Six years ago, the Phoenix Center released (and later published) a paper entitled Network Neutrality and Foreclosing Market Exchange: A Transaction Cost Analysis.  In that paper, we analyzed the effects of network neutrality proposals that foreclose or severely limit market transactions between content providers and broadband service providers.  Our model revealed that under plausible conditions, rules that prohibit efficient commercial transactions between content and broadband service providers could, in fact, be bad for all participants: consumers would pay higher prices, the profits of the broadband service provider would decline, and the sales of Internet content providers would also decline.  As a result, such proposals would eliminate the potential for efficient, voluntary, welfare-improving market transactions.   

Notwithstanding our warning, such proposals were eventually formalized in the FCC’s Open Internet Order.  Significantly, while the FCC’s Open Internet Order prohibits such transactions for wireline networks, the Open Internet Order does not block voluntary deals in the mobile broadband sector.  Given this opening in the rules, a real-world attempt to exploit this exception was inevitable.

As fate may have it, we now have anecdotal evidence of such an attempt.  To wit, the Wall Street Journal just reported that ESPN is discussing with at least one mobile wireless carrier a deal that allows the cable sports channel to subsidize consumers’ wireless data plans.  Video content is bandwidth intensive, and the usage charges incurred for mobile data properly incent consumers to consume bandwidth rationally.  Consequently, to the consumer, ESPN’s content—which is largely streaming video of sporting events and news—is more costly to consume at the margin.  Demand slopes downward, so the higher cost leads to lower consumption.  Since ESPN is partly in the business of selling eyeballs to advertisers, the reduction in the use of its service cuts into profits.  Likewise, since consuming ESPN’s video is desired by consumers, the reduction in demand for ESPN over mobile networks also reduces the demand for mobile data plans, reducing the profits of the mobile data provider.  With both ESPN and the data networks hurt by the opportunity cost of bandwidth, there’s a win-win possibility for a voluntary market exchange. 

In the ESPN deal, it appears that the arrangement may remove ESPN’s bandwidth from inclusion in the monthly data cap, a move that frees up the bandwidth allotment for other forms of content.  Since the ESPN deal takes its content off the meter, in effect we have ESPN paying for a higher data cap for subscribers of its content.  Of course, consumers are permitted to increase their limit or buy data above their limits, and this approach may arguably serve the same purpose as the transaction between ESPN and the carrier.  For example, AT&T charges $10 per GB over the customers subscribed data cap.  It appears that streaming a football game on a mobile connection could consume 0.6 to 1.2 GB (about $10 per game). 

However, a consumer buying more data is unlikely to be the same deal as a direct content-to-carrier arrangement.  First, the consumer is unlikely to know how much bandwidth is being consumed, and in my opinion, most consumers would prefer a service that says “ESPN is unlimited.”  Second, while I have no insight into the negotiations, I suspect that the ESPN-carrier deal will have a price below $10 per game (i.e., about 1 GB), in large part because of the relative efficiency of an arrangement between two large and well-informed parties instead of between millions of mostly uninformed parties.  Thus, by allowing the deal to occur between the content provider and the broadband service provider (rather than consumer and provider), the total cost of the arrangement is reduced, creating additional surplus.  The ESPN deal will be an eco-system-wide price reduction; a result consistent with our theoretical model from 2007.

In the press release of a later work—Non-Discrimination or Just Nonsense—I was quoted as saying, “… the FCC’s proposed rule will likely block efficient voluntary transactions and block quality improvements.  When that happens, consumers and content providers lose. Eventually, it will be the content sector pleading for the elimination of this rule.”  The ESPN deal shows why this is true.  Everyone stands to gain from the better management of capacity and congestion, so there are opportunities for surplus-creating exchange.  Voluntary transactions in the less regulated mobile sector can increase consumer welfare, but such potential unfortunately remains bottled-up in the wireline sector as a direct consequence of the Open Internet Order. 

Certainly, it is the job of regulators and antitrust officials to monitor markets for anticompetitive activity, and at a high level the concept of “openness” of the Internet is sensible.  But one cannot regulate or mandate “openness”—it is an idea, not a policy.  Policies are legally-defensible and written rules that direct specific action.  Policies are also not limited to the actions involving the purported target activity, but produce evasive responses and alter the incentives across the entire ecosystem (e.g., the Open Internet Order will likely, at the margin, shift investment to wireless from wireline networks).  Regulators of the ever-evolving Internet, perhaps the most important general purpose technology of our day, should not be enticed to act for the sake of claiming action on a sexy topic.  Outright and ex ante prohibitions on voluntary transactions between the content and network layers is, in my opinion, exactly that.

The Internet, and the concept of network neutrality, deserve better.

]]> http://phoenix-center.org/blog/archives/1389/feed 0 http://phoenix-center.org/blog/archives/1356 http://phoenix-center.org/blog/archives/1356#comments Thu, 02 May 2013 16:01:28 +0000 Larry Spiwak http://phoenix-center.org/blog/?p=1356 Read more →]]> Over the past several years, there have been numerous efforts to improve the practices and procedures used at the Federal Commissions Commission.  However, of all of the potential improvements bandied about, I submit that there is one improvement that has been entirely overlooked and needs immediately implementation:  that is, the repeal of Section § 1.1204(6) of the FCC’s ex parte rules, which provides that the Commission and the Department of Justice (“DOJ”) can meet in secret as often as they like—without having to file anything into the record about the date of the meeting, who attended the meeting and what was discussed—just so long as “any new factual information obtained through such a presentation that is relied on by the Commission in its decision-making process will be disclosed by the Commission no later than at the time of the release of the Commission’s decision.”  While I am in favor of “inter-agency” cooperation as much as the next guy, I believe allowing the FCC and DOJ to meet secretly during the course of a formal FCC proceeding raises some legitimate due process concerns.

First, as I set forth in my law review Separating Politics from Policy in FCC Merger Reviews: A Basic Legal Primer of The “Public Interest” Standard, the DOJ and FCC have very different roles and very different statutory mandates.  For example, the Department of Justice is a law enforcement agency in the Executive Branch responsible for enforcing the U.S. antitrust laws.  As a law enforcement agency, they are empowered with detailed and strong investigative tools, such as the Hart-Scott-Rodino Act.   In contrast, the FCC is an independent regulatory agency charged with administering the Communications Act and bound by the precepts of the Administrative Procedures Act.  Thus, simply put, while much of the DOJ’s information comes, by definition, from a confidential, investigative process, the FCC’s process is specifically designed to develop a public record upon which interested parties may comment and participate in the proceeding.  Allowing the FCC secret access to such confidential extra-record information—even if the agency never officially relies on such information in the final rule or order—could bias the agency’s ultimate determination.  Worse, as the affected parties participating in the FCC proceeding have no idea what this confidential information is, or whether this confidential information is even accurate, it is impossible for the parties to present a meaningful response.

