Archives For Broadband

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.

[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.

[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 wirelessinternet 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.

[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.

Brent Skorup is a senior research fellow at the Mercatus Center at George Mason University.]

Ajit Pai came into the Federal Communications Commission chairmanship with a single priority: to improve the coverage, cost, and competitiveness of U.S. broadband for the benefit of consumers. The 5G Fast Plan, the formation of the Broadband Deployment Advisory Committee, the large spectrum auctions, and other broadband infrastructure initiatives over the past four years have resulted in accelerated buildouts and higher-quality services. Millions more Americans have gotten connected because of agency action and industry investment.

That brings us to Chairman Pai’s most important action: restoring the deregulatory stance of the FCC toward broadband services and repealing the Title II “net neutrality” rules in 2018. Had he not done this, his and future FCCs would have been bogged down in inscrutable, never-ending net neutrality debates, reminiscent of the Fairness Doctrine disputes that consumed the agency 50 years ago. By doing that, he cleared the decks for the pro-deployment policies that followed and redirected the agency away from its roots in mass-media policy toward a future where the agency’s primary responsibilities are encouraging broadband deployment and adoption.

It took tremendous courage from Chairman Pai and Commissioners Michael O’Rielly and Brendan Carr to vote to repeal the 2015 Title II regulations, though they probably weren’t prepared for the public reaction to a seemingly arcane dispute over regulatory classification. The hysteria ginned up by net-neutrality advocates, members of Congress, celebrities, and too-credulous journalists was unlike anything I’ve seen in political advocacy. Advocates, of course, don’t intend to provoke disturbed individuals but the irresponsible predictions of “the end of the internet as we know it” and widespread internet service provider (ISP) content blocking drove one man to call in a bomb threat to the FCC, clearing the building in a desperate attempt to delay or derail the FCC’s Title II repeal. At least two other men pleaded guilty to federal charges after issuing vicious death threats to Chairman Pai, a New York congressman, and their families in the run-up to the regulation’s repeal. No public official should have to face anything resembling that over a policy dispute.

For all the furor, net-neutrality advocates promised a neutral internet that never was and never will be. ”Happy little bunny rabbit dreams” is how David Clark of MIT, an early chief protocol architect of the internet, derided the idea of treating all online traffic the same. Relatedly, the no-blocking rule—the sine na qua of net neutrality—was always a legally dubious requirement. Legal scholars for years had called into doubt the constitutionality of imposing must-carry requirements on ISPs. Unsurprisingly, a federal appellate judge pressed this point in oral arguments defending the net neutrality rules in 2016. The Obama FCC attorney conceded without a fight; even after the net neutrality order, ISPs were “absolutely” free to curate the internet.

Chairman Pai recognized that the fight wasn’t about website blocking and it wasn’t, strictly speaking, about net neutrality. This was the latest front in the long battle over whether the FCC should strictly regulate mass-media distribution. There is a long tradition of progressive distrust of new (unregulated) media. The media access movement that pushed for broadcast TV and radio and cable regulations from the 1960s to 1980s never went away, but the terminology has changed: disinformation, net neutrality, hate speech, gatekeeper.

The decline in power of regulated media—broadcast radio and TV—and the rising power of unregulated internet-based media—social media, Netflix, and podcasts—meant that the FCC and Congress had few ways to shape American news and media consumption. In the words of Tim Wu, the law professor who coined the term “net neutrality,” the internet rules are about giving the agency the continuing ability to shape “media policy, social policy, oversight of the political process, [and] issues of free speech.”

Title II was the only tool available to bring this powerful new media—broadband access—under intense regulatory scrutiny by regulators and the political class. As net-neutrality advocate and Public Knowledge CEO Gene Kimmelman has said, the 2015 Order was about threatening the industry with vague but severe rules: “Legal risk and some ambiguity around what practices will be deemed ‘unreasonably discriminatory’ have been effective tools to instill fear for the last 20 years” for the telecom industry. Internet regulation advocates, he said at the time, “have to have fight after fight over every claim of discrimination, of new service or not.”

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. Net neutrality would draw the agency into contentious mass-media regulation once again, distracting it from universal service efforts, spectrum access and auctions, and cleaning up the regulatory detritus that had slowly accumulated since the passage of the agency’s guiding statutes: the 1934 Communications Act and the 1996 Telecommunications Act.

There are probably items that Chairman Pai wish he’d finished or had done slightly differently. He’s left a proud legacy, however, and his politically risky decision to repeal the Title II rules redirected agency energies away from no-win net-neutrality battles and toward broadband deployment and infrastructure. Great progress was made and one hopes the Biden FCC chairperson will continue that trajectory that Pai set.

[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.

Harold Feld is senior vice president of Public Knowledge.]

Chairman Ajit Pai prioritized making new spectrum available for 5G. To his credit, he succeeded. Over the course of four years, Chairman Pai made available more high-band and mid-band spectrum, for licensed use and unlicensed use, than any other Federal Communications Commission chairman. He did so in the face of unprecedented opposition from other federal agencies, navigating the chaotic currents of the Trump administration with political acumen and courage. The Pai FCC will go down in history as the 5G FCC, and as the chairman who protected the primacy of FCC control over commercial spectrum policy.

At the same time, the Pai FCC will also go down in history as the most conventional FCC on spectrum policy in the modern era. Chairman Pai undertook no sweeping review of spectrum policy in the manner of former Chairman Michael Powell and no introduction of new and radically different spectrum technologies such as the introduction of unlicensed spectrum and spread spectrum in the 1980s, or the introduction of auctions in the 1990s. To the contrary, Chairman Pai actually rolled back the experimental short-term license structure adopted in the 3.5 GHz Citizens Broadband Radio Service (CBRS) band and replaced it with the conventional long-term with renewal expectation license. He missed a once-in-a-lifetime opportunity to dramatically expand the availability of unlicensed use of the TV white spaces (TVWS) via repacking after the television incentive auction. In reworking the rules for the 2.5 GHz band, although Pai laudably embraced the recommendation to create an application window for rural tribal lands, he rejected the proposal to allow nonprofits a chance to use the band for broadband in favor of conventional auction policy.

