Tales of the Sausage Factory

An insider’s view of the media hegemony

The Markey-Pickering “Net Neutrality” Bill: Grinding Out One More First Down In The Internet Freedom Bowl.

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God knows I love Ed Markey as one of the true defenders of us average folks. Time and again, he has proven himself that rare combination of smarts and political savvy to remain an effective champion against media consolidation and telco and cable interests even when he was minority member. Which is why it always pays to pay attention when he acts.

Markey’s latest bill, The Internet Freedom Preservation Act of 2008, H.R. 5353 (co-sponsored by retiring Republican “Chip” Pickering (R-MS)), would seem at first glance pretty weak gruel compared to his previous bill in 2006. So what lies behind this apparent retreat from an outright ban on ISPs discriminating to Congressional findings, a mandate for some FCC hearings, and a report? After all, with Markey chair of the Subcommittee, shouldn’t he be pushing something more aggressive? I mean, the Dems control both houses of Congress now, right?

The answer lies in the pragmatics of Washington and the recognition that — unlike in the movies — major battles aren’t won overnight. As I have said before, this is a long, messy fight in which both sides invest a heck of a lot of time and energy in positioning themselves and grinding out short yardage plays to advance the ball. Seen in that context, the Markey Bill is a very effective tool for both keeping the debate alive and advancing the ball another ten yards toward the goal post.

Analysis below . . .

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Is It Really De Ja Vu All Over Again? And Which De Ja Are We Viewing?

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Everyone loves history, especially their own. It is perhaps therefore not surprising to see a spate of Democratic/Liberal columnists fret about the possible similarities between the upcoming Democratic Convention in Denver and the infamous 1968 Democratic Convention in Chicago. There, the Democratic Party — caught between an entrenched old guard and a vocal youth vote, between supporters of the Vietnam War v. opponents, civil rights activists in varying degrees, and supporters of Robert Kennedy adrift after his assassination — engaged in brutal internecine warfare that split the party and gave Richard Nixon the victory.

But is it the right analogy? I would suggest, as I know others have as well, that the correct analogy lies not with 1968 but 1932. That story ended happily for the Democrats, and it is worth considering why and whether that success can be repeated — if we do not try to shove our differences under the rug and “play nice.”

More below . . . .

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A Black Day For The Rule of Law

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The Senate has voted to give retroactive immunity to the phone companies for spying on Americans without a warrant.

As I have written elsewhere, this does violence to the Rule of Law. As usual, the defendants of this measure make the best case against it. As Senator Orin Hatch explained:

“And frankly, if we do not give retroactive immunity, there is not a general counsel of any of these companies that would [again] expose their company to the … litigation that has come since.”

Which is precisely the point. It should not be possible, let alone easy, for the Executive Branch to provide an end run to the Constitution and the law. That a majority of the Senate will retroactively concur in this law breaking — even applaud it and encourage it! — makes mock of the very notion that we are a free people in the land of the free governed by laws, not men, safe from the tyranny of Kings because their power is restrained.

As a Republic, we will recover. We have suffered such stains and indignities on the law in the past. Korematsu and the internment of Japanese Americans, the warrantless surveillance of civil rights leaders, The Espionage Act in World War I, which made it illegal to criticize the government’s military recruitment efforts. The list goes on. Then the pendulum swings back. We stand ashamed, offering compensation and apologies, shaking our heads at what people do and wondering how a previous generation could have erred so dramatically.

What is appalling here is that this is not done in the first rush of panic, pain and fear following the attacks. It is not prompted by “false intelligence.” There are no excuses for those Democrats who have ONCE AGAIN given President Bush everything he asks for, after promising us in 2006 that “the blank check is over” and that the Democratic landslide signaled a return to a government of checks and balances, accountability and oversight? And these Democratic Senators will come to us again in 2008, and expect the party faithful to once again fall in line?

I still have hopes for the House Democrats. Recently, Representatives Dingell, Markey and Stupak reminded their Senate colleagues of their duty to exercise oversight of the Executive to protect the rights of all Americans. Perhaps these champions of freedom will convince their House colleagues to stand firm in the face of White House pressure, telco PAC contributions, and the craven example of their colleagues in the Senate.

But it is a black day for the Rule of Law, and a black day for the Democratic party. Let every Democrat that has dared adopt a haughty attitude to Republicans for supporting domestic spying, torture, and the assault on our consititution hang his head in shame. Let our tongues be stilled. For our leaders have proven no better than theirs. And will not we, like the sheep we have accused them of being, quietly return them again to office?

Stay tuned . . . .

Cable Operators Shocked…Shocked I Tell You…about Verizon Marketing Practices.

