statements and opinions. I tried to win our friendly competition. I tried pretty hard. And I lost; worse than I care to admit. But we had fun. And I very much admired the combination of analytical rigor, clarity of exposition, and intellectual honesty in his work. Anyway, the jealousy would be all too much if he weren’t also a remarkable person and friend.

The life of a minority commissioner can be a frustrating one. Like Sisyphus, the minority commissioner often wakes up each day to roll the regulatory (well, in this case, deregulatory) boulder up the hill, only to watch it roll down. And then do it again. And again. At times, it is an exhausting series of jousting matches with the windmills of Washington bureaucracy. It is not often that a minority commissioner has as much success as Commissioner Pai did: dissenting opinions ultimately vindicated by judicial review; substantive victories on critical policy issues; paving the way for institutional and procedural reforms.

It is one thing to write a raging dissent about how the majority has lost all principles. Fire and brimstone come cheap when there aren’t too many consequences to what you have to say. Measure a man after he has been granted power and a chance to use it, and only then will you have a true test of character. Ajit passes that test like few in government ever have.

This is part of what makes Ajit Pai so impressive. I have seen his work firsthand. The multitude of successes Ajit achieved as Chairman Pai were predictable, precisely because Commissioner Pai told the world exactly where he stood on important telecommunications policy issues, the reasons why he stood there, and then, well, he did what he said he would. The Pai regime was much more like a Le’Veon Bell run, between the tackles, than a no-look pass from Patrick Mahomes to Tyreek Hill. Commissioner Pai shared his playbook with the world; he told us exactly where he was going to run the ball. And then Chairman Pai did exactly that. And neither bureaucratic red tape nor political pressure—or even physical threat—could stop him.

Here is a small sampling of his contributions, many of them building on groundwork he laid in the minority:

Focus on Economic Analysis

One of Chairman Pai’s most important contributions to the FCC is his work to systematically incorporate economic analysis into FCC decision-making. The triumph of this effort was establishing the Office of Economic Analysis (OEA) in 2018. The OEA focus on conducting economic analyses of the costs, benefits, and economic impacts of the commission’s proposed rules will be a critical part of agency decision-making from here on out. This act alone would form a legacy any agency head could easily rest their laurels on. The OEA’s work will shape the agency for decades and ensure that agency decisions are made with the oversight economics provides.

This is a hard thing to do; just hiring economists is not enough. Structure matters. How economists get information to decision-makers determines if it will be taken seriously. To this end, Ajit has taken all the lessons from what has made the economists at the FTC so successful—and the lessons from the structural failures at other agencies—and applied them at the FCC.

Structural independence looks like “involving economists on cross-functional teams at the outset and allowing the economics division to make its own, independent recommendations to decision-makers.”[1] And it is necessary for economics to be taken seriously within an agency structure. Ajit has assured that FCC decision-making will benefit from economic analysis for years to come.

Narrowing the Digital Divide

Chairman Pai made helping the disadvantaged get connected to the internet and narrowing the digital divide the top priorities during his tenure. And Commissioner Pai was fighting for this long before the pandemic started.

As businesses, schools, work, and even health care have moved online, the need to get Americans connected with high-speed broadband has never been greater. Under Pai’s leadership, the FCC has removed bureaucratic barriers[2] and provided billions in funding[3] to facilitate rural broadband buildout. We are talking about connections to some 700,000 rural homes and businesses in 45 states, many of whom are gaining access to high-speed internet for the first time.

Ajit has also made sure to keep an eye out for the little guy, and communities that have been historically left behind. Tribal communities,[4] particularly in the rural West, have been a keen focus of his, as he knows all-too-well the difficulties and increased costs associated with servicing those lands. He established programs to rebuild and expand networks in the Virgin Islands and Puerto Rico[5] in an effort to bring the islands to parity with citizens living on the mainland.

You need not take my word for it; he really does talk about this all the time. As he said in a speech at the National Tribal Broadband Summit: “Since my first day in this job, I’ve said that closing the digital divide was my top priority. And as this audience knows all too well, nowhere is that divide more pronounced than on Tribal lands.“ That work is not done; it is beyond any one person. But Ajit should be recognized for his work bridging the divide and laying the foundation for future gains.

