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THE FREE STATE FOUNDATION
Book Luncheon

"Communications Law and Policy in the Digital Age: The Next Five Years"

 

On January 23, 2013, the Free State Foundation held a lunch seminar to celebrate the publication of FSF's newest book, "Communications Law and Policy in the Digital Age: The Next Five Years," Four of the book's contributing authors, all prominent scholars and experts in the field of communications policy, discussed their chapters in the book. Following their initial presentations, there was a lively, interactive exchange on several hot-topic issues, including broadband policy, net neutrality, USF reform, spectrum policy, and public media reform. During the discussion, many new, bold ideas for reforming communications law and policy were addressed. 

 

FSF is now releasing a transcript of the seminar discussion, which was moderated by RANDOLPH MAY, President of The Free State Foundation. The participants, along with their chapter titles, were:

 

SETH COOPER, FSF Research Fellow - "Restoring a Minimal Regulatory Environment for a Healthy Wireless Future"

 

ELLEN GOODMAN, Professor, Rutgers School of Law - Camden, and Member of FSF's Board of Academic Advisors - "Public Media Policy Reform and Digital Age Realities"

 

CHRISTOPHER YOO, Professor, University of Pennsylvania Law School, and Member of FSF's Board of Academic Advisors - "Internet Policy Going Forward: Does One Size Still Fit All?"

 

DANIEL LYONS, Professor, Boston College Law School, and Member of FSF's Board of Academic Advisors - "Reforming the Universal Service Fund for the Digital Age"

 

The transcript should be read in its entirety for an appreciation of the views of each panelist. Nevertheless, in the meantime, immediately below are selected excerpts in the order of the panelists' presentations. These excerpts provide an indication of the various perspectives presented at the session. But, again, the transcript should be read in its entirety in order to obtain a full appreciation of each panelist's views. And, if you would like to watch the YouTube video of the proceedings, it is here.

 

SETH COOPER

 

For the next generation of wireless technology, there needs to be as much freedom and incentive to invest and innovate as there has been for the generations of wireless technology that have preceded it. But the FCC has set in place some new restrictions on wireless services, or at least aspects of it. The claimed bases of those regulations and their underlying rationale portend a future expansion of regulation of wireless. I...urge a course correction here, to reverse that pro-regulatory trajectory and restore a minimal regulatory environment over wireless in order to best ensure the fullest payoff for consumer choice for the next generation of wireless services.

                       

Despite these vibrant market conditions, we have witnessed what I believe is a subtle shift, or perhaps not so subtle a shift, to a more regulatory environment with respect to wireless, where we have seen the FCC heap on or attach some Title II-like regulations or novel Title III-based regulations, whether it involves network management, wholesale pricing arrangements by providers, or spectrum use restrictions... With regulatory encroachments of this type, it's hard to track lost economic opportunity. It's hard to track investment diverted elsewhere. It's hard to track innovation that never happens.

 

To date, what is perhaps more important than any particular regulatory provision that touches on wireless are the premises the FCC has set down and their trajectory...If you look at the wireless competition reports, at least the last two or three, the FCC often describes its task as "pulling policy levers to create superior outcomes," and it does this without ever trying to establish that there are real competitive problems or market failure or that the market is somehow not effectively competitive. You can also see this in the Open Internet Order, paragraph 78, where the FCC rejects the idea that it should have to have actual evidence demonstrating market failure or consumer harm before it engages in regulation. Instead, it says it can just simply pursue broader purposes such as promoting free expression and things like that as the basis of new regulations.

                                               

I urge that wireless policy be approached with the kind of consumer welfare standard that the FTC applies when it looks at markets, where it tries to see if there is evidence of market failure or at least imminent market failure or harm to consumers, and if necessary the agency tries to target any kind of regulation to that kind of harm. I think that kind of standard should apply to any kind of rulemakings or agency conduct by the FCC of spectrum auctions or review of mergers, rather than come up with a series of ad hoc requirements or restrictions.

