issue: Telecom

PPI Report: ‘The Best Path Forward on Net Neutrality’ is to Focus on Investment, Case-by-Case Adjudication

Posted on by The Progressive Policy Institute

The Progressive Policy Institute (PPI) today released a new policy report providing evidence that the best possible resolution to the current “net neutrality” stalemate is for the FCC to avoid the heavy-handed approach of Title II regulation, and lean instead on its Section 706 authority to regulate potential abuses by Internet Service Providers (ISPs) on a case-by-case basis.  The report was also filed into the FCC’s official docket on the proposed rules for the Open Internet.

Co-authored by PPI Senior Fellow Hal Singer and Brookings Non-Resident Senior Fellow Robert Litan, The Best Path Forward on Net Neutrality argues that by relying on its Section 706 authority the FCC can promote greater investment across both edge and content providers compared to Title II. It will also allow the FCC to avoid any unintended consequences, such as creeping regulation, that encompasses content providers or other ISP services.

“Internet policy, including the resolution of the net neutrality debate, should be guided, in our view, by a simple rule: Pick the policy that maximizes total investment across the entire Internet ecosystem,” write Singer and Litan. “Investment by both core and edge providers is paramount to a properly functioning Internet ecosystem, and due to feedback effects, investment by one depends on the investment by the other.”

“Imposing public-utility style regulation on Internet access would dampen innovation and investment in more, faster broadband. We propose the FCC implement the same case-by-case process to adjudicate discrimination complaints it has established for cable companies to broadband providers.”

The report’s release comes at a critical time when the FCC is seeking public comment on the current role of the Internet’s openness in facilitating innovation, economic growth, free expression, civic engagement, competition, and broadband investment and deployment. The FCC’s open comment period on the proposed Open Internet rules is set to close on September 15.

Download The Best Path Forward on Net Neutrality.

Forbes: Rate Regulation Run Amok: Lessons for Net Neutrality

Posted on by The Progressive Policy Institute

Readers of this blog who follow the net neutrality debate will recognize an important case called Cellco, cited repeatedly in the D.C. Circuit’s January decision to gut key provisions of the FCC ’s Open Internet Order that smacked of heavy-handed rate regulation.

In Cellco, the D.C. Circuit blessed the FCC’s 2011 Data Roaming Order, which established the terms by which wireless broadband providers should contract for data roaming. Importantly, the Court approved a light-touch approach to adjudicating roaming disputes: Rather than set a roaming rate by fiat, the Data Roaming Order granted the parties the freedom to negotiate towards a “commercially reasonable” roaming rate.

To ensure that his agency’s revised Open Internet Order survives scrutiny by the same court, the Chairman of the FCC, Tom Wheeler, has imported the “commercially reasonable” language from the Data Roaming Order to establish the terms under which content providers and Internet service providers (ISPs) should contract for priority delivery. I’ve written about his proposal glowingly here.

Not everyone agrees with my assessment. Proponents of strong net neutrality such as Netflix and Kickstarter claim that the current proposal would permit the development of “fast lanes” for content companies that could afford priority delivery. They seek to steer the Chairman toward heavy-handed rate regulation, which would bar any contracting for priority delivery by effectively setting its rate at $0.

 

While net neutrality garners press attention, similar efforts by competitors are underway to steer the FCC toward heavy-handed rate regulation for roaming disputes. In particular, they are trying to convert the “commercially reasonable” standard embraced in the Data Roaming Order into de facto rate regulation. And they have brought out the big guns.

Writing on behalf of T-Mobile, Dr. Joseph Farrell, former chief economist of the FCC and currently professor of economics at UC Berkeley, has proposed a new standard for determining whether a roaming rate is “commercially reasonable.” According to Professor Farrell, any roaming rate, expressed on a per-megabyte (MB) basis, that substantially exceeds the access provider’s retail rate for the incremental MBs used while roaming should be looked at with suspicion.

To make his proposal concrete, consider Sprint’s current wireless offering at $50 per month. Assuming the average wireless broadband user consumes 1,700 MB of data per month, Sprint’s roaming rate should not exceed three cents per MB (equal to $50 divided by 1,700 MB).

Not only would Professor Farrell’s proposal constitute heavy-handed rate regulation of the kind rejected by the Court, it would also impose the wrong rate. To see why, consider the following hypothetical:

Sprint competes with T-Mobile (as well as AT&T T +0.17% and Verizon) for business customers in Whatever, USA. To commute downtown, suburbanites ride a bus across a bridge that is covered by Sprint, AT&T and Verizon, but is not covered by T-Mobile. Although T-Mobile’s license covers the bridge, T-Mobile chooses not to build out its network there. Assume further that the typical commuter consumes five percent of her daily consumption of MB on the bridge. And most important, no commuter would ever subscribe to a wireless carrier that did not cover the bridge.

By providing bridge coverage to T-Mobile via roaming, Sprint creates a new option for commuters that did not previously exist. It is now possible for a commuter who previously would have opted for Sprint, to now opt instead for T-Mobile. Is it any wonder why Sprint is reluctant to cut a roaming deal in this circumstance?

