Friday, September 16, 2005 - The Progress & Freedom Foundation Blog

Long Live Public Interest Regulation!

The House of Representatives' Energy & Commerce Committee released draft legislation yesterday aimed a cleaning up the nation's telecom and cable laws. A revision of the Telecom Act of 1996 has been in the works for some time and is very much needed, so most parties welcomed this news.

Here at PFF, of course, we've been working hard with a group of respected academics and experts to provide a new framework for communications policy reform. That project is called "DACA," which stands for Digital Age Communications Act.

One thing we largely left out of DACA effort was any in-depth discussion of video regulation. That is, the extensive "public interest" regulatory regime that currently covers the broadcast sector and to some extent cable and satellite services. There were several reasons we left it out of the DACA project; most importantly, we simply felt that most of these rules could easily be sunset in light of growing competition in the multi-channel video marketplace and the media universe more broadly. Under our DACA framework, any "market power" problems that might develop in the future video / media marketplace would be handled with simple competition policy principles borrowed from antitrust law.

So Much for "Hands Off the Net"
Unfortunately, after looking through the House Commerce Cmmt. draft legislation last night, I realize that not everyone shares our opinion about the growing media market competition alleviating the need for extensive "public interest" regulation of the video marketplace. Specifically, Sec. 304 of the bill (which begins on pg. 41 of the discussion draft) is entitled "Application of Video Regulations to Broadband Service Providers." Section A which immediately follows is appropriately labeled "Comparable Requirements and Obligations," and then goes on to not how "each of the following provisions of the 1934 [Communications] Act, and the regulations under each such provision, that apply to a cable operator shall apply to a broadband service provider under this title in accordance with regulations prescribed by the Commission..."

The specific video regulations that this section is referring to are pulled directly out of the Title 3 (broadcasting) and Title 6 (cable) sections of the Communications Act of 1934. The House Commerce discussion draft advocates imposing these rules on all broadband service providers. The specific regulations that would be imposed on new broadband service entrants include:

* "Program Ratings" -- Sec. 303(w)(2): These rules mandate ratings schemes.
* "Facilities for Candidates for Public Office" -- Sec. 315: These rules mandate special access to broadcast facilities while running for office.
* "Announcements with Respect to Certain Matter Broadcast and Disclosure of Certain Payments" -- Sec. 317: These rules forbid "payola," or the practice of broadcasters accepting payment to run certain programs without acknowledging receipt of payment for doing so.
* "Retransmission" -- Sec. 325: These regulations govern how various types of signals are carried or retransmitted to the public. The draft also specifies that FCC network non-duplication, syndicated exclusivity, and sports black-out rules are to be rolled onto broadband service providers as well.
* "Ownership" -- Sec. 613: These rules impose ownership caps on the reach of cable systems and would be extended to broadband providers.
* "Carriage of Local Commercial and Noncommercial Educational Television Signals" -- Sec. 614 and 615: These "must-carry" mandates force cable operators to carry local broadcast TV signals on their cable systems.
* "Blocking and Scrambling of Channels" -- Sec. 624(d)(2): Mandates that a cable provider scramble access to certain channels if a subscriber demands it.
* "Public, Educational, or Governmental [Set-Asides]": These are the mandates imposed on video operators forcing them to carry certain local programs on their systems. (You know those dreadfully boring channels between roughly 11 and 35 on your cable box that absolutely no one watches? Those are the "PEG" access channels that Congress is now proposing every broadband provider carry.)

And there are many other mandates in the bill that I have not summarized here, including anti-"redlining" regulations and yet-to-be-determined "build-out" requirements governing the pace and structure of broadband diffusion. To repeat, all of these regulations, and the many others I chose not to list, would be imposed on all new broadband video service providers. What are we to make of these proposals?

"Mother, May I" Regulation: Will It Ever End?
Well, the first conclusion we can draw from this is that, contrary to their announced intentions, these proposals clearly contradict the supposedly deregulatory thrust of the measure. This is not deregulation, this is expanded regulation. This is not "Hands Off the Net;" this is Hands All Over the Net. In fact, right from the start of the bill, I was shocked to see just how much "Mother, May I" regulation this bill contains.

Its 77 pages (and do we really need 77 pages to deregulate an industry?) are filled with numerous prophylactic provisions forcing broadband carriers to get permission before they do much of anything.

Here's a fairly simple exercise for you to conduct if you want to see just how much regulation is in this bill. Use Adobe Acrobat to search the bill and type in the word "registration." You'll get 51 hits and Adobe will list each one of those registration requirements out for you so that you can see what is required. I'm not sure that there were this many registration requirements in old Soviet Union factories! Here's another test of just how much "Mother, May I" regulation you'll find in the measure: Search for the word "shall" in the document. You'll get a stunning 151 hits. Now, admittedly, not every use of the term "shall" in the bill is followed by a pro-regulatory proposal. Regrettably, however, most are.

I don't see how the FCC is going to get much smaller under this measure. In fact, I can't seem to find anything in the bill about downsizing the FCC at all. The bill's authors even felt the need to cap off the bill with 20-plus pages of regulations listed under the banner of "National Consumer Protection Standards" to apparently keep us all safe from those evil new broadband service providers. Wheh! Thank you Congress! God only knows what I do without those protections. I might do something stupid like switch carriers if I was unsatisfied.

