I don’t see a nexus between the goals of net neutrality rules and social policy

September 15th is fast approaching.  That’s the deadline for reply comments to the Federal Communications Commission’s proposed open network rules.  A lot of hype has been raised about the one million or so comments that have been submitted by net neutrality rules proponents, but what I find more relevant is the lack of any connection between the FCC’s proposed social goals for broadband deployment and the factors these goals are supposedly based on.

I would expect this disconnect from proponents of the rules.  I wouldn’t call them advocates for broadband deployment or adoption.  Even Free Press and Public Knowledge give less than a passing glance to the issue of deployment or adoption preferring to focus on the purported needs of existing customers and hypothetical scenarios of broadband operator abuses.

That’s the unfortunate part about no evidentiary hearing on these rules.  The FCC, unfortunately, must subject itself to claims not supported by true economic analysis, the basis of good policy.  The bad practices of pro-net neutrality commenters may be rubbing off on the FCC for the Commission’s proposed rules lack the required rigor in explaining how the FCC’s proposed rules are in any way tied to broadband deployment; a lack of rigor that net neutrality proponents prefer.

Let’s look at the social policy that the open Internet rules are supposed to pursue.   The social policy goal, deployment of advanced telecommunications capability and increased  infrastructure investment, is derived from five variables found in the rules; consumer choice, freedom of expression, end-user control, competition, and freedom to innovate without permission.

These variables are supposed to result from network operators being transparent as to their operations and management; the network operator’s duty to not block end-user access to websites of the end-user’s choice; and the network operator’s duty to not engage in commercially unreasonable practices.

The way the rules are written reminds of a chain derivative with y being a result of x being a result of t.  The problem with the rules as policy is that the FCC has not even attempted to say how the variables upon which the social policy goals are based are to be measured or operationalized.  Measurement is important if you are going to measure a policy’s success.

How do you measure consumer choice?  Freedom of expression?  Freedom to innovate?  Are these measurements to be determined in administrative hearings or in court?  If so, what happens to innovative broadband deployment in the meantime?

Even if the FCC were to erase consumer choice, freedom of expression, end-user control,  competition, or freedom to innovate from its proposed rules, it would still be stuck with measuring transparency, non-blocking, and commercially reasonable practice, although to its credit the FCC defines these concepts in its rules.

More importantly the FCC would have to demonstrate, beyond rhetoric, that transparency, non-blocking, and commercially reasonable standards lead to increased infrastructure deployment.

Nothing in their rules or analysis of their rules makes any tie between net neutrality and broadband infrastructure deployment.

An emerging Africa means America must deploy broadband quickly

Last week, President Barack Obama hosted fifty leaders from the African continent.  The United States is recognizing Africa as an emerging market.  According to an article in The Economist, Africa’s population will double by 2050 and it will be a young population.

This young population is also taking advantage of mobile technology where, for example, farmers are applying mobile telephone technology to connect them to weather and crop information that can hopefully lead to increased profits.

President Obama is correct in his assessment that the American economy is based on ideas and innovation and that ideas and innovation depend on development of human capital.  The African economy is going to need ideas and information in order to create knowledge that can be applied to problem solving, product creation, and service delivery.

Part of the reason why I was excited by Time Warner’s Howie Hodges’ presentation at the Congressional Black Caucus Leadership Institute conference a couple weeks ago was the result of him mentioning virtual data rooms.  Virtual data rooms or VDRs are replacing the physical data rooms that law firms and investment banks use to share and access information involving merger and acquisitions or bankruptcy proceedings.

According to Inc.com,  the virtual data room industry market, which was valued at $628 million in 2012, is expected to balloon to $1.2 trillion in 2017.   VDRs operate on the edge of the Internet and as repositories of digitized information, I see them playing an increasing role in global markets especially as trade between America and African countries increase.

An edge provider industry expected to grow this quickly should not be at risk of becoming collateral damage from Title II or common carrier regulation.  As these providers receive increasing requests to provide more services, they will have to respond not only to demand but to increasing competition.  They will have to be nimble.  They can’t run the risk of being forced to buy access services out of tariffs or wait for the FCC or a state regulator to approve new services or facilities because an advocacy group believes that strategic partnerships are taboo.

