2014 provided fertile soil for those interested in policy research. So with New Years rapidly approaching, I want to uphold tradition and use our last blog post of the year to highlight what we at the Phoenix Center thought to be the most interesting policy issues of 2014 and to provide some select examples of where we believed we added constructively to the debate.
Spectrum Availability and Allocation
While spectrum policy is always complex, the debate again boiled down to the fundamental questions: how do we free up more spectrum; and once we do, how do we allocate it?
For example, one of the early battles in 2014 was whether, and to what extent, the FCC should impose incumbent exclusion rules for the upcoming voluntary incentive auction for broadcast spectrum. Building on our work from 2013, we authored a paper entitled Will Bidder Exclusion Rules Lead to Higher Auction Revenue? A Review of the Evidence, where we conclusively showed that not only did AT&T’s and Verizon’s participation not deter smaller firms from entering into prior auctions, but AT&T’s participation substantially raised total auction proceeds above and beyond the effect of a typical bidder.
We also had a paper published in the Federal communications Law Journal entitled Market Mechanisms and the Efficient Use and Management of Scarce Spectrum Resources (originally released as Phoenix Center Policy Paper No. 46), where we demonstrated that if the goal of spectrum use and management is economic efficiency, and because the government itself has repeatedly conceded that it uses and manages spectrum inefficiently, then policymakers should expand the private sector’s management of the nation’s scarce spectrum resources. We were pleased to see that our paper was cited by the Institute for Defense Analyses as part of the White House Office of Science and Technology Policy’s spectrum review.
Along the same lines, another perennial policy issue is whether government should auction or force parties to share scarce spectrum resources. An example of how we weighed in on this topic can be found in an op-ed published in The Hill by Phoenix Center Chief Economist Dr. George Ford entitled: Shared Spectrum is a Pipe Dream. In this op-ed, George took on University of Pennsylvania Professor Kevin Werbach’s claim that the United States should abandon spectrum auctions in favor of a sharing regime. As George observed, “To adopt a blanket presumption of sharing for all new spectrum as Professor Werbach touts is simply inefficient and wasteful. Rather, the allocation decision should be made based on which licensing approach is expected to generate the greatest value for the spectrum being allocated.”
Finally, we addressed the argument in that “spectrum exhaust” is a myth. For example, in a study we released entitled Have We Got it All Wrong? Forecasting Mobile Data Use and Spectrum Exhaust, George took on one such claim by Aalok Mehta from the Office of Management and Budget and J. Armand Musey of Goldin Associates and found Mehta and Musey’s arguments severely wanting. Among other problems, George demonstrated that Mehta and Musey’s claim that demand forecasts over-estimate actual traffic largely misses the point. While Mehta and Musey are correct that there are always alternatives to procuring “more spectrum” as a way to offset capacity shortages, George pointed out that it is exactly these alternatives that policymakers are attempting to avoid—including, primarily, higher prices for mobile services. George also demonstrated that the FCC’s prediction of a spectrum shortage is unaffected by Mehta and Musey’s concerns—more spectrum is needed for commercial mobile data services and soon.
One of the major legislative fights in 2014 was the effort to extend—or, ideally, make permanent—the Internet Tax Freedom Act (“ITFA”), which imposed a three-year moratorium on the imposition of (new) state and local taxes on Internet access. To examine the likely adverse effects of failing to extend the ITFA, George authored a study entitled Should the Internet Tax Moratorium be Made Permanent?, where he estimated that the levying of the typical state and local communications taxes on Internet connections will have a sizeable adverse effect on broadband adoption, likely erasing all reasonable estimates of the gains to Internet adoption from the billions of dollars spent to date on federal, state and private-sector programs. George also showed that failure to extend the ITFA could adversely impact how the United States is ranked by the OECD for broadband adoption—a meaningless yet oft-cited statistic. For fixed-line connections, George estimated that that a loss of 5 million connections would lower the U.S. one spot in the OECD’s rankings, and a loss of 13.5 million fixed lines would cause the U.S. to fall from a rank of 16 to 21. For wireless, a plausible loss of 30 million lines would result in a 10% drop in adoption and would move the U.S. from the 7th to the 9th spot in the OECD’s rankings of mobile broadband adoption. While Congress just extended the ITFA with the recent spending package, it did so for only through October 2015, so we fully expect to revisit this issue again next year.
