Adam Thierer's Blog, page 90

SCOTUS Healthcare Decision Indicates FCC Interoperability Mandate Unconstitutional

The Communications Liberty and Innovation Project (CLIP) recently filed comments at the Federal Communications Commission (FCC) opposing an interoperability mandate in the 700 MHz band. CLIP argued that the proposed interoperability mandate would be manifestly unjust. The Supreme Court’s holding in the healthcare opinion issued last week indicates that the mandate could be more than merely unjust: it might be unconstitutional.

In National Federation of Independent Business v. Sebelius, the Court upheld the constitutionality of the “individual mandate” in the Affordable Care Act, but only as a tax, not as a regulation. The individual mandate requires individuals to buy a health insurance policy from a third-party. Those who do not comply must submit a “shared responsibility” payment to the federal government with their taxes. The individual mandate in intended to force healthy individuals – whose premiums on average are higher than their health care expenses – into the insurance risk pool, which allows insurers to subsidize the costs of covering the unhealthy individuals that the new law requires insurers to accept.

The Court held that Congress lacked the authority to impose the individual mandate under the Commerce Clause, which is applicable only to the regulation of existing commercial activity. According to the Court, “Construing the Commerce Clause to permit Congress to regulate individuals preciselybecause they are doing nothing would open a new and potentially vast domain to congressional authority.”

The Court rejected the government’s argument that it could enact the individual mandate under the Necessary and Proper Clause. The government claimed that the mandate is an “integral part of a comprehensive scheme of economic regulation,” i.e., a scheme that “requires regulation of inactivity to be effective.” The Court noted that the Necessary and Proper Clause is not an independent source of substantive power beyond those specifically enumerated in the Constitution, and cannot be used to create the necessary predicate to the exercise of an enumerated power (in this case, the Commerce Clause).

The interoperability mandate proposed by the FCC shares the characteristics of the individual mandate that the Court considered constitutionally objectionable. The FCC has proposed forcing AT&T (and similarly situated licensees) to buy equipment that operates on the 700 MHz A Block spectrum, which AT&T cannot legally use, in order to subsidize the costs of AT&T competitors, who are licensed to use that spectrum. That sounds remarkably similar to forcing healthy individuals to buy health insurance in order to subsidize the cost of insurance for the unhealthy.

Although they appear similar, there are several reasons why the proposed interoperability mandate would impose even greater restraints on liberty than the individual mandate, and is thus likely to be considered unconstitutional under the Commerce Clause.

First, the individuals who buy health insurance under the ACA are legally allowed to use the insurance for its intended purpose (for routine checkups, at the very least). The FCC is proposing to simultaneously compel AT&T to buy A Block equipment and prohibit AT&T from using that equipment for its intended purpose – i.e., to transmit and receive signals on the A Block spectrum – because AT&T doesn’t hold any A Block licenses. If an interoperability mandate were imposed on AT&T, it would get no benefit at all. The only beneficiaries of the mandate would be AT&T’s competitors, who might be able to buy A Block equipment for their own use at lower prices.

Second, the individual mandate imposes no costs on currently uninsured individuals beyond the cost of their health insurance or, in the alternative, the shared responsibility tax. The proposed interoperability mandate would impose costs on AT&T that go well beyond the costs of A Block equipment by causing harmful interference to its 700 MHz network. That’s like forcing people to buy health insurance that makes them sick.

It is also why AT&T elected to refrain from buying any A Block spectrum in the first place. For example, a system that uses only the B Block can avoid the harmful interference that afflicts the A Block. But, if the system is also capable of operating on the A Block, the B Block suffers harmful interference as well. Like the queen’s apple in Snow White, one bite of the A Block is enough to poison the whole system.

As a result, AT&T would suffer harm to its competitive position and, more importantly, millions of consumers who use AT&T’s new LTE network would receive poorer service.

Third, unlike the individual mandate, the interoperability mandate isn’t necessary to effectuate the regulatory scheme. FCC auctions are designed to determine the appropriate market price of the spectrum for sale. In the 700 MHz auction, the auction determined that the A Block was worth $3.96 billion, and the B Block was worth $9.1 billion. Bidders who won spectrum in the B Block thus paid $5.1 billion more for their spectrum in the aggregate than bidders who won spectrum in the A Block. This massive difference in market value reflects the potential for harmful interference that plagues the A Block. The issues the FCC would attempt to address with an interoperability mandate were thus built into the A Block’s steeply discounted price.

It is like buying a synthetic suit for less than half the price of a wool suit and complaining to the manager about the fabric quality. The manager might offer to swap a wool suit for the synthetic, if the customer were willing to pay the difference in price. The manager might even be willing to offer a discount on the wool suit to keep the customer happy. The manager would not, however, try to make another customer pay for the swap, especially when the other customer already paid full price for a wool suit.