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I may occasionally (O.K., more than occasionally) have some snarky things to say about the free market philosophies of my opposite numbers at places like CATO and Progress & Freedom Foundation. But what distinguishes them in my mind from industry shills and sock puppets is their ideological integrity. When they want everything deregulated, they really mean it. Not so the industry and its true sock puppets, who can spin on an ideological dime without the least regard for even the vaguest notions of consistency with their previous statements.

Case in point, this FCC complaint by the cable companies against Verizon for “retention marketing.” Mind you, these are the same folks that complain whenever the FCC even thinks about interfering with the “vibrant and competitive telecommunications market,” and who protest that enforcing the laws passed by Congress to require interoperable set top boxes and set a numeric limit on the number of subscribers they can have constitutes a “vendetta.” But, as usual, consistency is not exactly a strong point for industry. As I continually remind folks, industry does what is best for its bottom line, period. And here, it means using the big bad evil FCC to slap the telcos around.

Which brings me to the point I expound upon below. Too often, the industry gets to win by making this a fight about process and “level playing field” and confusing the issue. But what we really need to care about is what our actual policy IS. If we want to encourage competition because we prefer it to regulation of monopolies, then we damn well better make sure competition actually happens, which means subjecting the incumbents with market power (at least initially) to a very different set of regulations than the new entrants. For many years after the break up of AT&T, the FCC subjected AT&T to a set of regulations designed to keep it from using its position as the dominant long-distance carrier to prevent the new entrants like MCI and Sprint from attracting customers. The FCC did not worry if that was “fair” to AT&T to have different rules that prevented exercise of market power by a dominant firm. It said “hey, we want competition! That’s about economic policy, not about being fair.”

Mind you, I don’t expect my opposite numbers to agree. But they will at least have the virtue of consistency.

More below . . . .

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Go Writers Guild!

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Although as Writers Guild of America reminded its members, the strike is still on until the votes are counted, WGA has suspended picketing and it looks like they have a firm deal. The deal links writer compensation to advertising and other revenue derived from streaming media, an elegant solution to the problem of monetizing a product so new no one knows how it will make money and is extremely likely to be given away (you know, like broadcasting).

I don’t have much to add here by way of analysis, but I wanted to give a huge shout out to the writers and the guilds and the actors that supported them for holding out and getting a fair deal. If we are indeed a country on the verge of change (as I keep hearing), I can hope that one change will be to reverse the sad downward slide of organized labor. Unions have been one of the most positive forces in our country for economic progressivism. Perhaps a high profile win or two will remind people why it pays to join and why they should look for the union label . . . .

Stay tuned . . . .
(Former member National Treasury Employees Union)

Comcast Reacts To FCC Probe By Changing Fine Print

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Well, it appears that Comcast has learned a valuable lesson from our complaint about blocking BitTorrent and subsequent FCC investigation. Sadly, but unsurprisingly, the lesson appears to be “make our policies more explicitly outrageous.”

My thanks to Marvin Amouri at Free Press for this excellent analysis of Comcast’s new terms of service. As Marvin notes, Comcast released this puppy quietly on its website, taking advantage of the pre-existing fine print to alter terms unilaterally. (Question for Comcast, if I don’t like the new terms, can I cancel without tirggering an early termination fee?)

Marvin really says everything that needs to be said on his excellent post, so I shall limit myself with simply rolling my eyes and wondering when we will have a Congress and an FCC genuinely interested in promoting broadband adoption and competition rather than providing cover for lazy duopolists squeezing locked in customers unwilling to invest in network upgrades. Oh yeah, I forgot. According to this Administration, we already solved the broadband problem.

Stay tuned . . . .

The Economics of Telco Deregulation: Califronia Dreaming, Economic Realities, and the “Reverse Ramsey” Pricing Model

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This article in the LA Times on the impact of telco price deregulation in California is a good illustration of the complex nature of the economics of competition and deregulation, and why it’s so friggin’ important for regulators and the public to understand this stuff. In 2006, the California PUC decided that voice service faced sufficient competition to phase out price regulation. In theory, competition would lead to lower costs and increased services and would remove the invariably stultifying impacts of regulation.

The result has been an increase in the availability of services and an overall decrease in the cost of service, but not in the way that ordinary folks understand or that regulators professed to expect from deregulation. Most customers have, in fact, increased the amount they pay for telecommunications services overall. But because they buy larger bundles of services that profess to discount the price of each element in the bundle, the average cost per service is lower although the amount of money paid has gone up. That might seem a good value trade if it were driven strictly by consumer choice. But consumer choice is driven by the decision of telcos to increase the cost of stand alone services. So people not looking to bundle do so because it is “cheaper” while poor people who cannot afford the higher price for the bundle get a real price hike with no value added.