Africa’s emerging markets and their adoption of mobile broadband technologies for their agricultural and financial transaction markets signal the need for America to service the Continent’s needs for innovation and knowledge that only the American knowledge economy can provide.

Is Title II good for information content entrepreneurs? No

Later today I will participate in a Congressional Black Congress Foundation panel discussion on telecommunications and media.  I’ll be sharing my thoughts and insights on how a Title II classification of broadband access could impact information service providers in general and minority-owned information services providers in particular.

It should be no surprise, if you are one of the three or four people who follow this blog, that I see no social policy benefits in treating broadband access as a Title II common carrier.  Title II does not encourage broadband deployment or investment.  It does not even promote the neutral and open platform necessary for encouraging the development and deployment of the software applications that have provided us with familiar services like e-mail and video streaming.

The main reason that Title II is ineffective in a 21st century broadband world is that Title II was intended to regulate services and pricing for telecommunications services provided in an analog, point-to-point, switched circuit world with an emphasis on regulating prices and charges for services.  While the early days of the Internet were driven by a philosophy of openness intended to encourage application development and deployment necessary for exchanging information, Title II was intended to facilitate the universal access of American households to a legacy switched-circuit telephone infrastructure.

Title II says nothing about digital networks much less net neutrality.  Title II says nothing about democratizing access to or app development on the Internet.  In fact, the entire Communications Act of 1934 doesn’t speak to net neutrality.  Section 1302 (section 706 under the Telecommunications Act that amended the Communications Act) boils down to encouraging the deployment of advanced services, where advanced services have been determined to mean broadband.

Title II has become the backdoor approach used by net neutrality proponents to get to regulation of broadband services and the Internet as opposed to the old fashioned method of proposing legislation to Congress that would expressly authorize net neutrality as a policy tool and provide the Federal Communications Commission with the authority to create net neutrality rules.

But what proponents of net neutrality rarely discuss are the negative impacts Title II would have on information and content entrepreneurs.  Take for example section 203 of the Communications Act.  This section discusses schedule and charges assessed by common carriers.  To analyze what a Title II eco-system would look like for broadband operators, replace the term “common carriers” with the term “broadband operators.”

So, according to this section broadband operators would have to keep on file with the FCC a schedule of their rates and charges, whether for traffic sent solely on their networks or traffic exchanged with other broadband operators.  At first blush this may seem like just a mere compliance or administrative inconvenience.  What this requirement would do, however, is introduce more uncertainty for information and content entrepreneurs.

For the broadband operators it may mean calling out of retirement a few of their tariff experts.  (Don’t call me.  I hated drafting the damned things.)  The real inconvenience will fall on entrepreneurs.  For example, if the broadband operator has to change rates or charges to accommodate changes in his relationship with video distributors like Netflix, price changes, pursuant to section 203(b) of the Act, would take place after 120 days notice of the price change.

Would a broadband operator want to put off collecting additional revenues while waiting for the FCC to approve a rate change?

Can an information provider afford to have a broadband operator say no to its additional traffic because the broadband operator has not instituted the appropriate price points to compensate for additional traffic?

Another source of uncertainty for information and content entrepreneurs may come from section 204(a)(1) of the Act.  This section allows the FCC to hold hearings to challenge the lawfulness of new charges.  These challenges may come from the FCC or from a consumer.  Along with the challenge would be a suspension of the rate for up to five months.

Broadband operators may be walking on eggshells when a content or data entrepreneur wants to run a service that calls for a change in rate only to be turned down because the operator doesn’t want the headache  of a future refund headache down the road.

Information and content entrepreneurs should also be concerned about section 211(a) which would require a broadband operator file with the FCC other contracts that the operator has with other broadband operators.  Why should this concern information and data entrepreneurs?  Because if the terms and conditions of these contracts includes third-party, information and content entrepreneur information, it may expose these entrepreneurs to competitive risks.