Yet, that is in essence what the FCC has proposed to do in the 700 MHz band. The interoperability mandate would allow A Block licensees to keep their $5.1 billion interference discount while compelling their rivals, who paid full price for their spectrum, to pay the costs of that interference. That isn’t a legitimate regulatory goal, let alone necessary or proper to implement any enumerated constitutional power, and I doubt such a mandate could survive judicial review.

The FCC could argue that 700 MHz licensees “as a class are active in the market” for the provision of mobile service, and that an interoperability mandate would merely regulate how this class of licensees conducts that activity rather than compel them to engage in it.

The government made a similar argument in support of the individual mandate. According to the government, uninsured individuals are active in the market for health care, which they regularly obtain, and the individual mandate merely regulates that activity by requiring them to pay for healthcare through a third-party insurer rather than pay for it themselves (“self-insurance”). The Court held that belonging to a class that is active in the market is of no constitutional significance when the government attempts to compel one portion of the class to act in order to subsidize another. “If the individual mandate is targeted at a class, it is a class whose commercial inactivity rather than activity is its defining feature.”

The same is true for 700 MHz licensees whose defining feature is their decision not to deploy equipment capable of operating on the A Block or buy any A Block licenses. Like healthy people who have other priorities for their money, 700 MHz licensees have chosen to refrain from deploying A Block equipment to avoid harmful radiofrequency interference, which is precisely the reason the FCC is considering the interoperability mandate. If the bidders who won B Block licenses in the 700 MHz auction had known they would be required to operate on A Block spectrum as well, they may have chosen not to participate in the auction at all, and they almost certainly would not have paid the government an additional $5.1 billion to avoid the A Block.

Bidders who chose not to buy a spectrum license in the A Block had every reason to believe they would not be compelled to provide equipment in that Block. As noted above, the Communications Act prohibits mobile providers from using spectrum in the A Block without a license. And, to compensate for the inherent differences among spectrum bocks in the 700 MH band, the FCC expressly permits “licensees to make determinations respecting the services provided and technologies to be used . . . so long as those services comply with [its] technical rules.” (PDF)

Finally, because Congress has not delegated general taxing authority to the FCC, the interoperability mandate cannot be considered a tax. For the FCC, the unconstitutionality of a regulatory mandate under the Commerce Clause is fatal.

This does not mean the FCC should do nothing. It has authority to solve the A Block interference issues using its spectrum management authority, and CLIP believes the FCC should solve them. But, whatever the solution is, it should not include an interoperability mandate that distributes the costs of the interference by making them worse.

A Victory for Liberty: Healthcare Ruling Shines Spotlight on Lack of Transparency in World of Regulation and Taxation

In his reaction to the U.S. Supreme Court’s decision upholding healthcare legislation, Virginia Attorney General Ken Cuccinelli said, “On the liberty side, we won.” I couldn’t agree more.

By treating the individual mandate as a tax, the Court has shone a spotlight on the regulatory state. Taxation requires a transfer from the people to the government, which in turn requires that the government engage in federal spending to achieve its ends. Regulations enacted pursuant to the commerce clause typically require a transfer from one person to another, which allows the government to achieve its ends through private expenditures. These “hidden taxes” empower the regulatory state by cloaking its costs in the shadows.

The difficulty of tracking and quantifying the costs of regulations shields them from significant public scrutiny. Yet we know their costs are enormous. The Competitive Enterprise Institute’s Ten Thousand Commandments estimates that federal regulations cost taxpayers $1.8 trillion annually, which is nearly 50% of budgeted federal expenditures.

When regulatory costs are transparent, however, taxpayers overwhelmingly reject them. An ABC News poll indicated that two-thirds of Americans believed the Supreme Court should throw out the individual mandate – even though its purpose and design are virtually indistinguishable from many regulations that are already on the books.

The transparency of taxation is its greatest limitation. Congress may have virtually unlimited power to coerce the citizenry through taxation. But, when it exercises that power, the people have the ability to hold the government accountable. Decisions that enhance transparency and accountability are a victory for liberty.

The Problem with the “Declaration of Internet Freedom” & the “Digital Bill of Rights”

We live in an entitlement era, when rights are seemingly invented out of whole-cloth. It should come as no surprise, therefore, that a bit of “rights inflation” is creeping into debates about Internet policy. Today, for example, a coalition of groups and individuals (many of which typically advocate greater government activism), have floated a “Declaration of Internet Freedom.”  My concern with their brief manifesto is that is seems to based on a confused interpretation of the word “freedom,” which many of the groups behind the effort take to mean freedom for the government to reorder the affairs of cyberspace to achieve values they hold dear.

The manifesto begins with the assertion that “We stand for a free and open Internet,” and then says “We support transparent and participatory processes for making Internet policy and the establishment of five basic principles:”

Expression: Don’t censor the Internet.
Access: Promote universal access to fast and affordable networks.
Openness: Keep the Internet an open network where everyone is free to connect, communicate, write, read, watch, speak, listen, learn, create and innovate.
Innovation: Protect the freedom to innovate and create without permission. Don’t block new technologies, and don’t punish innovators for their users actions.
Privacy: Protect privacy and defend everyone’s ability to control how their data and devices are used.