Ajit Pai’s Spectrum Policy Gave the US a Strong Position for 5G and Wi-Fi 6

To fully appreciate Chairman Pai’s accomplishments, we must first fully appreciate the urgency of opening new spectrum, and the challenges Pai faced from within the Trump administration itself. While providers can (and should) repurpose spectrum from older technologies to newer technologies, successful widespread deployment can only take place when sufficient amounts of new spectrum become available. This “green field” spectrum allows providers to build out new technologies with the most up-to-date equipment without disrupting existing subscriber services. The protocols developed for mobile 5G services work best with “mid-band” spectrum (generally considered to be frequencies between 2 GHz and 6 GHz). At the time Pai became chairman, the FCC did not have any mid-band spectrum identified for auction.

In addition, spectrum available for unlicensed use has become increasingly congested as more and more services depend on Wi-Fi and other unlicensed applications. Indeed, we have become so dependent on Wi-Fi for home broadband and networking that people routinely talk about buying “Wi-Fi” from commercial broadband providers rather than buying “internet access.” The United States further suffered a serious disadvantage moving forward to next generation Wi-Fi, Wi-Fi 6, because the U.S. lacked a contiguous block of spectrum large enough to take advantage of Wi-Fi 6’s gigabit capabilities. Without gigabit Wi-Fi, Americans will increasingly be unable to use the applications that gigabit broadband to the home makes possible.

But virtually all spectrum—particularly mid-band spectrum—have significant incumbents. These incumbents include federal users, particularly the U.S. Department of Defense. Finding new spectrum optimal for 5G required reclaiming spectrum from these incumbents. Unlicensed services do not require relocating incumbent users but creating such “underlay” unlicensed spectrum access requires rules to prevent unlicensed operations from causing harmful interference to licensed services. Needless to say, incumbent services fiercely resist any change in spectrum-allocation rules, claiming that reducing their spectrum allocation or permitting unlicensed services will compromise valuable existing services, while simultaneously causing harmful interference.

The need to reallocate unprecedented amounts of spectrum to ensure successful 5G and Wi-Fi 6 deployment in the United States created an unholy alliance of powerful incumbents, commercial and federal, dedicated to blocking FCC action. Federal agencies—in violation of established federal spectrum policy—publicly challenged the FCC’s spectrum-allocation decisions. Powerful industry incumbents—such as the auto industry, the power industry, and defense contractors—aggressively lobbied Congress to reverse the FCC’s spectrum action by legislation. The National Telecommunications and Information Agency (NTIA), the federal agency tasked with formulating federal spectrum policy, was missing in action as it rotated among different acting agency heads. As the chair and ranking member of the House Commerce Committee noted, this unprecedented and very public opposition by federal agencies to FCC spectrum policy threatened U.S. wireless interests both domestically and internationally.

Navigating this hostile terrain required Pai to exercise both political acumen and political will. Pai accomplished his goal of reallocating 600 MHz of spectrum for auction, opening over 1200 MHz of contiguous spectrum for unlicensed use, and authorized the new entrant Ligado Networks over the objections of the DOD. He did so by a combination of persuading President Donald Trump of the importance of maintaining U.S. leadership in 5G, and insisting on impeccable analysis by the FCC’s engineers to provide support for the reallocation and underlay decisions. On the most significant votes, Pai secured support (or partial support) from the Democrats. Perhaps most importantly, Pai successfully defended the institutional role of the FCC as the ultimate decisionmaker on commercial spectrum use, not subject to a “heckler’s veto” by other federal agencies.

Missed Innovation, ‘Command and Control Lite

While acknowledging Pai’s accomplishments, a fair consideration of Pai’s legacy must also consider his shortcomings. As chairman, Pai proved the most conservative FCC chair on spectrum policy since the 1980s. The Reagan FCC produced unlicensed and spread spectrum rules. The Clinton FCC created the spectrum auction regime. The Bush FCC included a spectrum task force and produced the concept of database management for unlicensed services, creating the TVWS and laying the groundwork for CBRS in the 3.5 GHz band. The Obama FCC recommended and created the world’s first incentive auction.

The Trump FCC does more than lack comparable accomplishments; it actively rolled back previous innovations. Within the first year of his chairmanship, Pai began a rulemaking designed to roll back the innovative priority access licensing (PALs). Under the rules adopted under the previous chairman, PALs provided exclusive use on a census block basis for three years with no expectation of renewal. Pai delayed the rollout of CBRS for two years to replace this approach with a standard license structure of 10 years with an expectation of renewal, explicitly to facilitate traditional carrier investment in traditional networks. Pai followed the same path when restructuring the 2.5 GHz band. While laudably creating a window for Native Americans to apply for 2.5 GHz licenses on rural tribal lands, Pai rejected proposals from nonprofits to adopt a window for non-commercial providers to offer broadband. Instead, he simply eliminated the educational requirement and adopted a standard auction for distribution of remaining licenses.

Similarly, in the unlicensed space, Pai consistently declined to promote innovation. In the repacking following the broadcast incentive auction, Pai rejected the proposal of structuring the repacking to ensure usable TVWS in every market. Instead, under Pai, the FCC managed the repacking so as to minimize the burden on incumbent primary and secondary licensees. As a result, major markets such as Los Angeles have zero channels available for unlicensed TVWS operation. This effectively relegates the service to a niche rural service, augmenting existing rural wireless ISPs.

The result is a modified form of “command and control,” the now-discredited system where the FCC would allocate licenses to provide specific services such as “FM radio” or “mobile pager service.” While preserving license flexibility in name, the licensing rules are explicitly structured to promote certain types of investment and business cases. The result is to encourage the same types of licensees to offer improved and more powerful versions of the same types of services, while discouraging more radical innovations.

Conclusion

Chairman Pai can rightly take pride in his overall 5G legacy. He preserved the institutional role of the FCC as the agency responsible for expanding our nation’s access to wireless services against sustained attack by federal agencies determined to protect their own spectrum interests. He provided enough green field spectrum for both licensed services and unlicensed services to permit the successful deployment of 5G and Wi-Fi 6. At the same time, however, he failed to encourage more radical spectrum policies that have made the United States the birthplace of such technologies as mobile broadband and Wi-Fi. We have won the “race” to next generation wireless, but the players and services are likely to stay the same.

[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.

Randy May is president of the Free State Foundation.]

