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Monday, March 15, 2010

5 Regulatory Hot Potatoes That Could Derail the FCC National Broadband Plan
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Beyond the fact that the Federal Communications Commission (FCC) decided to release the executive summary of its long awaited National Broadband Plan via a PDF of a scanned printed copy, there are other reasons to be concerned about the agency's ability to centrally plan one of the most important, fast-moving sectors of our economy. In this video clip, I discussed some of my general reservations with the idea of a gargantuan government industrial policy for the broadband sector, and in this essay I noted how, from what we've see of the plan thus far [Executive Summary], the FCC appears to be engaged in some creative accounting techniques to fund the scheme.

Not everything in The Plan troubles me, however, and I hope to touch on some of the more sensible elements in a future post. But, as I was reading through it, I flagged 5 regulatory hot potatoes in the plan that threaten to derail the entire thing. In this regard, the parallels between the National Broadband Plan and the debate over health care "reform" are really quite striking. Indeed, it appears the Administration has once again settled upon a "go for broke" (potentially quite literally!) strategy. In both cases, they appear hell-bent and trying to do it all in the form of One Big Plan. Now, I won't lie to you; such everything-plus-the-kitchen-sink public policy gambits make me nervous based simply on the sheer scale of the undertaking. When Washington tries to regulate massive chunks of the economy using bloated bills and bureaucracies inside the Beltway, it troubles me greatly. But even if the sound of Big Government on Steroids doesn't raise your blood pressure, one would hope that the prospect of political gridlock and litigation hell would force advocates to scale back their ambitions a tad bit. After all, what good is a plan that can never pass or be implemented?

That's why I was rather surprised to see these 5 regulatory initiatives teed up in the National Broadband Plan:

(1) Return of the Forced Access Regulatory Nightmare? The Plan says the FCC will, "Undertake a comprehensive review of wholesale competition rules to help ensure competition in fixed and mobile broadband services." As my friend Randy May of the Free State Foundation notes:

In plainer English, this means considering requiring that some Internet service providers unbundle and share their networks with other would-be competitors. The FCC tried that approach of "managed competition" in the late '90s in implementing the Telecom Act of 1996. The result was not pretty. Investment was stifled. The court ultimately overturned the FCC's mandatory sharing rules - but not before a lot of damage was done. The FCC shouldn't even start down this road again.
Indeed, as the southern gentleman that he is, Randy is once again being far too kind in his assessment of things. Forced access regulation was a public policy fiasco of the first order. As I documented in my essay,"Will the FCC's Nat'l Broadband Plan Be 'Full Employment for Lawyers'?", in the years following passage of the Telecom Act, entire forests fell because of the thousands of pages of regulatory and judicial interpretations that were handed down trying to figure out how to interpret what just one word ("cost") meant. And the economic devastation of infrastructure socialism was substantial since it greatly retarded investment and innovation by incumbents and new "entrants" alike. But those new entrants weren't really entering the market at all. They were just "networks built on paper," to use Peter Huber's wonderful phrase. Our regulators labored under the illusion that they could create the fiction of competition based upon infrastructure sharing. The problem, however, is that sharing is not competing. The only thing that you can accomplish with a forced access regime is that you can milk the regulated monopoly you create until it runs dry; you can force that network provider to share its entire network with "competitors" at regulatory wholesale rates until you basically eat all the seed stock in terms of future investment and innovation on that network. If, on the other hand, you want competitive and highly innovative facilities-based networks, then you must allow carriers to earn a fair return on their investment and be free of arbitrary network-sharing mandates like the FCC is now apparently considering once again.

Even if you disagree with everything I've just said about forced access regulation, you cannot deny this: If the FCC walks down this path once again, it will lead to another round of epic legal battles and will tie up The Plan in Congress, the FCC, and the courts for years to come. That doesn't seem like a very sensible thing to include the National Broadband Plan if you hope to incentivze new network creation and investment in the short-term.

(2) Set-top Box Regulation: The Plan says the FCC will:

Change rules to ensure a competitive and innovative video set-top box market, to be consistent with Section 629 of the Telecommunications Act. The Act says that the FCC should ensure that its rules achieve a competitive market in video "navigation devices," or set-top boxes-the devices consumers use to access much of the video they watch today.

What this means is that the agency wants to muck around with the TV market even more in an attempt to engineer next generation set-top boxes and transmission standards. This battle has been going on for many years, actually. In particular, cable operators and some consumer electronics companies have long been engaged in heated technical disputes over set-top boxes, "digital cable ready" equipment, and "plug-and-play" interactive applications. Basically, it's a fight about how various features or services available on video distribution networks should work. In the old days the battle was over features like electronic programming guides (EPGs), video-on-demand (VOD), pay-per-view (PPV) services, and other interactive television (ITV) capabilities. And now it's over the Internet and access to online video services.

But here's the question that I asked in an old paper on the topic ("Unplugging Plug-and-Play Regulation") that I found myself asking again after I saw this mentioned in the FCC's Broadband Plan: Why is this issue -- and technical disputes about next generation hardware standards -- even before the FCC? Why are regulators being asked to make technical determinations that could skew marketplace developments and innovation for years to come? Again, you won't be surprised to hear I am skeptical of the agency's ability to somehow micromanage next generation video standards better than marketplace experimentation would. Moreover, what the heck is the problem here? Who the hell cares about set-top boxes in a world of abundant video choices across a broad range of media devices? And, again, how is all of this going to stimulate more investment and innovation in broadband? You got me.

