Time for the Supremes to Decide ‘Net Neutrality’

rcm_logo_followTime for the Supremes to Decide ‘Net Neutrality’

By Thomas Hazlett & Joshua Wright

The FCC’s dramatic 2015 pivot on Internet regulation sought to envelope advanced broadband networks in the shroud of telephone company rules rolled out in the Mann Elkins Act of 1910. These historic common carriage “Title II” regulations – originally the province of the Interstate Commerce Commission, long ago antiquated and finally abolished in 1995 — were cited as exemplars by the Commission in last year’s Open Internet Order. Continue reading

Data-Driven Modernization of E-rate for Wi-Fi in Schools

By: Sarah Oh

Around the time of the modernization order of the E-rate program in 2014, I published an empirical study[1] on distribution effects of program rules between 1998 and 2012.  I found that the old rules, particularly the discount rate matrix, had distribution effects that perhaps needed reform.  Since the Universal Service Administrative Company (USAC) abides by administrative order to run the E-rate program, it was a natural question to ask whether the rules were causing particular outcomes.

My data analysis showed that per-student and per-school estimates of cumulative internal connection funds were higher in New York, California and Texas than the other 48 states, including Washington D.C.  I chose to study “internal connection funds” which supports payments for new Wi-Fi equipment.  I found that large school districts in major cities benefited more than the smaller districts in suburb, town, and rural schools.

For instance, my estimates showed that funds to New York, California and Texas recipients amounted to an estimated $826 per student enrolled in the National School Lunch Program.  In the other 48 states, students in the same lunch program received less than half, at an estimated $302 per student.  The rules created disparities at the per-school level as well.  In New York, California, and Texas, schools received an average of $251,399 in cumulative funds, while the other 48 states received an average of $75,340 each.  These three states enroll approximately 14 million children in over 27,000 schools each year, which is less than half of the 38 million children in over 91,000 schools in the other 48 states.

There is greater need in New York, California and Texas than the other 48 jurisdictions.  For those familiar with the E-rate rules, an average discount rate of 80 in those states shows a higher level of need compared to 76 in the rest of the country.  However, New York students with a discount rate of 77 reaped far more funds than students in the other 48 states with a slightly better discount rate of 76.  For every pupil enrolled in the school lunch program in New York, an estimated $1,285 has been spent, while an estimated $302 has been spent per student enrolled in the same national school lunch program in the other 48 jurisdictions.

Funding discrepancies do not disappear by simply increasing E-rate funds.  The rules created distribution effects even though the discount matrix carefully incorporated school lunch program demographics and urban and rural locations.  Perhaps administrative resources at the school district level contributed to these outcomes.  The New York City Department of Education applied for and received $1.7 billion in E-rate internal connection funds over fifteen years, Los Angeles Unified School District $738 million, San Diego Unified $114 million, Dallas, Houston, and Laredo Independent School Districts $145, $141, and $89 million each.  School districts with larger operations perhaps benefited from greater administrative know-how and organizational resources able to navigate a complicated process.  Perhaps smaller school districts in other states are limited by smaller economies of scale.  Might an intermediary be created to help these smaller schools?

The FCC’s data-driven modernization order of December 2014 will improve broadband connectivity in schools and libraries.  A recent annual target by the FCC to distribute $1 billion for Wi-Fi internal connections infrastructure will connect more schools and school districts around the country.  Continued scrutiny could increase the effectiveness of Universal Service Funds by making sure funds are sent to smaller school districts around the country.

Sarah Oh is a graduate student at George Mason University, where she studies economics.   

The opinions expressed in this piece are those of the author and may not necessarily represent the view of the Aspen Institute.

[1]http://www.sciencedirect.com/science/article/pii/S030859611400113X

Hazlett Participates in FCC’s Open Internet Roundtable

MULTICHANNEL NEWS

Wheeler: Net May Be at Regulatory Inflection Point
Asks Whether ‘Terminating Monopolies’ Hold Key To Letting Startups Scale Up

10/02/2014
By John Eggerton

FCC chairman Tom Wheeler has at least raised the possibility that the Internet economy is at an “inflection point” at which the government needs to step in to insure the continuing ability of innovative startups to scale up at the pace of high-speed broadband. Continue reading

Hazlett on The Rationality of U.S. Regulation of the Broadcast Spectrum in the 1934 Communications Act

On the 80th anniversary of the Communications Act, the November 2014 issue of The Review of Industrial Organization looks back at the landmark legislation and ahead to the future of broadcast regulation. The journal features an article by Thomas W. Hazlett, “The Rationality of U.S. Regulation of the Broadcast Spectrum in the 1934 Communications Act.”

