September 1, 2006 Policy Blog , Spectrum Reform

Don't believe everything you read in the papers or online – contrary to what Reuters reported today, the District Court in Miami did not issue an injunction requiring Echostar to terminate distant network TV signal service to all its subscribers. While Fox did file a motion today asking for such an injunction, the court gave Echostar until September 12 to demonstrate why the court should not grant Fox's request. So Echostar lives to fight another day.

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Take your $100 million and …..

September 1, 2006 Policy Blog , Spectrum Reform

Reuters is reporting that a District Court in Miami has issued an order barring Echostar from retransmitting any distant signals to its customers, even those to whom it provides those signals legally. This "permanent injunction" was issued at the behest of the Fox network, which filed the request today. As I reported on Monday, the Fox network pulled out of settlement negotiations at the last minute last week, while Echostar settled with all the network affiliates (including Fox's), for $100 million and other concessions, including the cessation of service to all illegal subscribers. So what could have been a win-win situation for all involved has come down instead to this scenario – the Losers: nearly 800,000 innocent and legal subscribers to network distant signals who will no longer receive those signals; the affilliates, who are probably out $100 million and who now won't benefit from the increased local-into-local satellite service that was part of the settlement; and of course Echostar, whose previous behavior cannot be condoned, but who has done everything possible to ensure continued service to legal subscribers. The Winner: Fox and its parent company News Corporation, which owns Echostar's only direct competitor, DIRECTV. What possible motive could Fox have other than to kick its competitor while it was down, hoping that subscribers who lose their service will switch satellite providers? Sigh. I suppose now its time for Congress to get involved to protect consumers and competition.

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Spectrum and Net Neutrality Lessons from the FCC’s Recent Spectrum Auction

August 29, 2006 FCC , Network Neutrality , Policy Blog , Spectrum Reform

As reported in yesterday's New York Times, although the AWS spectrum auction will not formally close for another month or so, the likely winners of the licenses will be the incumbent wireless companies and "SpectrumCo LLC," a joint partnership with Comcast, Time Warner, and Sprint-Nextel (albeit with Comcast and Time Warner the dominant partners). The much ballyhooed hope that the AWS auction would produce a new, disruptive competitor for either mobile phone service or broadband service died when the DBS partnership of DIRECTV and Echostar exited the auction after getting systemically outbid by the incumbents and Spectrum Co.

Of course, this outcome was entirely predictable to anyone who (a) actually looks at the economics of bidding in open, ascending spectrum auctions and (b) has not drunk the intermodal competition cool-aid. Which is why I pushed the FCC for anonymous bidding rules back in the spring and have argued that we should not allow incumbent cable operators to bid on spectrum if we want competition.

The FCC has a chance to learn some lessons here for the upcomming auction of returned analog television spectrum, the so called "700 MHz Auction." The FCC issued a Notice of Proposed Rulemaking soliciting comment on service rules and auction considerations. Unfortunately, it will be hard to convince the FCC that an auction with almost 170 bidders raising close to the maximum anticipated $15 Billion in revenue was a failure because it further entrenched the incumbents and failed to produce a meaningful new competitor. For those devoted to the dogma of the perfection of "the market" as the ultimate arbiter, the failure of a new competitor to emerge indicates that there is no need for another competitor or that another competitor is not economically viable (the notion of strategic behavior to preserve market dominance apparently being a heresy to be firmly rejected by orthodox free market theologians). Heaven forfend the government should "interfere with the market" by structuring an auction more likely to produce the emergence of new entrants.

It is also worth noting in passing that the triumph of the incumbents likewise has implications for the network neutrality debate. At the start of the AWS auction, the Wall St. Journal and other opponents of network neutrality as an evil government mandate and attempt to "socialize the internet" pointed to the AWS auction as proof that (a) we have more than enough competition in broadband to eliminate any need for "net neutrality" and (b)if tech companies like Google or Microsoft want to build their own pipe, they can get spectrum to do so.

Instead, as predicted by Greg Rose and Mark Lloyd in a paper for the Center for American Progress, the incumbents (including the incumbent residential broadband providers Comcast and Time Warner) acted to block potentially disruptive new entrants from getting licenses. As a result, we have exactly the same competitors and potential competitors in the broadband market today as we had before the auction started.

Sure, AWS licenses acquired by the wireless incumbents may eliminate some capacity constraints that wireless providers claim have hampered their deployment and required them to impose limits on users. But the fact that three of the four largest national mobile phone companies are owned or affiliated with incumbent wireline providers (Cingular with AT&T & Bell South, Verizon Wireless with Verizon, and SprintNextel with Comcast & Time Warner via their affiliation and resale agreements) makes it a lot less likely that these "competitors" will prove sufficiently aggressive and disruptive that the incmbents will not dare degrade user choice of where to go online or what applications to run over the network.