More to the point, while both agencies certainly have their core competencies, it is important to recognize that the standard DOJ Merger Guidelines antitrust approach may not always be 100% applicable to FCC deliberations.  As the D.C. Circuit stated in United States v. FCC, the “basic goal of governmental regulation through administrative bodies and the goal of indirect governmental regulation in the form of antitrust law is the same—to achieve the most efficient allocation of resources possible.”  According to (now) Supreme Court Justice Stephen Breyer, these goals are “low and economically efficient prices, innovation, and efficient production methods.”  However, just because antitrust and regulation share the same goals, it does not a fortiori mean that an antitrust-type of analysis should be dispositive of whether regulation is appropriate given, in the Supreme Court’s words, the “particular structure and circumstances of the industry at issue.”  In fact, as we have shown here, here, here, here and here, using a textbook antitrust-type of analysis may actually improperly tip the scales in favor of regulatory intervention even when a cost/benefit analysis would dictate the opposite result.  For this reason, it is black-letter administrative law that all the FCC must do, in the exercise of its responsibilities, is to “make findings related to the pertinent antitrust policies, draw conclusions from the findings, and weigh these conclusions along with other important public interest considerations.”

Second, if you allow the DOJ to be exempt from the FCC’s ex parte rules, then where do you draw the line for secret contacts from other government agencies?  Under the FCC’s view of permissible secret inter-agency cooperation, that line is quite squishy.  For example, under the FCC’s current ex parte rules, the Federal Trade Commission—as the other antitrust enforcement agency—is also exempt.  Similarly, under Section § 1.1204(5) of the FCC’s ex parte rules, any other “agency or branch of the Federal Government” that “share[s] jurisdiction” with the FCC is exempt.  (I guess this wide berth deliberately leaves out state public utility commissions or state attorneys general.)  However, if “shared jurisdiction” is the litmus test, then what about direct contacts from members of Congress or from the White House?  For an independent administrative agency bound by the Administrative Procedures Act’s precepts that it must make decisions based on the public record before it, the slippery slope of government abuse here is steep.

Third, by allowing such secret inter-agency cooperation, you increase the risk of politicizing the deliberative process, whereby one agency can use the “expert” imprimatur of the other agency to achieve coordinated policy goals.  If you think I am kidding, let me give you two recent examples.

By the Department of Justice’s own admission (see here and here), the Department worked in “close coordination” with the FCC to block the merger between AT&T and T-Mobile.  While the public (or the parties to the merger for that matter) will never know the full extent of how close this “close coordination” actually was, we do know this:  While the two agencies were conducting their respective reviews of the merger, in August 2011, the DOJ filed a formal complaint to block the AT&T/T-mobile merger in federal district court.  Given that the “close cooperation” between the DOJ and FCC was an open secret, AT&T took the innovative legal step to withdraw its pending application before the FCC on the thinking that it would litigate, and ultimately prevail, against the DOJ in court, and then re-file its petition at the Commission with the support of a court victory.  However, rather than stand quietly on the sidelines and let the DOJ and AT&T duke it out in court, the FCC threw a curveball: although the agency had its Wireless Telecommunications Bureau issue an order granting AT&T’s request to withdraw its petition, the agency also deliberately released a staff report condemning the merger using, what staff conceded to be, a “traditional structural analysis used to apply the antitrust laws”.  In so doing, while the Commission did not take any “official action,” its release of the highly-flawed (and procedurally unchallengeable) staff report nonetheless sent a clear message to the district court not to waste its time moving forward and allowed the DOJ to claim victory. 

More recently, we have the DOJ filing an ex parte in the FCC’s Spectrum Screen Notice of Proposed Rulemaking docket urging the Commission to tilt the incentive auction against the nation’s two largest providers of mobile wireless services, AT&T and Verizon, in favor of the smaller mobile wireless carriers, primarily Sprint and T-Mobile.  Now, by way of background, the Section 6404 of the Middle Class Tax Relief and Jobs Creation Act of 2012 (the “Spectrum Act”) specifically prohibits the FCC from excluding eligible bidders.  This was a major defeat for outgoing Chairman Julius Genachowski and his allies, who had argued vociferously for the ability to impose auction participation restrictions.  However, determined not to take a Congressional “no” for an answer, because the Commission remains free under Section 6404 of the Spectrum Act to “adopt and enforce rules of general applicability, including rules concerning spectrum aggregation that promote competition”, in anticipation of the upcoming auction, the Commission recently instituted a proceeding to re-evaluate, and potentially tighten, its existing “spectrum screen.”  So was the DOJ’s recent filing calling for a tightened spectrum screen and, by extension, auction participation rules, a just coincidence?  Probably not.  In recent testimony by William J. Baer, Assistant Attorney General for Antitrust, before the Senate Judiciary Committee, Mr. Baer conceded under oath (see webcast starting around minute 1:18:45) that when it comes to the need to impose a tighter spectrum screen, “we’ve spent a fair amount of time working very cooperatively—quietly—with the Federal Communications Commission on these difficult policy issues.” (Emphasis supplied.)

As the old saying goes, “sunshine is the best disinfectant.”  While I have no doubts that the FCC’s ex parte exemption for the Department of Justice was promulgated with the best of intentions, it is readily apparent—at least to me—that this inter-agency cooperation is being abused.  If the Department of Justice wants to make a positive contribution to a FCC proceeding, then let them file formal comments and detailed ex partes along with everybody else.  Indeed, if we are wary when it appears that stakeholders are engaging in backroom deals with Commission staff to reach particular outcomes, then we should be even more wary when multiple branches of the federal government are able to meet in secret to achieve certain outcomes.  Due process deserves no less.

The argument for a spectrum cap is familiar and is well summarized in a statement by Greg Rosston, former FCC Deputy Chief Economist and, more recently, Senior Economist for Transitions at the FCC:

… the FCC has tools to make facilities-based competition more likely and more viable.  First and foremost, the FCC should get even more spectrum out into the marketplace.  And it is probably important that the spectrum not continue to go into the hands of the two incumbent landline telephone companies that also have by far the most valuable wireless spectrum.

Put simply, the argument for a spectrum cap holds that by directing spectrum resources away from larger firms and toward smaller firms the latter will become more successful and this will make consumers better off (perhaps by lowering price).   The argument sometimes extends to new entrants, whereby new rivals can be created by keeping spectrum out of the hands of incumbents.

If only it were that simple.  By the Commission’s own admission in its more recent CMRS Reports, innovation and competition in the mobile sector has outgrown the simplistic economic frameworks the agency has favored in the past (and many still encourage it to use), and the case for a spectrum cap is perhaps the most simplistic and naïve argument around.