This effort follows close on the heels of a proposal from Rep. Darrell Issa (R-CA) and Sen. Ron Wyden (D-OR) to craft a “Digital Bill of Rights” that, not to be outdone, includes ten principles. They are:

Freedom – digital citizens have a right to a free, uncensored internet.
Openness – digital citizens have a right to an open, unobstructed internet.
Equality – all digital citizens are created equal on the internet.
Participation – digital citizens have a right to peaceably participate where and how they choose on the internet.
Creativity – digital citizens have a right to create, grow and collaborate on the internet, and be held accountable for what they create.
Sharing – digital citizens have a right to freely share their ideas, lawful discoveries and opinions on the internet.
Accessibility – digital citizens have a right to access the internet equally, regardless of who they are or where they are.
Association – digital citizens have a right to freely associate on the internet.
Privacy – digital citizens have a right to privacy on the internet.
Property – digital citizens have a right to benefit from what they create, and be secure in their intellectual property on the internet.

In a recent Forbes column (“We Don’t Need a Digital Bill of Rights“), I expressed some concerns about the Issa-Wyden effort and I have similar feelings about that new “Declaration of Internet Freedom” as well. As I noted in the Forbes column on those “rights”:

It would be hard to be against any of these things. Luckily, at least here in the United States, we already enjoy all these freedoms thanks to the protections provided by our actual Bill of Rights. We are at liberty to participate where and how we choose, to share and be as creative as we desire, and to associate with whomever we wish. The First Amendment alone secures those rights. Likewise, properly construed, the First Amendment ensures the “right to a free, uncensored Internet,” it’s just that lawmakers often  try to evade the Amendment’s unambiguous and comprehensive “Congress shall make no law” prohibition.

But it’s not just that these new efforts aren’t needed, it’s that conflating them with the actual Declaration of Independence or Bill of Rights really bastardizes the true intent of those founding documents. As Cato’s Jim Harper rightly notes:

I’m really hoping that nobody living today gets to define the basic principles by which the Internet is ruled. We’ve got that. It’s a neato collection of negative rights, preventing the government from interfering with society’s development, whether that development occurs online or off.

Of course, Jim and I believe that the original Declaration, the U.S. Constitution, and the original Bill of Rights helped establish a government of limited, enumerated powers that properly safeguarded the most important general right of all: The right of individuals to be at liberty to live a life of their own choosing. It was all beautifully summarized in that simple phrase: you have a right to “life, liberty, and the pursuit of happiness.”

By contrast, if you subscribe to an alternative theory of rights that imagines there exists a litany of goodies to which we all possess an inalienable right, then you will likely be more sympathetic to efforts like the this new “Declaration of Internet Freedom” and “Digital Bill of Rights.” But that’s the problem I have with both documents.  The wonderful thing about the original Declaration, Constitution, and Bill of Rights was that they didn’t create any expensive entitlements that required affirmative state action. Instead, they tightly bound government and curtailed its powers and left the people at liberty. By contrast, these new “Declaration of Internet Freedom” and “Digital Bill of Rights” contain all sorts of aspirational principles that could be construed as “positive rights” that require government to provide some sort of basic underlying service, or to affirmatively and aggressively regulate the information economy to protect some of these amorphous values.

I think that’s pretty clear with some of the principles listed in the documents. Consider “Access” (“Promote universal access to fast and affordable networks”); and “Openness” (“Keep the Internet an open network where everyone is free to connect, communicate, write, read, watch, speak, listen, learn, create and innovate”). I suppose you could claim that those values do not represent calls for government action, but I hope you can imagine how easy it would be to convert both into an affirmative mandate to subsidize or regulate.

Similarly, I like the sound of the “Innovation” bullet (“Protect the freedom to innovate and create without permission. Don’t block new technologies, and don’t punish innovators for their users actions”), but is that protecting the freedom to innovation and creation without permission from the government or does this entail something more? After all, as I document in this book chapter (“The Case for Internet Optimism, Part 2: Saving the Net from Its Supporters“), there exists a large number of academics and advocacy groups today who believe that “openness” and “innovation” are values (even rights) that are most at risk from private, not public action. I invite you to read the works of Tim Wu, Dawn Nunziato, or Frank Pasquale (among others) to see what I am talking about. These new “Declaration” and “Bill of Rights” proposals don’t offer a detailed answer to that question, but I can’t help but raise this concern when at least the former effort was led by the far-left radicals at the Free Press, which was founded by America’s leading media Marxist (yes, Marxist — read about it all here).

Until the advocates who came up with these statements are willing to unpack these principles a bit more and explain their theories of rights and government, we really don’t know what these manifestos would mean if they came to influence public policy. But I suspect that they would both just result in more legislative meddling and regulatory adventurism.