I am pleased to participate in this retrospective symposium regarding Ajit Pai’s tenure as Federal Communications Commission chairman. I have been closely involved in communications law and policy for nearly 45 years, and, as I’ve said several times since Chairman Pai announced his departure, he will leave as one of the most consequential leaders in the agency’s history. And, I should hastily add, consequential in a positive way, because it’s possible to be consequential in a not-so-positive way.

Chairman Pai’s leadership has been impactful in many different areas—for example, spectrum availability, media deregulation, and institutional reform, to name three—but in this tribute I will focus on his efforts regarding “net neutrality.” I use the quotes because the term has been used by many to mean many different things in many different contexts.

Within a year of becoming chairman, and with the support of fellow Republican commissioners Michael O’Rielly and Brendan Carr, Ajit Pai led the agency in reversing the public utility-like “net neutrality” regulation that had been imposed by the Obama FCC in February 2015 in what became known as the Title II Order. The Title II Order had classified internet service providers (ISPs) as “telecommunications carriers” subject to the same common-carrier regulatory regime imposed on monopolistic Ma Bell during most of the 20th century. While “forbearing” from imposing the full array of traditional common-carrier regulatory mandates, the Title II Order also subjected ISPs to sanctions if they violated an amorphous “general conduct standard,” which provided that ISPs could not “unreasonably” interfere with or disadvantage end users or edge providers like Google, Facebook, and the like.

The aptly styled Restoring Internet Freedom Order (RIF Order), adopted in December 2017, reversed nearly all of the Title II Order’s heavy-handed regulation of ISPs in favor of a light-touch regulatory regime. It was aptly named, because the RIF Order “restored” market “freedom” to internet access regulation that had mostly prevailed since the turn of the 21st century. It’s worth remembering that, in 1999, in opting not to require that newly emerging cable broadband providers be subjected to a public utility-style regime, Clinton-appointee FCC Chairman William Kennard declared: “[T]he alternative is to go to the telephone world…and just pick up this whole morass of regulation and dump it wholesale on the cable pipe. That is not good for America.” And worth recalling, too, that in 2002, the commission, under the leadership of Chairman Michael Powell, determined that “broadband services should exist in a minimal regulatory environment that promotes investment and innovation in a competitive market.”

It was this reliance on market freedom that was “restored” under Ajit Pai’s leadership. In an appearance at a Free State Foundation event in December 2016, barely a month before becoming chairman, then-Commissioner Pai declared: “It is time to fire up the weed whacker and remove those rules that are holding back investment, innovation, and job creation.” And he added: “Proof of market failure should guide the next commission’s consideration of new regulations.” True to his word, the weed whacker was used to cut down the public utility regime imposed on ISPs by his predecessor. And the lack of proof of any demonstrable market failure was at the core of the RIF Order’s reasoning.

It is true that, as a matter of law, the D.C. Circuit’s affirmance of the Restoring Internet Freedom Order in Mozilla v. FCC rested heavily on the application by the court of Chevron deference, just as it is true that Chevron deference played a central role in the affirmance of the Title II Order and the Brand X decision before that. And it would be disingenuous to suggest that, if a newly reconstituted Biden FCC reinstitutes a public utility-like regulatory regime for ISPs, that Chevron deference won’t once again play a central role in the appeal.

But optimist that I am, and focusing not on what possibly may be done as a matter of law, but on what ought to be done as a matter of policy, the “new” FCC should leave in place the RIF Order’s light-touch regulatory regime. In affirming most of the RIF Order in Mozilla, the D.C. Circuit agreed there was substantial evidence supporting the commission’s predictive judgment that reclassification of ISPs “away from public-utility style regulation” was “likely to increase ISP investment and output.” And the court agreed there was substantial evidence to support the commission’s position that such regulation is especially inapt for “a dynamic industry built on technological development and disruption.”

Indeed, the evidence has only become more substantial since the RIF Order’s adoption. Here are only a few factual snippets: According to CTIA, wireless-industry investment for 2019 grew to $29.1 billion, up from $27.4 billion in 2018 and $25.6 billion in 2017USTelecom estimates that wireline broadband ISPs invested approximately $80 billion in network infrastructure in 2018, up more than $3.1 billion from $76.9 billion in 2017. And total investment most likely increased in 2019 for wireline ISPs like it did for wireless ISPs. Figures cited in the FCC’s 2020 Broadband Deployment Report indicate that fiber broadband networks reached an additional 6.5 million homes in 2019, a 16% increase over the prior year and the largest single-year increase ever

Additionally, more Americans have access to broadband internet access services, and at ever higher speeds. According to an April 2020 report by USTelecom, for example, gigabit internet service is available to at least 85% of U.S. homes, compared to only 6% of U.S. homes three-and-a-half years ago. In an October 2020 blog post, Chairman Pai observed that “average download speeds for fixed broadband in the United States have doubled, increasing by over 99%” since the RIF Order was adopted. Ookla Speedtests similarly show significant gains in mobile wireless speeds, climbing to 47/10 Mbps in September 2020 compared to 27/8 Mbps in the first half of 2018.

More evidentiary support could be offered regarding the positive results that followed adoption of the RIF Order, and I assume in the coming year it will be. But the import of abandonment of public utility-like regulation of ISPs should be clear.

There is certainly much that Ajit Pai, the first-generation son of immigrants who came to America seeking opportunity in the freedom it offered, accomplished during his tenure. To my way of thinking, “Restoring Internet Freedom” ranks at—or at least near—the top of the list.

[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.

Municipal broadband has been heavily promoted by its advocates as a potential source of competition against Internet service providers (“ISPs”) with market power. Jonathan Sallet argued in Broadband for America’s Future: A Vision for the 2020s, for instance, that municipal broadband has a huge role to play in boosting broadband competition, with attendant lower prices, faster speeds, and economic development. 

Municipal broadband, of course, can mean more than one thing: From “direct consumer” government-run systems, to “open access” where government builds the back-end, but leaves it up to private firms to bring the connections to consumers, to “middle mile” where the government network reaches only some parts of the community but allows private firms to connect to serve other consumers. The focus of this blog post is on the “direct consumer” model.