The argument for spectrum caps rests on many assumptions, but two of the more obvious include the assumption that (1) the equilibrium number of firms serving the wireless industry is determined solely by spectrum holdings; and (2) the assumption that the quality of services does not depend on spectrum holdings.  Obviously, the first assumption is invalid.  Spectrum is but one input into the production of wireless services—giving a firm spectrum does not ensure its financial success (as we have seen, repeatedly).  The construction and operation of a mobile wireless network requires billions in capital expenditures every year.  While the companies spend billions on spectrum in auctions and acquisitions, the data indicates that for each $1 spent on spectrum wireless carriers spend about $5 on network build out.  The sizable investments in infrastructure limit the number of firms that can serve the market (see this paper for an explanation). The construction and operation of a mobile wireless network requires billions in capital expenditures, and these investments limit the number of firms that can serve the market.  As for the second assumption, it is well understood that the provision of advanced services requires greater capacity, which is created by more spectrum (or investment in greater spectral efficiency).  It follows, therefore, that dividing a fixed amount of spectrum across a larger number of firms may reduce the quality of mobile wireless services, thus harming customers even if price were to fall.  The tradeoff between price and quality changes from spectrum policy is detailed in our recent paper A Policy Framework for Spectrum Allocation in Mobile Communications, published in the Federal Communications Law Journal.  You can see George’s summary of the paper at this blog post.

Another problem with the spectrum cap argument is its lack of empirical support.  As demonstrated by the figure from our Spectrum Allocation paper (replicated below), over the past two decades the amount of spectrum has risen (both overall and for each of the major U.S. wireless carriers), yet industry concentration, as measured by the concentration ratio, has not declined.  Thus, heeding the call for more data and less theory, historical evidence does not support the notion that “more spectrum” automatically means “more firms” or “more successful small firms.”  Critically, while concentration has risen over this interval, the price of mobile telephony has contemporaneously fallen.  Therefore, historical evidence does not support the notion that higher concentration leads to higher prices.  As stated plainly by the FCC in the Sixteenth CMRS Report and discussed in George’s recent blog, “High market concentration is not synonymous with a non-competitive market or with market power.”

Furthermore, as we show in our paper Wireless Competition Under Spectrum Exhaust, if wireless firms face a binding spectrum constraint as the FCC argues, then the case for spectrum caps becomes even weaker.  Under spectrum exhaust, increasing the number of competitors will actually increase prices, increase congestion and reduce quality—turning the standard view that more competitors leads to lower prices on its head.  So, even if a spectrum cap were to increase the number of competitors (which is it unlikely to do), in doing so it could make consumers worse off.  George summarizes the analytics of this paper here.

By all accounts, upcoming voluntary incentive auctions are going to be the most complex ever attempted by the Federal Communications Commission.  Before adding the complexity of incumbent exclusion rules and likely reducing the attractiveness of the auction to broadcasters, the Commission should put the argument for spectrum caps to a serious cost-benefit analysis.  I suspect the idea won’t survive honest scrutiny.

Unfortunately, the regulatory approval process for secondary market transactions is, in most cases, far from streamlined, as the government, the applicants’ competitors, and political interests groups regularly use the regulatory process to garner concessions that they would not otherwise be able to obtain in the normal course of business.  While the FCC has recent stepped up efforts to approve deals among smaller players relatively quickly, in deals involving the larger wireless carriers (i.e., Verizon and AT&T), central to the policy debate is the fear of some observers that the sale or transfer of spectrum to certain firms or for certain uses will result in a change in market structure which is undesirable, or what we refer to as the “monopolization narrative.”  We have seen this narrative play out in many spectrum transactions including, most recently, the proposed $1.9 billion spectrum transaction between Verizon and AT&T, where AT&T is acquiring spectrum from Verizon in the 700 MHz band.  Verizon’s entry into the secondary market for this particular spectrum is a result of its commitment to shed some spectrum resources when seeking approval of its spectrum acquisition from the cable industry in 2012.

As typically tendered, the “monopolization narrative” suffers from a profound defect.  Specifically, given spectrum exhaust, the normal rules-of-thumb about the benefits of multi-firm competition may not hold.  We provided the first theoretical analysis of this important issue in our paper entitled Wireless Competition After Spectrum Exhaust.  (See my non-technical explanation of the paper here.)  Put simply, when spectrum capacity is exhausted, it is likely that fewer—not more—firms produces lower prices and more innovation.  It’s an admittedly peculiar result to the non-economist, but the economic logic is undeniable:  i.e., when capacity is exhausted, quantity cannot rise, and if quantity cannot rise, then price cannot fall.  Other papers have found similar results using different modeling assumptions.  Given the inherent scale economy in using spectrum (that is, twice the spectrum leads to more than twice the capacity), putting more spectrum in fewer hands leads to price reductions since output can expand.

The economic implications of spectrum exhaust don’t stop there.  In a more recent Policy Paper entitled Taxation by Condition:  Spectrum Repurposing at the FCC and the Prolonging of Spectrum Exhaust, we modeled the implications of the FCC’s regulatory process wherein the agency applies value-extracting mandatory and voluntary conditions on parties to a spectrum exchange.  These conditions are essentially a form of a tax, and in that light the implications of the regulatory process are apparent.  When you tax something: (1) you get less of it; and (2) you can affect what types of transactions you get.  (You can read the CliffsNotes version of the paper in this blog.)  If resolving the spectrum exhaust is a priority for the well-being of American people and the economy, then burdening transactions with excessive and costly conditions is an unwise policy approach (and it’s certainly not a “policy breakthrough”).

In regards to the monopolization narrative, our Taxation by Condition paper offers a direct insight on the AT&T/Verizon deal.  Note first that Verizon claims it had no plans to use the spectrum in the near term, yet AT&T—who is relatively more spectrum constrained than Verizon—has plans to put the spectrum to use as soon as possible.  (According to Verizon, “the lower 700 megahertz A and B does not fit as nicely into our spectrum holdings as it may for others. So we think it is the prudent thing to do to sell these licenses off to the rest of the industry for the benefit of their customers and to enhance their ability to build out 4G LTE.”)  Thus, this deal moves spectrum from a less constrained use to a more constrained use.  In such a case, we show that the monopolization narrative is not meaningful and do so by comparing the spectrum reallocation decisions of a welfare-maximizing social planner and a profit-maximizing monopolist.

In Taxation by Condition, we show that under spectrum exhaust, a welfare-maximizing social planner will reallocate more or the same amount of spectrum than will profit-maximizing firms.  Put simply, market power does not provide an incentive to repurpose “too much” spectrum from a social perspective.  Market-based transfer decisions such as the AT&T/Verizon sale, therefore, should be presumptively welfare enhancing.  Second, the AT&T/Verizon transaction is virtually costless from a societal standpoint since the spectrum is being shifted from a carrier that was not going to put it to immediate use to a carrier that has stated it will put it to use quickly. If output continues to be constrained before and after the sale due to the existence of the industry-wide spectrum exhaust, then price will be lower with the transfer than without because the amount of capacity has increased.  The AT&T/Verizon deal, under any plausible scenario, will put downward pressure on prices.

If the goal of the FCC is to implement “policy breakthroughs” to address spectrum exhaust, then barring legitimate competitive or interference concerns, then a sensible first step is to commit to the timely and unconditioned approval of secondary market transactions that move spectrum not being currently used into the hands of entities needing to deploy it.  Perpetuating the simplistic “monopoly narrative” in the spectrum-constrained mobile communications market is not constructive.