Intellectual Property Protection
Building on our work in 2013, the Phoenix Center again wrote several papers which took on the argument that digital piracy of intellectual property is costless to society.
For example, in a paper entitled What is the Effect of File Sharing on the Creation of New Music? A Critical Review of “A Case Study of File Sharing and Music Output”, George took on the claims of Tulane University Law School Professor Glynn Lunney, Jr. that “file sharing has not reduced the creation of new original music” based on the correlation of music sales over time to the appearance of “new artists” appearing at the top of Billboard’s Hot 100 chart. After review, George found that that Dr. Lunney’s analysis suffers from defects so severe that the study is completely useless for guiding public policy.
Similarly, in a paper entitled Movie Leaks, Box Office Success and Child’s Play: Using an On-Line Game is No Way to Quantify the Effects of Piracy, George took on the claims of University of Kansas Professor Koleman Strumpf that that pre-release movie piracy has no effect on box office revenue. As George pointed out, however, because Professor Strumpf’s analysis relies on highly questionable data, Professor Strumpf’s final results are without credibility and of little policy relevance.
And in a paper entitled Free Markets, Monopolies, and Copyright, George took on those who argue that current copyright law confers a “monopoly” to artists and, as such, is antithetical to laissez-faire capitalism. To refute this claim, George reviewed the writings of the three “giants” of laissez-faire capitalism—economists Ludwig von Mises (mentor of Friedrich Hayek), Milton Friedman and philosopher Ayn Rand—and found that any claim that copyright is inconsistent with laissez-faire capitalism and constitutes a “monopoly” is an exceedingly difficult position to defend. As George demonstrated, all three of these luminaries offer strong arguments for copyright in a free-market economy and reject the view that copyright is a monopoly in the modern use of the term. Not to be outdone, George also demonstrated that in addition to the “giants” of free market capitalism, economists, antitrust agencies and courts have concluded that a copyright conveys no more market power than does a deed to a house.
Finally, as we at the Phoenix Center not just “talk the talk” but also “walk the walk” when it comes both to the creation and protection of intellectual property, I was honored to play a duet with Ed Rollins from the double-platinum recording band Collective Soul before a standing-room only crowd at the U.S. Chamber of Commerce’s 2nd Annual Global Intellectual Property Summit.
In 2004, the United States Supreme Court in Nixon v. Missouri Municipal League ruled that the Federal Communications Commission may not use Section 253 of the Telecommunications Act to preempt state laws that restrict or prohibit municipal broadband deployment. Despite this defeat in Nixon, proponents of municipal broadband have spent the last decade trying to find an alternative legal theory of preemption and, with the D.C. Circuit’s recent ruling in Verizon v. FCC, believe they now may have finally found one—namely, the FCC’s authority in Section 706(a) of the Communications Act. Given the court’s ruling, FCC Chairman Tom Wheeler, a vocal proponent of municipal broadband, boldly stated last April that ‘‘I believe the FCC has the power—and I intend to exercise that power—to preempt state laws that ban competition from community broadband.’’ Taking up Chairman Wheeler’s invitation, the municipal provider in Chattanooga, Tennessee recently filed a petition with the FCC urging the agency to use its authority under Section 706 to preempt a Tennessee state law which, it claims, prevents it from expanding beyond its existing franchise territory. The Commission then put out this petition on an expedited pleading cycle. In a “mini law review” for Bloomberg BNA entitled FCC Has No Authority to Preempt State Municipal Broadband Laws, I outlined the multiple legal infirmities with using Section 706, including, inter alia, the simple observation that nowhere in Section 706 does any derivation of the word ‘‘preemption’’ appear—only the word ‘‘forbearance’’—and there is a big legal difference between the two concepts.