There have been many economic studies on municipal broadband, both theoretical and empirical. The literature largely finds that municipal broadband poses serious risks to taxpayers, often relies heavily on cross-subsidies from government-owned electric utilities, crowds out private ISP investment in areas it operates, and largely fails the cost-benefit analysis. While advocates have defended municipal broadband on the grounds of its speed, price, and resulting attractiveness to consumers and businesses, others have noted that many of those benefits come at the expense of other parts of the country from which businesses move. 

What this literature has not touched upon is a more fundamental problem: municipal broadband lacks the price signals necessary for economic calculation.. The insights of the Austrian school of economics helps explain why this model is incapable of providing efficient outcomes for society. Rather than creating a valuable source of competition, municipal broadband creates “islands of chaos” undisciplined by the market test of profit-and-loss. As a result, municipal broadband is a poor model for promoting competition and innovation in broadband markets. 

The importance of profit-and-loss to economic calculation

One of the things often assumed away in economic analysis is the very thing the market process depends upon: the discovery of knowledge. Knowledge, in this context, is not the technical knowledge of how to build or maintain a broadband network, but the more fundamental knowledge which is discovered by those exercising entrepreneurial judgment in the marketplace. 

This type of knowledge is dependent on prices throughout the market. In the market process, prices coordinate exchange between market participants without each knowing the full plan of anyone else. For consumers, prices allow for the incremental choices between different options. For producers, prices in capital markets similarly allow for choices between different ways of producing their goods for the next stage of production. Prices in interest rates help coordinate present consumption, investment, and saving. And, the price signal of profit-and-loss allows producers to know whether they have cost-effectively served consumer needs. 

The broadband marketplace can’t be considered in isolation from the greater marketplace in which it is situated. But it can be analyzed under the framework of prices and the knowledge they convey.

For broadband consumers, prices are important for determining the relative importance of Internet access compared to other felt needs. The quality of broadband connection demanded by consumers is dependent on the price. All other things being equal, consumers demand faster connections with less latency issues. But many consumers may prefer slower speeds and connections with more latency if it is cheaper. Even choices between the importance of upload speeds versus download speeds may be highly asymmetrical if determined by consumers.  

While “High Performance Broadband for All” may be a great goal from a social planner’s perspective, individuals acting in the marketplace may prioritize other needs with his or her scarce resources. Even if consumers do need Internet access of some kind, the benefits of 100 Mbps download speeds over 25 Mbps, or upload speeds of 100 Mbps versus 3 Mbps may not be worth the costs. 

For broadband ISPs, prices for capital goods are important for building out the network. The relative prices of fiber, copper, wireless, and all the other factors of production in building out a network help them choose in light of anticipated profit. 

All the decisions of broadband ISPs are made through the lens of pursuing profit. If they are successful, it is because the revenues generated are greater than the costs of production, including the cost of money represented in interest rates. Just as importantly, loss shows the ISPs were unsuccessful in cost-effectively serving consumers. While broadband companies may be able to have losses over some period of time, they ultimately must turn a profit at some point, or there will be exit from the marketplace. Profit-and-loss both serve important functions.

Sallet misses the point when he states the“full value of broadband lies not just in the number of jobs it directly creates or the profits it delivers to broadband providers but also in its importance as a mechanism that others use across the economy and society.” From an economic point of view, profits aren’t important because economists love it when broadband ISPs get rich. Profits are important as an incentive to build the networks we all benefit from, and a signal for greater competition and innovation.

Municipal broadband as islands of chaos

Sallet believes the lack of high-speed broadband (as he defines it) is due to the monopoly power of broadband ISPs. He sees the entry of municipal broadband as pro-competitive. But the entry of a government-run broadband company actually creates “islands of chaos” within the market economy, reducing the ability of prices to coordinate disparate plans of action among participants. This, ultimately, makes society poorer.

The case against municipal broadband doesn’t rely on greater knowledge of how to build or maintain a network being in the hands of private engineers. It relies instead on the different institutional frameworks within which the manager of the government-run broadband network works as compared to the private broadband ISP. The type of knowledge gained in the market process comes from prices, including profit-and-loss. The manager of the municipal broadband network simply doesn’t have access to this knowledge and can’t calculate the best course of action as a result.

This is because the government-run municipal broadband network is not reliant upon revenues generated by free choices of consumers alone. Rather than needing to ultimately demonstrate positive revenue in order to remain a going concern, government-run providers can instead base their ongoing operation on access to below-market loans backed by government power, cross-subsidies when it is run by a government electric utility, and/or public money in the form of public borrowing (i.e. bonds) or taxes. 

Municipal broadband, in fact, does rely heavily on subsidies from the government. As a result, municipal broadband is not subject to the discipline of the market’s profit-and-loss test. This frees the enterprise to focus on other goals, including higher speeds—especially upload speeds—and lower prices than private ISPs often offer in the same market. This is why municipal broadband networks build symmetrical high-speed fiber networks at higher rates than the private sector.

But far from representing a superior source of “competition,” municipal broadband is actually an example of “predatory entry.” In areas where there is already private provision of broadband, municipal broadband can “out-compete” those providers due to subsidies from the rest of society. Eventually, this could lead to exit by the private ISPs, starting with the least cost-efficient to the most. In areas where there is limited provision of Internet access, the entry of municipal broadband could reduce incentives for private entry altogether. In either case, there is little reason to believe municipal broadband actually increases consumer welfarein the long run.

Moreover, there are serious concerns in relying upon municipal broadband for the buildout of ISP networks. While Sallet describes fiber as “future-proof,” there is little reason to think that it is. The profit motive induces broadband ISPs to constantly innovate and improve their networks. Contrary to what you would expect from an alleged monopoly industry, broadband companies are consistently among the highest investors in the American economy. Similar incentives would not apply to municipal broadband, which lacks the profit motive to innovate. 

Conclusion

There is a definite need to improve public policy to promote more competition in broadband markets. But municipal broadband is not the answer. The lack of profit-and-loss prevents the public manager of municipal broadband from having the price signal necessary to know it is serving the public cost-effectively. No amount of bureaucratic management can replace the institutional incentives of the marketplace.

The U.S. Federal Trade Commission’s (FTC) well-recognized expertise in assessing unfair or deceptive acts or practices can play a vital role in policing abusive broadband practices.  Unfortunately, however, because Section 5(a)(2) of the FTC Act exempts common carriers from the FTC’s jurisdiction, serious questions have been raised about the FTC’s authority to deal with unfair or deceptive practices in cyberspace that are carried out by common carriers, but involve non-common-carrier activity (in contrast, common carrier services have highly regulated terms and must be made available to all potential customers).