Title II puts entrepreneurs at risk as collateral damage in attempts to regulate hypothetical broadband operator bad behavior.  Investors in online start ups should consider the impact of Title II on their investments.

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The FCC has no reason to pre-empt state laws banning municipal broadband

I just filed the following comments in WCB Docket Numbers 14-115 and 14-116.

The Electric Power Board of Chattanooga, Tennessee and the City of Wilson, North Carolina have asked the Federal Communications Commission to pre-empt statutes that ban or restrict the provision of broadband services by municipalities to the public.  The parties seek pre-emption pursuant to section 1302 of the Communications Act of 1934 as amended by the Telecommunications Act of 1996.  Pursuant to the reasons I lay out below, I ask the Commission to deny their petitions.

The Supremacy Clause of the United States Constitution gives Congress the authority to pre-empt state laws that conflict with the exercise of federal power [Schwartz 2010].  Congress may express its intent to preempt conflicting state law by saying so in the text of a statute or imply the intent to pre-empt state law based on the structure or purpose of the federal law.  In addition, where Congress intended to occupy an entire regulatory field or there is a conflict between federal and state law, the federal law would trump state law.  The courts may provide federal agencies considerable deference where the federal agency finds that state law conflicts with the federal law an agency is authorized to administer. [Schwartz, 2010]

Although the Commission is an independent agency, it should be able to find guidance on preemption from a May 2009 memorandum issued by President Obama on the issue of preemption.   Here is an excerpt from that memorandum:

“An understanding of the important role of State governments in our Federal system is reflected in longstanding practices by executive departments and agencies, which have shown respect for the traditional prerogatives of the States. In recent years, however, notwithstanding Executive Order 13132 of August 4, 1999 (Federalism), executive departments and agencies have sometimes announced that their regulations preempt State law, including State common law, without explicit preemption by the Congress or an otherwise sufficient basis under applicable legal principles.

The purpose of this memorandum is to state the general policy of my Administration that preemption of State law by executive departments and agencies should be undertaken only with full consideration of the legitimate prerogatives of the States and with a sufficient legal basis for preemption. Executive departments and agencies should be mindful that in our Federal system, the citizens of the several States have distinctive circumstances and values, and that in many instances it is appropriate for them to apply to themselves rules and principles that reflect these circumstances and values. As Justice Brandeis explained more than 70 years ago, ‘[i]t is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.’”

It appears that the President wants the federal government to recognize that federal and state governments are not only partners in serving the public interest, but that the specific circumstances of each state should be taking into account before the federal government risks exercising unnecessary overreach.  Using section 1302 as basis for preempting state law would constitute such overreach.  Section 1302 (b) reads as follows:

“The Commission and each State commission with regulatory jurisdiction over telecommunications services shall encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans (including, in particular, elementary and secondary schools and classrooms) by utilizing, in a manner consistent with the public interest, convenience, and necessity, price cap regulation, regulatory forbearance, measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment.”

The Petitioners argue that state legislation banning or restricting municipal broadband somehow lessens competition or works against deploying broadband and by preempting state legislation the Commission would in essence put in place a policy that encourages the deploying high-speed broadband.  I argue that it was never the intent of the Telecommunications Act of 1996 to see municipalities deploy broadband or telecommunications.  The Telecommunications Act of 1996 was primarily designed to open the telecommunications markets to more competition between private sector players.  Section 1302 was an attempt to recognize the importance of this thing called the Internet and allow the commercialized Internet to grow and flourish with private sector players deploying broadband in a least restrictive regulatory setting.

Ironically over that 18 year period we have gone from the thing called the Internet to an Internet of Things.  This is a testament to how a private sector subject to light touch regulation has been able to innovate both broadband and edge services for the benefit of consumers.

Going back to the legislation, there is no language in section 1302 that expressly preempts the states from implementing legislation that bans municipal deployment of broadband.  Also, there is nothing in the structure or intent of the Telecommunications Act that implies preemption.