Finally, I know that a few of my friends here at the TLF have come up with their own “Declaration” to push back against this other one, and I agree with many of the principles that they have articulated in their counter-manifesto. (Hell, Wayne Crews and I once even came up with a sort of Declaration of our own back in 2001).  But I think we now need to impose a moratorium on all these new “Declarations” and “Bill of Rights” proposals until we get a hell of a lot more serious about honoring the originals.

JUST SAY NO to new “Declarations” and “Bill of Rights” proposals, and JUST SAY YES to the real deals!

P.S. For a light-hearted take on the excesses of our entitlement age, you might enjoy my old essay: “Broadband as a Human Right (and a short list of other things I am entitled to on your dime)“

SB 1161 Promotes California’s Internet Innovation and Economic Growth

California is recognized as a world leader in Internet technologies and services. It is the home of companies, like Apple, Google, and Cisco, whose innovations are driving economic recovery in California and Internet innovation around the world. The success of these and many other California technology companies has been driven by the decentralized and largely unregulated Internet, which provides them with the ability to market their products and services globally.

California’s success is also its biggest threat. The economic growth, individual empowerment, and entrepreneurialism driven by Internet innovation in California have made it the envy of the world. As a result, local and international governments are increasingly proposing new regulations that would favor their own companies – and cripple California’s economy. A current example is the upcoming World Conference on International Telecommunications, which will consider proposals to impose price regulations on the Internet through an agency of the United Nations.

The U.S. government has long recognized the damage heavy-handed regulation would do to the Internet economy. As a result, Congress and the Federal Communications Commission (FCC) have largely exempted the Internet from economic regulation. Last week, the U.S. House Energy and Commerce Committee adopted a resolution (H. Con. Res. 127) expressing the sense of Congress that it is the “consistent and unequivocal policy of the United States to promote a global Internet free from government control.”

State Senator Alex Padilla, a San Fernando Democrat, introduced a bill (S.B. 1161) that would implement this policy in California. The bill would prevent the California Public Utilities Commission (PUC) from imposing new regulations on Voice over Internet Protocol, or “VoIP” services, which deliver telephone service over the Internet. It would not, however, affect any existing regulation of basic telephone services.

Exempting VoIP services from state regulation would provide California’s high tech industry with the certainty it needs to invest in the next generation of innovative Internet products and services. The Internet is a global phenomenon that seamlessly crosses countless local and international borders. Rising interest in localized Internet regulation is increasing the risk that the borderless Internet could succumb to balkanization – i.e., fragmentation of the Internet into separate enclaves – which would create a hostile environment for California’s digital entrepreneurs. Senator Padilla’s bill would send a powerful message to other states and nations around the world that California believes in an open Internet free from incompatible regulations and unnecessary government interference.

Despite these benefits, some consumers groups have attacked the legislation on the misguided assumption that it would eliminate consumer protections for telephone services. That is simply not true. The bill is designed to preserve the status quo, and would not deregulate any services that are currently regulated by the California PUC.

The FCC has regulatory responsibility over Internet-based services, including VoIP, because they are inherently international in scope. In exercising this responsibility, the FCC has imposed numerous consumer protection obligations on VoIP providers, including universal service support, enhanced 911,disability access, local number portability (the ability to keep your phone number when you switch providers), law enforcement access, and discontinuance of service.

There is no reason for the California PUC to regulate VoIP as well. Allowing the California PUC to develop its own set of Internet regulations would serve little purpose beyond setting a dangerous precedent. Local, state, and international governments who are contemplating Internet regulation would consider themselves entitled to act on their own rather than participate in the multi-stakeholder model that governs the Internet today. The resulting balkanization would require Internet entrepreneurs to develop products and services that are compliant with incompatible regulations and networking requirements around the world: a daunting task that would spell the end of the tech community’s garage entrepreneurs (Apple and Google both started in California garages) and California’s booming Internet industry alike.

The Internet is the economic engine of the 21st century digital economy. We should not decide its fate through fear mongering and political posturing at any level of jurisdiction, whether state, federal, or international. We should instead seek to fairly debate the substantive merits of Internet policy principles. I look forward to engaging any group willing to participate in a civil dialogue about Senator Padilla’s bill.

Four Ways the Internet Changed Poker

Delaware looks ready to become the second state after Nevada to authorize Internet poker as a gambling bill was approved this week by the state senate 14-6 with one senator abstaining.

In the wake of the Department of Justice’s Dec. 23, 2011 memo that for all intents and purposes said there were no federal statutes prohibiting intrastate online wagering on anything save sports, several states. Including Iowa, New Jersey and California, have started moving on legislation that would permit Internet poker, other casino games, and online purchasing of lottery tickets for residents and visitors inside their borders.

Poker players across the country would welcome the chance to play online once more. The Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006 did not make Internet poker illegal outright, but by prohibiting U.S. banks from conducting transactions with off-shore gaming sites, made it extremely difficult for U.S. players to open or maintain accounts with legitimate sites such as Bovada, Bodog and PartyPoker.