Considering the response to earlier reports, I expect that many will be dismayed by the agency’s failure to make findings, particularly as to whether the U.S. wireless industry is “effectively competitive.”  After all, Section 331(c)(1)(C) requires the agency to perform “an analysis of whether or not there is effective competition,” and a failure to do so seems to be in direct contradiction to the statute. Further, the Commission likewise fails to follow other mandates of Section 331(c)(1)(C).  For example, the statute requires the agency to conduct “an analysis of whether any …. competitors have a dominant share of the market for such services,” yet the Commission provides no analysis or discussion of “dominance.”  Indeed, the word “dominant” appears only twice in the text and then only as quotes of the statute.  Also, the statutory guidance mandates that the Commission issue “a statement of whether additional providers or classes of providers in those services would be likely to enhance competition,” but there is no direct statement on this point in the Sixteenth Report (though perhaps an indirect statement as discussed below).

At bottom, what the agency’s critics want is for the FCC to conclude that because some observed factor X is above or below some arbitrarily defined critical level, the market is or is not effectively competitive.  In my opinion as a trained economist, such an approach is non-sense.

To prove my point, consider the most obvious and commonly-used statistic for measuring competition:  the number of competitors.  Section 331(c)(3)(C) requires the Commission to provide “an identification of the number of competitors in various commercial mobile services,” and Section III.D of the latest report provides a very detailed discussion of industry concentration.  In transforming evidence on the number of competitors to a finding on “effective competition,” one approach would be a strict adherence to the DOJ/FTC Merger Guidelines.  With an HHI of 2,873 (Sixteenth Report at ¶ 59), the agency could use the Merger Guidelines’ thresholds to conclude that the mobile industry is “Highly Concentrated,” and thus is not “effectively competitive.”  In contrast, the agency could adopt the definition of “effectively competitive” from the 1992 Cable Act, effectively establishing an HHI of 7,450 as the threshold for effective competition, and conclude the mobile industry is, in fact, effectively competitive.   What does the FCC do?  In the Sixteenth Report, the agency rightly concludes,

High market concentration is not synonymous with a non-competitive market or with market power—the ability to charge prices above the competitive level for a sustained period of time.  High market concentration may indicate that a firm or firms potentially may be able to exercise market power, but market concentration measures alone are insufficient to draw such a conclusion.  (Sixteenth Report at ¶ 61.)

Put simply, the Commission concludes that “concentration” bears no direct relationship with “competition.”  This conclusion is profoundly significant and absolutely legitimate.  [If you don’t know why, read our paper (cited frequently in the Sixteenth Report) entitled Competition After Unbundling: Entry, Industry Structure and Convergence.]  So, while the statute requires the agency to “review competitive market conditions,” the agency concludes that the requirement to “identif[y] the number of competitors” is not helpful in that regard.  This recognition is a huge development in the agency’s thinking, and appears to reject the pedestrian and simplistic approach to competitive analysis many want the agency to take (at least in the CMRS Reports).

This surrender to the complexity of the mobile market extends to all the evidence.  Take the agency’s analysis of price and non-price competition.  From this evidence, which is substantial, all the Commission can muster for a conclusion is that there is “evidence of significant actions.”  (Sixteenth Report at ¶ 136.)  Many may find this tepid conclusion frustrating, but in my view, it is realistic.  What prices say about “effective competition” in an industry moving from a voice-centric pricing model to a data-centric pricing model is unclear.  What prices say about “effective competition” in an industry facing capacity shortages is unclear.  Even the evidence on the steady rise in mobile industry investment does not permit a clean shot at “effective competition,” since economic theory offers ambiguous relationships between the investment and market power.  It is therefore reasonable that the agency refrained from drawing definitive conclusions about price and non-price competition.

I could go on and on about the agency’s failure to link its review of the evidence with an analysis of competitive market conditions; however my point is simply that the agency seems to be recognizing the reality many of us have been living in for decades. The structure of the mobile industry and the ways it seeks to serve its customers is very complex and becoming more so.  Whether a particular anecdote or trend is evidence of competition (or the lack of it) is not obvious.  Further, applying time-worn theories to the industry as a model for determining competitiveness produces some peculiar outcomes.  For example, while the old method was to assume that more competitors implies more competition, the modern economist understands that more intense price competition could mean fewer competitors.  Behaviors that many contend are anti-consumer, such as usage-based pricing, can actually make consumers better off even under conditions that appear most egregious.  Economic theory indicates that under spectrum exhaust more competitors makes price go up, not down.

Let’s appreciate the fact that the agency has all but confessed that competition acts in ways we do not expect.  This view is, of all things, consistent with the views of economist Friedrich Hayek who observed,

… competition is important only because and insofar as its outcomes are unpredictable and on the whole different from those that anyone would have been able to consciously strive for; and that its salutary effects must manifest themselves by frustrating certain intentions and disappointing certain expectations (Competition as a Discovery Procedure (2002) at p.10).

The Sixteenth Report suggests that the agency may be refusing to think of competition in the mobile sector in an exceedingly naïve and narrow way.  In fact, it says so explicitly by stating, “[we] refrain from providing any single conclusion because such an assessment would be incomplete and possibly misleading in light of the variations and complexities we observe.”  (Sixteenth Report at ¶ 15.)  Its humility may imply, in turn, that regulation can no longer be trusted to improve economic well being by forcing particular behaviors, since the agency is unable to label specific behaviors as being consistent with what competitive forces will render.

Interestingly, the path forward for the agency and its CMRS Reports is spelled out plainly in the Sixteenth Report with the statement,

Competitive rivalry among providers is desirable not as an end in itself, but rather as a means of bringing tangible benefits to consumers, such as lower prices, higher quality, and greater choice of services.  (Sixteenth Report at ¶ 242 (emphasis supplied).)

The statute wants a competitive analysis, but as the Commission correctly points out, competition is not the goal, it is the means.  Better performance is the goal.  When the evidence presented in the Sixteenth Report is viewed in this way, the conclusion to be reached about the mobile industry, at least to me, is obvious:  the U.S. mobile wireless industry is performing exceptionally well for consumers, regardless of whether or not it satisfies someone’s arbitrarily-defined standard of “effective competition.”

I’m in good company.  Outgoing FCC Chairman Julius Genachowski lists among his proudest achievements that “the U.S. is now the envy of the world in advanced wireless networks, devices, applications, among other areas.”  Indeed, in his just-published list of what he believes to be his many accomplishments at the helm of the agency, he points to the facts that: (a) the U.S. is the first country deploying 4G LTE networks at scale, and in late 2012 the U.S. had as many LTE subscribers as the rest of the world combined, making the United States the global test bed for LTE apps and services; (b) annual investment in U.S. wireless networks grew more than 40% between 2009 and 2012, from $21 billion to $30 billion while investment in European wireless networks has been flat since 2009 and wireless investment in Asia, including China, is up only 4% during that time; (c) more than 90% of smartphones sold globally in 2012 run operating systems developed by U.S. companies, up from 25% three years ago; (d) the new mobile apps economy is a “made in the U.S.A.” phenomenon that has created more than 500,000 U.S. jobs; and, finally (e) investments in wireless broadband infrastructure created more than 1.6 million U.S. jobs since 2007.