In addition to my legal analysis on this topic, in a study entitled Do Municipal Networks Offer More Attractive Service Offerings than Private Sector Providers? A Review and Expansion of the Evidence, George evaluated the claims by the New America Foundation and the Consumer Federation of America that municipal wireline broadband service providers offer much more attractive triple-play prices than do commercial broadband service providers. As George demonstrated, the alleged price differentials between the public and private sector are the direct and sole consequence of New America and Consumer Federation improperly comparing the prices of unlike bundles. After correcting for New America’s and Consumer Federation’s numerous factual and technical errors, George showed that, in actuality, municipal systems typically charge consumers substantially more than their private-sector rivals for very similar triple-play offerings. George’s analysis also suggests that the competitive price for a fairly standard triple-play service is about $100 in the U.S., and the expansion of municipal provision of broadband service won’t alone alter that reality.
Benefits of Broadband
We also had two important papers published this year in leading academic journals about the benefits of broadband.
The first paper is entitled Use and Depression Among Retired Older Adults in the United States: A Longitudinal Analysis (originally released as Phoenix Center Policy Perspective No. 13-02) which was published in Journals of Gerontology, Series B: Psychological Sciences and Social Sciences. In this paper, analyzing data from four waves (2002–2008) of the Health and Retirement Survey, George and his co-authors assessed whether depression among older Americans was affected by Internet use. The sample included 3,075 respondents observed over 4 waves of data, yielding a total of 12,300 observations. George found a positive contribution of Internet use to mental well-being of retired older adults in the United States, where Internet use reduced the probability of a depressive state by about 33%.
The second paper is entitled Capital investment and Employment in the Information Sector (originally released as Phoenix Center Policy Bulletin No. 25) which was published in Telecommunications Policy. In this paper, George—along with our very brilliant Fellows Professor Randy Beard and Professor Hyeongwoo Kim—estimated an “employment multiplier” from historical data and found that for each million dollars in expenditure, 10 information sector jobs are created and perhaps 24 new jobs per million dollars invested across the entire economy. Given that information sector jobs have substantially higher median earnings than the private sector average, the economic significance of changes in information sector employment are greater than the average employment effects.
Since the net neutrality debate started ten years ago, the Phoenix Center has authored the most comprehensive and rigorous research on the topic. Despite the rapid de-evolution of the debate in 2014 into sophistry and name calling, we refused to take the bait and chose instead to continue to author the most substantive research on the topic. In particular, I would like to call your attention to three major papers we released this year (all of which have been accepted for academic publication).
The first paper is entitled What Are the Bounds of the FCC’s Authority Over Broadband Service Providers? A Review of the Recent Case Law. As the title implies, in this paper I reviewed three recent cases from the D.C. Circuit—Comcast v. FCC, Cellco Partnership v. FCC and Verizon v. FCC—to evaluate the current state of the law. After review, I showed that these cases clearly hold that the Federal Communications Commission has ample legal authority over Broadband Service Providers under the current legal regime and, as such, reclassification of broadband as a Title II telecommunications service is unwarranted. This paper will be published in the Journal of Internet Law.
The second paper is entitled Tariffing Internet Termination: Pricing Implications of Classifying Broadband as a Title II Telecommunications Service. In this paper, George and I looked at the plain terms of the FCC’s governing statute, current case law, and the Commission’s own precedent—and found the following: First, reclassification turns edge providers into “customers” of Broadband Service Providers and this new “carrier-to-customer” relationship (as opposed to a “carrier-to-carrier” relationship) would require all BSPs (i.e., telephone, cable and wireless broadband providers) to create, and then tariff, a termination service for Internet content under Section 203 of the Communications Act. Because a tariffed rate cannot be set arbitrarily, and since a service cannot be generally tariffed at a price of zero, reclassification would require all edge providers (not their carriers)—as customers of the BSP—to make direct payments to the BSP for termination services. Second, the Commission would be prohibited from using its authority under Section 10 of the Communications Act to forbear from such tariffing requirements because the agency has characterized Broadband Service Providers as “terminating monopolists” and in the presence of a terminating monopoly, competition (a key component of Section 10) cannot be used as a basis for forbearance. This paper will be published in the Federal Communications Law Journal.