States have been encouraging private sector innovation through deregulation.  In Florida where I served on the Florida Public Service Commission’s staff, I witnessed Florida’s attempts in 1994 and 1995 to deregulate Florida’s communications market.  We were not encouraging cities and towns to provide Internet access or local phone services.  We recognized that the emerging technology at the time allowed for cable companies and resellers to enter the market and sell local and long distance services.  The Telecommunications Act continued and built on what the states were doing to encourage competition via a light touch regime, a regime that the Petitioners want to attack by encouraging preemption.

In sum, the structure of federal communications law does not imply preemption but cooperation with and deference to the states and recognizes that the private sector, given its scale and access to capital was best suited to build a nationwide broadband network.  The states that ban or restrict municipal broadband deployment also recognize that capital will turn away from a market where a “competitor” is heavily subsidized with free money from tax payers.  The private sector, even at today’s low rates of interest, cannot compete with free money or a competitor who may not be subject to the same, onerous net neutrality principles or other rules that a private sector provider has to or may have to abide by.

For the reasons I shared above, the Federal Communications Commission should deny the Electric Board of Chattanooga and the City of Wilson’s petition.

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Aereo should not call itself a cable company

Aereo is trying to reinvent itself after its June 2014 loss in the U.S. Supreme Court where the high court held that Aereo activities were substantially like those of a cable company; therefore it met the definition of performance under the Copyright Act and was required to compensate broadcasters for the performance of their content.  Aereo, like other cable companies, should have to pay re-transmission fees to over-the-air broadcasters whose signals Aereo was capturing via miniature antennas and providing to Aereo’s subscribers.

Aereo’s reportedly new approach will be to ask the courts to treat the company as such, as a cable company, so that Aereo can move forward with a business model that allows it to make some money fast.

Well, Aereo may not want to move too fast with that classification redux.  According to U.S.C. 47 sec. 522 (5), a cable operator means any person or group of persons (A) who provide cable service over a cable system and directly or through one or more affiliates owns a significant interest in such cable system, or (B) who otherwise controls or is responsible for, through any arrangement, the management and operation of such a cable system.

A cable system is defined as a facility consisting of a set of closed transmission paths and associated signal generation, reception, and control equipment that is designed to provide cable service which includes video programming and which is provided to multiple subscribers within a community, but such term does not include (A) a facility that serves only to transmit the television signals of one or more television broadcast stations; (B) a facility that serves subscribers without using any public rights of way; (C) a facility of a common carrier which is subject, in whole or in part, to the provisions of sub-chapter II of this chapter, except that such facility shall be considered a cable system (other than for purposes of section 541(c) of this title) to the extent such facility is used in the transmission of video programming directly to subscribers, unless the extent of such use is solely to provide interactive on demand services; (D) an open video system that complies with section 573 of this title; or (E) any facilities of any electric utility used solely for operating its electric utility system.

Yes, I know that’s a mouthful, but bear with me.  I believe one can make the argument that while Aereo looks like a cable operator because it grabs broadcast signals out of the air and retransmits them to subscribers, under the Communications Act the company isn’t a cable company.  Aereo falls under the exception carved out in section 522(B) because its antennas are stored in a warehouse, not in a public rights-of-way.  The signals are distributed to subscribers via wireless spectrum licensed to a wireless company or via fixed wired facilities owned by a telephone or cable company.

Aereo itself may be buying access to a wireless or wired broadband provider but again these facilities are probably owned by these carriers.  Even if Aereo owned facilities that connected its warehouses to a broadband provider, that ownership would not amount to enough to be described as a cable operator.

I believe Aereo fails under section 522 (A) of the Communications Act also since, according to its published business model, Aereo captures and re-transmits the signals of broadcast television channels only.

Aereo may be able to sell its technology to an existing cable company or to some other upstart that wants to get its unique content into the hands of subscribers, but Aereo, in my opinion, would only dig itself a deeper hole if it tells the 11 cities it was providing services in that it is now a cable company.  Its financial woes would only be compounded if it held itself out to a local franchise authority as a cable company only to find itself being squeezed by the regulatory gestapo located in a cable office in some county or city government.

Not labeling itself a cable company would give Aereo and its investors some wiggle room as it determines its next best course of action.