‘Nuff said.

The New America study looks at broadband pricing in Bristol (Virginia), Chattanooga (Tennessee), Lafayette (Louisiana), Los Angeles, New York, San Francisco and Washington, D.C., and then compares the prices in these U.S. cities to some measure of “price” in places such as Amsterdam, Berlin, Prague, Seoul, and others.  As noted above, the New America report concludes “that U.S. consumers in major cities tend to pay higher prices for slower speeds compared to consumers abroad” and, as a result, “add[s] weight to a growing body of evidence that suggests that the U.S. is lagging behind many of its international counterparts….”  According to New America, this “lag” results directly from the fact that most of our international counterparts “have higher levels of competition and, in turn, offer lower prices and faster Internet service.”  Naturally, to solve the alleged “higher prices” problem, New America concludes that policymakers need to “increase competition and encourage more affordable high-speed Internet in the U.S.”

Promoting competition to reduce prices is the report’s key policy recommendation, so you might think that New America would provide a detailed analysis of the relationship between competition and prices.  Yet, New America provides no evidence to support its assertion that other countries have “more competition,” or that competition bears any relationship to price.  (New America’s earlier work on mobile pricing contained the same flaw.)  In fact, the U.S. is recognized as one of the most competitive broadband markets among advanced economies, ranking 3^rd in intermodal competition in the OECD.  Given New America’s high regard for OECD rankings, this omission is particularly ironic.

With respect to the quantification of prices, even a cursory review of the data implies that New America’s work is again careless.  Take, for example, New America’s price for Riga, Latvia (the city with purportedly the lowest price for a “triple play” bundle).  According to New America, the listed price for a triple-play bundle in Riga is $25.43 (converted to U.S. dollars based on Purchasing Power Parity).  Apparently, the authors of the study were unfazed by the fact that in this bundle the basic telephone service costs only $2.80 per month.  Such a low price looks a little funny to me, and if you look further at the Balticom website (the provider offering this service), you’ll find that there are some hefty usage fees for telephone service.  Call a mobile phone, for example, and it looks like you’ll be dishing out about $0.37 per minute.  That’s pricey; especially considering the average income of a Latvian is about 28% of that of an American (based on relative GDP per capita).  Also, included in Balticom’s triple-play bundle is only 60 video channels, which hardly compares to the hundreds of channels the typical U.S. subscriber receives.  (Note also that Comcast pays nearly $30 per subscriber-month in programming costs alone, which obviously excludes the possibility of charging $24.43 per month for a triple-play bundle).  Even ignoring differences in the “quality” of the bundle, as a percent of income (GDP per capita), a triple-play bundle price of about $91 (=25.43/0.28) in the U.S. is equivalent to the $25.43 price in Latvia.  Looking at New America’s table, you’ll see that’s about exactly the price for U.S. carriers offering comparable download/upload speeds (but an overwhelmingly superior television service and no-usage fees on telephone calls).  So, if you want to pay $25.43 for your triple-play bundle, you can move to Latvia, get paid about a quarter of your current income, lose 300 to 400 channels of video, and make no telephone calls.  I’ll stay here, thank you.

(As discussed in a recent blog, for those interested in a careful analysis of international broadband pricing, I recommend a recent study by the Information Technology and Information Foundation.)

With that settled, let’s move on to a more significant point regarding broadband pricing.  The New America study concludes that what’s lacking in the U.S. is competition, and this lack of competition leads to high prices.  Yet, New America’s own data rejects this thesis.

Specifically, New America includes in their sample of U.S. cities the prices of government-owned and operated service providers offering triple-play services (in Lafayette and Chattanooga).  New America lists the triple-play price for the municipal broadband provider in Lafayette as $103.89 per month, and for Chattanooga as $129.51 per month.  However, the prices offered by municipal networks are roughly equivalent to those offered by the private sector in those markets and others (with the bulk of prices in the $80-$110 range).  In Chattanooga, for example, Comcast offers its triple-play bundle at $99.99 per month, which is the same price it offers in Washington, D.C.  If it’s true (as is claimed) that the municipal providers offer services at the “lowest reasonable cost,” then we can be somewhat confident that the private sector firms are also offering services at the lowest reasonable cost, and, loosely speaking, “the lowest reasonable cost” is the “competitive price.”  Thus, the competitive price for a triple-play bundle in the U.S. isn’t $24.43, but more like $100 plus (for the type of service offered by the typical triple-play provider today).  Plainly, a third wire to the home, even if owned and operated by the government, is not going to lead to radically lower prices for broadband services.  (Nor will broadband subsidies, since such subsidies merely shift the costs from one set of customers to another.)

While the New America study aims to invoke an emotional response to a fabricated broadband “crisis,” the evidence they present actually suggests the following.  First, New America’s evidence suggests that currently observed broadband prices in the U.S. (at least, in the form of a triple-play bundle) are consistent with competitive outcomes (i.e., the lowest reasonable prices).  Second, an increase in government involvement, up to and including owning and operating a network, is not going to bring significantly lower prices for broadband services in America.

The White House agrees … that consumers should be able to unlock their cell phones without risking criminal or other penalties. In fact, we believe the same principle should also apply to tablets, which are increasingly similar to smart phones. And if you have paid for your mobile device, and aren’t bound by a service agreement or other obligation, you should be able to use it on another network.  It’s common sense, crucial for protecting consumer choice, and important for ensuring we continue to have the vibrant, competitive wireless market that delivers innovative products and solid service to meet consumers’ needs.

This is particularly important for secondhand or other mobile devices that you might buy or receive as a gift, and want to activate on the wireless network that meets your needs—even if it isn’t the one on which the device was first activated.  All consumers deserve that flexibility.

From this statement, it appears that the White House staff doesn’t have a very good grasp of the issue.  To begin, the White House has bought into the popular misconception that the only thing that keeps a mobile phone from working on a competitor’s network is the locking function.  This assumption simply is not true.  U.S. mobile providers use a variety of different technologies (e.g., CDMA, GSM, LTE, IDEN, etc.) and, as such, a handset must match the carrier’s network technology.  Stated in practical terms, my AT&T GSM iPhone will not work on Verizon’s or Sprint’s CDMA networks (and visa versa).  Equally as important, many carriers make network-specific enhancements to take advantage of certain device functionalities, so a consumer may not get the full benefits of an “unlocked” smartphone if they try to use it on a different network.  Put simply, a world of unlocked phones is not the same as a world of interoperable phones.

Second, Mr. Edelman’s hypothetical where a person gets a “secondhand or other mobile device[]” and “want[s] to activate on the wireless network that meets [their] needs—even if it isn’t the one on which the device was first activated” suggests a lack of familiarity with the Librarian’s decision.  The Librarian of Congress made it abundantly clear that consumers are legally free to unlock “legacy” phones.