Sprint’s margins that are put in play via the roaming agreement are not just the margins associated with the commuter’s MB usage over the bridge. Instead, the entirety of Sprint’s retail margin is put in play! Accordingly, it would be perfectly commercially reasonable for Sprint to demand to be compensated for its forgone retail margins when setting its roaming rate.

At margins of roughly 40 percent, that would mean a $20 roaming fee per subscriber per month (equal to 0.4 x $50 per month). But if Sprint asked for anything more than $2.50 per subscriber per month (equal to 0.05 x 1,700 MB x 3 cents per MB), Sprint’s offer would violate Professor Farrell’s proposed standard. In other words, the roaming rate that would make Sprint indifferent between serving the customer indirectly (via a roaming agreement) and directly (as a retailer) is eight times T-Mobile’s asking price!

And herein lies the harm from rate regulation: Wireless providers made massive investments in broadband networks under the belief that those retail margins would provide a sufficient return on investment; dilute those margins too aggressively and the investments disappear. The access seeker sits back and then wants to cherry pick that investment at regulated rates rather than build the network itself. Yet an explicit goal of the Data Roaming Order was to provide incentives to “those providers to invest and deploy advanced data networks, and avoid potential disincentives for those providers to invest.”

Investment incentives are particularly important because wireless carriers are continually upgrading their networks. 4G is just the current flavor, but it followed 3G, and it will soon be followed by 5G, which might just serve as a viable alternative to wireline access technologies such as cable modem. If only wireless investment were complete, it might be possible to construct an economic model showing that Professor Farrell’s proposed solution maximized short-term consumer welfare. But when an industry is as dynamic as wireless, investment is never complete, and attempts to appropriate “sunk” investment will surely backfire.

To be fair, allowing access providers to capture the forgone retail margin may not be wise policy when retail markets are monopolized. But that is not the case here: The effective price per MB on U.S. wireless networks declined from $0.25 in 2008 to less than $0.05 by 2012. Retail competition among four national providers ensures that the voluntary access rates do not reflect monopoly rents.

So what is the lesson for net neutrality? Competitors are lobbying the FCC to set a regulated price for roaming, with little concern for investment effects. With the same recklessness, certain content providers are lobbying the FCC to set the regulated price for priority delivery at zero. In both instances, the FCC should refrain from getting embroiled in rate regulation.

The Chairman should stick with his original net neutrality proposal. ISPs and content providers should be free to contract for priority delivery pursuant to a commercially reasonable standard. Under such a standard, special arrangements for affiliated websites could be barred. And an ISP that tried to reduce the speeds of its standard offering—with the introduction of a “slow lane”—would be presumptively in violation of the standard. But there would be no regulated price for priority delivery.

If the FCC is dragged into rate regulation in these important cases, the incentives for private-sector investment will be undermined and, when the current flavor of technology is locked in place, broadband consumers will suffer.

This is cross-posted from Forbes.

Regulation and the Data-Driven Boom

Posted on by The Progressive Policy Institute

The FCC has a full plate: It is dealing a wide variety of regulatory policy decisions in the coming months, including net neutrality, IP transition, spectrum auctions, the Comcast-Time Warner merger, and the AT&T-Direct TV merger.

Even as the FCC engages with these different issues, the U.S. economy is experiencing an unprecedented data-driven boom that is the envy of the world. A new PPI analysis shows that Americans consume 58 gigabytes of data per month per capita, on average, compared to only 23 and 19 gigabytes of data per month per capita, for France and Germany respectively.* In other words, Americans use 3 times as much data as Germans, per capita. The only major European country that even comes close to the U.S. is Sweden.

The combined innovative and investment efforts of the telecom/cable providers, such as AT&T, Verizon and Comcast, and the edge Internet companies, such as Google, Amazon, and Apple, helped propel economic growth above 4% in the second quarter. The number of computer and mathematical workers is up more than 400,000, or 11%, over the past year alone. The tech/info sector—including telecom/cable providers, edge companies, and content creators—is proving to be the most dynamic part of the economy. And as our upcoming “Investment Heroes” report will show, the tech/info sector also includes some of the companies investing the most in the domestic economy.

So how can the FCC keep this data-driven boom going? As the old saying goes, if it ain’t broke, don’t fix it. In recent years, with some large exceptions, the FCC has more or less followed the principle of moderate regulation when it comes to broadband and wireless policy. That means only intervening when there is clear and compelling reasons to do so, in order to give maximum scope for innovation and investment.

This advice is, of course, very different than the more aggressive regulatory approach advocated by some critics who point to Europe as a better example. But if we compare apples to apples—the data consumed per person in the U.S. versus the data consumer per person in most European countries—we see that the U.S. comes out way ahead.

Given the good results so far, we suggest that the FCC should stay on its same moderate course, balancing out the important goal of consumer protection against the long-term benefits of emphasizing innovation and investment. The same principle applies to other regulators, such as the FTC, as they deal with issues such as privacy. Only in that way can we ensure the continued gains from the data-driven economy.

