In a long, meandering, and hastily prepared statement released May 6, 2010, FCC Chairman Genachowski attempted to explain his rationale for imposing additional regulations on providers of broadband network access services. It is his response to a DC Circuit Court ruling setting aside FCC claims of statutory authority to pursue its net neutrality related regulatory ambitions. Its purpose is to explain the Chairman’s logical, public interest rationale for his, and presumably, the FCC’s continued pursuit of efforts to regulate rate and service offerings of providers of Internet access in the mode of traditional telephone common carrier regulation.

This ConsumerGram considers the logical, analytical and factual elements of the Chairman’s statement. It focuses on the “missing links” between what is proposed and a) the goals set out in the statement and b) the facts now before the Commission.

Introduction

Most of FCC Chairman Genachowski’s recent eight page, 3,000+ word statement is classic “Washington Speak” highlighting the obvious and emphasizing the extraneous, while shrouding the underlying purposes and implications of actions being taken. The Chairman mentions consumers one time and then in context of a declaration of market failure that is not supported by facts or analysis in the record: “Consumers do need basic protection against anticompetitive or otherwise unreasonable conduct by companies providing the broadband access service…” There is no mention of the well documented costs to consumers of the regulatory course of action he will pursue.

The Chairman repeatedly refers to long standing, consensus goals of national telecom policies – investment, competition, universal access, reliance on markets, primacy of consumer welfare, and others. He repeats approvingly almost word for word many of the talking points of advocates for free markets. Having done that, the remainder of the statement ignores the voluminous factual record on these matters submitted in response to several past Commission Notices about the negative impact on these goals of a more interventionist FCC approach. The Chairman nonetheless commits the agency to a course of action that will almost certainly undermine the cited goals.

The Missing Link

Notably missing from the statement is any link between means (more FCC regulation) and ends (more investment, more innovation, more competition, greater consumer welfare, etc.) The reason is in equal parts obvious and distressing. There is not a shred of evidence that more regulation – light, heavy or in between — will advance any of these goals. None. And, not surprisingly, the statement does not cite any such evidence, despite the Chairman’s repeated insistence that parties provide facts and analysis, while eschewing rhetoric and talking points, in support of their policy recommendations.

The Chairman is burdened by lack of evidence in the record linking more regulation to any of the goals he claims to embrace. With only rare exceptions, advocates of more regulation do not even attempt to provide linkages between regulation and consensus goals. They have chosen instead to invoke the need for and value of neutrality; of openness; of nondiscrimination; of mysterious network design principles; and other equally vague, immeasurable and fundamentally irrefutable notions. “Net Neutrality?” How do you argue against that other than by stating the obvious: Nothing is neutral!

The proposed rules the Chairman is defending here are not neutral and he makes no effort to defend them on those grounds. Indeed, the term neutrality does not appear in the entire statement, despite its use for years to characterize the very actions the Chairman intends. One reason the Chairman does not embrace the rhetoric of neutrality is because the proposed rules are clearly not neutral. The record makes clear that they create winners and losers.

Winners and Losers from the Chairman’s Proposals

The big losers are consumers. They lose in the first instance because the proposal requires that they, and only they, must pay effectively the entire bill for building out broadband networks. The rules supported by the Chairman’s proposal will prohibit broadband companies from reducing subscriber rates from revenues received by charging other stakeholders who use networks to create value for their customers. These include companies who provide, and derive revenue and profits from, services offered over broadband networks.

But the consumer damage is not limited to the requirement that they and only they are obliged to pay for the lion’s share of the costs of providing broadband networks. Consumers will be penalized further by delay in building out high capacity, universal broadband networks. Numerous investment analysts have concluded that the rules proposed by the Chairman will diminish returns to broadband investment and raise further questions about their long term financial viability of broadband fiber, wireless and hybrid networks. Higher costs, more delay, more uncertainty will lead to less investment, which of course translates into slower network expansion and delay in realization of the goal of universal, high speed broadband service adoption – the very goal so prominent in all FCC policy emanations. It is not clear how this benefits consumers or the economy more generally. No matter how you slice it, less broadband investment turns consumers into losers from the deal. The Chairman’s statement, while professing support of high rates of capital formation, simply ignores this basic fact.

