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Copps and Adelstein “Get It” on White Spaces

October 12, 2006 FCC , Policy Blog , Spectrum Reform

As I mentioned in an earlier post, the FCC acted on the broadcast "white spaces" item at today's meeting. While the actual text of the order is not yet written, the general summary given at the meeting, the FCC press release, and statements of the Commissioners indicate that:

1) At this time, the FCC will not exclude any channel between 2-51 for unlicensed use (where empty) except channel 37. The FCC will, for now at least, not permit mobile devices to operate on channels 14-20 (I presume for fear that a mobile device will move from a market where 14-20 are not used for public safety to one where 14-20 are used for public safety).

2) The FCC did ask questions about exclusive licensing v. unlicensed. Worse, from my perspective, the FCC has shifted from its stronger position in the original 2004 Notice of Proposed Rulemaking (NPRM). Building on the work of the spectrum task force in 2002 and a specific notice of inquiry in 2003, the 2004 NPRM resolved the licensed v. unlicensed question in favor of unlicensed. Broadcasters succesfully pushed back to once again make this an open question.

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Now THAT’s an Agenda!

October 9, 2006 FCC , Network Neutrality , Spectrum Reform

The FCC has posted the agenda for its open meeting Thursday, October 12. And boy, that is some agenda.

1) Cable Competition: By federal law, the FCC is required to do an annual report on whether the 1992 Act (and the 1996 Act ) have made subscription television competitive and broken the cable stranglehold on programming and rates. Usually, this is an outrageous piece of trash designed to protect the cable industry. But Kevin Martin has signalled impatience with the cable industry and a desire to see that market become more competitive.

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The FCC Of the Future

September 26, 2006 FCC , Policy Blog

Art's recent post about conditions on the AT&T-BellSouth merger, and the possible issuance of an Notice of Inquiry on network neutrality, underscore the state of the FCC's policymaking apparatus. It is not pretty.

The FCC, rather than develop a rule-of-law culture steeped in intellectually rigorous and tractable principles, is riddled with a legislative-like give-and-take legacy of dealmaking, rent-seeking pressures, and industrial policymaking (i.e., picking and choosing winners or handicapping the race). Such a legacy leads many to ask, including one commenter on my net neutrality post, "can we trust the FCC with any substantial policymaking responsibility?" This criticism, by the way, is one of the most powerful reasons behind the critique of the Broadcast Flag–the agency is not to be trusted as a reasonable arbiter of DRM given its traditional sensitivity to political pressures.

The question for the FCC of the future is whether it will develop capabilities to adjudicate competition policy matters (as in net neutrality), define and enforce property-like rights in spectrum, and protect public values in an intellectually honest fashion (say, seeking to evaluate the best strategies for promoting media diversity). To date, I have not paid as much attention to such questions as I should–for an exception, see the second half of this piece–but going forward, the question of what type of FCC should exist may well be far more important than the substantive questions of whether the agency should pursue X or Y policy.

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Seems my week to argue with Phil

FCC , Network Neutrality , Policy Blog

A different perspective from Phil's recent network neutrality posts.

First, I'll agree that network neutrality is a poor second best to the separation of content and conduit we used to have under the old Computer Proceedings that allowed thousands of independent ISPs to bloom and provide competition and independent service.

That said, there is a reality here. Phil is right this is a complicated issue. But here's why I think we need network neutrality, defined as a prohibition on letting the handfull of vertically integrated companies that control high-speed access leverage take third party payments for "premium" delivery.

First, a few terms. Phil is right again that the internet isn't "neutral" in the sense of treating all packets the same. But, as market analyst Blair Levin observed in testimony on net neutrality back in May, the greatest danger to optimizing value occurs when you have a non-transitory bottleneck that restricts economic growth. Here, any individual subscriber faces a relatively small number of providers of high-speed broadband. In some markets, that number is limited to one. In most markets, at least for residential services, it's two (telco dsl and cable). Some markets may climb higher. None reach the four equal-sized firms that the standard antitrust metric ("HHI") consider "moderately concentrated."