With legislation moving along, most gaming industry analysts see Internet poker becoming a reality in at least one or two states by the end of this year.

While the topic of online gambling is still controversial, poker is just one more place where the Internet has had an impact. Before the World Wide Web, you either had to live in Nevada or New Jersey (even in states that had casino gambling, not every casino had a card room) to play regularly. For most who did play, poker was a friendly diversion within a family or social circle.

In broadening poker’s appeal, the Internet also changed the nature of the game. These changes fully manifested themselves when Chris Moneymaker won the main event of World Series of Poker (WSOP) in 2003. Moneymaker was the first world champion to have qualified for the tournament at on line site. The WSOP was the first major live tournament he played. The bulk of his experience and expertise was acquired through online play.

In honor of developments in Delaware and elsewhere, and keeping in mind that the main event of the 2012 World Series of Poker begins July 7, and because it’s Friday afternoon, let’s look at four ways the Internet has changed poker significantly from the game your parents knew. For our purposes here, we will keep things in the context of Texas Hold ‘Em, today’s most popular poker game.

 

Math knowledge has become critical to winning

You’re last to act and have four to the winning, or “nut,” flush (say the Ace and 10 of spades in your hand, with two more spades among the four community cards that have been drawn). There are no pairs showing on the board that would make an opponent a possible full house. You’re the last to act. The pot is $100 and it will cost you $50 to call. Do you call, raise or fold?

Since the Internet offers no opportunity to assess a player’s body language, a solid grounding in mathematics and probability theory became more important to consistent winning online. This has since carried over to live games. When it comes to gambling, a good bet pays better than the odds of the expected outcome. Since there are 9 spades remaining among the 46 cards you haven’t seen, the odds of a making the nut flush “on the river,” that is, with the final card drawn, is 46/9 or just slightly more than 5 to 1. That means for you to consistently make money from this decision the pot must be more than 5 times the size of your $50 bet for you to correctly call. In the example above, the right move is to fold.

Good poker players always had a feel for pot odds. But the Internet made the math aspect integral to long-term success at the game. In the past, mediocre players could survive much longer without a grasp of pot odds and the more fluid concept of “implied odds.” Today, because of the Internet, you’ll find good players are adept at calculating and manipulating pot sizes to drive out drawing hands that could trump treys or a made two-pair. Sharper players not only keep pot odds in mind, but are aware of basic win percentages of any two-card Hold ‘Em hand against any random hand. That accounts for the “maniac” play you find in richer no-limit games–players making big bets, even going all-in pre-flop from a late position (that is, they are among the last to act). They may hold a weak hand, but they are nonetheless wagering that it has a 50 percent chance or better of beating the two or three hands behind it. Detailed knowledge of hand percentages, which can determine the correct times as to bet all your chips, is now integral to winning tournaments. Sites like PokerStove.com provide hand-analysis software that help players hone this tactic.

Aggressiveness is Rewarded

Because successful Internet play depends on the application of math in every poker hand, it has yielded a generation of players who are far more aggressive when they have the edge. Today’s players who are dealt pocket aces or kings, unless they develop into a monster hand on the flop, are not going to allow six or seven players to stick around through the river just to fuel a big pot. By then, their aces will likely have gone from favorite to underdog. The Internet has taught players to play big pairs, two-pairs and treys early and aggressively, while they still have the lead.

Conversely, today’s passive players suffer in several ways. For one, they pay heavily for calling early with marginal hands that can’t justify a follow-up call to a raise behind them. Second, once an aggressive player realizes that a passive player won’t call a raise, the aggressive player will begin raising with weaker hands, say a suited 8-7, in hopes the passive player, out of fear, will muck a slightly better hand like 6,6 or J,10. Third, when an habitual passive player does call a raise, the aggressive player knows that he is likely has a strong hand and backs off. The passive player doesn’t get the full value for his good hand.

Growth of Fast Tournaments

Until the Internet, multi-day, multi-table tournaments were the rule, a tradition that’s kept alive by the WSOP, which features a number of two- and three-day events, culminating in the 10-day main event. The Internet popularized “sit-and-goes”–single table tournaments decided in a few hours, as well as smaller multi-table events in which the blinds and antes rise in 15 or 20-minute intervals compared to an hour or more in traditional formats. For up-and-coming players they can be fun because an inexpensive entry fee can yield several hours of play.

These “fast” tournaments call for the knowledge of math and the daring (some might say reckless) aggressiveness that the Internet has fostered. In fact, traditional tournament strategies may be of no use in these faster formats. For a long time, Patrick Harrington’s three-volumeHarrington on Hold ‘Em was the bible for tournament strategy. Newer books, such as Arnold Snyder’sPoker Tournament Formula and Lee Nelson’s Kill Phil and Kill Everyone have generated controversy by claiming Harrington’s advice and methods won’t work in fast tournament formats. Snyder and Nelson advocate new strategies that address factors that arise in these fast games, such as relative chip value, playing position and the way the math of the game changes when play reaches the “bubble,” that is, when exiting the tournament means missing the a significant share of the prize money by just one or two places.