                       

The wireless market has been tremendously successful in segmenting itself to reach both high-volume, high-end users and low volume, price sensitive users. The wireless prepaid market is an excellent example of reaching the really price sensitive users...When you start tinkering with these usage-based models through regulation, what happens is you end up shutting out the ability of some of the price sensitive users to get the kind of targeted services they want.

                       

A minimal regulatory environment for wireless services would involve a revitalization of the idea or concept of Title I as a deregulated information service...We need to make Title I a deregulatory firewall from Title II-like restrictions... We need to make Title I status consequential when it comes to the FCC's Title III public interest authority as well... I'm not saying we need to seal off Title III completely because it involves the FCC's basic powers of licensing and prohibiting interference and things like that. But we should try and grasp for some principled limits on Title III for the future.

 

To the extent the USF program is out to serve low-income consumers, it's in some conflict with itself when it comes to wireless. We know low-income consumers are increasingly choosing wireless as their means of voice communications. We are seeing now these surcharges applied to wireless, but it's not in a vacuum. States and local governments already subject wireless to a number of taxes and fees that include state USF fees and state 911 fees that sometimes go to things completely separate and apart from 911 services. That can also include specific state telecom taxes that far exceed the state's general rate for sales tax. Tax reforms should be part of any broader framework for wireless policy.

 

ELLEN GOODMAN

 

The U.S. public media system is decentralized. Although people may think of national organizations like PBS and NPR, the vast majority of public media assets are in the hands of local nonprofits and universities. This is a weakness when it comes to infrastructure and content investment, too little to go around to too many. It's a strength when it comes to localism, diversity, experimentation, and sustainable business models... [I]nformation needs that the market does not satisfy are increasingly local. Think about the decimation of local papers and the decline of State House reporting. Moreover, information systems are increasingly structured as decentralized networks of nodes. The American public media system is already organized this way. It's a system that fosters ties laterally within a community among heterogeneous nonprofit institutions in the media arts, sciences, and education. This is in addition to the vertical ties between local studios and national networks.

 

The Public Broadcasting Act promised alternative, noncommercial service in every town. It promised innovation and communications infrastructure and applications as well as generous access to distribution. At the most basic level, the purpose of the Act and the billions of dollars that have been invested in public broadcasting stations, noncommercial broadcast spectrum, and the rest of the public media system, was to satisfy informational and expressive needs that the market could not. Understandably, in 1967, the Act attempted to achieve this through the broadcast platform. Not only that, but it assumed and ensured that each station would carry out every one of the system's essential functions. In other words, the Act is premised on the bundled delivery of infrastructure and content and everything else. As a result, legacy broadcasters still today are entitled to CPB funding largely without regard to performance. There is redundant capacity and functionality. There is an over-investment in broadcast infrastructure. There is an under-investment in new digital entrants who may be developing educational apps or doing the high cost, low profit local reporting that newspapers have abandoned.

 

[I]n 2012, Congress authorized public TV stations along with commercial stations to auction their spectrum for tens of millions of dollars. In the next 24 months, the television spectrum is slated to go out for sale. Twenty percent of this spectrum is in the hands of noncommercial licensees. This spectrum was set aside like park land for a public purpose. As the law currently stands, those spectrum assets may produce windfalls for lucky nonprofits or universities that choose to sell. CPB and Congress should consider whether these assets should instead be re-deployed for other non-broadcast public media purposes.

 

[T]he FCC is making room for hundreds of new noncommercial radio stations that will provide local and hyper-local service. These will begin to be licensed on October 15 of this year. They will not be eligible for CPB funding. It will be argued that CPB has limited funds and they should be dedicated to full power stations that cover larger territory. If, however, we were to think beyond broadcasting, we might consider a race to the top in public media. Let new entities, including new radio stations, compete for support and provide their service across platforms. The functional achievements of innovation, service, and access should be rewarded and extended.

                       

CHRISTOPHER YOO

 

Slogans are right now being used in this policy discourse in ways that I think are not constructive. They are used to obscure rather than enlighten. In fact, the inability to engage past those slogans has become a problem.... One slogan I love is that there is "one Internet" and there must be "one Internet" that is universally accessible to everyone. Now this is in direct contradiction to the idea that we always said the Internet is a network of networks. It is, in fact, not one network, and that creates a different set of problems.

