Author: Harold

Some Common Misperceptions About Incentive Auctions, and Why They Matter.

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I rarely gush enthusiastically over a Notice of Proposed Rulemaking (NPRM) from the Federal Communications Commission (FCC), but I will make an exception for the recently released Incentive Auction NPRM and associated Appendix on auction design. As Republican Commissioner Ajit Pai observed in his separate statement, it has become almost cliché to observe that this is “the most complicated set of spectrum auctions ever held by any country.” What the NPRM explains, if you are willing to plough through it, is why it is so insanely complicated.

 

Unfortunately, the complication has given rise to a number of misunderstandings about what is actually going on here. In this case, a failure to understand why this is so complicated, rather than simply knowing that it’s complicated, can result in bad policy.  The most critical misconception I have encountered to date is that the incentive auction involves wireless companies bidding for broadcast licenses, with the FCC acting as a sort of spectrum Christie’s. That is, after all, how this got sold and broadcasters and wireless companies seem to be the main players.

 

Below, I explain why this is not merely wrong, but why visualizing the auction in this way leads to policy choices that almost guarantee failure. It also bears directly on one of Commissioner Pai’s questions: why has the FCC proposed ending the auction as soon as the “victory conditions” set by Congress are met, rather than keeping the auction open as long as there appears to be the possibility of more willing bidders. . . .

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Apparently, Program Access Rules Are Toast — Another Kill for the DC Circuit.

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Last week I posted that if the FCC were going to extend the Program Access Rules, or was still thinking about what to do, then it ought to buy itself some time to proceed in an orderly fashion. That same day, according to this article in Broadcasting and Cable, Chairman Genachowski circulated a draft Order allowing the rules to sunset. According to the article, the FCC will still address outright discrimination on a case-by-case basis under the Section 628(b) general prohibition on “unfair or deceptive acts or practices.” Hopefully, the Order will spell out what this means.

To be honest, I am having a hard time feeling worked up about this given that the competing MVPDs did not put a heck of a lot of effort into protecting the rules. Given that the D.C. Circuit made it clear that it was unlikely to bless a further renewal, the folks in the industry that rely on the Program Access rules should have known they were going to have to make a strong case to preserve the rules in some way shape or form. But lobbying around this issue has been fairly anemic, despite the fact that the October 5, 2012 date has been circled in red for the last five years.

Mind you, I am still sympathetic to a lot of the little guys, like American Cable Association, who don’t have a lot of lobbying resources and are really in a position to feel a squeeze. The NPRM had proposed some targeted relief for them, which could still get considered under the FCC’s general authority even if the main rules expire. But it is frankly very hard to predict with certainty how this impacts he market. I absolutely expect the vertically integrated players to start pushing the boundaries on pricing and exclusions — particularly with regard to things like internet-based distribution rights. It will probably also be even harder for any new entrant with even a slightly different business model to get programming, so if someone wanted to try a mix of traditional and online delivery, they are screwed. But since it wasn’t clear that such a competitor would emerge anytime soon anyway, it is kind of hard for the FCC to use that as a justification for maintaining the existing rule.

What really bugs me is that this is a classic example of how the DC Circuit goes all activist and conceives its role as being overall manager of agencies like the FCC, rather than as a court deciding actual cases. The DC Circuit dropped a pretty large hint to the FCC that it better not try to renew the rule, so the FCC tremblingly obeys whatever the merits. Because lets face it, no one wants to waste time creating rules that are going to get reversed on appeal. Congress never intended the D.C. Circuit to act as some sort of Uber-Agency enforcing an anti-regulatory agenda while mouthing the language of deference. But so it has become. The result is a great deal of regulatory uncertainty as agencies and practitioners spend the time wondering what will appeal to the prejudices of particular D.C. Circuit judicial panels rather than focusing on the actual law or facts.

Stay tuned . . . .

Will The Program Access Rules Expire On October 5?

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Back in March, the FCC released a Notice of Proposed Rulemaking on whether to extend the “program access rules” for another five years, either as they exist now or in some modified form.  For those unfamiliar with the program access rules, they require a cable or satellite provider that also owns programming to make that programming available to rivals on commercially reasonable terms. For example, Cablevision has to sell AMC to Verizon for at least a facially reasonable price, even if it would rather not sell AMC to Verizon at all.

Congress required the FCC to create the program access rules as part of the 1992 Cable Act. Because Congress did not particularly trust the FCC to do a good job fighting cable market power, it gave the FCC very explicit instructions in Section 628(c) (codified at 47 U.S.C. 548(c)). But it also said the rules would expire after 10 years, unless the FCC extended them. The FCC extended the rules for 5 years in 2002, and again in 2007. Without another extension, the Program Access Rules will expire on October 5, 20122.

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FCC Authority In VZ/SpectrumCo, or “Real Lawyers Read The Footnotes.”