And again, this work started as minority commissioner. Before he was chairman, Pai proposed projects for rural broadband development; he frequently toured underserved states and communities; and he proposed legislation to offer the 21st century promise to economically depressed areas of the country. Looking at Chairman Pai is only half the picture.

Keeping Americans Connected

One would not think that the head of the Federal Communications Commission would be a leader on important health-care issues, but Ajit has made a real difference here too. One of his major initiatives has been the development of telemedicine solutions to expand access to care in critical communities.

Beyond encouraging buildout of networks in less-connected areas, Pai’s FCC has also worked to allocate funding for health-care providers and educational institutions who were navigating the transition to remote services. He ensured that health-care providers’ telecommunications and information services were funded. He worked with the U.S. Department of Education to direct funds for education stabilization and allowed schools to purchase additional bandwidth. And he granted temporary additional spectrum usage to broadband providers to meet the increased demand upon our nation’s networks. Oh, and his Keep Americans Connected Pledge gathered commitment from more than 800 companies to ensure that Americans would not lose their connectivity due to pandemic-related circumstances. As if the list were not long enough, Congress’ January coronavirus relief package will ensure that these and other programs, like Rip and Replace, will remain funded for the foreseeable future.

I might sound like I am beating a dead horse here, but the seeds of this, too, were laid in his work in the minority. Here he is describing his work in a 2015 interview, as a minority commissioner:

My own father is a physician in rural Kansas, and I remember him heading out in his car to visit the small towns that lay 40 miles or more from home. When he was there, he could provide care for people who would otherwise never see a specialist at all. I sometimes wonder, back in the 1970s and 1980s, how much easier it would have been on patients, and him, if broadband had been available so he could provide healthcare online.

Agency Transparency and Democratization

Many minority commissioners like to harp on agency transparency. Some take a different view when they are in charge. But Ajit made good on his complaints about agency transparency when he became Chairman Pai. He did this through circulating draft items well in advance of monthly open meetings, giving people the opportunity to know what the agency was voting on.

You used to need a direct connection with the FCC to even be aware of what orders were being discussed—the worst of the D.C. swamp—but now anyone can read about the working items, in clear language.

These moves toward a more transparent, accessible FCC dispel the impression that the agency is run by Washington insiders who are disconnected from the average person. The meetings may well be dry and technical—they really are—but Chairman Pai’s statements are not only good-natured and humorous, but informative and substantive. The public has been well-served by his efforts here.

Incentivizing Innovation and Next-Generation Technologies

Chairman Pai will be remembered for his encouragement of innovation. Under his chairmanship, the FCC discontinued rules that unnecessarily required carriers to maintain costly older, lower-speed networks and legacy voice services. It streamlined the discontinuance process for lower-speed services if the carrier is already providing higher-speed service or if no customers are using the service. It also okayed streamlined notice following force majeure events like hurricanes to encourage investment and deployment of newer, faster infrastructure and services following destruction of networks. The FCC also approved requests by companies to provide high-speed broadband through non-geostationary orbit satellite constellations and created a streamlined licensing process for small satellites to encourage faster deployment.

This is what happens when you get a tech nerd at the head of an agency he loves and cares for. A serious commitment to good policy with an eye toward the future.

Restoring Internet Freedom

This is a pretty sensitive one for me. You hear less about it now, other than some murmurs from the Biden administration about changing it, but the debate over net neutrality got nasty and apocalyptic.

It was everywhere; people saying Chairman Pai would end the internet as we know it. The whole web blacked out for a day in protest. People mocked up memes showing a 25 cent-per-Google-search charge. And as a result of this over-the-top rhetoric, my friend, and his family, received death threats.

That is truly beyond the pale. One could not blame anyone for leaving public service in such an environment. I cannot begin to imagine what I would have done in Ajit’s place. But Ajit took the threats on his life with grace and dignity, never lost his sense of humor, and continued to serve the public dutifully with remarkable courage. I think that says a lot about him. And the American public is lucky to have benefited from his leadership.

Now, for the policy stuff. Though it should go without saying, the light-touch framework Chairman Pai returned us to—as opposed to the public utility one—will ensure that the United States maintains its leading position on technological innovation in 5G networks and services. The fact that we have endured COVID—and the massive strain on the internet it has caused—with little to no noticeable impact on internet services is all the evidence you need he made the right choice. Ajit has rightfully earned the title of the “5G Chairman.”

