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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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Fortunately the FCC did not apply The Big Bang Theory to Time Warner and CBS

Well, if you’re a “Person of Interest” who enjoys watching “The NFL Today” with “Two Broke Girls” in Los Angeles, New York City, or Phoenix, then Tuesday morning’s settlement over re-transmission fees that Time Warner Cable will pay to CBS brought a smile to your face.

According to The New York Times, “Time Warner Cable pressed throughout the month-long impasse after it removed CBS’s stations from its systems for some form of government intervention, from either the Federal Communications Commission or Congress, but none materialized.

While the acting F.C.C. chairwoman, Mignon L. Clyburn, said on Aug. 9 that she was distressed at the standoff and was ‘ready to consider appropriate action if this dispute continues,’ it continued for another three weeks without her intervening. Several media analysts said early in the dispute that the commission’s options were limited because the right of a station owner to seek re-transmission compensation was granted in a law passed by Congress in 1992.

Monday evening, Ms. Clyburn issued a statement saying: ‘I am pleased CBS and Time Warner Cable have resolved their retransmission consent negotiations, which for too long have deprived millions of consumers of access to CBS programming. At the end of the day, media companies should accept shared responsibility for putting their audience’s interests above other interests and do all they can to avoid these kinds of disputes in the future.’ ”

I was caught off guard by Chairman Clyburn’s statement about a consideration of appropriate action should the negotiations continued to wallow. In my opinion the FCC’s rules did not give Ms. Clyburn much room to maneuver in. Section 76.64 of the FCC’s rules requires the consent of a local commercial broadcaster be given to the cable operator before the station is carried on a cable operator’s system. That requirement puts any appropriate action on the part of the FCC in a very narrow box, maybe limiting them to exercise their expertise in mediation and that’s about it.

The FCC’s must carry rules (See Section 76.56) would not have been available to the FCC for use since CBS yanked permission for Time Warner to carry the broadcaster’s signal in the first place. There was never much their for Ms. Clyburn to drag the parties down to The Portals to negotiate anyway.

Oh well, at least Time Warner subscribers will get some NFL and college football and the U.S. Open tennis this weekend.

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Maybe it’s time for cable companies to say good-bye to cable

Today Verizon’s vice-president for public policy and general counsel Randall Milch had a little fun with the Federal Communications Commission’s net neutrality rule, calling out its apparent double standard of allowing CBS to get away with blocking Time Warner subscriber access to its website. Under the FCC’s net neutrality rules, a broadband provider could not get away with blocking access to a content provider like CBS, but apparently blocking the other way around is just fine under the rules.

Earlier today The Wall Street Journal posted an article by Gordon Crovitz where Mr. Crovitz opined on the current standoff between Time Warner Cable and CBS as a result of the FCC’s regulatory policies. Mr. Crovitz said that, “The absurdity of the current laws is clear: A regulatory system designed to keep local broadcasts available to viewers is causing disputes between cable companies and broadcasters, leading to the very blackouts the regulations were supposed to prevent. It’s past time to deregulate video distribution.”

I think broadband providers like Time Warner and Comcast should push the FCC and their local government cohorts toward that direction by disrupting the current video distribution business model. First, it should take itself out of the cable operator box by declaring itself a provider of on-demand services. While ensuring consumers access to Hulu and Netflix, cable operators should also promote access to their own streaming services. This would put pressure on content providers to go the route of a “House of Cards” and make programming available for binge viewing.

Second, knowing that its programming would now have to be offered in a format comparable to “House of Cards”, CBS and other providers would have to license its programming at a lower bulk rate since there would be no guaranteed channel slot to occupy.

Thirds, consumers would have the capacity to compare programming side by side and get to the least appealing programming at some later time. “On-demand” providers would be able to better gauge the demand for specific shows and set the license purchase prices accordingly.

Consumers would also see their bills decrease because the additional franchise, I-net, and public access channel fees would go away. On-demand providers are not cable operators under current FCC rules and local franchising authorities would be hard pressed to extort franchise fees from a non-cable operator.