 

[T]he Internet was born through the National Science Foundation, NSFNet, and at a time they had commercialization restrictions that did not permit commercial traffic to travel. So we created two Internets. We created the Commercial Internet Exchange to allow a different set of principles to apply. In fact, we have had baked in from the beginning a huge problem with segregating different types of service based on whether they were commercial or not and where they could pass. That's the beginning of a long legacy of needing different things from the network that has played out in many, many different ways.

                       

[W]e have a much more interesting topology with secondary peering and content delivery networks, CDNs. Right now, 80 percent of the traffic nodes can connect to each other without touching the public backbone at all. Apparently, some industry estimates say 25 percent of the traffic passes without touching the public backbone. We may also have a very, very different world in terms of how the interconnections happen. A much richer world that leads to a lot more interesting options, and curbs certain amounts of market power, creates advantages for other players in ways that are much, much more interesting than the simple slogan "one Internet."

 

[T]he implicit idea of why we need one Internet is because the Internet is supposed to get more valuable as it gets larger... I believe that statement to be profoundly false. On some level, there is a point of diminishing marginal returns... But more to the point, usage of the Internet is radically heterogeneous...[A] constant increase in size in the Internet is, in fact, not creating value. And to the extent to which it's creating congestion, it creates problems...The other thing we are starting to see is greater heterogeneity in applications.

 

If we insist there be one Internet, people who want the advantages of guaranteed quality service and can't get that by an Internet that's uniformly on one principle - the best efforts principle - will have no choice but to do private networking to guarantee their VoIP works properly or their video works properly.... Taking advantage of sharing bandwidth is the fundamental principle that created value on the Internet. If you can't get that out of the network itself and have to go to private networking as your only available alternative, we lose all those benefits.

 

In a way, we are rooted in this old discourse which creates a very backward-looking, conservative Internet policy that this existing architecture somehow has to remain unchanged and pristine.  People even say that because it's responsible for its past success, therefore, we should preserve it. But that is a logical statement only if you assume the fundamental conditions haven't changed... It is important to increase the level of sophistication to understand that the network has new demands being placed on it and has greater capabilities... We need a better understanding. Even if we are going to have people agree or disagree, we need to have a foundation of tools to have the discourse we need. We need to have an intelligent policy debate, instead of throwing slogans at each other in ways that don't lead to good policy and just sound good when you are quoted.

 

The slogan that there is one Internet relates somewhat to the Open Internet proceeding, but it relates to the broader question of Internet interconnection. Right now, what we are talking about primarily is network-to-network interconnection. In a brief footnote that is, charitably, unreasoned, it says that this order doesn't apply to paid peering. Basically, this order does not apply to the business terms under which networks interconnect with one another. That safely had the effect of taking the FCC out of the Level 3/Comcast dispute. But one of the problems is that by taking a duck there, what we are seeing is very, very different market topological structures that are now immune from the network neutrality proceeding. Whereas if you build a CDN and try to do direct payments with the last mile provider, that is still prohibited. That is a very, very strange world. All of a sudden we have created a regulatory bias towards one topological solution because the one person who can't charge for that is the last mile provider, whereas we could have it done through a series of contracts and it would flow through and be all right up until you get to the last mile.

 

What is much more important about saying we don't have one Internet is the latent proposal... to turn Internet interconnection into some version of telecommunications interconnection. That is based on the premise that we have one large international network and one large settlement mechanism with an IT regulation sitting across the whole thing... The idea that we would take wholesale the regime created for a different technology and a single application in a different world and cram it down on the new technology, however the chips would fall, would be accidental at best. More likely, it will be rather Procrustean.

 

The idea of creating one Internet naturally plays into the idea that there has to be a universal management system that ensures all the networks interconnect, and interconnect in a fair and equal way. Whereas we know in a system that's made up of 30,000 autonomous different networks bargaining through arm's length transactions, you're going to see tremendous heterogeneity in terms of the price and the quality and the interconnection points.