Conclusion

I cannot give Ajit all the praise he truly deserves without sounding sycophantic, or bribed. There are any number of windows into his character, but one rises above the rest for me. And I wanted to take the extra time to thank Ajit for it.

Every year, without question, no matter what was going on—even as chairman—Ajit would come to my classes and talk to my students. At length. In detail. And about any subject they wished. He stayed until he answered all of their questions. If I didn’t politely shove him out of the class to let him go do his real job, I’m sure he would have stayed until the last student left. And if you know anything about how to judge a person’s character, that will tell you all you need to know. 

Congratulations, Chairman Pai.

[1] Jerry Ellig & Catherine Konieczny, The Organization of Economists in Regulatory Agencies: Does Structure Matter?

[2] Rural Digital Opportunity Fund, Fed. Commc’ns Comm’n, https://www.fcc.gov/auction/904.

[3] Press Release, Connect America Fund Auction to Expand Broadband to Over 700,000 Rural Homes and Businesses: Auction Allocates $1.488 Billion to Close the Digital Divide, Fed. Commc’ns Comm’n, https://docs.fcc.gov/public/attachments/DOC-353840A1.pdf.

[4] Press Release, FCC Provides Relief for Carriers Serving Tribal Lands, Fed. Commc’ns Comm’n, https://www.fcc.gov/document/fcc-provides-relief-carriers-serving-tribal-lands.

[5] Press Release, FCC Approves $950 Million to Harden, Improve, and Expand Broadband Networks in Puerto Rico and U.S. Virgin Islands, Fed. Commc’ns Comm’n, https://docs.fcc.gov/public/attachments/DOC-359891A1.pdf.

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Pai’s Legacy of Progress in Closing the Rural Digital Divide

Gus Hurwitz —  19 January 2021

[TOTM: The following is part of a digital symposium by TOTM guests and authors on the legal and regulatory issues that arose during Ajit Pai’s tenure as chairman of the Federal Communications Commission. The entire series of posts is available here.

Justin “Gus” Hurwitz is associate professor of law, the Menard Director of the Nebraska Governance and Technology Center, and co-director of the Space, Cyber, and Telecom Law Program at the University of Nebraska College of Law. He is also director of law & economics programs at the International Center for Law & Economics.]

I was having a conversation recently with a fellow denizen of rural America, discussing how to create opportunities for academics studying the digital divide to get on-the-ground experience with the realities of rural telecommunications. He recounted a story from a telecom policy event in Washington, D.C., from not long ago. The story featured a couple of well-known participants in federal telecom policy as they were talking about how to close the rural digital divide. The punchline of the story was loud speculation from someone in attendance that neither of these bloviating telecom experts had likely ever set foot in a rural town.

And thus it is with most of those who debate and make telecom policy. The technical and business challenges of connecting rural America are different. Rural America needs different things out of its infrastructure than urban America. And the attitudes of both users and those providing service are different here than they are in urban America.

Federal Communications Commission Chairman Aji Pai—as I get to refer to him in writing for perhaps the last time—gets this. As is well-known, he is a native Kansan. He likely spent more time during his time as chairman driving rural roads than this predecessor spent hobnobbing at political fundraisers. I had the opportunity on one of these trips to visit a Nebraska farm with him. He was constantly running a bit behind schedule on this trip. I can attest that this is because he would wander off with a farmer to look at a combine or talk about how they were using drones to survey their fields. And for those cynics out there—I know there are some who don’t believe in the chairman’s interest in rural America—I can tell you that it meant a lot to those on the ground who had the chance to share their experiences.

Rural Digital Divide Policy on the Ground

Closing the rural digital divide is a defining public-policy challenge of telecommunications. It’s right there in the first sentence of the Communications Act, which established the FCC:

For the purpose of regulating interstate and foreign commerce in communication by wire and radio so as to make available, so far as possible, to all the people of the United States…a rapid, efficient, Nation-wide, and world-wide wire and radio communication service[.]

Depending on how one defines broadband internet, somewhere between 18 and 35 million Americans lack broadband internet access. No matter how you define it, however, most of those lacking access are in rural America.

