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Free State reminds us how market manipulation skews markets

So why should the Federal Communications Commission keep conduct a least restrictive spectrum auction for broadcast spectrum?  Because, according to the Free State Foundation, tying conditions to an auction negatively impacts the outcome in terms of pricing and the number of firms that leave the auction with any spectrum at all.

In a recent blog post, the Foundation shares a couple examples of how interference by the FCC, in the form of aiding what the agency deemed as financially weak competitors, resulted in less spectrum being released. In describing the PCS C Block and 700 MHz auctions, the Foundation stated that:

“In the PCS auction, the FCC extended long-term credit to financially weak bidders, with the apparent intention of encouraging small businesses and rural bidders. This manipulation of the auction resulted in a decade of bankruptcy litigation, delayed the availability of spectrum, and cost consumers over $65 billion according to some estimates. In the 700 MHz C block auction, the FCC required the winner of the 22 MHz C license to provide non-discriminatory network access for all devices and applications. This vague “open access” mandate lacked detail on the freedom of a new licensee to set prices or innovate and disincentivized bidding. This condition-encumbered C block sold for 29% of the price as comparable or even less valuable blocks. Additionally, in auctioning the D block in the same 700 MHz auction, the FCC imposed significant conditions on the use of the spectrum and imposed eligibility rules on bidding. The results of this auction were also unsuccessful, since the D license failed to sell even for a reserve price that was one-third of the average obtained for other comparable licenses. As Tom Hazlett, Professor of Law & Economics at George Mason School of Law stated, “this is evidence that regulatory rules and spectrum allocation procedures continue to distort markets.”

This time, the FCC is considering providing help to smaller wireless carriers by either keeping larger carriers out of the auction, or limiting the amount of spectrum larger carriers can walk away with.  Rules have yet to be promulgated for the reverse television spectrum auction so there is still time to consider this: if a carrier is financially weak, what is the likelihood that carrier is able to stay in the market long enough to acquire the customers necessary to be successful?

Whether credit is extended, larger carriers excluded from the auctions, or the amount of spectrum garnered is subjective to caps, why should the FCC spread the small carriers’ risks to taxpayers?  The FCC seems dead  set on getting into market scuffles between investors.  The FCC, like any regulator, manages to maintain too much focus on the companies (the investor facade) versus the investors themselves.  This is a result of the FCC not including in its mandate the balance between consumer and investor.  The FCC can easily pursue the hands off approach to regulation overall and the spectrum auctions in particular if it remembers that investors in these wireless carriers, whether publicly or privately held, accepted risk when they purchased their shares.  The risk investors in smaller companies took on was the chance that larger carriers would continue, through marketing and quality of service, to widen their lead by better serving their customers.

Should larger carriers be punished for leveraging their historical advantages? I hope not.

 

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Broadband providers should take heed on meaning of First Amendment in Indiana

In Goodpastor v. City of Indianapolis (U.S. Court of Appeals-7th Circuit, Case No. 13-1629), a number of bar owners challenged an ordinance that extended a ban on smoking in public places to include most Indianapolis bars and taverns.  What caught my attention was the court’s interpretation of the First Amendment, which the bar owners bringing the appeal alleged Indianapolis violated.

The First Amendment, according to the court, does  not protect coming together at a local bar to smoke nor are bar patrons organized as a group to engage in speech.  They are not an association getting together for the purpose of transmitting a system of values.  Because the bar patrons do not engage in expressive association, the city’s ordinance prohibiting smoking in bars did not violate the First Amendment.

Could the U.S. Court of Appeals-DC Circuit expand this definition toward broadband providers?  Verizon made First Amendment arguments in its case against the federal Communications Commission’s net neutrality rules and the DC court is expected to make a decision soon.  Although broadband providers don’t get together to engage in speech, arguably investors do through their ownership of broadband providers.

Although the DC court of appeals is under no obligation to follow the 7th circuit’s lead, broadband providers should hope that Dc does not find this interpretation of the First Amendment persuasive.

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As city cores become populated by the educated, urban broadband takes on more importance

Posted November 22nd, 2013 in Broadband, digital divide, economy, Internet, urban and tagged , , by Alton Drew

The Federal Reserve Bank of Cleveland senior analyst Kyle Fee recently published a report finding that as America becomes increasingly urbanized, the core areas of American cities are being increasing populated by those with at least a bachelor’s degree. In his report, Mr. Fee concludes:

“Though most people in the US live in metropolitan areas, they’ve been choosing to live farther and farther from the center of those areas since the 1950s. While that trend continues to this day, there are some dramatic changes. The exodus from the center of town is slowing down quite a bit, for one. For another, those residents who now live in the central city are better educated than they used to be.”

Mr. Fee continues,

“Over the last 10 years, central business districts have increasingly attracted highly educated individuals as residents. Today, the average educational attainment rate of the urban core is almost identical to the average educational attainment rate in neighborhoods away from the core (on a population-weighted basis), and much of the gap has been closed in the last 10 years. The reasons behind the shifts are likely multifaceted, but they may include rising congestion in large, dense metropolitan areas and improvements in public safety.

