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Pai challenges the notion of government providing a free, open internet

Federal Communications Commission chairman Ajit Pai today laid out his vision for removing broadband access from under Title II regulations imposed in 2015 by a 3-2 Democratic majority on the Commission.  Two decades prior to the Commission’s net neutrality order that imposed Title II regulations, the internet was already free and open. Companies such as Google, Facebook, and Netflix came into being under a non-Title II regime. Title II was an archaic regulation designed in the 1930s for plain old telephone services.

Title II boiled down to a solution in search of a problem, Mr Pai further argued. Rather than energizing a demoralized Democratic Party base licking its wounds from the butt hurt of the 2014 mid term elections, Former president Barack Obama and the rest of his Title II proponents wound up disincentiving $5.1 billion in capital investment and dissuaded companies to not hire or lay off 75,000 to 100,000 laborers.

What particularly caught my attention in Mr Pai’s remarks was his highlighting the belief that Title II proponents have about government and freedom, namely that government was going to guarantee freedom on the internet. A close read of the American Constitution tells you that its framers were concerned about the natural propensity of government to squash freedom. This is why the document put in place checks and balances against attempts to usurp power over individuals. Net neutrality opponents and members in Congress who support continued imposition of the rules confuse “rights” with “freedom.” The rights issued by government are permission slips that say “a person can be, but only up to the limits we allow them to be” versus freedom which is innate.

This is not to say that freedom doesn’t have its limits. You can’t just violate another person’s spectrum without facing the consequences that result from moving into another person’s space. But how those consequences are managed should be left up to the individuals or in the case of broadband, the broadband access providers and their customers. Allow customers and access providers to define the limits, terms, and consequences of their relationship, including price and type of service. In the 21st century, this type of strategic partnership between customer and access provider is very possible.

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FCC overlooks the word proprietary

The Federal Communications Commission refers to customer data as “proprietary” in its privacy order set for vote this coming Thursday. Webster’s New World Dictionary defines proprietary as something belonging to an owner like a patent, trademark, or copyright. By placing the qualifier “proprietary” on customer data, the Commission gives the impression that the data is compiled by the consumer for possible placement into the stream of commerce and by transferring this data can receive something in return. Is the consumer doing this; getting something in return for putting her data out there?

The relationship between a consumer and her broadband internet access service is one where she provides certain personal information along with a network access fee to her broadband provider and in exchange receives access to the internet. An informed consumer is aware that sharing some personal data is part of her total cost for receiving access to the internet via her broadband provider. The best way to ensure privacy of her data is to not buy access service to begin with but public and social policy currently promotes universal deployment of and access to broadband so discouraging her purchase is not a policy option.

In my view, the consumer has created a negative externality by providing property, in this case her personal information, for free. The rate the consumer pays for broadband access overcompensates the service provider given the value the broadband service provider receives. What the Commission should encourage is a pricing regime where consumers can charge for the use of their proprietary information. This way, the prices paid for access provide a better reflection of what is actually being exchanged.

The Commission may find that with this market solution concerns of privacy will be abated as the consumer exercises more control over her market relationship with the broadband service provider. Allowing for consumers compensation for providing data may create a ripple effect in the internet eco-system. Go onto Facebook and you see consumers sharing a lot of personal information for free. Advocates for consumer empowerment should like this approach but these so called advocates would lose too much control of the consumer protection debate if consumers were to enjoy this type of market freedom over compensation for their data.

Bottom line, if the Commission is truly concerned about protecting proprietary consumer information, it should give the consumer the front line tools to protect her data and in a market system, that front line tool is the ability to be compensated for one’s property.

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Telling a media company to not buy content is like telling a car company to not buy tires

Earlier today The Wall Street Journal reported that AT&T may close on a deal to buy Time Warner. Time Warner (not to be confused with Time Warner Cable) is a content play with popular properties HBO, CNN, and Warner Bros. in its inventory. AT&T has seen the light flowing from convergence and is rapidly becoming a media company, an exciting move away from being just a broadband access provider.

The boo birds are out, providing the usual “this is bad juju” arguments against a merger should merger talks go just beyond speculation over the weekend. Michael Copps, former member of the Federal Communications Commission, reportedly refers to talks of merger as an action that would result in monopoly power, a power that is “incompatible with democracy.”