It’s unsurprising why this is the case. Looking at North Dakota, South Dakota, and Nebraska—three of the five most expensive states to connect each household in both the 2015 and 2018 Connect America Fund models—the cost to connect a household to the internet in these states was twice that of connecting a household in the rest of the United States. Given the low density of households in these areas, often less than one household per square mile, there are relatively fewer economies of scale that allow carriers to amortize these costs across multiple households. We can add that much of rural America is both less wealthy than more urban areas and often doesn’t value the benefits of high-speed internet as highly. Taken together, the cost of providing service in these areas is much higher, and the demand for them much less, than in more urban areas.

On the flip side are the carriers and communities working to provide access. The reality in these states is that connecting those who live here is an all-hands-on-deck exercise. I came to Nebraska with the understanding that cable companies offer internet service via cable and telephone companies offer internet service via DSL or fiber. You can imagine my surprise the first time I spoke to a carrier who was using a mix of cable, DSL, fiber, microwave, and Wi-Fi to offer service to a few hundred customers. And you can also imagine my surprise when he started offering advice to another carrier—ostensibly a competitor—about how to get more performance out of some older equipment. Just last week, I was talking to a mid-size carrier about how they are using fixed wireless to offer service to customers outside of their service area as a stopgap until fiber gets out to the customer’s house.

Pai’s Progress Closing the Rural Digital Divide

This brings us to Chairman Pai’s work to close the rural digital divide. Literally on his first day on the job, he announced that his top priority was closing the digital divide. And he backed this up both with the commission’s agenda and his own time and attention.

On Chairman Pai’s watch, the commission completed the Connect America Fund Phase II Auction. More importantly, it initiated the Rural Digital Opportunity Fund (RDOF) and the 5G Fund for Rural America, both expressly targeting rural connectivity. The recently completed RDOF auction promises to connect 10 million rural Americans to the internet; the 5G Fund will ensure that all but the most difficult-to-connect areas of the country will be covered by 5G mobile wireless. These are top-line items on Commissioner Pai’s resume as chairman. But it is important to recognize how much of a break they were from the commission’s previous approach to universal service and the digital divide. These funding mechanisms are best characterized by their technology-neutral, reverse-auction based approach to supporting service deployment.

This is starkly different from prior generations of funding, which focused on subsidizing specific carriers to provide specific levels of service using specific technologies. As I said above, the reality on the ground in rural America is that closing the digital divide is an all-hands-on-deck exercise. It doesn’t matter who is offering service or what technology they are using. Offering 10 mbps service today over a rusty barbed wire fence or a fixed wireless antenna hanging off the branch of a tree is better than offering no service or promising fiber that’s going to take two years to get into the ground. And every dollar saved by connecting one house with a lower-cost technology is a dollar that can be used to connect another house that may otherwise have gone unconnected.

The combination of the reverse-auction and technology-neutral approaches has made it possible for the commission to secure commitments to connect a record number of houses with high-speed internet over an incredibly short period of time.

Then there are the chairman’s accomplishments on the spectrum and wireless–internet fronts. Here, he faced resistance from both within the government and industry. In some of the more absurd episodes of government in-fighting, he tangled with protectionist interests within the government to free up CBRS and other mid-band spectrum and to authorize new satellite applications. His support of fixed and satellite wireless has the potential to legitimately shake up the telecom industry. I honestly have no idea whether this is going to prove to be a good or bad bet in the long term—whether fixed wireless is going to be able to offer the quality and speed of service its proponents promise or whether it instead will be a short-run misallocation of capital that will require clawbacks and re-awards of funding in another few years—but the embrace of the technology demonstrated decisive leadership and thawed a too limited and ossified understanding of what technologies could be used to offer service. Again, as said above, closing the rural digital divide is an all-hands-on-deck problem; we do ourselves no favors by excluding possible solutions from our attempts to address it.

There is more that the commission did under Chairman Pai’s leadership, beyond the commission’s obvious order and actions, to close the rural digital divide. Over the past two years, I have had opportunities to work with academic colleagues from other disciplines on a range of federal funding opportunities for research and development relating to next generation technologies to support rural telecommunications, such as programs through the National Science Foundation. It has been wonderful to see increased FCC involvement in these programs. And similarly, another of Chairman Pai’s early initiatives was to establish the Broadband Deployment Advisory Committee. It has been rare over the past few years for me to be in a meeting with rural stakeholders that didn’t also include at least one member of a BDAC subcommittee. The BDAC process was a valuable way to communicate information up the chair, to make sure that rural stakeholders’ voices were heard in D.C.