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Many years ago, I taught a semester of law school as an adjunct. I assigned the students to read the FCC’s 2005 Internet Policy Statement. I was dismayed to discover that, after doing the reading, none of them had even heard of the concept of “reasonable network management.” How was that possible? Reasonable network management is not mentioned in the main text, but in footnote 15 which says that the principles are “subject to reasonable network management.” Given the centrality of the “reasonable network management” concept to the net neutrality debate, I was rather irritated. “Understand this before you graduate,” I warned them. “Real lawyers read the footnotes!”

I thought of that after reading Geoffery Manne’s and Berin Szoka’s piece about VZ/SpectrumCo over on CNET.

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Could Verizon/SpectrumCo Create Gaping New Loophole In Media Ownership Rules?

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Few people would imagine that the Verizon/SpectrumCo deal, now heading rapidly for conclusion, could potentially have huge impact on traditional broadcast ownership rules. Unfortunately, unless the FCC takes action, the deal is likely to create a new and powerful loophole in traditional media ownership rules involving something called the “attribution rules.”  While I do not think the participants themselves are aware of this problem, or intend this outcome, allowing the major cable companies and Verizon to participate in a Joint Operating Entity (JOE) without certain precautions creates a means by which these parties, if they wished, could coordinate their video offerings in a way that Congress and the FCC have traditionally found antithetical to our media policy of viewpoint diversity.

 

As the attribution rules apply to broadcast media, the mechanism for circumventing the attribution rules set in this case would extend to radio and television broadcast ownership as well. In other words, it’s not just about Comcast and VZ, or even Comcast and TWC, sharing programming info such as what they are paying for ESPN or what tier they plan to place Tennis Channel or EPIX. Approval of the deal in its current form also creates a mechanism whereby broadcasters such as News Corp and CBS could get together to coordinate news coverage on things of mutual interest, such as whether Congress should adopt SOPA.

 

Fortunately, the DOJ proposed final judgment lays the groundwork for addressing these concerns. But the FCC has to actually focus on this and act. It doesn’t make a difference for the current deal, but it makes a huge difference for the future of media ownership.

 

I explain below . . .

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USTR “Limitations and Exceptions” Proposal Laughably Weak; Time To Get Biblical (Prov 22:15) On Their Ass.

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Back in the beginning of July, the USTR made a major policy and rhetorical shift by actually acknowledging the importance of “limitations and exceptions” in copyright. As I noted at the time, this represented a major victory for opponents of copyright maximalism given the USTR’s previous refusal to even acknowledge the validity of limitations and exceptions. While applauding USTR’s positive change in direction (always make it easy for people to agree with you!), I also noted that this change was the direct result of ACTA crashing and burning and the recognition by USTR that any trade agreement must “at least pay lip service to the vital role of limitations and exceptions in the copyright ecosystem” if it expects ratification. So while this concession created opportunity to start turning back the endless erosion of personal rights by the incoming tide of copyright maximalism, I warned that “the actual language of the treaty might still undermine limitations and exceptions in practice while pretending to acknowledge their importance on the surface.” Accordingly, it would still fall to civil society to “help USTR move down the path of wisdom by refining the text” and prevent it from backsliding into its previous position that “limitations and exceptions” is just a fancy way to say piracy.

Last week, the USTR proposal got leaked. Unsurprisingly, it turns out USTR still needs some hand-holding and education on what it genuinely means to embrace the value of limitations and exceptions. Rather than get angry, however, we must approach USTR with the kind of “tough love” advised by Proverbs 22:15. Or, in other words, we just need to get Biblical on their ass — again.

I explain below . . . .

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If I were the MPAA . . . How I Would Deal With My Car Break-In.

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My family and I got back from our annual vacation in the Current Middle Ages last Friday morning around 2 a.m.  Exhausted from the trip, I forgot to take in my iPod and left it visibly displayed on the front seat. When I went out to the car the next morning, I found the passenger-side window broken and the iPod (along with some other items in the front seat) stolen. I called the police, and an officer came out to take my report. He was properly professional and sympathetic. He informed me that the chief tool available was a database that pawnshops must maintain of any electronic devices that are pawned. If the serial number on my iPod came up in the database, they would nab the felon. Otherwise, though, there wasn’t much hope. The officer also advised me that there had been some similar incidents in the general neighborhood and that the best way to avoid having my car broken into in the future was to make sure that no electronics or charging cords were visible. I thanked him for his professionalism and advice and that was that.

 

Then I got to thinking, what if I were the Motion Picture Association of America (MPAA) or the Recording Industry Association of America (RIAA)? How would I handle the theft of my iPod and the advice from the police on how to avoid future break ins? Rather differently, as I explain below . . . .

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The Wireless Market Is Seriously Messed Up When Every Incentive Is Anti-Consumer.

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AT&T reported their second quarter results today. According to this analysis, AT&T achieved better profitability by (a) dramatically limiting their broadband service; (b) discouraging consumers from upgrading their devices; and (c) figuring out new charges for consumers to enhance overall profit per customer.

I get that firms are supposed to maximize profit. But when every single incentive to profit maximization relies on providing less service for more money and discouraging people from using your service, something is seriously messed up. This is doubly true when usual trend in information technology is to drive prices down. And, more tellingly, it creates a real concern if we are relying on market incentives to ensure that providers do things like build out networks and provide us with better service and lower prices.

