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The FCC needs to change its mindset about capital and Title II

The politics of Washington is not commensurate with capital flow when it concerns broadband investment.  The Federal Communications Commission’s decision to apply Title II common carrier rules has resulted in a decrease in capital expenditures.

It has been reported that during the first half of 2015, AT&T saw a decrease in capital expenditures of 29% relative to 2014.  Charter Communications also saw a decline of 29% relative to 2014 while Cablevision saw capital expenditures fall off by 10% versus last year. CenturyLink was down nine percent while Verizon saw a fall in capex of four percent.

The politics pushing the FCC toward their anti-capital decision was driven by a grass roots group argument that freedom of expression was being challenged by the potential bottlenecks that broadband providers could create.  With narratives that included claims that consumers would not be able to create content on the internet or access the content of their choice, at least the three Democratic FCC members fell sway to it.

Edge providers, like Netflix, also played the “threat to democracy” card, arguing that broadband access providers , via paid prioritization, would discriminate among content providers and deny consumers access to their content.  Netflix, however, has been able to hedge its political bets by paying some of these broadband providers for fast lanes so that video traffic to its subscribers is not congested.

Now the political center of gravity lies in the Congress, at least this week, as the House committee on energy and commerce takes a look at how Title II common carrier treatment of broadband will impact investment.  Given Republican control of the committee, it’s no surprise that the committee’s leadership sees Title II as a burden on investment.  For example, the committee’s majority takes issue with the FCC’s finding that the total annual cost on all broadband providers for complying with the application of the FCC’s Title II rules would be approximately $700,000.  The majority believes the annual cost of compliance could be as much as $52 million.

Having supervised a tariff shop for a state regulator and drafting and filing tariffs as a staff attorney for a law firm, I can assure you that the cost of complying with Title II rules will well exceed the $6.95 per hour that the FCC estimates.  We are not talking flipping burgers here.

Politically, reversing the impact Title II regulation will have on broadband investment is out of the hands of Congress, at least in the short term.  Should a Republican win the White House in 2016 and the GOP maintain control of both chambers of Congress, then investors should expect a new FCC Republican majority to repeal the rules.

A repeal by the Republicans could be moot should the United States Court of Appeals-District of Columbia find that the rules have no statutory basis or that the FCC has not shown why its earlier treatment of broadband as an information service should be abandoned.

The probabilities of a court decision or an election outcome in favor of broadband providers is difficult to calculate but the likelihood of the FCC or the Obama administration changing its mindset about Title II’s impact on capital flows to broadband is definitely zero.  Both the President and the FCC’s three Democrats have invested too much political capital in steering the wrong course.

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An offer Democrats shouldn’t refuse

Internet Innovation Alliance honorary chairman Rick Boucher recommended a compromise between Congressional Democrats that favor the transparency and non-discrimination that net neutrality rules is supposed to provide and Congressional Republicans who see net neutrality rules as onerous and intrusive while hampering the level of investment ion broadband deployment.  Mr. Boucher would like net neutrality principles codified in federal statute in return for internet service providers being returned to their prior information services classification.  From a market reality perspective, Mr. Boucher’s offer in compromise makes sense.  You can read Mr. Boucher’s persuasive argument here.

I’ve argued before that Comcast, AT&T, Verizon, and a host of other broadband access providers have gone or heading beyond their old classifications as broadband providers or even communications companies.  These companies sell ad space on their portals; provide news and information; collect data from their customers that may be used to enhance the quality of the ads consumers see or any other services the broadband entity provides.  Collecting and distributing information is an increasingly important part of their business model as they compete with Google, Facebook, and Netflix for consumer eyeballs.  Classifying them as information service providers is appropriate and would show that the Federal Communications Commission has some understanding of the information market that they are trying to regulate.

Of course I’d rather the rules not even exist thus eliminating the need for Congress to come up with another statute.  Market realities and the philosophy of openness that the internet has adhered to for a quarter of a century should be enough incentive for broadband providers not to discriminate against traffic from certain websites or block their subscribers access to websites of their choosing.  The internet has always been the geeks haven for information flow and its commercialization hasn’t changed that,  If anything, keeping the tap on information flow wide open only drives up the value of a provider’s network leaving the provider with the fun challenge of monetizing that flow.

Mr. Boucher’s offer is one that the Democrats shouldn’t refuse.

Congress should not fund a FCC with misplaced priorities

Free Press has been calling on its constituents to encourage the Republican-controlled Congress to vote against a House appropriations bill that would significantly reduce funding for the Federal Communications Commission.  For Fiscal Year 2016, the FCC asked Congress for $388,000,000 in offsetting collections. This represents a $48 million increase over the FCC’s request for Fiscal Year 2015, which ends tonight at midnight.