Commendably, the Ninth Circuit held on February 26, in FTC v. AT&T Mobility, that harmful broadband data throttling practices by a common carrier were subject to the FTC’s unfair acts or practices jurisdiction, because the common carrier exception is “activity-based,” and the practices in question did not involve common carrier services.  Key excerpts from the summary of the Ninth Circuit’s opinion follow:

The en banc court affirmed the district court’s denial of AT&T Mobility’s motion to dismiss an action brought by th Federal Trade Commission (“FTC”) under Section 5 of the FTC Act, alleging that AT&T’s data-throttling plan was unfair and deceptive. AT&T Mobility’s data-throttling is a practice by which the company reduced customers’ broadband data speed without regard to actual network congestion. Section 5 of the FTC Act gives the agency enforcement authority over “unfair or deceptive acts or practices,” but exempts “common carriers subject to the Acts to regulate commerce.” 15 U.S.C § 45(a)(1), (2). AT&T moved to dismiss the action, arguing that it was exempt from FTC regulation under Section 5. . . .

The en banc court held that the FTC Act’s common carrier exemption was activity-based, and therefore the phrase “common carriers subject to the Acts to regulate commerce” provided immunity from FTC regulation only to the extent that a common carrier was engaging in common carrier services. In reaching this conclusion, the en banc court looked to the FTC Act’s text, the meaning of “common carrier” according to the courts around the time the statute was passed in 1914, decades of judicial interpretation, the expertise of the FTC and Federal Communications Commission (“FCC”), and legislative history.

Addressing the FCC’s order, issued on March 12, 2015, reclassifying mobile data service from a non-common carriage service to a common carriage service, the en banc court held that the prospective reclassification order did not rob the FTC of its jurisdiction or authority over conduct occurring before the order. Accordingly, the en banc court affirmed the district court’s denial of AT&T’s motion to dismiss.

A key introductory paragraph in the Ninth Circuit’s opinion underscores the importance of the court’s holding for sound regulatory policy:

This statutory interpretation [that the common carrier exception is activity-based] also accords with common sense. The FTC is the leading federal consumer protection agency and, for many decades, has been the chief federal agency on privacy policy and enforcement. Permitting the FTC to oversee unfair and deceptive non-common-carriage practices of telecommunications companies has practical ramifications. New technologies have spawned new regulatory challenges. A phone company is no longer just a phone company. The transformation of information services and the ubiquity of digital technology mean that telecommunications operators have expanded into website operation, video distribution, news and entertainment production, interactive entertainment services and devices, home security and more. Reaffirming FTC jurisdiction over activities that fall outside of common-carrier services avoids regulatory gaps and provides consistency and predictability in regulatory enforcement.

But what can the FTC do about unfair or deceptive practices affecting broadband services, offered by common carriers, subsequent to the FCC’s 2015 reclassification of mobile data service as a common carriage service?  The FTC will be able to act, assuming that the Federal Communications Commission’s December 2017 rulemaking, reclassifying mobile broadband Internet access service as not involving a common carrier service, passes legal muster (as it should).  In order to avoid any legal uncertainty, however, Congress could take the simple step of eliminating the FTC Act’s common carrier exception – an outdated relic that threatens to generate disparate enforcement outcomes toward the same abusive broadband practice, based merely upon whether the parent company is deemed a “common carrier.”

Next week the FCC is slated to vote on the second iteration of Chairman Wheeler’s proposed broadband privacy rules. Of course, as has become all too common, none of us outside the Commission has actually seen the proposal. But earlier this month Chairman Wheeler released a Fact Sheet that suggests some of the ways it would update the rules he initially proposed.

According to the Fact Sheet, the new proposed rules are

designed to evolve with changing technologies and encourage innovation, and are in harmony with other key privacy frameworks and principles — including those outlined by the Federal Trade Commission and the Administration’s Consumer Privacy Bill of Rights.

Unfortunately, the Chairman’s proposal appears to fall short of the mark on both counts.

As I discuss in detail in a letter filed with the Commission yesterday, despite the Chairman’s rhetoric, the rules described in the Fact Sheet fail to align with the FTC’s approach to privacy regulation embodied in its 2012 Privacy Report in at least two key ways:

  • First, the Fact Sheet significantly expands the scope of information that would be considered “sensitive” beyond that contemplated by the FTC. That, in turn, would impose onerous and unnecessary consumer consent obligations on commonplace uses of data, undermining consumer welfare, depriving consumers of information and access to new products and services, and restricting competition.
  • Second, unlike the FTC’s framework, the proposal described by the Fact Sheet ignores the crucial role of “context” in determining the appropriate level of consumer choice before affected companies may use consumer data. Instead, the Fact Sheet takes a rigid, acontextual approach that would stifle innovation and harm consumers.

The Chairman’s proposal moves far beyond the FTC’s definition of “sensitive” information requiring “opt-in” consent

The FTC’s privacy guidance is, in its design at least, appropriately flexible, aimed at balancing the immense benefits of information flows with sensible consumer protections. Thus it eschews an “inflexible list of specific practices” that would automatically trigger onerous consent obligations and “risk[] undermining companies’ incentives to innovate and develop new products and services….”

Under the FTC’s regime, depending on the context in which it is used (on which see the next section, below), the sensitivity of data delineates the difference between data uses that require “express affirmative” (opt-in) consent and those that do not (requiring only “other protections” short of opt-in consent — e.g., opt-out).

Because the distinction is so important — because opt-in consent is much more likely to staunch data flows — the FTC endeavors to provide guidance as to what data should be considered sensitive, and to cabin the scope of activities requiring opt-in consent. Thus, the FTC explains that “information about children, financial and health information, Social Security numbers, and precise geolocation data [should be treated as] sensitive.” But beyond those instances, the FTC doesn’t consider any other type of data as inherently sensitive.

By contrast, and without explanation, Chairman Wheeler’s Fact Sheet significantly expands what constitutes “sensitive” information requiring “opt-in” consent by adding “web browsing history,” “app usage history,” and “the content of communications” to the list of categories of data deemed sensitive in all cases.