The big winner is Google. Aided by pro-regulatory groups who have generally opposed Commission forbearance from regulating cable and telephone service provider, Google along with its companion providers of applications that ride on broadband networks – eBay, Amazon, Yahoo and others – are the driving forces behind net neutrality regulations proposed, if not named as such, in the Chairman’s statement. Read on to find out why.

The “Nondiscrimination” Proposals Discriminate against Consumers in Favor of Google

The key to the controversy, and the identity of winners and losers, is found in the Chairman’s pledge to apply only a “handful” of Title II Sections — 201, 202, 208, 222, 254, and 255. A handful? Aside from the transparent effort to minimize his regulatory intentions, it is beyond dispute that Sections 201 and 202, while less than a “handful” of the Act’s sections, are nevertheless the heart of the Act’s common carrier rate regulatory schemes. And, they are the slippery slope to tariffs, cost accounting schemes, and endless litigation over what constitutes a just and reasonable rate.

Notwithstanding his pledge to minimize regulatory creep and pursue a “narrow and tailored approach”, the Chairman will have little or no long run control over how regulation will evolve. That will be decided by his successor, by Congress and/or by the Judiciary. The Chairman, the Commission, and the Commission’s General Counsel have very limited discretion to pick and choose what parts of the law to enforce should they set out on the Chairman’s proposed path.

The motivation and implications for consumers of this whole exercise can be found in the application of Section 202 of Title II which forbids network providers to: “… make any unjust or unreasonable discrimination in charges…or services … or to make or give any undue or unreasonable preference or advantage to any particular person, class of persons…” (Italics added to the language of the Act.)

We all discriminate with every choice and decision we make. The issue that will be placed repeatedly before Commission under the Chairman’s proposal is where and how to draw a bright dividing line between what is just and reasonable discrimination or preference and what is not — in the context, not of ethnic or racial or social preference, where the line is pretty distinct, but in consideration of thousands of business decisions and activities which will inevitably favor and disfavor some “person or class of person.”

Under Net Neutrality rules the Chairman is proposing, the Commission does indeed draw a bright line between some kinds of discrimination, which it bans, and other types which it pledges to bless. The Commission’s Rulemaking Notice last year indicates the nature of its intention to enforce the nondiscrimination provision – and the differences in application to different stakeholders. Consider the following taken verbatim from the recent FCC Notice of Proposed Rulemaking (with italicized parentheticals added):

“Subject to reasonable network management, a provider of broadband Internet access service must treat lawful content, applications, and services in a nondiscriminatory manner…” (Translation: In some cases discrimination is permissible; in some cases not!)
“We understand the term ‘nondiscriminatory’ to mean that a broadband Internet access service provider may not charge a content, application, or service provider for enhanced or prioritized access to the subscribers of the broadband Internet access service provider…” (Translation: It is bad discrimination if access providers charge different applications or content providers for improved service quality; or, alternatively, to offer a lower price for a lower quality of service.)
“We propose that this rule would not prevent a broadband Internet access service provider from charging subscribers different prices for different services.” (Translation: It is OK to discriminate among–charge different rates for different service quality to — consumers who subscribe to Internet access services.)

No matter how you read it, the FCC’s proposed nondiscrimination rule a) will not apply to charges to consumers, b) may apply in the case of network management practices and c) will absolutely apply so as to prevent broadband operators from offering prioritized service to a content or application provider who might so desire; or, to offer at discount a reduced QoS version.

Under these rules network operators can charge consumers for preferred service, but are forbidden to do the same with respect to content or applications providers. The Commission is in essence commanding a zero price rule in the context of a two sided market for one side of the market (applications, content providers), but permitting full operator pricing discretion for the other side (subscribing consumers).

Informed Consumers Would Like to Know! Why?