But the BDAC process had another important effect: it made clear that there was someone in D.C. who was listening. Commissioner Pai said on his first day as chairman that closing the digital divide was his top priority. That’s easy to just say. But establishing a committee framework that ensures that stakeholders regularly engage with an appointed representative of the FCC, putting in the time and miles to linger with a farmer to talk about the upcoming harvest season, these things make that priority real.

Rural America certainly hopes that the next chair of the commission will continue to pay us as much attention as Chairman Pai did. But even if they don’t, we can rest with some comfort that he has set in motion efforts—from the next generation of universal service programs to supporting research that will help develop the technologies that will come after—that will serve us will for years to come.

In Administrative Law, Broadband, Federal Communications Commission, International Center for Law & Economics, Regulation, Regulatory Reform, Retrospective on Ajit Pai’s Tenure as FCC Chairman, Symposia, Telecommunications, Truth on the Market, Wireless , , , , , , , , , , , , , , ,
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Introductory Post: Retrospective on Ajit Pai’s Tenure as FCC Chairman

Kristian Stout —  14 January 2021

[TOTM: The following is part of a digital symposium by TOTM guests and authors on the legal and regulatory issues that arose during Ajit Pai’s tenure as chairman of the Federal Communications Commission. The entire series of posts is available here.

Kristian Stout is director of innovation policy for the International Center for Law & Economics.]

Ajit Pai will step down from his position as chairman of the Federal Communications Commission (FCC) effective Jan. 20. Beginning Jan. 15, Truth on the Market will host a symposium exploring Pai’s tenure, with contributions from a range of scholars and practitioners.

As we ponder the changes to FCC policy that may arise with the next administration, it’s also a timely opportunity to reflect on the chairman’s leadership at the agency and his influence on telecommunications policy more broadly. Indeed, the FCC has faced numerous challenges and opportunities over the past four years, with implications for a wide range of federal policy and law. Our symposium will offer insights into numerous legal, economic, and policy matters of ongoing importance.

Under Pai’s leadership, the FCC took on key telecommunications issues involving spectrum policy, net neutrality, 5G, broadband deployment, the digital divide, and media ownership and modernization. Broader issues faced by the commission include agency process reform, including a greater reliance on economic analysis; administrative law; federal preemption of state laws; national security; competition; consumer protection; and innovation, including the encouragement of burgeoning space industries.

This symposium asks contributors for their thoughts on these and related issues. We will explore a rich legacy, with many important improvements that will guide the FCC for some time to come.

Truth on the Market thanks all of these excellent authors for agreeing to participate in this interesting and timely symposium.

Look for the first posts starting Jan. 15.

In Administrative Law, Broadband, Federal Communications Commission, International Center for Law & Economics, Net Neutrality, Regulation, Retrospective on Ajit Pai’s Tenure as FCC Chairman, Symposia, Telecommunications, Truth on the Market, Wireless , , , , , , , , , , , , , , , ,
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Doublespeak in the Debate About Rural Broadband Buildout

Ben Sperry —  6 August 2020

As Thomas Sowell has noted many times, political debates often involve the use of words which if taken literally mean something very different than the connotations which are conveyed. Examples abound in the debate about broadband buildout. 

There is a general consensus on the need to subsidize aspects of broadband buildout to rural areas in order to close the digital divide. But this real need allows for strategic obfuscation of key terms in this debate by parties hoping to achieve political or competitive gain. 

“Access” and “high-speed broadband”

For instance, nearly everyone would agree that Internet policy should “promote access to high-speed broadband.” But how some academics and activists define “access” and “high-speed broadband” are much different than the average American would expect.

A commonsense definition of access is that consumers have the ability to buy broadband sufficient to meet their needs, considering the costs and benefits they face. In the context of the digital divide between rural and urban areas, the different options available to consumers in each area is a reflection of the very real costs and other challenges of providing service. In rural areas with low population density, it costs broadband providers considerably more per potential subscriber to build the infrastructure needed to provide service. At some point, depending on the technology, it is no longer profitable to build out to the next customer several miles down the road. The options and prices available to rural consumers reflects this unavoidable fact. Holding price constant, there is no doubt that many rural consumers would prefer higher speeds than are currently available to them. But this is not the real-world choice which presents itself. 