By treating some of the most common and important categories of data as always “sensitive,” and by making the sensitivity of data the sole determinant for opt-in consent, the Chairman’s proposal would make it almost impossible for ISPs to make routine (to say nothing of innovative), appropriate, and productive uses of data comparable to those undertaken by virtually every major Internet company.  This goes well beyond anything contemplated by the FTC — with no evidence of any corresponding benefit to consumers and with obvious harm to competition, innovation, and the overall economy online.

And because the Chairman’s proposal would impose these inappropriate and costly restrictions only on ISPs, it would create a barrier to competition by ISPs in other platform markets, without offering a defensible consumer protection rationale to justify either the disparate treatment or the restriction on competition.

As Fred Cate and Michael Staten have explained,

“Opt-in” offers no greater privacy protection than allowing consumers to “opt-out”…, yet it imposes significantly higher costs on consumers, businesses, and the economy.

Not surprisingly, these costs fall disproportionately on the relatively poor and the less technology-literate. In the former case, opt-in requirements may deter companies from offering services at all, even to people who would make a very different trade-off between privacy and monetary price. In the latter case, because an initial decision to opt-in must be taken in relative ignorance, users without much experience to guide their decisions will face effectively higher decision-making costs than more knowledgeable users.

The Chairman’s proposal ignores the central role of context in the FTC’s privacy framework

In part for these reasons, central to the FTC’s more flexible framework is the establishment of a sort of “safe harbor” for data uses where the benefits clearly exceed the costs and consumer consent may be inferred:

Companies do not need to provide choice before collecting and using consumer data for practices that are consistent with the context of the transaction or the company’s relationship with the consumer….

Thus for many straightforward uses of data, the “context of the transaction,” not the asserted “sensitivity” of the underlying data, is the threshold question in evaluating the need for consumer choice in the FTC’s framework.

Chairman Wheeler’s Fact Sheet, by contrast, ignores this central role of context in its analysis. Instead, it focuses solely on data sensitivity, claiming that doing so is “in line with customer expectations.”

But this is inconsistent with the FTC’s approach.

In fact, the FTC’s framework explicitly rejects a pure “consumer expectations” standard:

Rather than relying solely upon the inherently subjective test of consumer expectations, the… standard focuses on more objective factors related to the consumer’s relationship with a business.

And while everyone agrees that sensitivity is a key part of pegging privacy regulation to actual consumer and corporate relationships, the FTC also recognizes that the importance of the sensitivity of the underlying data varies with the context in which it is used. Or, in the words of the White House’s 2012 Consumer Data Privacy in a Networked World Report (introducing its Consumer Privacy Bill of Rights), “[c]ontext should shape the balance and relative emphasis of particular principles” guiding the regulation of privacy.

By contrast, Chairman Wheeler’s “sensitivity-determines-consumer-expectations” framing is a transparent attempt to claim fealty to the FTC’s (and the Administration’s) privacy standards while actually implementing a privacy regime that is flatly inconsistent with them.

The FTC’s approach isn’t perfect, but that’s no excuse to double down on its failings

The FTC’s privacy guidance, and even more so its privacy enforcement practices under Section 5, are far from perfect. The FTC should be commended for its acknowledgement that consumers’ privacy preferences and companies’ uses of data will change over time, and that there are trade-offs inherent in imposing any constraints on the flow of information. But even the FTC fails to actually assess the magnitude of the costs and benefits of, and the deep complexities involved in, the trade-off, and puts an unjustified thumb on the scale in favor of limiting data use.  

But that’s no excuse for Chairman Wheeler to ignore what the FTC gets right, and to double down on its failings. Based on the Fact Sheet (and the initial NPRM), it’s a virtual certainty that the Chairman’s proposal doesn’t heed the FTC’s refreshing call for humility and flexibility regarding the application of privacy rules to ISPs (and other Internet platforms):

These are complex and rapidly evolving areas, and more work should be done to learn about the practices of all large platform providers, their technical capabilities with respect to consumer data, and their current and expected uses of such data.

The rhetoric of the Chairman’s Fact Sheet is correct: the FCC should in fact conform its approach to privacy to the framework established by the FTC. Unfortunately, the reality of the Fact Sheet simply doesn’t comport with its rhetoric.

As the FCC’s vote on the Chairman’s proposal rapidly nears, and in light of its significant defects, we can only hope that the rest of the Commission refrains from reflexively adopting the proposed regime, and works to ensure that these problematic deviations from the FTC’s framework are addressed before moving forward.

Last week, FCC General Counsel Jonathan Sallet pulled back the curtain on the FCC staff’s analysis behind its decision to block Comcast’s acquisition of Time Warner Cable. As the FCC staff sets out on its reported Rainbow Tour to reassure regulated companies that it’s not “hostile to the industries it regulates,” Sallet’s remarks suggest it will have an uphill climb. Unfortunately, the staff’s analysis appears to have been unduly speculative, disconnected from critical market realities, and decidedly biased — not characteristics in a regulator that tend to offer much reassurance.

Merger analysis is inherently speculative, but, as courts have repeatedly had occasion to find, the FCC has a penchant for stretching speculation beyond the breaking point, adopting theories of harm that are vaguely possible, even if unlikely and inconsistent with past practice, and poorly supported by empirical evidence. The FCC’s approach here seems to fit this description.

The FCC’s fundamental theory of anticompetitive harm

To begin with, as he must, Sallet acknowledged that there was no direct competitive overlap in the areas served by Comcast and Time Warner Cable, and no consumer would have seen the number of providers available to her changed by the deal.

But the FCC staff viewed this critical fact as “not outcome determinative.” Instead, Sallet explained that the staff’s opposition was based primarily on a concern that the deal might enable Comcast to harm “nascent” OVD competitors in order to protect its video (MVPD) business:

Simply put, the core concern came down to whether the merged firm would have an increased incentive and ability to safeguard its integrated Pay TV business model and video revenues by limiting the ability of OVDs to compete effectively, especially through the use of new business models.

The justification for the concern boiled down to an assumption that the addition of TWC’s subscriber base would be sufficient to render an otherwise too-costly anticompetitive campaign against OVDs worthwhile:

Without the merger, a company taking action against OVDs for the benefit of the Pay TV system as a whole would incur costs but gain additional sales – or protect existing sales — only within its footprint. But the combined entity, having a larger footprint, would internalize more of the external “benefits” provided to other industry members.