The third paper is entitled Section 10 Forbearance: Asking the Right Questions to Get the Right Answers. In this paper, George and I showed how the FCC’s Phoenix Forbearance Order rejects the validity of forbearance in the presence of either monopoly or duopolistic competition. Given the Commission’s repeated finding that Broadband Service Providers are “terminating monopolists” as a justification for implementing Open Internet Rules, the Commission cannot reclassify broadband Internet access as a telecommunications service and then easily use its forbearance authority to create what is colloquially referred to as “Title II Lite.” In fact, we show that if the Commission classifies broadband as a common carrier Title II service, then the Commission’s stance on broadband competition—combined with the agency’s conclusions about duopolistic competition in the Phoenix Forbearance Order—could require, for the first time, the price regulation of all retail broadband connections. Given the above, we recommended that if the Commission wants to continue to use the notion of a “terminating monopoly” to justify Open Internet rules, then its cleanest legal option is to move forward under Section 706 as the D.C. Circuit in Verizon v. FCC instructed. This paper was presented and TPRC this year and will be published in CommLaw Conspectus.
In an effort to validate the accuracy of our conclusions, we held a series of events with our peers to make sure we were on track. These events included a “Teleforum”, two panels at our Annual Symposium, and our Annual Rooftop Policy Roundtable.
The Improper Politicization of Broadband Policy
After twenty years in the policy business (including several in the agency’s Office of General Counsel), I would be naïve to think that politics do not play a significant role in what is supposed to be a dispassionate decision-making process on the merits and law at the Federal Communications Commission. Unfortunately, when it comes to putting politics over substance of late, I believe we have hit a new nadir.
To illustrate this point, we released a detailed study entitled The Unpredictable FCC: Politicizing Communications Policy and its Threat to Broadband Investment (which was subsequently published in Bloomberg BNA), where we detailed how over the last several years political pressure has led the Commission either to reverse, or threaten to reverse, the major bi-partisan deregulatory policies of the past two decades. As firms require long-term certainty that they will be able to earn a return on the significant sunk capital investments, the increasing risk that the FCC will change its mind to accommodate the shifting political winds casts a pall on broadband investment in the United States.
I also demonstrated in an op-ed entitled “The Clictivist In Chief” published in The Hill how the White House isn’t helping in this regard. Indeed, rather than set forth a detailed proposal of how a “Title II Lite” regime might work, the President of the United States instead cynically chose to launch a formal “clictivist” campaign to pressure what is supposed to be an independent administrative agency bound by the precepts of both the Communications Act and the Administrative Procedures Act. And, as if this was not bad enough, I repeatedly demonstrated that the President possessed a startling ignorance of the basic facts at issue, leading me to observe that the President’s “talking points offer nothing new to the debate other than an endorsement of regulations his team plainly knows nothing about.”
Finally, in an op-ed I wrote for The Hill entitled Is the FCC Still Trying to Stifle Political Speech? I exposed the startling fact that buried deep in the FCC’s Staff Working Group Report on Process Reform, the agency was contemplating forcing anyone filing at the Commission to disclose whether they received any direct or indirect support “from industry.” According to the Report, implementation of such a rule will permit the agency to “evaluate the credibility of factual and policy arguments by knowing who is making them.” (Emphasis supplied.) Putting aside the problem that such a proposal runs in clear violation of Supreme Court precedent, what is particularly troubling is that we have a naked admission by the Commission that it does not intend to evaluate the merits of the arguments before it, but that the agency will assess the “credibility of … arguments” based on “who is making them” and, thus, the filer’s presumed “motives.”
As policy debates have become increasingly politicized over the years, we still believe (perhaps over-optimistically) that, in the end, substance matters. The policy choices we face are hard, and they should be treated with the respect and analytical rigor they deserve. Hopefully, we have contributed positively towards restoring some of this analytical rigor.
We appreciate everybody’s support of our work in 2014, and we look forward to contributing to the debate again in 2015.