House Republicans have been blatant about their unwillingness to fund the FCC’s net neutrality regime.  So serious are they about taking the wind out of the so called open internet that they have a budget bill that would provide the FCC with only $314,844,000 for Fiscal Year 2016.  If federal budgets represent national priorities, it is clear that net neutrality is not a priority for the GOP, whose members have railed against how onerous the rules are.

While the rules are burdensome, what is more telling is the FCC’s unwillingness to get out of the narrow vision box.  The FCC is still stuck on the concept of encouraging competitive telecommunications networks.  In the 21st century why would the FCC be concerned about a concept calling for a multiple number of firms providing point-to-point voice communications services via wire or wireline?

What the FCC should be concerned about is promoting the development of the information and data markets that are being created and transacted in over internet infrastructure.   Information and data are the currency being exchanged on digital networks.  Also the returns on stock that investors are seeing should be an indication as to where the economy via the internet is going.

According to data from Morningstar, the telecom services industry saw one-year returns on stock at 8.42%.  Three-year returns were 9.82% while five-year returns were at 9.64%.

In the information technology services industry, one-year returns amounted to 10.93%; three-year returns came in at 10.41%; and five-year returns were 12.16%.

The internet content and information industry saw first-year returns of 17.04%; three-year returns of 23.90%; and five-year returns on 18.70%.

I don’t pretend to be a stock analyst but if the FCC really wants to encourage competition on the internet, shouldn’t the agency promote entry into the higher performing industries?  If the FCC wants to convince me that they are interested in economic growth, their analysis should be based on the current reality of the internet economy and the data and information markets.

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Shouldn’t the Federal Communications Commission​ show that its regulation of commerce increases commerce?

I think it is safe to say that broadband access has an impact on commerce, specifically commerce that passes though the digital conduit we know as the internet. Individuals and businesses use broadband access to acquire online content, deliver services, and communicate.

It would be a difficult argument to make that Congress’ constitutonal power to regulate commerce did not include the electronic commerce. There is a rational basis for concluding that broadband substantially effects interstate commerce. While broadband access is a sub-division of the internet; it provides that last mile connection between end-user and the information cloud, As an impacting factor on commerce, its regulation would come under the reach of Congress.

I suspect that Congress’ regulation of commerce was a left over from the mercantilist period that started to wind down in the late 18th century. Mercantilist policies were designed to protect the government and commercial class. By restraining imports and expanding exports, governments and their commercial classes hoped to expand their nations’ wealth.

Contrast the mercantilist approach with the laissez-faire and free market approach that would replace it. The free market approached emphasized trade based on specialization in production benefited importer and exporter. Economic welfare would, because of free trade and freer markets, be spread across a population outside of government and commercial interests.

But whether in the context of a mercantilist system or today’s preferred free market system, no government would regulate commerce in order to reduce it’s output and vibrancy. The Federal Communications Commission, as a creature of Congress, should, as an economic regulator, demonstrate that its Title II rules for broadband access would do just that. Simply repeating the phrase, “virtuous cycle” doesn’t equate to evidence of growth in the knowledge economy spawned by new rules. In 300-plus pages of support for less than ten pages of actual rules, the FCC offerred no evidence of rigorous quantitative support for growth in commerce as a result of its new rules.

The courts like using deference to an expert agency as their out for not expanding the overreach of government. It may be time to turn the tables on that judicial philosophy by requiring agencies show how their actions improve our economy.

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Does the Republican Party want to turn ‪#‎netneutrality‬ into ‪#‎Benghazi‬?

Right now Tom Wheeler, chairman of the Federal Communications Commission, is testifying before the House Committee on Oversight and Government Reform. The Republicans have making an issue of President Obama’s supposed influence in the FCC’s rulemaking in the net neutrality space, arguing that until a number of meetings either with the President or White House staff, Mr. Wheeler was pursuing net neutrality rules based on section 706 of the Telecommunications Act of 1996 versus the common carrier rules from Title II of ythe Communications Act of 1934.

Section 706 authorizes the FCC to promote the deployment of advanced communications services with different regulatory schemes including price regulation. Title II, a section of the 1934 Act, allows the FCC to regulate rates, services, classifications, and practices of telecommunications companies. The FCC wants to reclassify broadband operators as telecommunications companies thus sending public policy in the telecom space back to the late 20th century when we sported Kangols and rocked to Dougie Fresh and Slick Rick.

Unfortunately for the American public, the issue of how much influence the White House had over the decision making process at the FCC is turning into another #Benghazi hearing.

The GOP inquiry into how much Mr. Obama was able to twist Mr. Wheeler’s arm and deviate from a section 706-based order to an order dripping with Title II ooze won’t amount to much of anything unless Congress decides to overhaul the disclosure procedure for all government agencies.

Jason Chaffetz, chairman of the oversight committee, echoed my sentiments during the hearing and hopefully Congress can write a rule that provides a 30-day comment period for draft rules before a final vote is taken. This would add credibility to a decisionmaking process where unelected bureaucrats are making policy impacting the decisionmaking process of entreprenuers.