The FCC theorized that, by acquiring a larger footprint, Comcast would gain enough bargaining power and leverage, as well as the means to profit from an exclusionary strategy, leading it to employ a range of harmful tactics — such as impairing the quality/speed of OVD streams, imposing data caps, limiting OVD access to TV-connected devices, imposing higher interconnection fees, and saddling OVDs with higher programming costs. It’s difficult to see how such conduct would be permitted under the FCC’s Open Internet Order/Title II regime, but, nevertheless, the staff apparently believed that Comcast would possess a powerful “toolkit” with which to harm OVDs post-transaction.

Comcast’s share of the MVPD market wouldn’t have changed enough to justify the FCC’s purported fears

First, the analysis turned on what Comcast could and would do if it were larger. But Comcast was already the largest ISP and MVPD (now second largest MVPD, post AT&T/DIRECTV) in the nation, and presumably it has approximately the same incentives and ability to disadvantage OVDs today.

In fact, there’s no reason to believe that the growth of Comcast’s MVPD business would cause any material change in its incentives with respect to OVDs. Whatever nefarious incentives the merger allegedly would have created by increasing Comcast’s share of the MVPD market (which is where the purported benefits in the FCC staff’s anticompetitive story would be realized), those incentives would be proportional to the size of increase in Comcast’s national MVPD market share — which, here, would be about eight percentage points: from 22% to under 30% of the national market.

It’s difficult to believe that Comcast would gain the wherewithal to engage in this costly strategy by adding such a relatively small fraction of the MVPD market (which would still leave other MVPDs serving fully 70% of the market to reap the purported benefits instead of Comcast), but wouldn’t have it at its current size – and there’s no evidence that it has ever employed such strategies with its current market share.

It bears highlighting that the D.C. Circuit has already twice rejected FCC efforts to impose a 30% market cap on MVPDs, based on the Commission’s inability to demonstrate that a greater-than-30% share would create competitive problems, especially given the highly dynamic nature of the MVPD market. In vacating the FCC’s most recent effort to do so in 2009, the D.C. Circuit was resolute in its condemnation of the agency, noting:

In sum, the Commission has failed to demonstrate that allowing a cable operator to serve more than 30% of all [MVPD] subscribers would threaten to reduce either competition or diversity in programming.

The extent of competition and the amount of available programming (including original programming distributed by OVDs themselves) has increased substantially since 2009; this makes the FCC’s competitive claims even less sustainable today.

It’s damning enough to the FCC’s case that there is no marketplace evidence of such conduct or its anticompetitive effects in today’s market. But it’s truly impossible to square the FCC’s assertions about Comcast’s anticompetitive incentives with the fact that, over the past decade, Comcast has made massive investments in broadband, steadily increased broadband speeds, and freely licensed its programming, among other things that have served to enhance OVDs’ long-term viability and growth. Chalk it up to the threat of regulatory intervention or corporate incompetence if you can’t believe that competition alone could be responsible for this largesse, but, whatever the reason, the FCC staff’s fears appear completely unfounded in a marketplace not significantly different than the landscape that would have existed post-merger.

OVDs aren’t vulnerable, and don’t need the FCC’s “help”

After describing the “new entrants” in the market — such unfamiliar and powerless players as Dish, Sony, HBO, and CBS — Sallet claimed that the staff was principally animated by the understanding that

Entrants are particularly vulnerable when competition is nascent. Thus, staff was particularly concerned that this transaction could damage competition in the video distribution industry.

Sallet’s description of OVDs makes them sound like struggling entrepreneurs working in garages. But, in fact, OVDs have radically reshaped the media business and wield enormous clout in the marketplace.

Netflix, for example, describes itself as “the world’s leading Internet television network with over 65 million members in over 50 countries.” New services like Sony Vue and Sling TV are affiliated with giant, well-established media conglomerates. And whatever new offerings emerge from the FCC-approved AT&T/DIRECTV merger will be as well-positioned as any in the market.

In fact, we already know that the concerns of the FCC are off-base because they are of a piece with the misguided assumptions that underlie the Chairman’s recent NPRM to rewrite the MVPD rules to “protect” just these sorts of companies. But the OVDs themselves — the ones with real money and their competitive futures on the line — don’t see the world the way the FCC does, and they’ve resolutely rejected the Chairman’s proposal. Notably, the proposed rules would “protect” these services from exactly the sort of conduct that Sallet claims would have been a consequence of the Comcast-TWC merger.

If they don’t want or need broad protection from such “harms” in the form of revised industry-wide rules, there is surely no justification for the FCC to throttle a merger based on speculation that the same conduct could conceivably arise in the future.

The realities of the broadband market post-merger wouldn’t have supported the FCC’s argument, either

While a larger Comcast might be in a position to realize more of the benefits from the exclusionary strategy Sallet described, it would also incur more of the costs — likely in direct proportion to the increased size of its subscriber base.

Think of it this way: To the extent that an MVPD can possibly constrain an OVD’s scope of distribution for programming, doing so also necessarily makes the MVPD’s own broadband offering less attractive, forcing it to incur a cost that would increase in proportion to the size of the distributor’s broadband market. In this case, as noted, Comcast would have gained MVPD subscribers — but it would have also gained broadband subscribers. In a world where cable is consistently losing video subscribers (as Sallet acknowledged), and where broadband offers higher margins and faster growth, it makes no economic sense that Comcast would have valued the trade-off the way the FCC claims it would have.

Moreover, in light of the existing conditions imposed on Comcast under the Comcast/NBCU merger order from 2011 (which last for a few more years) and the restrictions adopted in the Open Internet Order, Comcast’s ability to engage in the sort of exclusionary conduct described by Sallet would be severely limited, if not non-existent. Nor, of course, is there any guarantee that former or would-be OVD subscribers would choose to subscribe to, or pay more for, any MVPD in lieu of OVDs. Meanwhile, many of the relevant substitutes in the MVPD market (like AT&T and Verizon FiOS) also offer broadband services – thereby increasing the costs that would be incurred in the broadband market even more, as many subscribers would shift not only their MVPD, but also their broadband service, in response to Comcast degrading OVDs.