But access in this debate instead means the availability of the same broadband options regardless of where people live. Rather than being seen as a reflection of underlying economic realities, the fact that rural Americans do not have the same options available to them that urban Americans do is seen as a problem which calls out for a political solution. Thus, billions of dollars are spent in an attempt to “close the digital divide” by subsidizing broadband providers to build infrastructure to  rural areas. 

“High-speed broadband” similarly has a meaning in this debate significantly different from what many consumers, especially those lacking “high speed” service, expect. For consumers, fast enough is what allows them to use the Internet in the ways they desire. What is fast enough does change over time as more and more uses for the Internet become common. This is why the FCC has changed the technical definition of broadband multiple times over the years as usage patterns and bandwidth requirements change. Currently, the FCC uses 25Mbps down/3 Mbps up as the baseline for broadband.

However, for some, like Jonathan Sallet, this is thoroughly insufficient. In his Broadband for America’s Future: A Vision for the 2020s, he instead proposes “100 Mbps symmetrical service without usage limits.” The disconnect between consumer demand as measured in the marketplace in light of real trade-offs between cost and performance and this arbitrary number is not well-explained in this study. The assumption is simply that faster is better, and that the building of faster networks is a mere engineering issue once sufficiently funded and executed with enough political will.

But there is little evidence that consumers “need” faster Internet than the market is currently providing. In fact, one Wall Street Journal study suggests “typical U.S. households don’t use most of their bandwidth while streaming and get marginal gains from upgrading speeds.” Moreover, there is even less evidence that most consumers or businesses need anything close to upload speeds of 100 Mbps. For even intensive uses like high-resolution live streaming, recommended upload speeds still fall far short of 100 Mbps. 

“Competition” and “Overbuilding”

Similarly, no one objects to the importance of “competition in the broadband marketplace.” But what is meant by this term is subject to vastly different interpretations.

The number of competitors is not the same as the amount of competition. Competition is a process by which market participants discover the best way to serve consumers at lowest cost. Specific markets are often subject to competition not only from the firms which exist within those markets, but also from potential competitors who may enter the market any time potential profits reach a point high enough to justify the costs of entry. An important inference from this is that temporary monopolies, in the sense that one firm has a significant share of the market, is not in itself illegal under antitrust law, even if they are charging monopoly prices. Potential entry is as real in its effects as actual competitors in forcing incumbents to continue to innovate and provide value to consumers. 

However, many assume the best way to encourage competition in broadband buildout is to simply promote more competitors. A significant portion of Broadband for America’s Future emphasizes the importance of subsidizing new competition in order to increase buildout, increase quality, and bring down prices. In particular, Sallet emphasizes the benefits of municipal broadband, i.e. when local governments build and run their own networks. 

In fact, Sallet argues that fears of “overbuilding” are really just fears of competition by incumbent broadband ISPs:

Language here is important. There is a tendency to call the construction of new, competitive networks in a locality with an existing network “overbuilding”—as if it were an unnecessary thing, a useless piece of engineering. But what some call “overbuilding” should be called by a more familiar term: “Competition.” “Overbuilding” is an engineering concept; “competition” is an economic concept that helps consumers because it shifts the focus from counting broadband networks to counting the dollars that consumers save when they have competitive choices. The difference is fundamental—overbuilding asks whether the dollars spent to build another network are necessary for the delivery of a communications service; economics asks whether spending those dollars will lead to competition that allows consumers to spend less and get more. 

Sallet makes two rhetorical moves here to make his argument. 

The first is redefining “overbuilding,” which refers to literally building a new network on top of (that is, “over”) previously built architecture, as a ploy by ISPs to avoid competition. But this is truly Orwellian. When a new entrant can build over an incumbent and take advantage of the first-mover’s investments to enter at a lower cost, a failure to compensate the first-mover is free riding. If the government compels such free riding, it reduces incentives for firms to make the initial investment to build the infrastructure.

The second is defining competition as the number of competitors, even if those competitors need to be subsidized by the government in order to enter the marketplace.  

But there is no way to determine the “right” number of competitors in a given market in advance. In the real world, markets don’t match blackboard descriptions of perfect competition. In fact, there are sometimes high fixed costs which limit the number of firms which will likely exist in a competitive market. In some markets, known as natural monopolies, high infrastructural costs and other barriers to entry relative to the size of the market lead to a situation where it is cheaper for a monopoly to provide a good or service than multiple firms in a market. But it is important to note that only firms operating under market pressures can assess the viability of competition. This is why there is a significant risk in government subsidizing entry. 