The Game Has Expanded

Fifteen years ago, only a handful of casinos had poker rooms. Because of the Internet, now you can find one in every casino. There’s also a wider variety of games and tournaments, suited to players of various skill and experience levels. A beginner may be comfortable at the $3-$6 limit game Golden Nugget in downtown Vegas. Someone looking for a challenge may try the $10-$20 no-limit game at the Aria on the Strip.

The return of Internet poker promises more variety at lower stakes, increasing the popularity of a game of skill already enjoyed by millions of responsible adults. And yes, the changes to the game brought by online players further underlines the level of skill poker requires. Poker is not a game of chance, despite what some legislators insist when citing existing state laws against online wagering. The very fact that playing strategies evolve over time–techniques that won in the past fail to win now–demonstrates this. Poker is much closer to chess or go in this regard. As players master the game, they affect the way it is played.

FCC Commish Robert McDowell on Regulatory Failure & “Regulate My Rival” Politics

This may be the best speech by a regulator that you will read in your entire life. Federal Communications Commission (FCC) Commissioner Robert McDowell delivered an address in Rome today entitled, “The Siren Call of “Please Regulate My Rival”: A Recipe for Regulatory Failure.” I highly recommend it (and not just because I’m cited in it!) It is infused with important insights about the ugly downsides of excessive regulation of technology markets.

McDowell is an astute student of regulatory history and he documents how, despite the best of intentions, economic regulation has often been turned into a tool that industry exploits for their own narrow interests. Sadly, examples of such “regulatory capture” are rampant, as I have documented here before. McDowell notes that many telecom and media companies “suffer from the ‘please regulate my rival’ malady of an industry that has been regulated too much and for too long.  History is replete with such scenarios,” he says, “and the desire for more regulation for competitors always ends badly for the incumbent regulated industry in the form of unintended and harmful consequences.” That is exactly right.

I strongly encourage you to read the entire speech, but if you only have time to read one thing, make it the powerful and poetic closing paragraphs, which I have reprinted below:

“Regulating my rival” is a seductive notion for many, but it only lures its victims to rocky shores before revealing itself as a perilous Siren call.  Telecom companies should not look to regulate their “rivals,” Internet content and applications companies, down to their level – especially not through an intergovernmental body.

Instead, network operators should seek deregulation by their home governments to allow them full flexibility to produce and price freely in competitive markets.  In fact, as history shows us, attempting to regulate rivals will only produce unintended consequences that will harm the companies advocating regulation.  More importantly, consumers end up losing the most.  In short, the opposite of what is desired will occur, something called “regulatory failure.”  No government, let alone an intergovernmental body, can make economic and engineering decisions in lightning fast Internet time.  Nor can any government mandate innovation.  But new rules can undermine investment, innovation and job creation all too easily.

Despite these realities, resisting the temptation to regulate is difficult for many.  Furthermore, deregulation can seem counterintuitive to some.  We always hear talk of “market failure,” but we rarely see analyses of “regulatory failure.”  Perhaps that is why, in the words of Professor Adam Thierer, “regulation always spreads.” As world economies contract and government debt mounts, repeating the same government actions of regulating more and spending more of the public’s money will only produce the same results: shrinking economies and growing debt.  It is time to reverse these trends, but doing so will require tremendous political courage.

We can start by avoiding any expansion of regulation to the Internet.  Its phenomenal success can be traced directly to its voluntary and self-governing structure, the result of a multi-stakeholder process free from top-down governmental influences.  In fact, policy makers should head in the opposite direction of the proposals outlined earlier. We should learn from the voluntary, bottom-up, self governance approach in the image of the non-hierarchical Internet itself, and look to apply this successful model elsewhere.  Revolutionizing public policy through a fundamental modernization of legacy laws to clear away unnecessary regulatory obstructions will uncork the flow of investment capital, spark innovation, drive economic growth and propel job creation.  Couldn’t today’s world economy benefit from such positive and constructive change?

On the other hand, dragging rivals down to the lowest common denominator of overly regulated international telecom companies will enshrine mediocrity at best, and, at worst, snuff out incentives to take risks and reap the resulting rewards, therefore killing opportunities to revitalize moribund economies and improve the human condition.

Thank you, Commissioner McDowell, for speaking the truth and reminding the world that the actual history of telecom and media regulation has been a miserable, cronyist, anti-consumer fiasco.  This is exactly why we need to comprehensively deregulate these markets right now while also making sure that creeping cronyism and “regulate my rival” politics do not spread to new tech sectors.

Short Memories When It Comes to TV Progress

So, as I write this, I’m watching a House Commerce “Future of Video” hearing and I am trying to figure out if I’m the only person who was alive and watching television in the 1970s. I mean, come on, doesn’t anyone else remember the era of the Big 3 and meager viewing options?! Well, for those who forget, here were some of your TV viewing options this day in history, June 27, 1972. Read it and weep (and then celebrate the cornucopia of viewing riches we enjoy today in a world of over 900 video channels + the Internet).