And speaking of the Open Internet Order — wasn’t that supposed to prevent ISPs like Comcast from acting on their alleged incentives to impede the quality of, or access to, edge providers like OVDs? Why is merger enforcement necessary to accomplish the same thing once Title II and the rest of the Open Internet Order are in place? And if the argument is that the Open Internet Order might be defeated, aside from the completely speculative nature of such a claim, why wouldn’t a merger condition that imposed the same constraints on Comcast – as was done in the Comcast/NBCU merger order by imposing the former net neutrality rules on Comcast – be perfectly sufficient?

While the FCC staff analysis accepted as true (again, contrary to current marketplace evidence) that a bigger Comcast would have more incentive to harm OVDs post-merger, it rejected arguments that there could be countervailing benefits to OVDs and others from this same increase in scale. Thus, things like incremental broadband investments and speed increases, a larger Wi-Fi network, and greater business services market competition – things that Comcast is already doing and would have done on a greater and more-accelerated scale in the acquired territories post-transaction – were deemed insufficient to outweigh the expected costs of the staff’s entirely speculative anticompetitive theory.

In reality, however, not only OVDs, but consumers – and especially TWC subscribers – would have benefitted from the merger by access to Comcast’s faster broadband speeds, its new investments, and its superior video offerings on the X1 platform, among other things. Many low-income families would have benefitted from expansion of Comcast’s Internet Essentials program, and many businesses would have benefited from the addition of a more effective competitor to the incumbent providers that currently dominate the business services market. Yet these and other verifiable benefits were given short shrift in the agency’s analysis because they “were viewed by staff as incapable of outweighing the potential harms.”

The assumptions underlying the FCC staff’s analysis of the broadband market are arbitrary and unsupportable

Sallet’s claim that the combined firm would have 60% of all high-speed broadband subscribers in the U.S. necessarily assumes a national broadband market measured at 25 Mbps or higher, which is a red herring.

The FCC has not explained why 25 Mbps is a meaningful benchmark for antitrust analysis. The FCC itself endorsed a 10 Mbps baseline for its Connect America fund last December, noting that over 70% of current broadband users subscribe to speeds less than 25 Mbps, even in areas where faster speeds are available. And streaming online video, the most oft-cited reason for needing high bandwidth, doesn’t require 25 Mbps: Netflix says that 5 Mbps is the most that’s required for an HD stream, and the same goes for Amazon (3.5 Mbps) and Hulu (1.5 Mbps).

What’s more, by choosing an arbitrary, faster speed to define the scope of the broadband market (in an effort to assert the non-competitiveness of the market, and thereby justify its broadband regulations), the agency has – without proper analysis or grounding, in my view – unjustifiably shrunk the size of the relevant market. But, as it happens, doing so also shrinks the size of the increase in “national market share” that the merger would have brought about.

Recall that the staff’s theory was premised on the idea that the merger would give Comcast control over enough of the broadband market that it could unilaterally impose costs on OVDs sufficient to impair their ability to reach or sustain minimum viable scale. But Comcast would have added only one percent of this invented “market” as a result of the merger. It strains credulity to assert that there could be any transaction-specific harm from an increase in market share equivalent to a rounding error.

In any case, basing its rejection of the merger on a manufactured 25 Mbps relevant market creates perverse incentives and will likely do far more to harm OVDs than realization of even the staff’s worst fears about the merger ever could have.

The FCC says it wants higher speeds, and it wants firms to invest in faster broadband. But here Comcast did just that, and then was punished for it. Rather than acknowledging Comcast’s ongoing broadband investments as strong indication that the FCC staff’s analysis might be on the wrong track, the FCC leadership simply sidestepped that inconvenient truth by redefining the market.

The lesson is that if you make your product too good, you’ll end up with an impermissibly high share of the market you create and be punished for it. This can’t possibly promote the public interest.

Furthermore, the staff’s analysis of competitive effects even in this ersatz market aren’t likely supportable. As noted, most subscribers access OVDs on connections that deliver content at speeds well below the invented 25 Mbps benchmark, and they pay the same prices for OVD subscriptions as subscribers who receive their content at 25 Mbps. Confronted with the choice to consume content at 25 Mbps or 10 Mbps (or less), the majority of consumers voluntarily opt for slower speeds — and they purchase service from Netflix and other OVDs in droves, nonetheless.

The upshot? Contrary to the implications on which the staff’s analysis rests, if Comcast were to somehow “degrade” OVD content on the 25 Mbps networks so that it was delivered with characteristics of video content delivered over a 10-Mbps network, real-world, observed consumer preferences suggest it wouldn’t harm OVDs’ access to consumers at all. This is especially true given that OVDs often have a global focus and reach (again, Netflix has 65 million subscribers in over 50 countries), making any claims that Comcast could successfully foreclose them from the relevant market even more suspect.

At the same time, while the staff apparently viewed the broadband alternatives as “limited,” the reality is that Comcast, as well as other broadband providers, are surrounded by capable competitors, including, among others, AT&T, Verizon, CenturyLink, Google Fiber, many advanced VDSL and fiber-based Internet service providers, and high-speed mobile wireless providers. The FCC understated the complex impact of this robust, dynamic, and ever-increasing competition, and its analysis entirely ignored rapidly growing mobile wireless broadband competition.

Finally, as noted, Sallet claimed that the staff determined that merger conditions would be insufficient to remedy its concerns, without any further explanation. Yet the Commission identified similar concerns about OVDs in both the Comcast/NBCUniversal and AT&T/DIRECTV transactions, and adopted remedies to address those concerns. We know the agency is capable of drafting behavioral conditions, and we know they have teeth, as demonstrated by prior FCC enforcement actions. It’s hard to understand why similar, adequate conditions could not have been fashioned for this transaction.

In the end, while I appreciate Sallet’s attempt to explain the FCC’s decision to reject the Comcast/TWC merger, based on the foregoing I’m not sure that Comcast could have made any argument or showing that would have dissuaded the FCC from challenging the merger. Comcast presented a strong economic analysis answering the staff’s concerns discussed above, all to no avail. It’s difficult to escape the conclusion that this was a politically-driven result, and not one rigorously based on the facts or marketplace reality.

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

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

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

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

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

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