Last time I checked, democracy was simply about the masses having the ability to enter a ballot box and choose the lesser of two political evils.  Mr. Copps is conflating a supposed monopoly on content with freedom of expression. If there is a merger, freedom of expression and democracy would not be harmed. To use such arguments is like saying that a car company shouldn’t be allowed to buy a certain tire for its SUVs and refrain from marketing its SUVs as using such tires. AT&T is a media company and should be able to establish an inventory or library of content that reflects its brand. I would argue that it would be undemocratic to stop it from choosing the content that best expresses what type of media company AT&T wants to be,

Besides, there is no monopoly harm here. AT&T won’t get the most out of its content if it does not make it available to as many outlets as possible. Also, the merger doesn’t stop any other content producer or media company from producing and distributing their own branded content.

Content is near infinitesimal in its creation and distribution. This makes the argument of favoritism toward one’s own content ridiculous. What the favoritism argument really indicates that protesters don’t have the talent to compete on quality of content and could do us all a favor by sitting down and taking a chill.

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I don’t see how the FCC set top box policy adds value to content

On 27 October 2016 the Federal Communications Commission will take up the issue of competition in the navigation device or set top box space. The Commission wants to see the video content distribution industry move from requiring subscribers use of set top boxes to the use of free apps to find content. The main driver of the proposed policy, according to the Commission, is subscriber avoidance of onerous set top box fees that allegedly average $231 a year. With today’s app and internet technology, argues the Commission, subscribers should be able to find content without paying navigation device fees.

The process for getting to a decision is driving some content developers bonkers.  According to a report in Broadcasting & Cable, some content developers are concerned about the proposal’s lack of transparency and whether the Commission will play an intrusive oversight role in contracts between content distributors and content programmers.  Contracts lay out terms for compensation and channel placement, items I would think that the Commission should not really be interested in. Rather, the Commission should be interested in whether the telecommunications sector is bringing value to the overall economy. While content creation is ancillary to the sector, without information, data, or knowledge flowing over networks, the network itself loses value.

From the content programmer’s perspective, while concerned with carving out a niche in a competitive content space, the content developer, where he can seize the opportunity, wants to recover as much of a premium as he can from his product. That means cashing in on as much exclusivity as he can. He will do this in two ways. One, produce content that generates traction. Two, make sure that given the traction, he makes the content as exclusive as possible so that he can extract higher rents. Free apps do not meet either of these conditions. Free apps providing you navigation to licensed and unlicensed content eliminates exclusivity. Content competition is increased which drives down the prices content programmers can charge. This leads to lower returns on capital. If returns on capital are seen as too low, no investment is made, no infrastructure deployed, no workers hired.

All this to save $231 a year.

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FCC does not recognize the value cable creates for content

Recently the Federal Communications Commission released a plan for increasing the number of ways consumers can navigate video content. The Commission wants cable companies to provide pay television subscribers with a free app that allows the subscriber to access their video content. The Commission believes that at an annual amount of approximately $231 for set top boxes, households are getting hosed and that additional choice is needed in order to reduce this financial burden.

The Commission appears to be ignoring the capital side of set top box equation. No where in his plan does Commission chairman acknowledge the billions cable companies spend on obtaining licensing to programming or creating their own content.  To extract value from this content, cable companies charge consumers a positive premium for using platforms necessary for accessing the content including set top boxes. The Commission is blatantly circumventing the ability of cable companies to extract the value of the content by requiring that cable companies provide consumers with apps that allow the consumer to avoid monthly fees altogether.

The Commission believes it is correcting some type of market failure by providing consumers access to content at a reduced cost, but by interfering with a market transaction, the Commission is creating an environment that sends a false signal to content providers and navigation technology providers. Device makers may think twice about investing resources into developing hardware where the use of free apps freezes the hardware provider out of the market. Small, non-cable affiliated app developers may have second thoughts as well, especially going up against deeper pocketed cable companies or internet portal companies such as Google who can leverage its advertising revenue to provide video navigation apps for free.

In addition, with the requirement that cable companies provide free apps and the expectation that established internet portals will enter the video navigation application market, smaller entrepreneurs will have a harder time accessing capital as investors view their business model as a source of lower returns.

Sending skewed market signals and reducing small app developer access to capital doesn’t make for good video marketplace policy.