Yesterday PFF posted a brief article I wrote explaining the negative consequences of open access regulations. I argue that while proposals like open access and net neutrality sound good, they are not based on sound economics. The most recent example is a set of filings by several consumer groups asking the FCC to impose a set of open access regulations on the upcoming 700 MHz spectrum auction. Despite their claims, these rules would require complicated and controversial price and other regulations, reduce investment incentives, and ultimately harm consumers.

Video franchise reform would both increase supply of broadband as well as demand for the service, adding to competition and benefiting consumers. The FCC should thus be praised for pushing forward an important but controversial issue. The FCC's recent order also raises interesting questions about how reforms should handle legacy investments and highlights the need to pay attention to inherent consumer demand for broadband.

Back in December, the FCC adopted an order to reform video franchising regulations. Under the existing regime, municipalities grant franchises to companies wishing to offer video services. Historically, that meant the local cable company was the lone franchisee and was in effect granted a monopoly in exchange for paying a franchise fee and providing certain services, such as public access channels. Cable companies enjoyed largely monopoly status until satellite companies entered the market, generating competition. In part because they did not use actual wires, satellite companies were exempt from franchise rules.

The issue today is that the legacy telephone companies, in particular AT&T and Verizon, are rolling out optical fiber and want to offer video over those lines in addition to lightning-fast broadband service. In order to offer video they must negotiate for franchise agreements with each municipality. Reforms could substantially reduce transactions costs and make it easier to obtain those agreements.

Franchise reform is long overdue. While cities understandably want oversight over some aspects of installing this infrastructure, such as digging up neighborhood streets, there is no economic rationale for local franchising of video services. The need to obtain a franchise represents little more than a barrier to entry. Removing this barrier will yield real consumer benefits in the form of additional broadband competition and additional video competition. Indeed, franchise reform is one of the few policies (along with moving more spectrum into the market) almost guaranteed to increase competition.

The FCC is now grappling with the sticky question of how to apply the order to incumbents and has requested comments on how the order should apply to existing franchisees (the cable companies).

Since March 2006, the number of premises passed by FTTH has grown from 4 million to 6 million, with 1 million of them actually hooked up, says a release by the Fiber-To-The-Home Council and the Telecommunications industry Association. The number of homes passed is growing by 300K/month, and the builders "include municipalities and utilities, real estate developers and operators as well as traditional and non-traditional service providers."

GigaOm has a chart showing that the number of homes connected went from 322,000 in Sept. '05 to 1,011,000 in Sept. '06. A Verizon-employee commenter says that about 500,000 of the current subscribers belong to VZ, and that VZ alone will have 6 million homes passed by the end of 2006.

I'm lucky enough to live in an area where broadband competition is rapidly intensifying -- Fairfax County in Northern Virginia (McLean, VA to be exact). In recent years, the incumbent cable operator Cox Communications has beefed-up its network to offer phone service and high-speed broadband in addition to its growing video programming lineup (which how includes plenty of HDTV and VOD offerings). I've been a Cox cable subscriber for many years now and have been very happy with them. In fact, after 7 years with DirecTV prior to that, I've never thought about going back to satellite after switching to cable. (Of course, the superior high-speed broadband option that Cox offers had something to do with that.)

Meanwhile, regional telephone giant Verizon Communications has been aggressively deploying new fiber optic lines throughout many Northern Virginia neighborhoods and other Washington, D.C. metro communities in the hope of competing against Cox and Comcast in the race to deliver the complete "triple play" package (voice, video, data) to consumers. Last year, Verizon sent a team of contractors out to my neighborhood to dig up my front yard, lay new fiber lines and install a new box. And then, for reasons I still can't quite understand, another team came back and dug up my yard again to install more lines and a different box! My wife wasn't real happy about the mess this created (and all the grass that died as a result), but I just kept telling her that one day it would all be worth it.

And that day has arrived.

Earlier this year, Verizon began dispatching door-to-door salespeople to my neighborhood in an attempt to sign up new subscribers for their new "FIOS" (fiber optic-based) service. I felt sorry for the salespeople who knocked on my door because they had no idea I was going to shower them with a litany of technical questions based on my knowledge of communications markets. But they were always very informative and helpful. And they REALLY wanted my business. Unfortunately, however, they had no control over the pesky city and county regulators who were holding up deployment of FIOS service in the area. In particular, Verzion had to fight for the right to offer consumers video programming services in competition with cable.

Luckily for me, they finally got permission in Fairfax County. (Of course, Verizon and other telcos are still fighting for permission to offer video services in countless other communities across America. And federal legislation is pending that would expedite that process through the use of national franchises). After I received confirmation that Verizon would at least be able to offer me everything I already had in my Cox "triple play" bundle, I finally decided to pull the trigger and sign up for a one-month trial of Verizon's FIOS service in my home.

When it comes to the issue of Net neutrality--or what my PFF colleagues more appropriately call "Net neutering"--it seems like a lot of people are forgetting the old lesson that there is no such thing as a free lunch in this world. The latest example of this is summarized in this Reuter's article discussing the possibility of the financial sector potentially gearing up to jump into the "Capitol Hill fight over the future of the Internet [to] stop an effort it says could add billions in costs just to maintain current offerings."