How does this differentiation in rules, or discrimination in favor of applications and content providers, benefit consumers? Fair question, but the record contains no answers from regulatory advocates who prefer instead to retreat to the secure, if blurry, confines of rhetoric about the value of openness and neutrality. In context of arguments about “neutrality”, how is it “neutral” to permit network providers to discriminate among their subscribers, while preventing the very same conduct with respect to providers of applications, like Google, who derive enormous value from the networks that are indispensable to their business?

Why is protecting Google and other applications and content providers more important than protecting consumers from the same set of pricing practices? Why do Google and other applications or content providers deserve a zero price for increasing service quality? How does that create value for consumers to offset the losses they suffer from the prohibition on conventional two-sided market pricing practices? If it is permissible to discriminate among subscribers, why is it bad to do the same with respect to applications providers? Why is one presumptively unfair, unjust, and unreasonable, while the other is just fine, thank you? How does this rule advance our global competitiveness and preserve the Internet as a powerful platform for innovation, free speech, and job creation. How does it contribute to any of the following objectives listed by the Chairman?”

• Extending broadband communications to all Americans;
• Protecting consumers and promoting healthy;
• Empowering consumers to take control of their personal information;
• Lowering the costs of investment; 
• Advancing the goals of protecting Americans against cyber-attacks;
• Safeguarding consumers’ right to connect with whomever they want; and
• Improving our education and health care, and helping deliver a clean energy future.

The answer is simple. It does not. These are not rhetorical questions. They deserve answers from public officials who are charged with acting on our behalf. But, none are to be found in the Chairman’s statement. And that is the missing link between the proposed FCC policies and our national goals; between means and ends; and, between fact and fantasy. No amount of fuzzy reference to the value of neutrality or openness or the like can answer these questions. But, informed consumers want to know and every citizen deserves it.

Posted May 7, 2010

For a printable (PDF) version click here –> cg-on-genachowski-statement-final.

(Published in the Milwaukee Journal Sentinel, April 24, 2010)

Net neutrality. Who could be against that? What’s the fuss all about?

Fair questions all.

Readers will ask: If net neutrality is neutral, why should consumers care? The answer is: Many consumers will be harmed.

Informed consumers will ignore rhetoric and high-sounding terms such as network “neutrality,” “openness” and “network design principles.” They will ask: What does it mean for me? What impact would the rules have on whether I get broadband service, when, what quality and at what price?

(To Read the full article visit … click here)

            It restates an oft-ignored truism – that the FCC is the agent of consumers and voters via power granted on their behalf by Congress.  It emphasizes:  a) notwithstanding volumes of commentary and opinion by stakeholders, consumers are not clearly and fairly informed of either the core issues or the stakes involved; b) whether or not the FCC has authority under existing law, resolution of the jurisdiction  issue will take a long time and foster an environment of uncertainty; c) even if the Courts agree that the FCC has the necessary authority under current law, administrative and legal resolution of assorted issues that now divide politically and economically powerful stakeholders will consume resources and time in ways that will thwart achievement of the National Broadband Plan. Time consumed by FCC rulemakings might well span generations of “Internet Time” and would put on hold investments and innovations that otherwise make good business sense and serve consumers’ needs.    …. Click here to read the entire-piece

Washington, DC (November 11, 2009) – Emphasizing its agreement that the FCC “…must be guided by evidence, not rhetoric,” the American Consumer Institute today released a point-by-point report refuting the claims about investment and regulation made by Free Press. Given the close relationship between broadband network investment and consumer welfare, ACI found the Free Press contentions particularly hostile to current and potential network subscribers and misleading as a basis for emerging national broadband policy. In its critique — “The Informed Policy Maker’s Guide to Regulatory Impacts on Broadband Network Investment” — ACI called attention to fundamental errors by Free Press in logic, facts, financial accounting practice and long standing principles of real investment. ACI’s report concluded:

• A basic principle of finance is that regulatory risk will tend to reduce investment;
• It is nonsense to claim, as Free Press does, that network providers are “disinvesting” or that they “boost profits” by reducing investment; and
• Returns on investment in applications and services are directly and critically dependent on the growth and quality of networks.