Excuse Me, But Isn't It the Other Way Around?
OK, let me stop being so sarcastic for a moment and get back to the video competition provisions of the measure since I think they deserve special attention. First, there is no explanation in the text of the discussion draft regarding why the old public interest regulations new to be extended to cover all new broadband networks and providers. It is important to remember that the rationale underlying most of these old regulatory mandates was that we lived in a world of scarcity and regulated monopoly. Competition was thought to be impossible in this environment and, therefore, regulation was to serve as a rough surrogate to ensure price competition and program diversity.

Well, along comes more competition, first from direct broadcast satellite (DBS) sources and then from overbuilders, and now from the telephone companies, and what do we propose in this discussion draft? Regulate 'em. All of 'em. Apparently the presence of new competitors and the overall explosion of media diversity mean absolutely nothing to these lawmakers. The discussion draft basically says that we're just going to go right on regulating the way we always have. You thought public interest regulation was dead? Ha! This bill basically says: Long live public interest regulation!

And scarcity is now a laughable proposition for regulating the video marketplace. Don't take my word for it. Read this FCC white paper from last year entitled "The Scarcity Rationale for Regulating Traditional Broadcasting: An Idea Whose Time Has Passed." This report by John Beresford, an attorney with the FCC's Media Bureau, lays out a devastating case against the scarcity rationale, which has governed spectrum & broadcast regulation in the United States for over seven decades. Calling the scarcity rationale "outmoded" and "based on fundamental misunderstandings of physics and economics," Beresford goes on to show why just about everything the FCC ever justified on this basis was misguided and unjust. He points out what countless economists have concluded through the years, namely that the scarcity the government complained of was "largely the result of decisions by government, not an unavoidable fact of nature." In other words, the government's licensing process created artificial scarcity.

Alas, while the FCC has given up on the scarcity rationale, Congress appears ready to cling to it as long as possible to ensure that they can retain some degree of leverage over media operators in this country. At least that what the House Commerce Committee draft seems to imply.

In sum, the logic underlying these video provisions of the discussion draft get it exactly backwards. Lawmakers could have looked at the current video marketplace with its rapidly expanding choice, competition, and innovation and said to themselves: "OK, this means we can start getting rid of all those old public interest regulations now. Competition can check any stupid, anti-consumer moves a given carrier might make." Instead they looked at the current situation and said: "My God, all these new competitors mean that consumers could get screwed by even more people!" It really shows how little faith the current Congress has in the free market.

The Sun Never Sets on the FCC's Empire
Third, there is no effort made in the bill to sunset any of these public interest requirements in the future. It is troubling enough that lawmakers would propose extending public interest regulation to cover all new broadband networks and providers, but it absolutely unforgivable that they would not propose sunsetting these rules at some point in the future. In the absence of any such sunsetting language, I guess we can assume that these old rules will cover any new provider or technology that comes along in the future, including wireless broadband providers or broadband over powerline companies. Again: Long live public interest regulation!

I must ask again: In a world of increasing competition and media diversity, why do we need ANY rules like this? Heck, there is now more competition in the broadband field than there is in the market for online auctions. Seriously, can you name a competitor to eBay? Despite that fact, no one is proposing extensive public interest regulations and consumer safeguards for the online auction marketplace. Nor are lawmakers asking eBay or any potential competitor to register with the FCC and get permission before they make any moves in that market. Why shouldn't that same mentality apply to broadband?

Should I Bother Mentioning the First Amendment?
Finally, although I'm probably wasting my breath in doing so, I feel compelled to once again point out that all these old public interest regulatory mandates are at odds with the First Amendment. Whether policy makers are looking to compel speech or restrict it, it all runs counter to the "Congress shall make no law..." vision of the First Amendment.

Although the Supreme Court has allowed much of this nonsense to remain on the books, they largely did so by resorting to the now thoroughly discredited scarcity rationale. One wonders what possible constitutional defense can be put forward now to justify treating all these new broadband / media competitors as second-class citizens in the eyes of the First Amendment.

Nonetheless, it is my hope that if this bill passes as is that some new broadband operator will immediately challenge several provisions of the Act, especially the must carry mandates, the PEG requirements, and the regulation buried in Section 402(a)(10) of the bill (on pg. 50) that would "prohibit the use of any equipment used for the provision of BITS, VOIP services, and broadband video services for obscene or indecent communications." Hasn't Congress learned any lesson from the numerous measures the Court has struck down in the wake of the Communications Decency Act of 1996?

I want to make it clear that, despite what I have said here, there are some important things accomplished by this bill. And in some ways, it represents a small improvement over the status quo. Heck, I've been covering telecom and media policy long enough now that I remember reading through proposed Communications Act revisions 15 years ago that obsessed over what to do about telephone company entry into the home alarm market! There was an entire bill introduced on that issue back in 1993. And a year before that, I cut my teeth as a young telecom policy wonk by analyzing numerous proposals to regulate cable rates, one of which finally passed into law as the Cable Act of 1992.

We can all give thanks that those days are over and at least measures like this current House Commerce Committtee discussion draft aren't proposing comprehensive price control schemes or new entry barriers for the market. So it's important not to lose perspective and forget just how far we've come.

Alas, I still hoped for something better out of the gates than this discussion draft. Given the intense media and broadband competition we're seeing out there today, one would have hoped that a Republican Congress that supposedly believes in markets and limited government would have kicked off a major reform effort with something bolder than this. As it stands now, however, I do not believe this effort represents a major improvement over the status quo.

posted by Adam Thierer @ 11:07 AM | Broadband , Cable , Capitol Hill , Communications , Mass Media , VoIP , Wireline