The article mentions that Washington lawyer Philip Corwin, a partner at the law firm Butera & Andrews, has been circulating a memo to financial services industry officials warning that "Net neutrality is an issue that (financial services) firms ignore at their peril" because it would supposedly give Internet service providers a green light to impose big new fees on financial companies. Corwin says "all will suffer" and that today's ISPs will become "gatekeepers" and an "electronic post office." To counter this supposed parade of horribles, the Corwin memo counsels that the financial services sector should immediately push legislation in the House and Senate committees they regularly deal with that would assure the continuation of flat high-speed Internet pricing for online financial services.

What we're talking about here, of course, is price controls for the Internet. Corwin's memo and recent editorial in The American Banker both confirm what I've long suspected: that the entire Net neutering debate is really a debate about pricing freedom. And now, the financial services industry--one of the pillars of the American capitalist system--is apparently thinking about taking this freedom away from another corporate sector to advantage itself.

News this week that proponents of network neutrality regulation are redoubling their efforts in the Senate reminds us that this legislative battle is far from over [TRDaily subscription required]. Also ongoing is the insistence -- in (virtually) all neutrality proposals -- that regulators pretend consumers will never have a choice of providers using technology other than cable modems and DSL. Sadly, if those favoring this regulation of the broadband Internet emerge victorious, make believe may become real, as I discuss in a recent op-ed.

A new pro-Net neutrality coalition has formed called the "Save the Internet Coalition."

Hey, who can be against that? Well, I can.

You see, this coalition's idea of "saving the Internet" is premised on regulators doing the saving. The coalition proclaims that "Congress must include meaningful and enforceable network neutrality requirements" in whatever communications reform legislation it passes this session "to ensure that the Internet remains open to innovation and progress."

Oh, I get it... Let's call in our benevolent-minded regulators to oversee the daily workings of something as complicated as Internet network management. Brilliant !!

Haven't we learned anything from seven decades of communications regulation? Empowering bureaucrats to micro-manage the operation of broadband networks and Internet activities isn't going to lead to communications nirvana; it's going to lead to just another regulatory hell. Supporters of Net neutrality mandates are essentially saying we need more government regulation in order to be free. It's the beginning of another sad chapter in the "burn the village in order to save it" story of modern communications regulation.

And in what I regard as an absolutely despicable contortion of the true meaning of the First Amendment, the Coalition's "statement of principles" on its website states that: "Network neutrality is the Internet's First Amendment. Without it, the Internet is at risk of losing the openness and accessibility that has revolutionized democratic participation, economic innovation and free speech."

Please! How dare you employ the First Amendment in defense of your Big Government plan for Internet control. In case the members of the "Strangle the Internet"... er, uh... "Save the Internet Coalition" have forgotten, the First Amendment could not be any more clear about the role it envisions for government when it says: "CONGRESS SHALL MAKE NO LAW..."!

We used to talk about "Hands Off the Internet." But groups like this are leading us down the path to "Hands ALL OVER the Internet." To use the First Amendment in service of this regulatory agenda is outrageous.

If the folks in this coalition want to take a stand in favor of the REAL First Amendment, perhaps they can come join me in my daily fight against the FCC on the speech control front. Those same benevolent bureaucrats that the "Save the Internet" coalition wants to empower to regulate Net have been very busy lately regulating speech in the broadcast sector.

You might say there's no connection between these two issues. Nonsense. We gave the regulators an inch on the broadcast front and they took a mile. Once we empowered them to regulate broadcast infrastructure, the regulation of the speech delivered via broadcast platforms followed. It's an example of what Vanderbilt law professor Christopher Yoo has labeled "architectural censorship." Simply stated, if government can regulate the soapbox, it can regulate the speech delivered from that soapbox as well. Do you really think things will be different once we invite the bureaucrats in to regulate the Internet?

I say if we're going to "save the Internet," let's start by saving it from silly ideas like Net neutrality regulation.

There's a crowd of people who still run around lamenting the death of the old UNE-P regulatory regime. They persist in their misguided belief that infrastructure sharing somehow offers us the path to broadband nirvana.

It's all quite silly, of course. Forced sharing doesn't lead to true infrastructure innovation or competition. Indeed, it leads to the exact opposite: technological stasis and plain vanilla networks. If you want real competition and innovation, you have to give carriers the incentive to invest in (and upgrade) their own networks with the promise that they will be able to reap the rewards of positive growth should it occur.

Still, the critcs persist, we'll never have any real competition without some degree of infrastructure sharing. Nonsense! Let me cite a little statistical and anecdotal evidence to explain just how wrong the infrastructure socialists are.

The nationwide debate regarding whether and how states and cities should help regulate digital age communications has evolved considerably in recent months. Thus, it is interesting to note how well areas of developing consensus were anticipated by a working group of university and other scholars back in autumn of last year.

Thoughtful policymaking requires, at a minimum, that participants offer concrete proposals for effecting their bright ideas. It is primarily in that spirit that this week's proposal to graft a network neutrality mandate onto the Communications Act can be commended [TRDaily subscription required]. The proposal also draws favor to the extent it acknowledges that consumers benefit not only from substantial flexibility in how they use Internet content, applications and devices, but also from escalating broadband transmission speeds and capabilities.

Beyond that, however, this latest attempt to regulate broadband providers -- for acts they might commit in the future, that might undermine consumer welfare and that might not be disciplined by market forces -- demonstrates the difficulty of turning bright ideas about how the Internet should evolve into legislative directives that answer more questions than they raise. And, indeed, proponents of network neutrality mandates should worry that consumers will raise questions.