ACI Fellow Larry Darby noted: “I can find no basis in history, financial principles, commonsense, or in the Free Press’ paper for concluding that proposed net neutrality regulations will have no impact on broadband network investment.” A copy of the report is available here — fp-report1

How “Cozy” is the BB Duopoly?

PFF Congressional Seminar:

“Broadband Competition: Is the Glass Half Empty or Half Full?

Delivered on June 12, 2009

**************************************************

Thank you.

· I want summarize some results of our ongoing work, from a consumer welfare perspective, What kinds of tests for market failure should suffice to warrant imposition of common carrier regulation in this sector?.

· The late senator Daniel Moynihan observed that folks are entitled to their own opinions, but not their own facts. So it is in the debate over private and public sector roles in the National Broadband Policy.

· In the next few minutes I will add some facts to some widely expressed opinions on one issue in that debate: the importance of (duopoly) market structure in the provision of broadband services.

First some opinions:

Opinion Number One. The FCC has allowed a cozy duopoly of telephone and cable companies to dominate the broadband access market…The reliance on this cozy duopoly has been disastrous for the United States…Consumers pay too much for too little.” (CFA)

Two. [Broadband] Prices are well above cost-plus reasonable profit; investment is withheld until absolutely needed; innovation is actively discouraged; and consumer welfare suffers. (CFA, CU)

Three. “…when a market has fewer than the equivalent of six equal-sized competitors, the market just doesn’t function properly. The FCC has ignored the mountains of evidence that our broadband markets are concentrated, anti-competitive, and fundamentally broken. (Free Press)

No matter how you interpret these opinions they say: “Nevermind what kinds of market conduct we observe or performance we can measure, the problem is in the structure; the duopoly; the cozy duopoly. (I looked up cozy to make sure I did not mischaracterize the suggestion. My Thesaurus suggests warmth and ease, contentment and comfort, family like intimacy, close association, discreet and cautious attitudes, connivance.)

These are opinions. But we obliged to ask: “Where’s the Beef?” What are the facts.

No reasonable, objective, well informed observer would suggest any form of collusion between cable and telco BB providers (every indication is that they are aggressive rivals in the voice market, in the data market and in the TV market marketplace and on many policy issues such as franchising and access to programming); or that there is no innovation in the sector (switching, transmission, digitization, bandwidth expansion) ; or that firms are “rationing” capacity (Wall Street suggests the contrary); or restricting supply in order to fetch higher prices (firms expanding output in response to demand) ; or to discriminate in ways to create market power; or that there is excessive profit in the sector (I will return to that in a moment).

The economic case for common carrier regulation is sometimes refers to two events of market conduct (Madison River service denial and Comcast traffic management); or international differences, but proponents’ case for regulation ultimately turns on market structure – duopoly. In fact, the principal corporate force behind the call for common carrier regulation explicitly stated as much:

The broadband problem….. “is the market itself, rather than in a roster of actual and potential “bad acts.” In other words, the flaw is structural, not behavioral.”” (Google)

With that in mind let me review with you quickly from six different perspectives some facts about duopoly and its threat, without regard to conduct or performance, to economic welfare. These views are 1) the neoclassical industrial organization view, 2) views from game theorists, 3) Outcomes from experimental economics, 4) evidence from other sectors served by two dominant firms, 5) what competition policymakers have to say and 6) some evidence of performance of the BB duopoly. These contrast sharply from the views expressed in law journals and Net Neutrality advocates.

1. Neo Classical Industrial Organization View. A fair assessment of scholarly work on the topic suggests no support for equating duopoly with market failure. The author of one well know textbook concluded his review as follows: “Economists have developed literally dozens of oligopoly pricing theories – some simple, some marvels of mathematical complexity. This proliferation of theories is mirrored by an equally rich array of behavioral patterns actually observed…Casual observation suggests that virtually anything can happen….” Indeed the only conclusion from oligopoly theory is that it is inconclusive.

On the Structure-Conduct-Performance framework more generally, it is well established that it may be a useful way to organize and describe our research, but that there are no reliable cause and effect relationships observable. In short, structure does not predict either conduct or performance and cannot alone provide a basis for government action.