I’m not claiming AT&T is being nefarious. I’m just saying something appears seriously messed up about the whole industry structure. Given the critical importance of this particular industry to our national economy, it would be particularly useful if we had a better understanding of why this is so messed up and — jus maybe — what policies would fix it. For example, if the enormous subsidies paid for iPhones and other smart phones is an issue, wouldn’t it make sense to sever the handset market from the network? If the problem is that network upgrades are expensive to meet demand for wireless capacity, then how are we going to get networks built out?

I’d be happy to concede the issue on metred pricing, except that there doesn’t seem to be any actual relationship between the price metering and the cost of provisioning. The idea of metering is that I want to provide you with more capacity because that way I make more profit. If this were bananas, I would have a fairly direct incentive to grow more bananas so I can sell more bananas. But AT&T doesn’t want to charge me for more bandwidth, which would arguably give it incentive to build better systems and sell me ever more capacity. It wants to sell me limited capacity and then stop, presumably so it can capture some imaginary and unspecified revenue on the the other side of the platform. That creates a fairly unfriendly incentive to create scarcity and avoid investment in the network.

Which brings me back to my original point. There is something seriously wrong in a market when every single incentive is anticonsumer, and when providers can act on these anticonsumer incentives with no consequences. If nothing else, can we at least stop pretending that “the market” is going to somehow look out for consumers, despite every provider incentive to the contrary?

Stay tuned . . . .

VZ/SpectrumCo Update: Actually Pretty Good, Except For That ‘Cartel’ Thing.

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I have been doing some analysis of Verizon’s latest move in the VZ/SpectrumCo transaction, the announcement VZ will engage in a series of AWS spectrum swaps with T-Mobile. Between this and Verizon’s commitment to sell off its Lower 700 MHz A&B block licenses, I am almost happy — except for that whole cartel thing with the major cable companies. But if we ignored the cartel thing, this deal now becomes the rare bird that actually enhances both Verizon’s position in the market and that of a prospective competitor. This is not quite a triumph for Coasian market efficiency, since it took the threat of agency action to nudge Verizon in the ‘right’ direction. I also need to point out that when we start out with a fairly dismal market structure, it does not take much to improve things. Giving spectrum to T-Mo is good, but it does not address all the competition problems created by our unfortunate means of distributing spectrum, which still ends up concentrating it in the hands of a very small number (i.e. 2) of companies. So ‘happy’ is a relative term.

As a result, the transaction needs a few minor conditions to make it complete: a data roaming condition to keep competition afloat (and in case the data roaming rule does not hold up in court) and accelerated build out/use or share to ensure rural communities see a 4G network before the end of the decade, but otherwise this looks pretty good (even with AT&T likely to snarf all the Lower 700 MHz B block licenses). Mind you, it reenforces the need to get interoperability and special access reform done if we want to see real competition — but we have rulemaking proceedings on those.

Unfortunately, there is that whole “cartel” thing with the major cable operators. And despite all the positive aspects of this transaction as now configured, they cannot outweigh the negative of creating an anti-competitive cartel at the center of our communications infrastructure.  But let me set that aside for the moment to focus on the spectrum side of things.

 

More below . . . .

 

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Time Warner Cable’s New Pricing Plan And The Dr. Strangelove Rule Of Price Signaling

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“The whole point of the Doomsday Machine is lost if you keep it a secret! Why didn’t you tell the world, eh?” — Dr. Strangelove, from Dr. Strangelove, or How I Stopped Worrying And Learned To Love The Bomb

Time Warner Cable (TWC) has announced it will expand its existing “Internet Essentials” program to more cities in Texas. Users that elect this pricing plan are limited to 5 GB per month. Go over, and you pay $1/GB until you hit a maximum of $25 extra on your monthly tab. Time Warner also provides  you with meters so you can keep track of your usage. TWC also allows you to switch back and forth between unlimited and “essentials” easily and without any lock-in. If I find I keep going over, I can switch back to unlimited. As an added effort to make sure users know what they are getting in to when they opt for the more restricted plan, TWC gives you a 2 month grace period if you switch to Essentials where they track your overages and don’t charge you for them. This is a good thing, because, as I discuss below, one of the issues for these usage based billing/bandwidth cap things is that many people do not have any clue how much capacity they use.

As I’ve written before, I like the way TWC is experimenting with pricing here.  I don’t know if customers will see this as a good deal, but that is the point of experimenting with different price plans. In fact, I wish other providers would experiment this way, rather than simply impose bandwidth caps or usage based billing (there is a difference between them, although most reports treat bandwidth caps as a form of UBB). Oddly, Time Warner Cable’s experiment may tell us a lot not only about whether customers like a low-bandwidth option (and whether five dollars is the right discount for it), but about whether other operators who are forcing their customers to take more constrained options are able to do so by exercising market power rather than because customers want it.

Which brings me to the Dr. Strangelove Rule of Price Signaling, which I describe below . . . .

 

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