 

Yes, Anyone Can Be a Reporter

In his syndicated column yesterday, Leonard Pitts, Jr. bemoaned the decision by the New Orleans Times-Picayune to cut back its print edition to three days a week, and attacked the sentiment, most recently expressed by former Alaska Gov. Sarah Palin, who might herself been quoting Matt Drudge, that the Internet allows “every citizen to be a reporter and take on the powers that be.”

Pitts immediately attacks the comment on the basis of its source, Palin. Then he wanders further from the point by conjuring the truly unpleasant conditions under which reporters, Picayune staffers no doubt among them, labored to ensure news got out in the weeks following Hurricane Katrina’s devastation of the Gulf Coast.

One night I had the distinct honor of sleeping in an RV in the parking lot of the Sun Herald in Gulfport, Miss., part of an army of journalists who had descended on the beleaguered city to help its reporters get this story told. The locals wore donated clothes and subsisted on snack food. They worked from a broken building in a broken city where the rotten egg smell of natural gas lingered in the air and homes had been reduced to debris fields, to produce their paper. Shattered, cut off from the rest of the world, people in the Biloxi-Gulfport region received those jerry-rigged newspapers, those bulletins from the outside world, the way a starving man receives food.

Yet nothing in this rather self-important prose tells us what’s so irreplaceable about printed newspapers as a platform for news delivery. Instead, we get a straw man.

Palin’s sin–and she is hardly alone in this–is to consider professional reporters easily replaceable by so-called citizen journalists like Drudge. Granted, bloggers occasionally originate news. Still, I can’t envision Matt Drudge standing his ground in a flooded city to report and inform.

One can say the same thing about Bill Maher, Keith Olbermann or Wolf Blitzer. Yet, come the next disaster, there’s no reason not to expect the same dedication from a handful of individuals who are driven to place themselves in the middle of an adverse, if not outright dangerous, event just to document first-hand what is happening. Only this time they have the cheap video cameras, battery operated laptops and cellphones with wireless Internet connections. The news will get out.

What Pitts actually is lamenting is the end of the monopoly of institutional media. Big media won’t go away, and will certainly carve out a large space on the Internet, but it’s losing the ability to define news and confer legitimacy on a newsgathering enterprise. Pitts equates the loss of newspapers with the loss of skilled reporting. This fallacy needs to be called out because it fuels the contention , voiced by FCC Chairman Julius Genachowski, Sen. John Kerry, and former Connecticut Gov. Jodi Rell, among other political leaders, that the government should prop up failing newspapers so they can compete against Internet news outlets. To his credit, Pitts never goes this far, but his arguments contain an unspoken invitation for others to do so.

At the end of his column Pitts says he doubts that “citizen journalists” have the credibility, knowledge or training of their newspaper or broadcast counterparts. Here, it helps to remember that we journalists did not truly join the professional class until the 1970s. Carl Bernstein, one-half of the reporting team that inspired a generation of j-school recruits, didn’t finish college. Peter Jennings, perhaps the best Middle East TV correspondent of his time, was a high school drop-out. What they did have, was that unique talent to sniff out news and follow a story where it led them.

My first boss at my first salaried reporting job, as old school a newspaper editor you would find, would give job applicants a convoluted press release to rewrite. The aim was not to test copy editing, speed, grammar or style, but to see if his prospective staffer could pull out the actual lead. More than anything, he valued and appreciated a reporter’s nose for news. To him this was the innate journalistic talent; everything else could be taught.

Newspaper companies don’t define news or reporters. News is timely, topical, compelling and significant. A reporter is anyone who can mine a topic-from something sweeping as global economy trends to as parochial as local city government-and communicate information that meets this criteria. And, yes, anyone can be one.

Future of Video Forecast: Sunny, With a Chance of Regulation

On Wednesday morning, the U.S. House of Representatives Energy & Commerce Subcommittee on Communications and Technology will hold a hearing on “The Future of Video.”

As we Tech Liberators have long argued on these pages (1, 2, 3, 4, 5, 6, 7), government’s hands have been all over the video market since its inception, primarily in the form of the FCC’s rulemaking and enforcement enabled by the Communications Act. While the 1996 Telecommunications Act scrapped some obsolete video regulations, volumes of outdated rules remain law, and the FCC wields vast and largely unchecked authority to regulate video providers of all shapes and sizes. Wednesday’s hearing offers members an excellent opportunity to question each and every law that enables governmental intervention—and restricts liberty in—the television market.

It’s high time for Congress to free up America’s video marketplace and unleash the forces of innovation. Internet entrepreneurs should be free to experiment with novel approaches to creating, distributing, and monetizing video content without fear of FCC regulatory intervention. At the same time, established media businesses—including cable operators, satellite providers, telecom companies, broadcast networks and affiliates, and studios—should compete on a level playing field, free from both federal mandates and special regulatory treatment.

