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
Wheeler: Net May Be at Regulatory Inflection Point
Asks Whether ‘Terminating Monopolies’ Hold Key To Letting Startups Scale Up
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
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
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:
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.
Joshua 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.
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 joined IEP Scholars Sarah Oh and Brent Skorup in authoring a paper studying the effects of laws passed in Finland and Belgium prohibiting the bundling of cell phones with 3G wireless broadband plans. The paper compares 3G subscribership rates in these countries with other European countries that did not place such a ban on bundling. This ban on vertical integration can have negative effects on consumer welfare, as shown by a slow 3G penetration rate while the bans were in place, followed by rapid expansion upon repeal of the laws.
The full paper, entitled Natural Experiments in Mobile Phone Regulation: Estimated Effects of Prohibiting Handset Bundling in Finland and Belgium, can be downloaded here.
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.
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.
The IEP conference from April 25th, Spectrum After Incentive Auctions, was covered in TR Daily by Paul Kirby. The entire text of the article appears below:
EXPERTS DEBATE WAYS TO IMPROVE GOVERNMENT SPECTRUM MANAGEMENT
TRDaily – April 25, 2014
Experts today debated ways the federal government could improve its management of spectrum, including providing more property rights over frequencies, imposing spectrum fees on government agencies, and allowing a new agency or independent entity to oversee the process.
The ideas were aired at a morning event sponsored by the Information Economy Project, which is currently a joint initiative of the George Mason University School of Law and Clemson University.
Blair Levin, a communications and society fellow at the Aspen Institute who led the FCC initiative that drafted the 2010 national broadband plan (NBP), spoke in favor of putting an agency similar to the General Services Administration in charge of all federal spectrum and imposing fees on agencies for their use. Over time, the amount of spectrum agencies use would be reduced, he said.
Mr. Levin discussed issues touched on in a white paper released recently by the House communications and technology subcommittee (TRDaily, April 1).
For example, he said, proposals to allow federal agencies to share revenues from auctions of spectrum they give up – similar to an incentive auction for those agencies – is not “a bad idea,” but he questioned whether it would succeed because agencies would know that Congress could rescind the benefit in the future. He also suggested that “sticks work far better than carrots” when it comes to federal agencies.
He said he opposed making auction revenues an explicit consideration in FCC auction design, saying it is “really bad policy.” He said such a policy would provide the FCC an incentive to “maximize scarcity value” in order “to maximize revenue.” He also said that “such a rule is an invitation to litigation,” which would delay auctions.
Richard Bennett, a visiting fellow at the American Enterprise Institute, proposed the creation of a Federal Spectrum Service, which would be an independent corporation like the U.S. Postal Service that would hold the licenses for federal spectrum. Under his proposal, federal agencies would be required to reduce their spectrum footprint within five years, while allowing agencies to expand “their mission” through newer technology. The spectrum given up could be used “for more productive uses,” Mr. Bennett said.
Michael Marcus, a consultant and former FCC official, complained that the Commission takes too long to make decisions in complicated proceedings. He said the FCC and the National Telecommunications and Information Administration should establish new technical advisory committees, and he said the Commission should create a new board to work on spectrum issues that are not controversial.
Tom Hazlett, the director of the Information Economy Project who is joining Clemson as an economics professor, said that the FCC should rely on a liberal licensing model for spectrum, which he said “can accommodate great change in the marketplace,” rather than making command-and-control decisions about whether particular bands should be licensed or unlicensed.
Harold Furchtgott-Roth, a senior fellow at the Hudson Institute and a former FCC Commissioner, suggested that wireless carriers may be hesitant to bid on AWS (advanced wireless services)-3 spectrum in the 1755-1780 megahertz and 1695-1710 MHz bands because of “rather vague and undefined concepts” on how they will coexist with federal government incumbents. A key question is how interference problems will be addressed, he said, adding, “I think the answer is no one knows.”
“I think private companies will bid, but I don’t think they’re going to bid an awful lot for that,” he added.
In the incentive auction, he said that carriers would be unwilling to invest too much unless the FCC reaches coordination agreements with Mexico and Canada – accords that he said should be agreed to before the sale.
Robert Kaminski, an analyst at Capital Alpha Partners, reviewed spectrum that the FCC has made available since release of its NBP and suggested that it will likely fall short of the goal of making an additional 300 MHz of licensed spectrum available by next year. He said the amount of licensed spectrum will likely only total between 145 MHz and 197 MHz, “under more optimistic scenarios.” Regarding the incentive auction, he predicted that the Commission would only be able to repurpose spectrum in the “low double digits” rather than the Commission’s original goal of 120 MHz.
However, Mr. Kaminski noted that unlicensed spectrum in the 5 gigahertz band and shared frequencies in the 3.5 GHz band would easily get the FCC past the 300 MHz band total.
But Tom Hazlett noted that in the NBP, the FCC detailed 300 MHz of licensed spectrum. As a result, he said, including unlicensed frequencies “is not apples to apples.”
Mr. Kaminski also said that beyond the planned AWS-3 and incentive auctions, there “is no real clear line of sight to more auctions.”- Paul Kirby, email@example.com
Reprinted with permission of TRDaily
Econ Focus, the economics magazine of the Federal Reserve Bank of Richmond, wrote an article on the state of the FCC’s spectrum auction process. In it, Thomas Hazlett is quoted detailing the difficulties the FCC has encountered in facilitating the auction due to the rigid nature of spectrum rights under the current system. He concludes that the FCC has taken some positive steps in creating flexible-use licenses, but further steps must be taken.
The article can be found here.