Example: Feldco the Telco raises the price of basic local voice from $10 to $20, and raises the price of additional services taken a la carte from $5 to $10, but I offer a package of basic voice and five additional services for $30 (which I tell you charging $5 for voice and $ 5 for each additional feature). Any customer that can afford to upgrade to my bundled package will do so, because the “value” of the bundle (at my new prices) is $70 and you are getting it for $30. So even though you upgraded and are paying me more, the cost of basic voice (calculated as part of the package) just dropped by $5. What a savings! of course, the customers who cannot afford the additional $10 a month for the bundle experience a real price increase of $10.

Basically, the problem of wealth inequity that we have seen in every other sector of the economy — where the highest earners have enjoyed the greatest increases — is now mirrored in California’s telecommunication service market. How did this happen? Do we care? And what does this tell us about the future of the metered internet, wireless competition, and the ever popular video competition?

Answers below . . . .

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Why I Have Decided To Endorse Obama.

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So here it is “Super Duper Tuesday.” My own local primary (MD) will not be until next week. And while endorsing a candidate is always a perilous thing for those of us that work in Washington, I have decided to give the Tales of the Sausage Factory Endorsement to Senator Barack Obama.

Why? See below . . . .

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Chutzpah, Thy Name Is Wireless Incumbent.

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So here we are in the middle of the most intensely competitive auction ever. As you can tell looking at the recent postings by fellow Wetmachiner Greg Rose this auction has dramatically pushed up the amount of money paid by bidders for licenses and has created more intense competition for a broader group of licenses than previous auctions, strongly suggesting that — as Greg and I predicted when we first started pushing anonymous bidding in March 2006 — anonymous bidding eliminates all kinds of targeting, collusion and retaliation that typically held back smaller bidders and allowed larger bidders to pick up licenses for a song. An utter smashing success (at least from the perspective of those who favor using auctions for distribution of licenses), right? Who could have a bad word to say about it?

Answer: All the people who hate anonymous bidding BECAUSE it eliminates the ability to signal, retaliate, and collude and thus makes the auction more competitive. i.e. The incumbent wireless licensees (other than Verizon, which wanted anonymous bidding to avoid being targeted).

More below . . . .

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700 MHz: Notes From The Spectrum New Hampshire Primary, C Block Not Dead Yet

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Everyone remember how Clinton was dead after Iowa? Now who remembers two weeks ago, or even last week, when analysts wrote off the 700 MHz auction as doomed due to credit crunch? But, other than D Block’s utter failure to move (and regular readers will know my opinion of why that happened), the auction has proven a success by every measure we can obtain so far. Sadly, however, the key measures are not yet in, and won’t be until after the auction is over. Which is why, despite C Block exceeding it’s reserve price, I caution folks that we are still at the equivalent of just after the New Hampshire primaries and that any speculation about the important points of the outcome remain unresolved.

Here’s what we know for sure now:

1) The current take now stands at over $14 b. This not only exceeds the $10 b that the Congressional Budget Office (CBO) estimated, it will exceed the “wildly successful” 2006 AWS auction (which grossed about 13.9 b). A, B, and C blocks have all met their reserve prices, with the most contentious fighting in certain high value markets B block.

2) Because C Block has met its reserve price, it will not be reauctioned and the open device conditions will go into effect.

So the auction is clearly a success from Kevin Martin’s perspective (again, with the exception of D Block, which is a special case). While those like Commissioner McDowell can argue that C block might have fetched more without conditions, $4.7 billion is nothing to sneeze at. And it is clear that the aggressive build out conditions did not scare bidders away from A and B block, so (assuming the FCC is serious about enforcement) we should see increased deployment of services into rural regions.

What we still don’t know is whether the new auction rules gave new entrants a real chance to win spectrum, or (as the conventional wisdom had it) will incumbents Verizon and AT&T end up capturing the lion’s share of the spectrum (albeit at higher prices, owing to the introduction of anonymous bidding). That we cannot know until after the anonymity lifts when the auction ends (which, if the FCC chooses to reauction D Block under the rules proposed for reauctioning the other blocks, might not be for several months yet). Much depends on the identity of the current C Block holder. Is it Google? Verizon? Some other deep pockets like AT&T or Echostar, or perhaps the mysterious Vavasi NexGen Inc.? And is C Block settled? If the package bidder in round 17 knocked off the previous high bidder, then the previous high bidder will need to respond fairly soon or it will start losing its eligibility (bidding chips) and no longer be able to challenge.

If it turns out the incumbents capture most of the spectrum, I will need to eat a huge plate of crow and tip my hat to Commissioner Adelstein and Publius at Obsidian Wings, both of whom fretted that only Verizon could win a huge block like C Block and that we would get more new entrants by slitting the spectrum up. OTOH, if the Great Google Prophecy comes true, I will become insufferably pleased with myself for at least a month.

But, rather than pull a Tweety Bird and start treating my own speculation in the absence of data as fact, I will simply say —

Stay tuned . . . .