The Committee should closely examine the Communications and Copyright Acts, and rewrite or repeal outright provisions of law that inhibit a free video marketplace. Adam Thierer has chronicled many such laws. The Committee should, among other reforms, consider:

Restoring traditional copyright protection to broadcast signals, instead of the compulsory license created by the 1976 Copyright Act;
Abolishing the “must-carry” rule that requires pay-TV providers to transmit certain broadcast signals without compensation;
Ending syndication exclusivity, network non-duplication, and sports blackout rules;
Repealing programming availability mandates and set-top box regulation;
Undoing broadcast/cable ownership restrictions and media cross-ownership rules;
Eliminating program access rules;
Stripping the FCC of the authority to intervene in and promulgate rules regarding retransmission negotiations;
Ending special regulatory treatment for public, educational, and governmental channels.

Here’s to the success of Sen. Jim DeMint, Rep. Steve Scalise, and other members of Congress who are working to achieve real reform and ensure that the future of video is bounded only by the dreams of entrepreneurs.

Is Stuxnet an act of war?

Tyler Cowen asks on his blog today:

By the way, didn’t it just come out in The Washington Post that the United States helped attack Iran with Flame, Stuxnet and related programs? If they did this to us, wouldn’t we consider it an act of war? Didn’t we just take a major step toward militarizing the internet? Doesn’t it seem plausible to you that the cyber-assault is not yet over and thus we face immediate questions looking forward? Won’t somebody fairly soon try to do it to us? Won’t it encourage substitution into more dangerous biological weapons?

Those are good questions. Let’s take them in turn.

If they did it to us, would we consider it an act of war? I tend to agree with Franz-Stefan Gady’s perspective that Stuxnet should not be considered an act of war. One of the most overlooked aspects of the great reporting done by the NYT and WaPo uncovering the details of Stuxnet is that the U.S. did not “hack in” to Iran’s nuclear facilities from thousands of miles away. Instead it had to rely on Israel’s extensive intelligence apparatus to not only understand the target, but to deliver the worm as well. That is, humans had to physically infiltrate Iran’s operations to engage in the spying and then the sabotage.

Espionage is not an act of war under international law. Nations expect and tolerate espionage as an inevitable political practice. Spies are sometimes prosecuted criminally when caught, sometimes traded for other spies, and often simply expelled from the country. Sabotage I’m less certain about, but I think it inhabits a similar space as espionage: frowned up, prosecuted criminally, but not an act of war per se. (I’ve been trying to find the answer to that question in vein, so if any international law experts would like to send me the answer, I’d appreciate it.)

So what do we have with Flame? It’s essentially spying, albeit in a frighteningly efficient manner. But, it’s not act of war. Stuxnet is similarly not an act of war if we assume sabotage is not. There’s little difference between Stuxnet and a spy infiltrating Natanz and throwing a wrench into the works. Stuxnet is just the wrench. Now, it’s key to point out what makes Stuxnet political sabotage and not terrorism, and that is that there were no deaths, much less civilian deaths.

Did we take a big step in militarizing the Internet? Won’t somebody fairly soon try to do it to us? Well, it’s already happening and it’s been happening for years. U.S. government networks are very often the subject of espionage–and maybe even sabotage–by foreign states. If something feels new about Stuxnet, it’s that for the first time we have definitive attribution to a state. As a result, the U.S. loses moral high ground when it comes to cybersecurity, and if someone doing it to the U.S. gets caught, they will be able to say, “You started it.” But they’re already doing it. Not that it’s necessarily a good thing, but the militarization of cyberspace is not just inevitable, it’s been well underway for some time.

Finally, Tyler asks, Won’t it encourage substitution into more dangerous biological weapons? The answer to that, I think, is a definitive no. “Cyber weapons” arecompletely different from biological weapons and even chemical or conventional, and certainly nuclear. For one thing, they are nowhere near as dangerous. No one has ever died from a cyber attack. Again, short of already being in a shooting war, these capabilities won’t be employed beyond espionage and surgical sabotage like Stuxnet.

That raises the question, however, if we’re in a shooting war with a Lybia or a Syria, say, will they resort to cyber? Perhaps, but as Thomas Rid has pointed out, the more destructive a “cyber weapon” the more difficult and costly it is to employ. Massively so. This is why it’s probably only the U.S. at this point who has the capability to pull off an operation as difficult as Stuxnet, and then only with the assistance of Israel’s existing traditional intelligence operation. Neither al Qaeda, nor Anonymous, nor even Iran will be able to carry out an operation on the same level as Stuxnet any time soon.

So, Tyler, you can sleep well. For now at least. ;o) Yes, we should have a national discussion about what sorts of weapons we want our government employing, and what sort of authorization and oversight should be required, but we should not panic or think we’re a few keystrokes away from Armageddon. The more important question to me is, why does one keeps $2.85 million in bitcoin?