Thomas W. Hazlett,
H.H. Macaulay Endowed Professor of Economics
Clemson University

Review of Industrial Organization
Volume 45, Issue 3 (November 2014), 203-220
© Springer Science+Business Media New York 2014

Published on-line: August 27, 2014

Hazlett’s paper is available here:

Download PDF (367 KB)

Here is the abstract:

Abstract

The Federal Radio Commission regulated radio broadcasting, 1927–1934. With the passage of the Communications Act of 1934, the 1927 Radio Act (enabling the Commission) was re-enacted in whole. This congressional endorsement yields key evidence as to what policy outcomes were intended, differentiating competing theories for the origins of spectrum allocation law: Coase (J Law Econ 2(1):1–40, 1959), emphasizing policy error; Hazlett (J Law Econ 33:133–175, 1990), focusing on “franchise rents” in a public choice framework; and the “public interest” hypothesis, reconstructed by Moss and Fein (J Policy Hist 15(4):389–416, 2003). Congress’ revealed preferences prove consistent with the franchise rents theory, while contradicting the other two.

 

Hazlett and Wright Pen Wall Street Journal Op-Ed on FCC Over-Management of the Internet

Link

The-Wall-Street-Journal-LogoJoshua Wright, IEP Scholar on leave and current FTC Commissioner, joined Thomas Hazlett to write an Op-Ed in the Wall Street Journal titled “Micromanaging the Web Would Be a Macro Mistake.” The Op-Ed warns of the issues that arise when the FCC attempts to over manage internet regulations, such as net neutrality. In an attempt to prevent anti-competitive behavior by ISPs, net neutrality regulations have actually had an anti-consumer effect. A much more efficient means to control anti-competitive behavior already exists in the form of anti-trust law.

The full article follows:

Micromanaging the Web Would Be a Macro Mistake
The FCC doesn’t seem to realize that antitrust law is enough to ensure fairness.

Thomas W. Hazlett And
Joshua D. Wright
July 13, 2014

The cry for Internet regulation is familiar. “Net neutrality” rules are the most recent episode in a recurring story in which proponents seek to limit competition while claiming that nothing less than the future of the Internet is at stake.

More than a decade ago there was Open Access, a proposal for the Federal Communications Commission to let third parties use cable TV lines at regulated wholesale rates so they could offer competing broadband service. Proud corporate supporters included GTE, a large phone company competing with cable operators, and AOL, then the largest Internet service provider. Their argument mirrored that of net-neutrality proponents today: Without it, the major Internet service providers would create their own fast lanes and stifle competition. The Clinton administration’s FCC rejected the idea, and the fears proved groundless. The Internet continued to grow rapidly with innovations from Google to Facebook.

That history makes the current debate over network-neutrality rules seem surreal. Columbia Law professor Timothy Wu, for instance, declared during a June congressional hearing that the modern Internet was nurtured on principles of neutrality that the FCC is only trying to enshrine, protecting against “new rules that reportedly would put a price tag on climbing aboard the Internet.”

Not so. The modern, open Internet evolved in the marketplace, with customers and firms making unregulated deals. The government’s primary contribution has been to clear out the “public utility” regulations that would have stifled it. As FCC Commissioner Ajit Pai explained in February when the FCC announced its latest attempt to salvage net-neutrality rules: “The Internet was free and open before the FCC adopted net-neutrality rules. It remains free and open today. Net neutrality has always been a solution in search of a problem.”

Moreover, Internet access has always required parties to ante up, and those who have paid more have received superior terms. Consider backbone providers, which are data transport networks that form the core of the Internet. They connect with other large networks called “peers” free of charge. Smaller networks and Internet service providers, on the other hand, pay for the same service. Content suppliers such as Apple, MTV and Major League Baseball use private, high-capacity pipes to avoid jams and improve customer experience. They pay content delivery networks like Akamai to access these pipes; giant data pushers such as Google run their own. These fast lanes improve the web, wired and wireless. Fast lanes are features, not bugs.

The fear among net-neutrality supporters is that major Internet service providers such as Verizon or Comcast will engage in anticompetitive behavior known as vertical foreclosure. Comcast, for instance, might prevent customers from viewing Disney -owned programs like ESPN, so as to favor its own network, NBC Sports. This fear overlooks the fact that not only is ESPN’s content widely available via Comcast and competing services, but such behavior is already unlawful, if harmful to consumers, without net-neutrality rules, thanks to antitrust law.

Nevertheless, the FCC imposed neutrality regulations in 2007 and 2010. The D.C. Circuit vacated both sets of rules. FCC Chairman Tom Wheeler, who seems to believe the third time is the charm, is now advancing a proposal that would give the agency power to review individual agreements between Internet companies on a case-by-case basis. Such micromanagement is sure to be inimical to the Internet’s development.

Critics challenged the agency in 2010 to produce empirical evidence of vertical foreclosure by Internet service providers, and the FCC came up with what it claimed was a supportive econometric study. The study looked at cable video, not broadband markets. The FCC’s report, which relied entirely on anecdotes, was remarkable in one sense: It found but a handful of allegations. As FCC Chief Economist Gerald Faulhaber put it in a 2011 paper, “By any standard, four complaints about an entire industry in over a decade would seem to be cause for a commendation, not for restrictive regulations.”