Third, the Librarian further found that no one was holding a gun to consumers’ heads to buy a new locked subsidized phone.  To the contrary, the Librarian found that:

with respect to new wireless handsets, there are ample alternatives to circumvention.  That is, the marketplace has evolved such that there is now a wide array of unlocked phone options available to consumers. While it is true that not every wireless device is available unlocked, and wireless carriers’ unlocking polices are not free from all restrictions, the record clearly demonstrates that there is a wide range of alternatives from which consumers may choose in order to obtain an unlocked wireless phone.  (77 Fed Reg. 65265) (Emphasis in original.)

So, just to restate the obvious, a state-of-the-art unlocked phone can be quite expensive—for example, a new entry-level unlocked iPhone 5 will run you about $649.  By signing a two-year contract with AT&T, however, that same phone runs you only $199, a $450 discount off the retail price for an unlocked phone.  Not a bad deal, even considering the early termination fee of $325, which declines by $10 per month of the contract and need not ever be paid by adhering to the term.  Of course, the ability to offer consumers heavily-discounted equipment requires the customer to stick around long enough to make the arrangement sensible for the carrier.  As an incentive to adhere to the agreement made between the carrier and the customer, wireless providers typically impose early termination fees and/or “lock” the device to their networks for the duration of the contract.  So, when a consumer gets a $649 phone for $199, is it that unreasonable to expect a little commitment from the consumer in return?  Most rational adults would think not, particularly when customers freely enter into that contractual arrangement.  When the contract is up, the customer is free to unlock the phone.  (Indeed, so long as the phone is out of contract, a simple web search reveals that the major U.S. carriers are more than willing to unlock phones upon reasonable request.)  If a consumer doesn’t like the idea of a locked phone and being bound by the terms of a service contract, then that consumer can spend $649 up-front and get an unlocked phone.  But, if the carrier hands you a $649 phone for $199, there’s obviously and reasonably a catch.

At bottom, the unlocking debate is little more than a tantrum thrown by people—hiding behind half-baked arguments about competition, innovation and copyright—that don’t want to pay full price for an unlocked phone.  Let me lay it out simply for you:  If you want an unlocked phone, then you can buy an unlocked phone.  There is no law against it, and plenty of places to do it.  Every mobile carrier will gladly sell you an unlocked phone, and you can get a used device on Craigslist or eBay.  But if you want someone else (i.e., your mobile carrier) to pay for your spiffy new smartphone, then you’ve got accept whatever limits they put on your use of that device.  That’s the deal.  If you don’t like the deal, then buy an unlocked phone.

Like it or not, there are major consequences for consumers at stake here.  Indeed, as both politicians and activists continue to throw around the requisite buzzwords like “competition” and “innovation” in the handset-locking debate, let’s remember that in the end this puerile behavior puts increasing pressure on the industry to kill the subsidized phone, an outcome that the formal economics show will slow the diffusion of new technology, diminish innovation in mobile handsets, and raise handset prices.

So, as the old saying goes, be careful what you wish for.

While such mandatory cuts will be painful, there nonetheless may be a “silver lining” to the Sequester:  Forced reductions to the operating budgets of many federal regulatory agencies may lead to increased economic growth.

As we noted last year in our paper entitled Regulatory Expenditures, Economic Growth and Jobs: An Empirical Study, my colleagues and I at the Phoenix Center used fifty years of data and modern econometric methods to quantify the relationship between government spending on regulatory activity and the important goals of economic growth and job recovery.  We found that reducing the size of the federal regulatory budget by even modest amounts will have significant positive effects on both GDP and private sector job growth.  Since a portion of the Sequester cuts hit regulatory agencies, these mandatory cuts may offer a positive influence on economic activity.

Assessments of the budget impacts of the Sequester indicates that a number of federal regulatory agencies will see meaningful cuts.  The budgets of the Department of Energy, the Environmental Protection Agency, and the Department of Labor are expected to see cuts of about 8%.  Not all regulatory agencies are affected, however.

Using the results from our study, we can make some predictions about how the Sequester’s mandatory budget cuts may positively impact our economy.  As you can see in the table below, our analysis indicated that even a small 5% reduction in the regulatory budget will result in about $75 billion in expanded private-sector GDP each year.  While the reduction in spending will reduce government employment by about 12,000 jobs, the economy is predicted to see an increase in employment of 1.2 million jobs annually.  Roughly, eliminating the job of a single regulator grows the American economy by $6.2 million and nearly 100 private sector jobs annually.  A regulatory budget cut of 10% produces an additional $149 billion in GDP and 2.4 million private sector jobs.  As we measured it, the decline in the regulatory budget is likely to be closer to the 5% figure, so it may be that whatever economic activity is lost from the reduction in government expenditures, it could be made up by the stimulation of economic activity in a less-regulated economy.

It is, of course, hard to say exactly what the full economic impacts of the Sequester will be, since its implementation will be complex, spread over time, and distributed across a number of agencies and economic sectors.  However, the Sequester does reveal a lot about the state of the country—i.e., our quality of government—than just the immediate impacts of a spending cut.  Sequestration is not just about dollars; instead, the sequestration process speaks (and has spoken) to the competence and courage of our nation’s leaders.

Over the last several years, we have seen the Federal Communications Commission put forth a rather clever argument to expand its regulatory authority over broadband services.  Under Section 706(a) of the Communications Act, the Commission “shall encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans … by utilizing … price cap regulation, regulatory forbearance, measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment.”  If the agency determines that broadband capability is not “being deployed to all Americans in a reasonable and timely fashion,” then “the Commission shall take immediate action to accelerate deployment of such capability by removing barriers to infrastructure investment and by promoting competition in the telecommunications markets.”  (Emphasis supplied.)  So, stating it plainly, if the Commission reasons that deployment is not “reasonable and timely”, then the agency reasons it has the legal authority to impose broad-reaching regulation over advanced services.

For the first five Section 706 Reports, the agency refused to take the bait and concluded that broadband deployment, though not ubiquitous, was nonetheless “reasonable and timely.”  Chairman Julius Genachowski, however, couldn’t resist the temptation.  In 2010, the FCC reversed this pattern and concluded that broadband deployment was not “reasonable and timely.”  The Commission’s determination hung on the standard of universal broadband availability, and since “we have not achieved this goal today,” the agency declared that deployment is not “reasonable and timely.”  Following its interpretation of Section 706, the agency has since used this determination to motivate implementation of the National Broadband Plan and to justify the regulation of broadband services in such major policy initiatives as the Open Internet Rules.  And, as much of the current FCC’s aggressive regulatory agenda hangs on this determination, the FCC’s Eighth Section 706 Report (released last August) again finds that broadband deployment was not reasonable and timely.

As noted above, soon after the Eighth Section 706 Report came out, we released a paper entitled Justifying the Ends:  Section 706 and the Regulation of Broadband, where we the first to demonstrate how the Commission deliberately ignored its own evidence to support expanded regulatory jurisdiction over IP-based services.  Specifically, we showed how the FCC ignored its own financial analysis conducted as part of its National Broadband Plan which found that ubiquitous availability using wireline or terrestrial wireless services is unreasonably costly.  By the agency’s own calculations, for the most costly 250,000 homes, the average subsidy required to provide service averages $56,000 per home, with many homes costly far more than that amount (and many not even buying the service once available).  To quote the Plan, “approximately $14 billion of the total investment gap [goes] to serve the last two-tenths of 1% of all housing units (p. 150).”  No plausible cost-benefit analysis would justify such expenditure.  As such, ubiquitous availability today using terrestrial technologies is an unreasonable expectation and an unreasonable goal.