2. Game Theory “ The reviewer for the IO survey concluded: Having warned the reader at the outset that there are many theories of oligopoly, I am left with the task of identifying the lessons learned from the collection of models discussed above…What we are in need of most now are further tests of the empirical validity of these various theories of strategic behavior.” (A clear concession of the indeterminancy of game theory models, and I might add of the work of what I call the Post Chicago Conjectures about strategic behavior.) But, we should not be surprised. Over forty years, and thousands of articles in journals of law or economics, ago, Nobel Winner Stigler wrote: “No one has the right, few the ability, to lure economists into reading another article on oligopoly theory without some advance indication of its alleged contribution.

3. Experimental Economics The behavior of oligopolists in general and duopolists in particular has been the subject of considerable interest and analysis by experimental economists. A recent survey article identified more than 150 published papers dealing with one or more different experiments designed to test the market behavior (mainly price and quantity of output) of oligopolists – mainly duopolists – under more than 500 different parameter constellations.

On the issues here today, the results can be easily summarized:

• Duopoly behavior is highly circumstantial;
• Conduct and performance vary along a continuum bounded by perfect competition and perfect monopoly;
• Many of the experiments had indeterminate outcomes;
• Many of the results were weak and not significant statistically; and, finally
• A surprising number of the outcomes were inconsistent with received theory and our economic intuition.

4. Evidence from other sectors served by two dominant firms. Duopoly (top two firms with 80% or more share of the relevant market) is surprisingly common in the general economy. It is everywhere in small to medium sized communities and in rural areas in particular. And, it is quite common among well known national brands. We have identified about 30 duopolies and are examining the “effectiveness of rivalry” in them and more particularly any evidence market failures sufficient to warrant substantial government involvement in constraining or obligating market behavior. These include:

• Moodys and S&P
• Fed Ex and UPS
• Pepsi and Coke
• Macys and Gimbel Department stores
• Home Depot and Lowes
• Kodak and Fuji Film
• MCI and AT&T in the early days
• Lexis/Nexis and WestLaw
• Dish Network and Direct TV
• Air Canada and Westjet in the Canadian Air transport market
• Gillette and Wilkinson Sword
• AirBus and Boeing

Are these markets perfect and without flaws? Are they replicas of the BB duopoly? Of course not. But a fair assessment of the usual indices of market conduct (behavior toward rivals and consumers) and performance (profits, progress, innovation, etc.), there is no support for the proposition that duopoly requires government intervention. There may be such evidence, but it is not in the behavior of duopolists in other sectors.

5. Views of competition policymakers? Our paper cites numerous quotes from DoJ, from FTC, from European and Asian competition policy authorities, as well as to judicial language from the Supremes and lower courts. But, the bottom line is the absence of a scintilla of support for connecting market structure per se to unacceptable performance.

6. Some evidence of performance of the BB duopoly. We have adduced lots of evidence about the actual performance of the BB duopoly of telcos and cable, but

finance-chart

Excessive profits? Margins of BB suppliers in line with the S and P 500 for 2008 and on average for the past five years.

Excessive returns to shareholders? Returns on invested capital for BB suppliers are well below the S&P average for 2008 and on average for the last five years.

Suppressing investment? Broadband duopolists ploughing back over 60% of cash flow from operations into capital expenditures. That is well above the average from our sample of S and P 500 companies. The two largest BB investors in 2008 (VZ and T) combined for about five times the amount provided to NTIA and RUS in the BB stimulus package.

Jobs? BB suppliers use substantially more labor for dollar of output than the S and P average. Thus, a shift of revenue to the BB access provider sector from others will create more jobs, which of course is precisely the point of the BB stimulus package.

There is more. But, we have not been able to find economic evidence of conduct or performance measures that suggest market failure or signal what kinds of regulations might improve BB performance.

What are the implications of all this?

First, our message to believers and advocates of the view that duopoly is the problem is drawn from Casey Stengel. You should as we have “Look it up!” There is no evidence to support a structuralist view of the need for common carrier regulation. The evidence we find suggests the Scotch Verdict: Case not proven.