 

DANIEL LYONS

 

In 1998, as the present incarnation of the Universal Service Fund was getting off the ground, it was funded by a three percent surcharge on interstate telecommunications revenues. Today, that surcharge has risen to 16 percent. The surcharge is a tax... It's been even higher than that before. To put real dollars on it, it's an $8 billion annual cost to telecommunications users.

 

[T]he FCC is aware of the problem that the USF has been out of control and that there are incredible inefficiencies in the system. To its credit, over the past two years or so the agency has made significant progress toward taming this beast. In late 2011, we saw reforms to the High Cost Fund that at least purported to cap the Fund's growth and limit it to its existing size of $4.5 billion. The Commission put annual limits on the amount of support that receiving carriers can get per line... Lifeline reforms in early 2012 did a very good job of adopting common sense reforms to reduce corruption and inefficiencies in that system.

 

The Commission is at least trying to sort out the problem on the contribution side as well. More importantly, each of these efforts came with an overlay that seems to be shaping the Commission's policy in this area. That is, we need to take steps to shift from the voice network of the 20th Century toward more IP-based networks that are going to form the backbone of 21st Century networks. I think these reforms are courageous. They are really hard. The agency should be applauded. At the same time, this is just the tip of the iceberg.

 

[W]e should focus much more on the core mission of the universal service: giving low-income consumers access to the telecommunications network. That means providing assistance directly to consumers, not to carriers as their proxies. Focusing on narrowing the broadband digital divide, migrating from voice to broadband, is exactly the right focus. Secondly, it is important to recognize that the world is not the monopoly of Theodore Vail. Modern telecommunications systems are competitive. The reforms that we enact and the mechanisms that we put in place should be market-driven and react to that environment.

 

I suggest a very different reform to universal service, a program that is built around empowering low-income consumers to participate as equals in the telecommunications marketplace. On the subsidy side, the cornerstone would be a means-tested voucher system, like a telecommunications food stamp program. Eligibility for the program would be determined by means testing, similar to Lifeline... The consumer would have a choice of what service to buy, whether it be basic broadband access or a voice-only plan that would be presumably cheaper than broadband and, therefore, less out of pocket... The goal, as I mentioned, is to give low income consumers more purchasing power so they can participate like anybody else in the telecommunications marketplace.

 

For those who can reasonably afford telecommunications rates, even if they were to go up, we need to bite the bullet. We simply cannot continue to afford to subsidize what is effectively a lifestyle choice... The fact that housing prices are much higher in Manhattan than they are in Houston doesn't suggest that we need a federal housing subsidy for people who are living in the Manhattan area to make sure housing is equalized. We need to think of telecommunications in the same way. The costs are higher in rural areas and that is simply a tradeoff and part of the decision to live there as opposed to a more population-dense area.

 

The contribution side is the big issue the FCC is trying to tackle right now. And it is a big issue. The costs of the program are growing while the revenue base from which the program is extracted is shrinking. The FCC is engaged in a very complex and contentious debate: Do we expand the revenue base to include broadband access? Do we shift from a revenue pool to a tax on every phone number, a tax on every IP address? Perhaps the most eloquent solution is simply to make universal service a line item in the federal budget, like most other assistance programs. This puts a hard budget cap on the program and it moves the administration of the program from the murky semi-privatized USAC and puts it more under direct congressional oversight. It also avoids the market distortion of trying to tax some goods but not other substitutes in order to fund the program. And, finally, it has the benefit of not taxing and, therefore, making more expensive, the very service that you are trying to make cheaper and more affordable. The primary objection is that people don't have a lot of appetite for new entitlement, particularly in this Congress. It's important to recognize that this wouldn't be a new entitlement. It would simply be making an implicit tax that all of us are paying more explicit.

 

* * *  

    

FSF's new book, Communications Law and Policy in the Digital Age: The Next Five Years, is chock-full of many good reform-minded ideas for implementing a free market-oriented communications policy suitable for the digital age. There are essays by Christopher Yoo, Jim Speta, Bruce Owen, Michelle Connolly and other prominent scholars. You may order the book from Carolina Academic Press here, from Amazon here, or from Barnes & Noble here.

 

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