In addition, there is a growing body of literature that notes the location decisions of high-skilled individuals increasingly involve consumer amenities that reflect tastes and preferences along with lifestyle. In The City as an Entertainment Machine, sociologists Richard Lloyd and Terry Nichols Clark observe changes in Chicago’s neighborhood demographics that support this analysis and shed light on the modern personal location decision. ‘The local amenities are no longer schools and churches. A residential population of young professionals with high levels of education and lower incidence of children creates a social profile geared toward recreation and consumption concerns.’ The emergence of skilled cores appears to be the manifestation of some cities becoming places that are more geared toward consumption rather than production.”

The impact on broadband? Although the paper does not address broadband specifically, young professionals are probably including in those amenities broadband connectivity. Young professionals may not only want broadband at home but also broadband on the go or mobile. According to The Washington Post, almost all degree holders in the U.S. is on line while 41% of those without a college degree are not cruising the information superhighway. The Pew Internet and American Life Project also found the highest rates of broadband usage at home was among those with college educations. Almost nine in ten college graduates have broadband access at home.

As more individuals with broadband tastes move to city core areas, those without may feel additional competitive pressures for work. Broadband access has become almost imperative for access to employment or other financial opportunities. In addition, along with the higher incomes entering city core markets, there may be increased costs for other items including food and housing and additional dollars drive up demand for services.

In face of increasing demand driven by the broadband haves, the broadband have nots may see more reasons for broadband adoption.

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Glad to see Longmont still believes in the markets

Posted November 22nd, 2013 in Broadband, capital, municipal bonds and tagged , by Alton Drew

Last Wednesday the National League of Cities hosted a webinar on broadband and the agriculture industry. It was informative, shedding light on the many uses of broadband made by the modern farmer. Farmers use broadband to remotely monitor and collect data on soil moisture and weather, which leads to avoiding soil and crop damage. Broadband is also used to live stream equipment and live stock auctions, advertise farm products, and gather pricing and industry information.

Safety is also a concern for America’s farmers. Mobile devices are used by farmers to assess the health of livestock; track livestock, and protect equipment.

Broadband also incentivizes the young to remain in farming communities by providing a method for maintaining contacts outside of the community.

Although the fixed costs of deploying communications facilities are about the same in urban and rural areas, the actual costs of providing broadband services to consumers in sparsely populated areas raises is more expensive. While these costs have raised barriers to entry to most private broadband providers, municipalities like Longmont have gone ahead with providing their own high-speed Internet facilities.

Instead of using universal service funds for financing the project, Longmont Power and Communications’ Vince Jordan told me that Longmont found it more straightforward to access the bond markets versus USF to get broadband going.

“There’s a lot less paperwork and reporting requirements involved with bonds versus federal subsidies”, Mr. Jordan said. Mr. Jordan explained that revenue bonds are much more straightforward, but encouraged other municipalities to get financing however they could.

Longmont was able to go after $34 million in bond financing on the strength of its utility plant, Mr. Jordan said. Sixty-seven percent of the city’s voters approved the bond issue.

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There is no coherent rationale for common carriage regulations

The title of this post came from remarks made by Christopher Yoo, professor of law at the University of Pennsylvania. Professor Yoo sat on a panel hosted today by the Progressive Policy Institute where the topic of discussion focused on existing common carrier obligations under the Communications Act. A common carrier, according to Section 153(11) of the Communications Act, is any person or entity engaged for hire to provide interstate or foreign communications by wire or radio, or interstate or foreign radio transmission of energy. Common carriers have a duty to provide communications services where the request is reasonable and granting the request is in the public interest.

Along with the public interest criteria comes the usual just, reasonable requirement for rates and charges assessed by common carriers and the prohibition against discrimination against consumers of communications services in the form charges, practices, classifications, regulations, facilities, or services. The issue here is whether these common carrier obligations are relevant in today’s broadband market.

I chuckle at my use of the word, “today.” As an old head I remember when common carriage referred to monopoly providers of local telephone services. The mandate that the Federal Communications Commission ensure the availability of a nationwide network that could be accessed by all Americans required that Americans not be turned away by communications providers of last resort. Compounding the need for this requirement was the monopoly status of these carriers. Even in 1996 when the Communications Act was last updated, Baby Bells and AT&T along with their little cousins GTE and United Telephone, still dominated the local and long distance communications landscape. Few people knew what a modem was (you had to be a true geek to have one), and mobile phones were still carried around in brief cases or big enough where they could be used to knock you over the head.

When i read the common carrier rules today, I can’t help but ask, “Why are these rules still in the books?” Today, voice is merely another app (one of one million apps to date); 11-year old kids have cellphones (I still refuse to get my 6th grader a smartphone); and people are watching live television on laptops, desktops (did I say desktops?), iPhones, and iPads. Choice is no longer an issue. Budget allowing, I could access the Internet from my apartment using three broadband platforms at the same time: a Verizon 4G “hotspot”; a Comcast cable modem; and an AT&T digital subscriber line.

Given this amount of choice, why should Google have to subject itself to non-discrimination rules and price schedule requirements from a bygone era of communications monopolies? Why should the broadband market run the risk of an innovative broadband provider not entering the market because its regulatory compliance costs are unnecessarily high?

While some advocate for applying a public utility model to the broadband market, I argue why drive up the costs for broadband access by using a model that has been abandoned by communications companies and failed the electric utility market. Analyzing common carrier rules in the context of today’s technology and multiple communications platforms should leave consumers with no other conclusion that we have broadband choice and that the common carrier framework is no longer relevant.