Competition drives sustained investment in the capital-intensive architecture of broadband networks, which suggests that ISPs are not natural monopolies. If they were, then having a monopoly provider regulated by the government to ensure the public interest, or government-run broadband companies, may make sense. In fact, Sallet denies ISPs are natural monopolies, stating that “the history of telecommunications regulation in the United States suggests that monopolies were a result of policy choices, not mandated by any iron law of economics” and “it would be odd for public policy to treat the creation of a monopoly as a success.” 

As noted by economist George Ford in his study, The Impact of Government-Owned Broadband Networks on Private Investment and Consumer Welfare, unlike the threat of entry which often causes incumbents to act competitively even in the absence of competitors, the threat of subsidized entry reduces incentives for private entities to invest in those markets altogether. This includes both the incentive to build the network and update it. Subsidized entry may, in fact, tip the scales from competition that promotes consumer welfare to that which could harm it. If the market only profitably sustains one or two competitors, adding another through municipal broadband or subsidizing a new entrant may reduce the profitability of the incumbent(s) and eventually lead to exit. When this happens, only the government-run or subsidized network may survive because the subsidized entrant is shielded from the market test of profit-and-loss.

The “Donut Hole” Problem

The term “donut hole” is a final example to consider of how words can be used to confuse rather than enlighten in this debate.

There is broad agreement that to generate the positive externalities from universal service, there needs to be subsidies for buildout to high-cost rural areas. However, this seeming agreement masks vastly different approaches. 

For instance, some critics of the current subsidy approach have identified a phenomenon where the city center has multiple competitive ISPs and government policy extends subsidies to ISPs to build out broadband coverage into rural areas, but there is relatively paltry Internet services in between due to a lack of private or public investment. They describe this as a “donut hole” because the “unserved” rural areas receive subsidies while “underserved” outlying parts immediately surrounding town centers receive nothing under current policy.

Conceptually, this is not a donut hole. It is actually more like a target or bullseye, where the city center is served by private investment and the rural areas receive subsidies to be served. 

Indeed, there is a different use of the term donut hole, which describes how public investment in city centers can create a donut hole of funding needed to support rural build-out. Most Internet providers rely on profits from providing lower-cost service to higher-population areas (like city centers) to cross-subsidize the higher cost of providing service in outlying and rural areas. But municipal providers generally only provide municipal service — they only provide lower-cost service. This hits the carriers that serve higher-cost areas with a double whammy. First, every customer that municipal providers take from private carriers cuts the revenue that those carriers rely on to provide service elsewhere. Second, and even more problematic, because the municipal providers have lower costs (because they tend not to serve the higher-cost outlying areas), they can offer lower prices for service. This “competition” exerts downward pressure on the private firms’ prices, further reducing revenue across their entire in-town customer base. 

This version of the “donut hole,” in which the revenues that private firms rely on from the city center to support the costs of providing service to outlying areas has two simultaneous effects. First, it directly reduces the funding available to serve more rural areas. And, second, it increases the average cost of providing service across its network (because it is no longer recovering as much of its costs from the lower-cost city core), which increases the prices that need to be charged to rural users in order to justify offering service at all.

Conclusion

Overcoming the problem of the rural digital divide starts with understanding why it exists. It is simply more expensive to build networks in areas with low population density. If universal service is the goal, subsidies, whether explicit subsidies from government or implicit cross-subsidies by broadband companies, are necessary to build out to these areas. But obfuscations about increasing “access to high-speed broadband” by promoting “competition” shouldn’t control the debate.

Instead, there needs to be a nuanced understanding of how government-subsidized entry into the broadband marketplace can discourage private investment and grow the size of the “donut hole,” thereby leading to demand for even greater subsidies. Policymakers should avoid exacerbating the digital divide by prioritizing subsidized competition over market processes.

In Antitrust & Competition, Barriers to Entry, Broadband, Google, Platforms, Telecommunications, Truth on the Market , , , ,
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California Dreamin’: California Public Utility Commission must resist extreme regulatory overreach in the recently proposed conditions in Comcast-TWC merger

Geoffrey Manne —  26 February 2015

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In Administrative Law, Antitrust & Competition, Broadband, Law & Economics, Mergers & Acquisitions, Regulation, Telecommunications , , , , , , , , , , ,
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