Even if content providers did not want to provide their content to an on-demand provider’s data base for streaming, the content provider could go the ABC television network route and make its programming available from its own website.

Anyway, it’s time for a little business model disruption. Cable operators have been to stodgy for too long.

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No we are not yet Borg

I admit that while not being a die-hard science fiction fan, I am a fan of Battlestar Gallactica and Star Trek. Last spring I binged on BSG sometimes watching three or four episodes a day. The series is great. While I’m more a fan of a Star Trek: The Original Series, I always found the Borg the more interesting of antagonists on Star Trek: The Next Generation. Their single-minded focus on assimilating all species of the known universe into one collective was intriguing and downright scary.

BSG also dealt with the collected in a way. The series depicted survivors of the Twelve Colonies (twelve planets) wiped out by machines they had created. These machines, the Cylons, were also part of a collective although they were not out to assimilate any humans. They managed to defeat the Twelve Colonies by hacking their interconnected computers. The commander of one of the Colonies’ battlestars, Bill Adama, had a rule on his ship that may have been responsible for them staying alive: no interconnected computers on his ship. Interconnection has its downside.

I’ve touched on being interconnected before, addressing the downside of social media, but an article in The Wall Street Journal by Holman Jenkins provided some additional fodder for the notion of being socially connected via computer. Mr. Jenkins argues in the latter part of his piece that the current tit-for-ta that we are seeing between CBS and Time Warner Cable is a side show, a distraction from the real goal of telecommunications and cable companies: facilitating the meld of mind and machine.

It makes sense. From a consumer view, cell phone users may as well implant their devices as much as we are seen clutching them to our ears. I have to get used to people apparently mumbling to themselves when they are actually talking to someone else.

From a business view the fight for advertisement dollars comes from the traffic we can accumulate at some point. The cable and telecommunications companies, the broadband providers, want their sites to be the points of accumulation. They want the advertising traffic that Facebook and Google are combating for. Anticipating our consumer needs by tracking and documenting our thoughts, feelings, and buying habits would be aided by a technology that makes it easier to meld devices collecting this data with the behavior of the consumer.

My question is, will government promote this type of innovation? How regulated will this new frontier of technology and consumer thought be?

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CBS experiencing reverse net neutrality?

According to Bloomberg News, CBS has lost 4.7% of its viewership as a result of its spat with Time Warner Cable over retransmission fees. These are fees paid by cable companies to network broadcasters for carrying a broadcaster’s signals over a cable company’s networks.

Raising the heat in the spat, CBS.com has apparently blocked Time Warner Cable subscribers from accessing its content. The content provider is blocking the broadband provider from accessing content. Sounds like net neutrality in reverse, where under Federal Communications Commission rules, broadband providers, such as Time Warner Cable, are not supposed to discriminate among content providers nor enter into arrangements to throttle speeds or provide special treatment for a content provider’s data traffic.

But the rules don’t say anything about what should happen should the opposite occur, as Bret Swanson points out in a piece for Forbes.com. Mr. Swanson and other analysts argued during the time the FCC was developing its net neutrality rules the probability of this “twist” occurring. According to Mr. Swanson:

“Either (1) net neutrality was not a neutral policy, not a basic, unbiased standard of web behavior, but instead a scale-tipping special interest provision favoring particular companies and business models over rivals. Or (2) if it were interpreted as applying to the entire Internet ecosystem, ‘This regulation could expand bureaucratic oversight to every bit, switch and business plan on the Internet.’”

I don’t see a rule violation here, but I see a policy imbalance that goes right to the heart of the FCC’s intent that consumers have reasonable access to the Internet content of their choosing. The imbalance is not surprising given that most attempts at market regulation tend to be imbalanced, where too much emphasis is placed on the provider versus the consumer, or in this case where the FCC and net neutrality advocates failed to treat the broadband-content provider relationship as a market.

Failing to view the exchange of traffic between content provider and broadband carrier as a market for data separate from the consumer-broadband provider market is where the FCC made its mistake, opening the door for the conflict in policy we are seeing today.