The cost-benefit analysis of ubiquitous broadband was not lost on the authors of the National Broadband Plan.  Specifically, the Plan observes, “[t]he FCC should consider alternative approaches, such as satellite broadband, for addressing the most costly areas of the country to minimize the contribution burden on consumers across America (p. 37).”  Additionally, Blair Levin, the director of the National Broadband Plan, observed: “Ultimately, it will be too expensive to provide service to the last .2 percent of homes, so those homes should be served by satellite broadband.”

Using satellite for very high-cost areas seems to be a reasonable if not necessary option, and one explicitly proposed by the National Broadband Plan team.  However, since the Plan also recognizes that satellite broadband is already ubiquitously available (“Satellite has the advantage of being [] ubiquitous (p. 137)”), the Commission had to reject satellite services as a valid broadband option in order to further its regulatory agenda—and did exactly that.  According to the Commission’s most recent Section 706 Report, it continues to reject satellite for two reasons:  First, the agency found that according to its most recent investigation, “there was not a commercially available satellite offering that could provide 4 Mbps/1 Mbps broadband service to consumers.”  (Eighth Section 706 Report at ¶ 41).  Second, the Commission found that “[s]atellite service generally has latency over 100 milliseconds and latency may affect a user’s ability to ‘to originate and receive high-quality voice, data, graphics, and video telecommunications using any technology,’ as required by section 706.” (Id. at ¶ 42).

Well guess what?  With the release of its Measuring Broadband America Report last week, the FCC has now officially shot down the very factual foundation for its aggressive regulatory agenda where it expressly states:

Starting in 2011, the consumer broadband satellite industry began launching a new generation of satellites which have greatly improved overall performance.  As relevant here, the high capacity of ViaSat’s ViaSat-1 satellite, which at the time of launch surpassed the total capacity of all current Ku-, Ka-, and C-band satellites over North America, together with other technological improvements discussed below, have decreased latency and improved the quality of satellite broadband service available to subscribers.  In our testing, we found that during peak periods 90 percent of ViaSat consumers received 140 percent or better of the advertised speed of 12 Mbps.  In addition, both peak and non-peak performance was significantly higher than advertised rates.  While latency for satellites necessarily remains much higher than for terrestrial services, with the improvements afforded by the new technology we find that it will support many types of popular broadband services and applications.  (Measuring Broadband America at p. 7 and emphasis supplied).

Indeed, WildBlue, a satellite broadband provider, offers a 12 Mbps downstream and 3 Mbps upstream service in most areas of the United States.  According to the FCC’s report, satellite broadband customers are receiving 137% of advertising download and 162.5% of advertised upload speeds, thereby clearly satisfying the agency’s definition of broadband service (4 Mbps/1 Mbps).

So, with the Commission’s new admission that satellite will, in fact, now “support many types of popular broadband services and applications”, the FCC has plainly conceded that the major factual predicate for its invocation of Section 706 as an independent source of legal authority over advanced services is no longer true.

The ball is in your court, Mr. Chairman.

While it is nice to see a well-done report on this topic, it is sad to see that such an effort is still required.  Among serious broadband scholars, the broadband rankings argument is as much dated as it is silly.  Given the inherent defects of such rankings, which the Phoenix Center has laid out clearly over the years (here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here), most serious scholars of broadband policy have long abandoned the discussion.  Nevertheless, those more interested in revolutions than facts keep hanging on to these comparisons; though it is clear that they are finding it harder and harder to cherry pick the data to make their case.  Indeed, I couldn’t help but notice that the ITIF report only listed very few names of those that continue to use the ranking argument, and those they do mention are largely at the fringe of policy relevance (a position earned, in part, by the continued reliance on discredited measures of performance and a reputation for careless research).  I’d like to say the rankings debate that motivated the ITIF report was a strawman—unfortunately, I cannot.

The ITIF report covers a wide range of topics and makes the following broad conclusions: (1) the U.S. has a relatively high rate of intermodal competition in broadband markets; (2) the U.S. leads the world in 4G/LTE mobile broadband adoption; (3) the U.S. has very low entry-level broadband prices; (4) the U.S. has relatively high average broadband “speeds” with a mean of 29.6 Mbps in 2012 and 82% of American homes are passed by networks capable of 100 Mbps or better, and this percentage is growing; (5) the U.S. has the fastest deployment rate of fiber; and (6) the U.S. is not a particularly profitable market for broadband providers (see our analysis of this topic here and here).  In sum, the U.S. is not falling behind in broadband by any reasonable measure of performance.

However, the authors reiterate the well-known fact that the U.S. has a relatively low adoption rate, though even so the report reveals that the country still fares well in international comparisons on this statistic.  The authors conclude that “incomplete adoption will remain the Achilles heel of American broadband (p. 67).”  Indeed, the adoption problem has always been the real hurdle for American broadband, a point made by many groups over time (including the Phoenix Center).  The ITIF report’s authors encourage policies that focus on bringing more Americans online, but also recognize that this effort is hindered by the country’s relatively low rate of computer ownership, relatively low interest in the Internet, and relatively high poverty rate.  Sadly, America has an exceedingly poor record on solving the poverty problem, and poverty probably lies at the core of our low adoption rate.  A recent survey by Connected Nation attempts to quantify how much of the adoption shortfall among the poor could be remedied with subsidized rates for broadband (e.g., Lifeline and Link-Up programs).  The Connected Nation survey suggests that lower rates would help but would by no means solve the adoption problem.

For those familiar with the topic of international comparisons, it is apparent that the ITIF report is the product of a substantial research effort that likely took many months to complete.  Yet, as is all too common in Washington, criticism of the ITIF report by those opposing its conclusions began before the ink was even dry.  In most cases, the too-quick criticism (less than 24 hours) of a serious research effort reveals little if any truth and serves mostly to expose the inherent biases or inadequacies of those doing the criticizing.

Take for example the almost immediate critique by Cyrus Farivar in ArsTechnica.  (Richard Bennett, a co-author of the ITIF study and a highly competent researcher on broadband technology, has already responded (forcefully and effectively) to some comments posted on ArsTechnica.  Richard is an engineer and I am an economist, so naturally my eye is attracted different material than his.)  Stating the matter politely, from a trained economist’s point of view, there are a more than a few irregularities with Mr. Farivar’s analysis.

For example, the Mr. Farivar states that “the margins on [Comcast’s] Internet services … are ‘comically profitable’.”  (The author admits, however, that this claim of “comically profitable” does not account for all the costs of providing service, which means his “comical” assertion is pure speculation.)  The observed low overall margins for Comcast (7%) is then attributed to the fact that Comcast has “lots of other business models besides simply providing Internet access.”  So let’s get this straight: Mr. Farivar’s argument is that Comcast could be “comically profitable” if it would just offer Internet access but instead deliberately chooses to have a relatively low profitability by offering other services for which it apparently makes huge losses.  I suppose Mr. Farivar believes that NBC/Universal (a Comcast business) is a public service offered by Comcast at great cost to the firm and its shareholders solely for the good of the country.  Personally, I’m not buying it.