Markets are imperfect, but so too are government regulatory programs. Again, you can look it up. In our paper we emphasize the differences in type one and type two errors, that is the costs or regulating too much v. regulating too little. This work paired with the findings of others who have studied the costs of regulation suggests that imperfect government is likely to be more costly to consumers than the market imperfections they are designed to address.

Our work has implications for ex post v. ex ante regulation. In English, between passing rules to ensure that nothing bad happens vs. waiting to address market failures one by one as they arise. (In that regard I refer you to the well reasoned FTC staff report.)

We have found nothing of consequence to support a case for common carrier regulation based on market structure, nor on international comparisons, nor on two or three instances of market conduct. Commonsense suggests that it must be based on a thorough consumer welfare oriented cost-benefit analysis of the conduct and performance of markets AND of the well known infirmities of government efforts to manage competitive processes.

Ms. Sharon Gillett, Chief
Wireline Competition Bureau
445 12th St., SW
Washington, DC 20554

Regarding the Pending Net Neutrality NPRM

Dear Ms. Gillett:

This letter is motivated in large part by Chairman Genachowski’s recent announcement of his intention to launch a rulemaking to strengthen and extend the Commission’s Net Neutrality principles. Its purpose is to raise some issues and suggest specific terms of inquiry that we believe will assist the Commission in its solicitation of the facts and analyses it must have to devise consumer-centric rules.

We commend the Chairman and the Commission for undertaking to resolve issues growing out of various contentions about the value of “net neutrality,” “open networks,” “nondiscrimination” and how best to assure their attainment without imposing barriers to achievement of other Commission goals. Addressing these new, yet-to-be defined objectives in the context of other long standing, statutory goals — fostering investment and innovation, encouraging universal network availability, maintaining low rates for network services, balancing the advantages and disadvantages of markets and regulation – is a monumental undertaking that will shape the development of one of our greatest economic and social assets – the Internet.

We are delighted by the Chairman’s insistence that data and analysis be provided by all stakeholders – both defenders of the regulatory status quo and proponents of regulatory change – and hope that the Commission’s able core of staff analysts will accord no decisional significance to the rhetoric, opinion, jargon, “factoids,” historical revisionism and unsupported conjecture that frequently creeps into what purports to be policy analysis.

The Commission already has a rich record, full of reliable facts and analysis germane to “net neutrality.” The record has been compiled in the context of stakeholder responses to earlier proceedings that raised issues and posed questions that will be quite material in the new rulemaking. Notable in this respect are notices related to Commission efforts to formulate a National Broadband Policy; to explore the operation of markets for wireless services; and to gather information on investment and innovation in wireless markets. In addition, the Commission has adduced a voluminous record, much of which reaches issues likely to be raised in the context of “net neutrality”, in previous years in proceedings related to, among others, universal service, intercarrier compensation, spectrum licensing, and regulatory forbearance. Again, we urge the Commission to comb the public responses in those proceedings for data and analyses bearing on the new, proposed net neutrality rules. There is much of value there.

While there is much in the current record to inform new rules, we believe that inclusion of the following suggested terms of inquiry would be helpful in complementing and expanding the record – and do so in keeping with the Chairman’s pursuit of facts.

1. What should (will) be the specific public policy goals and figures of merit for evaluating alterative courses of Commission action in this proceeding? The FCC has enormous latitude under the Communications Act to frame the four corners and depth of the “public interest,” which it is generally obliged to advance in all its rulemakings. The expansive bounds of that latitude have been reflected in changing emphasis over the years in one rulemaking to the next as the Commission alters the elements included in the public interest, as well as the weights accorded individual ones.

The Commission should consider the impact of its proposed rule changes on our macroeconomic performance. This is especially important given a) our current macroeconomic distress, reflected in continuing loss of jobs, low growth prospects, stagnant productivity and other negative indicia of economic performance and b) government wide efforts to find ways to stimulate the economy, including providing funds to stimulate broadband deployment. In this context, it is entirely appropriate, if not obligatory, for the Commission to consider the potential impact of “net neutrality” proposals on the economic performance of the economy – economic growth, productivity in other sectors and, of course, job preservation and creation. It is well established, and frequently recognized by the Commission, that broadband networks and services have enormous potential for stimulating economic activity, including jobs, in other sectors. Whatever benefits may be attributable to FCC regulation in pursuit of “net neutrality” ought to be judged in terms of their impact on the broader economy. Relatedly, the impact of the proposed rules on closing the bothersome and highly publicized “digital divide” – reflected in millions of “unserved” or “underserved” households — should be assessed.