Now add in that the largest residential providers are vertically integrated (they provide services that compete with what others want to provide over the network). Worse, they are dominant in a relavant neighboring product market, creating opportunities to leverage this dominance and incentive to prevent competition to their dominant product market emerging.

To translate that into English, cable companies have incentive to prevent real video competition from emerging via the internet, and telcos have incentive to prevent real voice competition. Both companies have the capability and incentive to protect their core video and voice markets, as well as the usual incentive to maximize profit by extorting money from both subcribers and "upstream" content providers. For anyone who has followed the history of the cable industry, this is very well-trodden ground.

To get around the fact that we have different ways to push bits faster, I distinguish between "subscriber tiering", where I charge customers more for a bigger pipe, "producer provisioning" in which third party providers invest in methods to deliver stuff faster (like peer-2-peer). I call a high-speed ISP charging third parties for "premium" delivery to its customers "Whitacre" tiering, in honor of the Chair of AT&T who popularized the idea.

I think a world that permits subscriber tiering and producer provisioning provides a virtuous cycle of ever-expanding bandwidth and innovation in delivery systems. By contrast, I think permitting Whitacre tiering locks us into a pathetically slow architecture. You can read my more complete analysis here. Briefly, and a little technically, allowing ISPs to charge third parties for "premium" delivery reduces down to an auction for speed among numerous providers indifferent to actual user desires. Whitacre tiering therefore creates an incentive for providers to restrict bandwidth to the point where they maximize the value of the "speed lane." Worse, the ability of the ISP to slow traffic removes the incentive for providers to innovate or pay others(like Akami) for faster transport. Why bother, if the ISP can neutralize the advanatge and capture that revenue for itself? Finally, this will add a whole new level of expensive transactions for third party providers.

Meanwhile, I am also worried that the ability to charge top dollar for a delivery advantage has very real consequences for democracy. My lengthier analysis here. Again, I'm operating on the assumption that allowing ISPs to offer a premium service amounts to an auction for speed, resulting in much higher prices for transmission of high-bandwidth content with no ability of the user to control preferences. I am not even assuming a deliberate intent to favor a particular message, which cable operators already do in the cable advertising world. I'm basing this analysis on broadcaster behavior under the current rules that require them to offer the same terms to every candidate.

Finally, I am concerned about something I call virtual redlining. I assume that third party providers will not spend money trying to reach customers they don't find "desirable", and that access providers will accomodate this. For analogy, consider how advertising rates in broadcasting are now linked to demographic ratings analysis. Companies pay top dollar for advertising on television shows that attract white 18-35 year old males, and pitch their products for that market on shows that command that demographic. Other shows with different demographics get different advertisements and advertisers pay less for these "less desirable" customers.

I see no reason we will not see the same phenomenom if third parties must pay for premium access to customers. Third party providers of content and services will seek to maximize delivery to "desirable" customers in the wealthiest zip codes. Providers and services targetting particular demographics will pay greater or lesser premiums based the percieved desirability of maximizing access to those zip codes. I leave it as an exercise to the reader to determine if this is a positive market efficiency or not.

I've read Phil's "Third Way" paper and agree with much of what he says. My problem is that Phil seems to think that bad results would occur only if ISPs acted from an anti-competitive bias. Accordingly, increasing transparency (for both efficiency and ease of enforcement) and prohibiting anticompetitive discrimination solve the possible problems while allowing markets to capture efficiencies.

I don't think that's true. Bad results can happen, as I hope my arguments above (and spelled out in more detail on the posts to which I have linked) show, even if we follow Phil's recommendations of having clear and neutrally available "premium" policies. Because allowing ISPs to sell premium access to thrid parties, indifferent to user preferences, creates its own set of negative consequences independent of any discriminatory intent.

I am also deeply suspicious of the supposed superiority of post hoc enforcement to prophylactic regulation. (Unsurprisingly, I've written at length on this subject as well.) Prophylactic rules let parties know in advance what they can and can't do. Combined with swift enforcement for clear violations, they save a lot of time in negotiations. By contrast, making rules on a case-by-case basis via after the fact adjudications encourages parties to keep pushing the envelope on prohibitted behavior until they get smacked by the agency. Then they complain that the agency didn't give them fair warning.