But there is more.  While Mr. Farivar concedes that the “U.S. has a high level of intermodal competition” between the phone and cable companies, he nonetheless laments that “there seems to be very little, if any, competition from anywhere else.”  Again, let’s get Mr. Farivar’s logic straight: there are “comically large” margins in providing Internet access service, but in spite of these “comically large” margins, hardly anyone is interested in providing the service.  Perhaps it’s just my formal economic training, but again I’m not buying it.  (If you wish to avoid logically inconsistent arguments about competition in telecom, read this paper.)  Furthermore, if Mr. Farivar is correct that no one else is interested in providing the ever-important broadband service to consumers and business, then perhaps instead of attacking the phone and cable companies a simple “thank you” to the private sector is in order both for covering over 95% of the country with broadband and for the billions of their own money they invest into their networks each year to expand and improve service.

And then we have the usual fall-back argument of the untrained:  Mr. Farivar’s  statement that “Americans are paying more per megabit than their counterparts in many European and Asian cities.”  Let’s get this straight once and for all:  price-per-megabit is a meaningless statistic.  If you put a little thought to it, you’ll realize that it is not possible to measure both price and quality with a single number.  (As is well recognized by those dealing with constructing a price index.)  Not long ago, my broadband provider doubled by “speed” without a change in price, but I assure you I did not consider this action a 50% reduction in price.  In fact, while the change in service represented a huge drop in the price-per-megabit, I didn’t even notice a change in service level.  In fact, I just cut my broadband connection speed from 40 Mbps to 12 Mbps and still can’t tell a difference.  My over-the-top video works just fine.

Another simple example illustrates the problem clearly.  Take the prices of EBP Fiber Optics, the municipal broadband provider in Chattanooga, Tennessee.  Their monthly standalone price for a 50 Mbps service is $57.99 per month, or $299.99 for a 1 Gbps service.  In per-megabit terms, the prices are $1.16 for the low speed and $0.30 for the high speed service, a significant differential.  By the price-per-megabit logic, we’d all be better off if the municipal provider stopped offering the 50 Mbps service and forced  consumers to subscribe to the 1 Gbps service, thus paying a much lower “price” for a 1 Gbps service (with the side benefit of making us look more like Seoul).  Obviously, such a decision would be a disaster for broadband in America as few budgets would permit the expense.  In fact, across its services, EBP Fiber’s prices-per-megabit are $1.16, $0.70, $0.56, or $0.30.   Is EPB a low-price or high-price company?  The truth is that consumers don’t pay price-per-megabit for Internet service, they pay a monthly price, and their demand for service is based on the monthly fee.

Further, try to imagine a scenario where you are attempting to get a lower-income individual to pay $40 per month for a 10 Mbps broadband connection.  In light of budget constraints, the individual decides that broadband doesn’t offer sufficient value to give up, say, food.  Is your response to offer instead a 100 Mpbs circuit for $40, lowering the per-megabit price to a mere 10^th of the initial offer?  Obviously not, since you know that the decision was that the individual decided there wasn’t $40 worth of value in the broadband connection.  Put simply, at any speed offered today, it’s the monthly “nut” that drives adoption, not the price-per-megabit.  I suppose the individual would be very interested in a 1 Mbps connection for $4 (the same per-megabit price as the 100 Mbps circuit), but obviously it’s not financially feasible for a provider to offer a broadband connection at $4 per month.  None do.  Once again, this hypothetical reveals that you can’t sensibly mix prices and speed into a single index because the perversions are more frequent than are the insights.

The Chattanooga example also reveals the logical defect in the argument about government-ownership solving the broadband crisis in America because the private sector’s prices and profits are ostensibly “too high.”  Presumably, the City of Chattanooga, running a government-owned and operated electric and broadband network, would never act all “corporationy” by sticking it to its constituent-consumers.  In fact, EPB’s website describes its mission as follows, “As a community-owned company, our goal is not to build stock value or amass wealth. It is to help as many people in our community as possible, improving our community through reliable products and services at the lowest reasonable cost.”  (Similarly, Lafayette, Louisiana’s city utility offers a 40 Mbps connection for about $50 per month (admittedly, it’s a symmetric connection, but hardly anyone needs that kind of bandwidth upstream).)  These prices are very much in line with those offered by most private-sector broadband providers, and they are certainly not so low as to resolve the low-income adoption problem.  Broadband is obviously expensive to provide in the U.S., and prices reflect that fact, whether set by public- or private-entities.  Subsidies may help, but subsidies merely hide cost-based pricing in other charges or fees that fund them.  Somebody, somewhere, must pay the full price.

Finally, Mr. Farivar extensively quotes Harold Feld, Senior Vice President at Public Knowledge and a very talented telecommunications lawyer.  You may not always agree with Harold, but you’d be remiss to dismiss him.  (Besides, he’s very entertaining, even to the point of having his own avatar and zippy theme song.)  Harold is quoted by Mr. Farivar as asking the following question: “[D]o we want to solve our national broadband problem or not?”  Harold is also quoted as saying that we need to “start dealing with the real problems right in front of our eyes.”  My question for Harold is what exactly is the national broadband problem?  What problem is “right in front of our eyes”?  And, what are the proposed to solutions to these problems, whatever they may be?  Susan Crawford wants to nationalize the broadband network.  Is this a solution to the problem?  Since Professor Crawford believes the government to be an industry shill, it’s not clear to me why she believes the government is a solution to anything.

In the past few years, the United States Government allocated over $7 billion to the expansion of broadband availability.  And guess what?  We are still looking for a measurable effect from that effort.  To many, the entire effort is beginning to look like a colossal waste of money.  As the New York Times recently reported, an eleven-student elementary school in Colorado has three fiber optic connections to the Internet thanks to BTOP.  Similarly, the Times reported that broadband grants in Alabama and Louisiana, totaling $140 million, were terminated over undocumented expenditures and failure to adhere to construction plans and schedules. In addition, four other grants, worth $42 million, returned the money before even getting off the ground.  Over half-a-billion dollars in broadband grants are now frozen.  Given such waste, fraud and abuse, it’s hard to place much confidence in the U.S. government to solve any problem effectively or efficiently.  In fact, that’s why we try so hard to get private-sector competition in communications markets:  regulation doesn’t work very well.  If it did, competition would be unnecessary.  Wishful thinking, I know.  (By the way, New York City requires an additional 60 million persons over its current 8.2 million to be as densely populated as Seoul, which is the highest density city in all of the OECD).

If you’re still hung up on the international comparisons debate or interact with people that are, I encourage you to read the new ITIF report.  But better, I hope you find that this study (along with the other research mentioned here) has put this issue to bed once and for all so we can move on to more relevant and substantive topics in the broadband debate.