Yesterday the U.S. Court of Appeals for the District of Columbia Circuit held that the Federal Communications Commission was empowered under Title III of the Communications Act to promulgate its data roaming rule. The rule, however, does not impose any common carrier obligations on mobile Internet providers.

In 2007, the FCC mandated that mobile voice carriers offer roaming agreements to other carriers on a just, reasonable, and non-discriminatory basis. The FCC invoked Title II of the Communications Act reasoning that mobile voice providers have a common carrier obligation to provide roaming.

The 2007 mandate did not extend to mobile Internet or mobile data carriers that entered voluntarily into roaming agreements with other carriers for mobile data.

The FCC’s rationale for its rule was:

1. The mandate would promote access to seamless mobile data coverage nationwide;
2. The mandate balances incentives for new entrants and incumbents to deploy advanced networks across the country; and
3. The mandate would foster competition among multiple wireless providers

Verizon and AT&T opposed the rule, arguing that the rule was unnecessary given that carriers were already entering voluntary agreements for data roaming and that smaller carriers would have reduced incentive to build their own networks.

On the surface, investors in large carriers such as AT&T and Sprint should not see any additional losses from the ruling. The data roaming rule has been in place from 2007 and given that no new rules or divestitures resulted from the ruling, I see no additional costs of compliance to AT&T or Verizon due to this legal proceeding.

I don’t see how in the long run the ruling would benefit smaller carriers. If anything they may see increases in whatever charges they are assessed by the larger carriers as a result of negotiations in for future agreements, and they can thank the FCC’s competition posture for this.

As spectrum becomes harder to come by, larger carriers may feel compelled to pass on higher costs of handling additional traffic from smaller carriers. Delays by the FCC in releasing spectrum compounded by burdensome and lengthy scrutiny of license transfers will make a scarce resource more expensive. Smaller carriers will not be able to have their cake and eat it too.

For example, smaller carriers will argue that they do not have the capital to expand their networks on the one hand while on the other criticize any attempts by the FCC to ensure that spectrum goes to the carriers with the greatest economies of scale and the larger client base that would be negative impacted by a lack of sufficient spectrum. Either way, smaller carriers are going to have to absorb the costs of expanding traffic on the network either through sucking it up and deploying their own networks or paying increasing costs for roaming.

Smaller carriers may find themselves being more of a price taker in negotiations for roaming because all a larger carrier has to show is that the roaming charge being negotiated is commercially reasonable, a lower standard than the classic just and reasonable standard.

In the immediate term, the ruling may be deemed by Verizon and AT&T as a loss, but in the longer term, smaller carriers may have simply delayed the inevitable.

The New York Times yesterday posted on article on real time bidding for online advertising that I found interesting. The article cited a petition filed with the Federal Trade Commission by the Center for Digital Democracy, where the CDD alleged that real time bidding, a process where advertising space on web sites is sold via an electronic trading platform, amounts to an unfair and deceptive practice.

Specifically, CDD alleged that electronic trading systems for advertising, where marketers can bid for consumers within milliseconds of a consumer visiting a web page, can unfairly stratify consumers, relegating some to inferior treatment while offering better pricing to others. According to CDD, not only does it resemble a cattle auction while reducing consumers to a “chattel” status, but these trading systems also threaten consumer privacy because advertisers are using consumer data obtained via data mining practices by third party aggregators. Consumers are not reaping the financial benefits of their very own data while advertisers, web sites, and third-party aggregators reap the profits.

Under section 45(n) of the Federal Trade Commission Act, the FTC applies a standard of proof and other public policy considerations when determining if an act is unfair and deceptive. There has to be, under the Act, a showing of substantial injury to a consumer from the party exhibiting bad behavior. The substantial injury must be a kind that is not reasonably avoidable by the consumer and not outweighed by countervailing benefits to the consumer and competition.

When reaching its conclusion on whether an action is unfair or deceptive, the FTC may consider, on a secondary basis, public policy.

I think the primary public policy consideration the FTC needs to take is whether a transaction has taken place where consumers are seeing degradation in their welfare. First of all, real time bidding does not directly involve the type of consumer that CDD is apparently concerned about. Consumers visiting web sites may not be interested in purchasing anything. Even if a consumer has a fetish for Gucci handbags and as a result of real time bidding finds her looking at ads for designer accessories, that’s not a deceptive act. It would be as if she walked into her favorite store and the attentive clerk who is aware of her penchant for these items lets her know that the store has some in stock. It’s simply information being shared.

Real time bidding gets information to a consumer faster because it leverages the history of the consumer’s tastes, desires, and ability to pay to get product in front of the consumer that she, based on these consumer characteristics, may be interested in. Back in my merchant days, we called this good marketing. The consumer’s welfare is also increased because she is receiving information that she can take into the market place and use when the time is right for her to make a purchase.

Also, the FTC needs to stay mindful that as households who have not yet adopted broadband continue to see other households take advantage of goods and services marketed directly to them based on their perceived tastes and desires, these unconnected households may choose to join the 21st century and get connected to e-commerce via broadband access. Following CDD’s lead and tainting cyberspace as a scary space to transact in will only delay the closing of a digital divide too many households are still facing today.

Blair Levin and Reed Hundt collaborated on an op-ed piece for MercuryNews.com laying out some tax and regulatory policy initiatives that they hope can spur additional investments in networks that deliver not only communications, but can also be used for efficient use of our energy grid.