Please note that prohibiting "Whitacre tiering" does not mean the end of innovation or even the end of tiered provisioning. What I object to is allowing third parties to establish user preferences. I, at least, would be happy with a system that lets users designate certain third parties for premium delivery (essentially a specialized form of "subscriber tiering"). For example, this could be something like Comcast's "power boost," but where a user pays to get available excess capacity for downloads on a transaction by transaction basis. This would concievably capture many of the advantages that Phil and others forsee in differentiated offerings, but not create the negative incentives and negative consequences I've described above. It would also resolve the problem of the so-called "power users," where a handful of users absorb the vast amount of available capacity on the network.

I recognize that my policy prescription may cut off some potential benefits. Not all deals between ISPs and content or service providers would necessarily be bad. But, trying to predict the behavior of the various actors, I think we have a much better internet, and therefore a much better public policy, if we keep the internet open and don't let last mile providers get in the way.

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Spectrum Season at the FCC

September 20, 2006 FCC , Policy Blog , Spectrum Reform

Although no spectrum items appeared on the FCC open meeting agenda, there appears to be considerable spectrum action happening at the FCC right now.

1) The Office of Engineering and Technology, the day before Chairman Martin's confirmation hearing, published this this proposed schedule for the FCC's white spaces proceeding to move forward. This proceeding would open the unassigned channels in the television broadcast space, called "white spaces," to unlicensed use.

The broadcast bands have physical properties that make them particularly useful for a variety of purposes. They can penetrate objects (such as wet leaves) and transmit signal significant distances for little energy cost. Because these bands are so useful for broadband, tech companies have joined with community wireless advocates to push for access to these white spaces.

Former FCC Chair Michael Powell was very enthusiastic about this proceeding as a way to get broadband competition. Martin has been a lot less excited about wireless generally than Powell was, a lot less excited than that about unlicensed generally, and even less excited that that about white spaces, since it means going toe-to-toe against the broadcasters (who oppose any use by others of "their" spectrum).

So the focus on white spaces has been in Congress, where it has had some modest success. It even made it into the otherwise wretched Stevens telecom reform bill.

So a number of us in DC are scratching our heads on why Martin has now given the o.k. to move forward on this proceeding. The timing of the notice (right before Martin's confirmation hearing) smells of politics. But the Stevens Bill isn't moving. And while many folks on the Senate Commerce Committee in both parties like the idea of opening the white spaces, the big issues for Martin were USF, media ownership, and network neutrality.

Whatever the reason, however, seeing forward movement on this proceeding is a welcome surprise.

2) The press reports that the FCC is close to resolving the dispute between Massport (which controls Logan Airport) and Continental Airlines on whether Continental can use its own wifi or must use Massport's exclusive contractor. This apparently minor proceeding has huge implications for use of wireless systems. If a landlord can block a tenant from using his or her own wireless system and require the tenant to use the system the landlord demands, then competition for fixed wireless services pretty much goes out the window.

In wireline services, incumbent wireline providers cut exclusive deals with landlords to keep out competitors. Want to subscribe to a cable overbuilder or CLEC? Too bad, says the landlord. As a condition of your lease, you have to use my provider. This is perfectly o.k., and has had huge impact on residential competition.

So it doesn't take a lot of imagination to see incumbents — including wireline incumbents — doing the same thing for wireless. Heck, Comcast and TW now have massive spectrum inventories. They can cut deals with landlords who will then turn around and say "you can use wireless, but it has to be my provider — Comcast." (Comcast, btw, is the provider Massport uses — at least according to the start up screen last time I passed through Logan.)

From what the press are saying, it looks like the FCC will come out in the right place on this one. I certainly hope so.

On the licensed side, the FCC issued three significant Notices in the last few months. The most important is the Notice for the auction rules for the 800 MHz auction (the returned DTV spectrum). That having been the subject of my last post, I won't belabor the issue here.

After a long quiessence, the FCC is once again looking at unlicensed spectrum. Hopefully, we will see some positive action soon.

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