Again, even if you disagree with everything I've just said about this issue as well, ask yourself if it's really worth putting everything else in The Plan at risk for a regulatory initiative like this.

(3) Privacy Regulation: The Plan says the FCC will:

Clarify the relationship between users and their online profiles to enable continued innovation and competition in applications and ensure consumer privacy, including the obligations of firms collecting personal information to allow consumers to know what information is being collected, consent to such collection, correct it if necessary, and control disclosure of such personal information to third parties.

Wow, who knew the FCC was suddenly a privacy regulator! Talk about mission creep. This agency has zero experience dealing with something as complicated as online privacy policy and yet here they are embarking on a bold new regulatory project to investigate privacy regulation as part of a plan to promote broadband diffusion.

Although the description of what the FCC plans to do is pretty vague, the phrase "obligations of firms collecting personal information to... consent to such collection" sounds an awful lot like a regulatory mandate by which opt-in would be required as a restrictive default. If you want to better understand why that will be so controversial, read this testimony by Berin Szoka and this testimony by Braden Cox (both to the FCC on this issue), as well as Berin's excellent testimony to the FTC late last year on the broader issues at stake here.

Again, why muck up The Plan with something this controversial? Makes no sense.

(4) Broadcast spectrum confiscation? The Plan says the FCC will:

Enable incentives and mechanisms to repurpose spectrum to more flexible uses. Mechanisms include incentive auctions, which allow auction proceeds to be shared in an equitable manner with current licensees as market demands change. These would benefit both spectrum holders and the American public. The public could benefit from additional spectrum for high-demand uses and from new auction revenues. Incumbents, meanwhile, could recognize a portion of the value of enabling new uses of spectrum. For example, this would allow the FCC to share auction proceeds with broadcasters who voluntarily agree to use technology to continue traditional broadcast services with less spectrum.

In my essay from earlier today, ("Will the FCC's National Broadband Plan Really Be Costless?"), I already noted why this idea is so controversial. As I noted:
Most of the spectrum they want to grab is currently occupied by someone else. In fact, a huge chunk of that 500 megahertz would come from licensed television broadcasters, who aren't exactly excited about getting and an eviction notice from the government. Even if one agrees with the FCC that the broadcast band is currently under-utilized, that doesn't mean that the broadcasters should be forced to vacate it. Moreover, any attempt to force them off would result in an epic legal battle that would take years to resolve and ultimately would not likely be resolved in the government's favor.

It's going to take huge sums of money to get the broadcasters to vacate voluntarily. That's just a reality. People can whine all they want about "the people owning the airwaves," but it's bunk that isn't going to stand up in court. Even if you like your odds of winning a massive spectrum confiscation case, do you have any idea how long it will take to fight the legal battles to resolve that thorny question?

(5) Another M2Z Fiasco? The Plan says the FCC will:

Consider licensing a block of spectrum with a condition to offer free or low-cost service that would create affordable alternatives for consumers, reducing the burden on USF.

Oh my, didn't the FCC learn anything from the M2Z fiasco? You will recall that former FCC Chairman Kevin Martin had his heart set on engineering a similar plan into existence, but he wanted the free wireless service to be squeaky-clean and filtered to weed out all the naughty bits. M2Z Networks had a plan to offer such a service that was slow as molasses but met the core condition of being free to the public (at least the basic, plain vanilla offering) and highly-filtered. Of course, the rather big catch was that before M2Z would give us The Net for Puritans, they wanted a big slice of juicy spectrum from the government at a greatly reduced lease rate. And Rep. Anna Eshoo (D-CA) floated a similar proposal as part of her " Wireless Internet Nationwide for Families Act of 2008," (H.R. 5846).

Bottom line: Rigging auctions will inevitably be hugely controversial, even if it doesn't include a censorship component. But, in all likelihood, any plan by the FCC to subsidize a free or low-cost service along the lines of what M2Z already proposed will generate that sort of debate about what standards should govern content on that network. After all, many taxpayers will understandably protest that they shouldn't have to subsidize content they find objectionable. Of course, the same might be said for other broadband subsidies proposed under The Plan, but when we're talking about a free service required to be provided as a condition of a sweetheart spectrum deal (rather than simply lowering the cost of paid services), the political pressure for censorship will be difficult to surmount. (For more details, see this old paper by Berin Szoka and me, "What's Worse Than Rigged Auctions & Internet Censorship? How About Both in One Package!" and this new article by Matt Lasar of Ars Technica, "Free Wireless Broadband Plan is déjà vu All Over Again.")


No doubt, the FCC and its janissary will claim that each of these regulatory proposals has merit and deserves consideration. But if these provisions remain in the National Broadband Plan, I think the agency is setting itself and its supporters up for a long fight and, ultimately, a very disappointing outcome. Some might claim that fortune favors the bold and that now is not the time for incrementalism. But this broadband plan would already be quite bold even without these controversial provisions included. For me, it's just a bit too bold since I don't believe the government has a very good track record when it comes to building high-tech networks or gauging demand for next generation services. But regulatory shenanigans like the 5 discussed here could sink the plan and make the whole debate moot.

posted by Adam Thierer @ 10:29 PM | Broadband

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