There is evidence, however, that net-neutrality regulation harms Internet users. In 2011, the FCC filed a complaint against Metro PCS, a small company less than 1/10th the size of Verizon Wireless, for violating net neutrality. The provider offered “all you can eat” mobile service—voice, text and data—for just $40 a month. There was a twist: Though most video streaming was blocked to avoid network congestion, users could watch unlimited YouTube videos because Google (YouTube’s parent) had engineered a compression technique that prevented traffic jams.

MetroPCS had a neutrality “problem.” It favored Google’s content over other streaming sites. Yet Metro PCS had no financial stake in Google, customers got extra content and lost nothing, and no competitive harm occurred. The D.C. Circuit eventually struck down the FCC’s rules, mooting the complaint, but not before the agency revealed its suspicion of new technological fixes undertaken by upstart rivals offering consumers superior services.

The FCC claims that a neutrality mandate serves consumers, but overwhelming historical and economic evidence suggests otherwise. While antitrust law is not without its own history of abuse, it has developed a consumer-centric framework based on economic analysis and evidence. Antitrust law gives consumers a chance to reap the benefits from business arrangements like those between MetroPCS and Google while protecting them from those that truly harm competition.

If you think the Internet is broken today, wait until the FCC administers case-by-case approvals of traffic agreements to fix it.

Mr. Hazlett is a professor of economics at Clemson University and previously served as Chief Economist of the FCC. Mr. Wright, a lawyer and economist, is a member of the Federal Trade Commission.

IEP Scholar Sarah Oh’s Paper on the Effects of the Discount Rate and Urbanicity on E-rate Funds

IEP Scholar Sarah Oh has written a paper entitled Effects of the Discount Rate and Urbanicity on E-rate Funds from 1998-2012. The abstract from the paper reads as follows:

Broadband in schools has been financially supported by the E-rate program for over fifteen years in the United States. Although prior studies have measured impacts  of demographic criteria on fund distribution, this study focuses on the discount rate and urbanicity type of schools and students on priority 2 internal connections funds from 1998-2012. Funds aggregated by state are regressed on average discount rates of fund recipients. Funds are also regressed  on  the  number  of  city,  suburb,  town,  and  rural  schools  and  students  per  state. Treatments are defined to include and exclude New York, California, and Texas, three states with the largest share of funds. The effect of the discount rate is statistically significant in both treatments. The effect of urbanicity is statistically significant for city schools and city students over all states, but this effect becomes insignificant when excluding New York, California, and Texas. A quasi-experiment on data from FY2010, a year when the FCC waived the discount rate criteria, also supports these results.

 

The full paper can be downloaded here:

Download (PDF, Unknown)

Hazlett Interviewed for Virginia Business Article on “Open Internet”

Virginia-Business1

     Thomas Hazlett was interviewed by Virginia Business Magazine in an article by Richard Foster analyzing the Netflix/Comcast deal and the ramifications for the so called “open internet.”  Critics have said the the deal will lead to an end to the era of open internet and will lead to higher costs for consumers as well as discrimination between websites.  Dr. Hazlett argues that the change will be much less dramatic because the notion of an open internet is a mischaracterization of how the internet has always operated.  In fact, this discrimination between different types of network traffic is beneficial to consumers, who value speed in services such as voice-over-internet more highly than in email.

The full article can be read here.

Thomas Hazlett Cited in Amicus Brief filed with the Supreme Court seeking to overturn Red Lion

Minority Television Project, Inc. v. Federal Communications Commission is a case, currently under petition for certiorari to the Supreme Court, that seeks to overturn the current legal standard set in Red Lion Broadcasting Co. v. FCC. In Red Lion, the Supreme Court held that the FCC has broad authority to regulate broadcast television in the “public interest.” Minority Television Project is an independent television station in San Francisco that has found FCC regulations to be too restrictive and is challenging them on First Amendment Grounds.

Thomas Hazlett is included in an amicus brief filed with the Supreme Court on behalf of former FCC officials supporting the argument that the FCC should not have constitutional authority to impose such strict sanctions on broadcast networks. Dr. Hazlett argues that the primary justification for the FCC’s authority, that there exists a scarcity of public airwaves that necessitates more government control, is no longer relevant in a world with numerous and diverse options such as cable, satellite and internet.

The full amicus brief can be read here.

Thomas Hazlett Cited in Daily Beast Article on Net Neutrality

The Daily Beast’s Nick Gillespie wrote an article entitled “The FCC Must Ignore the Silly ‘Net Neutrality’ Advocates.” In it, Gillespie explains why the dire consequences predicted by net neutrality proponents are exaggerations. The article contains several quotes from Dr. Hazlett’s papers and interviews, both about the FCC’s ability to regulate generally and the fallacy of net neutrality regulation in specific.

The article can be read here.