Worse, consider this exchange between Tod Cohen of Ebay and Carolyn Brandon of the Cellular Telecomunications and Internet Association (CTIA, the primary trade group for the incumbent wireless carriers). Apparently, the dominant wireless companies that won the AWS licenses and offer our best hope of broadband competition see no problem at all with exercising control over the user's choice of content and application, regardless of network capacity.

[Tod] Cohen [deputy general counsel for Ebay] said the wireless Internet in the U.S. is already operating in a non-net neutrality environment when it comes to EBay, an online auction service.

He said Cingular customers are not able to use text messages to make a payment through eBay's online subsidiary, PayPal, because Cingular won't agree to give PayPal access to necessary wireless codes on its network. PayPal is available to customers of other wireless services.

Carolyn Brandon, vice president of policy for industry trade group Cellular Telecommunications & Internet Association, responded that under a capitalistic market Cingular has the right to strike a contract with another online payment company and shouldn't be required to a cut a deal with PayPal.

"What's the market failure?" she asked.

Recent remarks by AT&T's Ed Whitacre show that the Bells have not given up their hopes of cutting such deals themselves.

Which, of course, is exactly the concern of folks who see positive social and economic benefit in an open internet. Absent regulation to the contrary, it makes perfect economic sense for the few broadband providers in the market to exploit their market position and extract additional rents from suppliers of content and services on one end and captive customers on the other. I just happen to think that allowing these providers to exercise their market power would be a disaster for democracy and a disaster for our economy.

Reasonable minds can differ, of course, on my economic analysis and whether network neutrality is a cure worse than the disease. Nor do I expect the paid shills and true believers to look at the AWS auction results and proclaim "how wrong we were to assume that competition exists or is likely to emerge absent some form of government intervention, given the power of incumbents to block new entrants!" But I do point to the recent AWS auction as proof of two central tenants in my analysis: the behavior of profit seeking firms is predictable using undergraduate level economics and a willingness to embrace empirical data over theory, incumbents will do what they can to block the emergence of potentially disruptive new entrants, and — absent some form of government action — they will succeed.

You may still decide this produces a better world than "government intervention in the market" does. But don't kid yourself about the world you're going to get as a result.

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A Reprieve for Echostar (Sort of)

August 28, 2006 Policy Blog , Spectrum Reform

Last week I wrote about an 11th Circuit Court of Appeals decision that would have required Echostar Communications (or Dish TV, as most people know it) to stop sending distant network TV signals to all of its customers, regardless of whether those customers were receiving those signals illegally. The Court was required by law to issue that penalty because it had found that Echostar had engaged in a "pattern or practice" of providing illegal signals.

Today, Echostar and all the network affiliates groups (ABC, CBS, NBC and Fox) announced that the parties had settled. Under the terms of settlement, Echostar agreed to expand its "local-into-local" TV service from 165 to 175 markets by the end of the year and agreed to pay the affiliates' trade association $100 million. Of course, Echostar also agreed to no longer send distant signals to those who do not qualify for them.

So Echostar and its legal customers are ok now, right? Well, not so fast. The ABC, CBS and NBC "owned and operated" TV stations settled with Echostar a long time ago, but the Fox network "O&Os" pulled out from the settlement at the last minute last week. Not surprisingly, Fox's parent company, News Corporation, owns Echostar's closest competitor, DIRECTV. While of late there has been some talk about a thaw between Echostar's CEO Charles Ergen and NewsCorp Chair Rupert Murdoch – they recently teamed up in an unsuccessful bid to obtain spectrum at an FCC auction – this will certainly send a chill back into the relationship. Some may recall that Murdoch successfully blocked Echostar's attempt to buy DirecTV in 2002, which permitted News Corp to waltz in an buy it instead.

Even if Fox ends its holdout, the settlement must still be approved by a Federal District Court in Florida. But chances for the court approving that settlement, and preserving service for legal customers, would be helped enormously should Fox come into the fold. It is hard to fathom why Fox refuses to settle, other than its desire to punish its closest competitor. I, for one, hope the court sees this maneuver for what it is, and accepts the settlement. But here is the silver lining in the cloud – by keeping the issue alive, Fox is opening the door for Congress to reconsider whether the "distant signal" law is anticompetitive and an anachronism in the Internet age.

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