“Universal service” has been a goal for over seventy-five years, but within that context a variety of other objectives have been identified – investment, fairness, innovation, level playing fields, competition, efficiency, transparency, real income re-distribution, closing the “digital divide,” fostering technological advance, and eliminating rate structure subsidies to name just a few. It is critical for the Commission to be definitive and clear about the goals it is pursuing in this proceeding, while making clear how the means of assuring an “open” Internet mesh with other legacy goals.

2. Where are the specific market failures to be addressed? What role does concentrated market structure play in the case for regulation? What has been the overall record of performance of Internet access providers and relatedly what are the main elements of unsatisfactory performance that will be addressed and remedied by the new rules. Our sense is that the evidence of market failure is based largely on the concentrated structure of markets for Internet access and three or four cases of operator “misconduct”. While natural monopoly has long been a consensus rationale for rate and service conduct regulation, there is little factual basis in the record demonstrating that market concentration (a characteristic widespread among sectors of the Internet Value Cluster) is sufficient basis for regulation. At the end of the day, consumers care about market performance and the Commission’s inquiry should reflect that concern.

3. What, if any, potential “government failures” should the Commission guard against? Many advocates will call attention to the case for free markets, as they have traditionally done in a wide variety of regulatory proceedings. While the case for markets has been expressed in both empirical and theoretical terms, the infirmities of government regulation are often merely implied or mentioned in passing by reference to unanticipated or unintended consequences. Advocates often refer generally to regulatory lag, regulatory uncertainty or regulatory capture by special interests. However, the Commission could usefully insist on a full briefing by stakeholders – facts and analysis – of concerns about imperfections in regulation, potential “failure”, or costs attributable to well meaning government actions to offset whatever market failures it finds. In this context, Professor Stiglitz, formerly Chairman of the President’s Council of Economic Advisors recently wrote:

“Anyone who has watched the U.S. government in the last seven years is well aware not only of the possibility of government failure but also of its reality. In some cases it is a matter of incompetence, in others of corruption, in still others it is a result of ideological commitments that preclude taking appropriate actions. In some cases it may be hard to distinguish the relative role played by each. Government programs can be subverted.”

4. What are the costs and benefits of alternative courses of Commission action? Numerous regulatory scholars, analysts and practitioners favor cost-benefit analyses as means to evaluate regulations. No Commission action, or inaction, is neutral inasmuch as the exercise of any policy alternative will create both costs and benefits. These will fall unequally on different supply-side stakeholders; on different classes of users and types of consumers; and be realized in a variety of ways. Focus on costs and benefits makes imperative a clear statement of goals and purposes which can provide frames of reference for assessing costs and benefits – innovations encouraged or foregone, jobs created or lost, investment incented or discouraged, broadband network diffusion accelerated or delayed, consumer welfare destroyed or created. Any rule change imposed by the Commission will do some of each and the Commission’s analysis will, hopefully, reasonably assess all appreciable costs and benefits – particularly those to consumers as a whole and to different demographic categories — attributable to its actions.

5. How should “openness,” neutrality,” “nondiscrimination,” and other notions reflected in concerns expressed by Internet stakeholders and policy advocates be defined? How can the definitions be made operational in ways that draw bright lines between what is permitted and what is not permitted? The Commission’s new rules will likely mandate certain operator behaviors while forbidding others. The record of controversy to date makes it is almost certain that whatever new rules the Commission adopts will be challenged in Court and that final resolution of the rules as guides to firm behavior, investment and innovation and other critical management decisions, will during that period be subject to considerable uncertainty. Such regulatory uncertainty can be particularly costly in this dynamic sector in which technology, tastes, market structures, and other technoeconomic conditions are changing so rapidly. Given the technological dynamism and rate of change in the marketplace, regulatory uncertainty is a barrier to consumer and economic welfare-enhancing innovation. Clarity in definition, intent and applicability of any new rules is needed to minimize these potential costs.