What caught my specific attention was an observation by Messrs. Levin and Hundt:

“The knowledge platform-the Internet and everything that rides on it – should be expanded so that the United States leads the world in delivering education, health care, public safety, and all government services from the cloud to broadband connected devices.”

I wonder if, in the argument for policies that would spur broadband adoption, we are failing to start the discussion at the very beginning of the adoption process. I wonder if we are forgetting to apply a basic supply and demand model to the discussion.

Broadband adoption begins with the supplier of content. The content producer, whether a retail service, media company, academic institution, etc., constantly seeks techniques and technology that make delivery of content less expensive. This was the case in the 1990s when Vice-President Al Gore was given the task of incorporating the Internet into the federal government’s communications system. This was the model within which Amazon was created.

On the other end of the knowledge commerce conduit is the end user or consumer of the content. Broadband is important on this end not primarily because it puts information in the consumer’s hands (the consumer has been getting information from other sources and mediums in the past), but it justifies or completes the content providers cost model.

In the middle is the carrier, the value of whose network increases with the addition of more end users, yes, but more importantly with the addition of more content providers. Consumers have to have a reason to join the network, and the value of joining is directly related to the type, amount, and quality of information circulating on the Internet.

The Federal Communications Commission’s adoption policy has been focusing on subsidizing the build-out of networks via universal service funds, expecting not only to provide a mechanism for getting broadband into underserved, unserved, or high-cost rural areas, but indirectly reducing the costs of subscribing to broadband access services. While this approach may have contributed to increased subscriber penetration for plain old telephone service, broadband is a different beast.

The best policy for broadband would be a free market, non-interventionist approach allowing all three major market participants to enter agreements for the creation, delivery, and consumption of knowledge and information passing over the net. If politics forces government intervention to create a market (an unfortunate scenario), then government should act merely as a clearinghouse for exchanging information on the pros and cons of broadband adoption, both by content providers and content consumers.

This is where the emphasis of policy should be placed. Any other intervention, including a universal service mechanism of any kind would only distort market signals and lead to inefficient pricing, the type of pricing that would not fully account for the demand for broadband in the first place.

We are in the middle of the silly season and social networking sites will be abuzz this week as the Democratic Party kicks off its national convention in Charlotte, North Carolina. It’s a good time to have a broadband connection as the activity on Twitter showed last week during the Republican Party’s convention in Tampa, Florida. Whether you support the GOP or not, if you are an avid political geek as yours truly, you were definitely getting in your two cents on how well the Republicans were making their case for whether they should be allowed four years in the White House.

Pew Research recently released an assessment of how all this tweeting and Facebook posting is impacting political discourse in America. Overall, the report found that postings to social networking sites are having some impact on political views, especially among people who identify themselves as Democrats or liberals. According to Pew Research, 24% of liberal social network site users and 18% of moderate social network site users said that use of social network sites have prompted them to change their political views. Only 11% of conservatives who use social network sites are prompted to change their views as a result of interacting online.

In addition, 25% of social network users have become more active as a result of using social network sites. Sixteen percent of social network site users have changed their political views as a result of interacting on the sites. Nine percent of social network site users took the opposite turn and became less engaged with political discussion as a result of postings online.

Oh well. Happy tweeting and see you tonight online at least.

Section 706 of the Telecommunications Act puts the Federal Communications Commission in a peculiar bind. The statute requires that the FCC determine whether Americans have access to high-speed, switched, broadband telecommunications capability that enables users to originate and receive high quality voice, data, graphics, and video telecommunications technology.

The FCC concluded that broadband was not being deployed in a timely manner. Factors such as broadband costs, quality of service, and adoption by consumers were hindering deployment.

Can you blame the industry? I say no, not after investing, according to the FCC, approximately $41 billion a year in network deployment. You can’t really fault the federal government, particularly after Congress allotted and the NTIA and RUS spent $7 billion to incentivize the design, construction, and deployment of broadband facilities in unserved and underserved communities.

But with 19 million Americans not having access to broadband, and 14.5 million of them living in rural areas, what more should the FCC do? As a promoter of commerce, the FCC has done a good job encouraging infrastructure deployment, but should it be responsible for encouraging broadband adoption?

Broadband adoption is a market reaction. By that I mean it’s up to consumers to determine the value of buying broadband access and it’s up to producers to create the demand. I got uncomfortable seeing FCC Chairman Julius Genachowski standing in front of a Best Buy talking about the fun apps and gadgets that could run on broadband networks. Fine and dandy, but once the FCC has met its duty to promote commerce by encouraging the deployment of networks, it’s time for the market players, consumers and producers, to do the rest.

Rural residents made a decision to live in rural areas. They should pick up the cost of building their own networks; pick up the cost of accessing current broadband networks, or investigate the alternative technologies that can provide them with access to broadband. Subsidies in the end mean some consumers are paying more than they have to in order for others to get service. Producers will have to rely on controversial cost models to approximate cost information that the market could more easily provide.

To limit the FCC’s interference in the broadband market, Congress could start by eliminating Section 706. By repealing this mandate, the FCC could better focus on ensuring the deployment of a ubiquitous network while the market could focus on sending and receiving more accurate supply and demand information.