6. What impact will the new rules have on the growth rate of penetration of broadband Internet usage? What impact will they have on the rate of diffusion of innovations made by applications and content providers or on the goals set forth in the Commission’s NOI in re: constructing and national broadband policy? The Commission has made clear its concerns about innovation and the diffusion/market penetration of Internet technologies in previous notices, in particular those regarding a National Broadband Policy, the state of competition in wireless, and investment/innovation in wireless. Any new rules implemented in the name of net neutrality, open networks or related objectives will very likely have a significant impact on innovation, investment, and the pace and overall character of broadband deployment. The record to date is deficient and can usefully be improved with more facts and disinterested analysis.

7. What impact will alternative rules have on rates paid for Internet access by consumers in the aggregate; on prices paid by different classes of consumers; and, on the rate of penetration? These questions are raised in the context of the Commission’s pursuit of a National Broadband Strategy or Plan, but can usefully be put in the more specific context of discussion of the net neutrality regulations.

8. What have been the major Internet-related innovations in recent years? Are these in the core or on the edge? What (level of) benefits have accrued from each? How if at all have they been encouraged or hampered by regulation? What effect will the proposed rules have on this aspect of sector performance? So far as we can discern, there is insufficient evidence in the record to date in support of various claims about the source of innovation, its value to consumers, and the impact of regulation on incentives and likely performance of different members of the Internet Value Cluster (providers of networks and components, applications, and content). Given the importance of innovation to Internet users and to other sectors of the economy via external stimulus from the Internet, it is imperative for the Commission to develop a strong factual and analytical record on this point.

9. What specific wireless market failures require regulatory remedies? To what extent will evolution of the wireless market place either magnify or ameliorate those concerns? What if any costs to the consumers related to rates, options, service quality, innovation or other regulatory objectives might reasonably be expected to offset the expected benefits of regulation to the wireless sector. The Commission has ongoing a separate proceeding designed to address current performance of the wireless sector. It is well known that the principal innovations in wireless networks take the form of, and have the practical impact of, utilizing scarce bandwidth more efficiently. As bandwidth scarcity becomes more acute as a result of booming growth in demand for bandwidth intensive services coupled with lagging availability of new spectrum, it is imperative for the Commission to understand fully the impact of any restrictions, in the name of net neutrality, on the ability of wireless operators to manage their networks in ways to assure maximum throughput and efficiency.

10. What role do price discrimination, service discrimination and, more generally, differential treatment of different customers play in other IT sectors; in other sectors of the economy? What are the costs and benefits to consumers in the aggregate; to individual consumers? What makes the Internet access provider sector worthy of discriminatory regulatory treatment among firms in the Internet Value Cluster in this regard? A key question in this context is the extent to which consumers or users in general place equal value on all content and the extent to which carriage of all content occasions the same costs – conclusions clearly implied by a requirement to treat all traffic and content the same. In the event of excess demand for bandwidth – that is in circumstances where there is a shortage of bandwidth – what are the alternative means for allocating available bandwidth and what are the (de)merits of each?

It may well be that the Commission would specify these points of inquiry in its impending Notice of Proposed Rulemaking. However, given their importance, in our view, we believed it worth the effort to spell them out and suggest their inclusion.

Respectfully submitted,

Larry F. Darby, Senior Fellow
The American Consumer Institute
Center for Citizen Research
1701 Pennsylvania Avenue, NW
Washington, DC 20006
Darby@theamericanconsumer.org

CC: Chairman Julius Genachowski
       Commissioner Michael J. Copps
       Commissioner Robert M. McDowell
       Commissioner Mignon Clyburn
       Commissioner Meredith Attwell Baker
       Ms. Ruth Milkman, Wireless Bureau Chief
       William T. Lake, Media Bureau Chief
       Paul de Sa, OSP Chief