*These figures update our earlier paper “Bridging the Data Gap.”

PPI Mission to Australia: Jobs in the Australian App Economy

Posted on by The Progressive Policy Institute

Leaders from the Progressive Policy Institute recently returned from Australia, where they engaged top government officials, business leaders, tech entrepreneurs, and policy analysts in discussions about the rising contribution of digital innovation to the country’s economy.

At a public forum held in the Legislative Assembly Chamber of the New South Wales Parliament in Sydney (left), PPI released its newest report, Jobs in the Australian Economy. The event featured a keynote address from Australian Minister for Communications, Mr. Malcolm Turnbull MP, followed by remarks from PPI President Will Marshall and Chief Economic Strategist Michael Mandel. Authored by Mandel, the report is the first effort to measure the tens of thousands of tech-related jobs created in Australia since the introduction of the smartphone in 2007.

Based on a methodology Mandel developed to estimate app job growth in the United States and United Kingdom, the study identified 140,000 Australian jobs that are directly related to the building, maintaining, marketing, and support of applications for smart-devices. Additionally, the report shows that the growth rate of Australian App Economy jobs, as a share of all tech jobs created since 2007, has significantly outpaced both the United States and United Kingdom. Perhaps more interesting, according to Mandel, is that Sydney and Melbourne are roughly on par with New York and London in a comparison of app-related growth.

“I congratulate Dr. Mandel on his new paper, Jobs In Australia’s App Economy, which is perfectly timed in identifying apps as a major and growing component of the ICT sector and economy generally,” said Mr. Turnbull (right) in his address. “It tells a very positive story in that many Australians ‘get it’— that apps will be important for their business, whether they are small businesses connecting directly with consumers or providing services to larger multinationals.

“This emergence and growth of this industry is a direct result of the market reacting to demand. That suggests there is a limited role for government here and the best thing we can do is to get out of the way to let private sector innovation continue to flourish.”

Indeed, as Mandel clarifies in his report, “Now, it’s important for policymakers to strike the right balance between essential and excessive regulation, especially in areas such as data privacy. … A general principle is that the tighter the regulations, the more obstacles in the path of the growth of the rapidly innovating App Economy.”

By creating a regulatory environment that fosters robust innovation, established democracies around the world can allow their growing app economies to become an integral part of their economic future bringing with them thousands of jobs and a wealth of other positive economic and social benefits.

While in Sydney and Melbourne, PPI leaders also held meetings with the following Australian thought leaders: The Honorable Paul Fletcher MP, Parliamentary Secretary to the Minister for Communications; The Honorable Jason Clare MP, Shadow Minister for Communications; The Honorable Ed Husic MP; Keith Besgrove, Chair, National Standing Committee on Cloud Computing; Linda Caruso, Australian Communications and Media Authority; Niels Marquardt, CEO American Australian Chamber of Commerce; Suzanne Campbell, CEO Australian Information Industry Association; Brenda Aynsley, Australian Computer Society Inc.

Additionally, PPI’s release of Jobs in the Australian App Economy received extensive coverage in the Australian media, including in the Australian Associated Press, Australian Financial Review, The Australian, International Business Times,  iTWire, and Startup Smart.

To read more about PPI’s work in this area please also see: Bridging the Data Gap: How Digital Innovation Can Drive Growth and Create Jobs; Data, Trade and Growth; Can the Internet of Everything Bring Back the High-Growth Economy?; The Rise of the Data-Driven Economy: Implications for Growth and Policy; Beyond Goods and Services: The (Unmeasured) Rise of the Data-Driven Economy

Why is My Cable Box Still So Big?

Posted on by The Progressive Policy Institute

Technological change is nothing new, but the speed of innovation in recent years has been unprecedented. It took decades to go from railroads to private cars, or from Kitty Hawk to the Jet Age. Yet we have sprinted from simple cell phones to smartphones carrying the entire Internet – plus apps – for every purpose under the sun in just a few short years. Flat screen TVs were a novelty a decade ago; now you can’t buy anything else.

Maintaining this pace of innovating in the digital age requires flexible rules that keep pace with the latest technology. This is especially true in the video services market, where change has been fast and furious. That’s why Congress should act to repeal an expensive and innovation-restricting requirement on the design of set top cable boxes.

Currently the FCC mandates that each cable box—the electronics in your home that links your TV with your cable provider—use a particular type of technology known as a “CableCARD” that contains the security mechanisms needed to receive programming. The FCC’s rule, formally known as the “integration ban,” requires that these security functions cannot be hard-wired or otherwise integrated within the rest of the box.

Continue reading at the New Jersey Star-Ledger.

The Hill: Looking Beyond the Minimum Wage

Posted on by The Progressive Policy Institute

The conversation surrounding economic inequality in the United States has risen from its usual steady drone to a headline-grabbing roar in recent weeks. Unlike in 2011, when protest movements such as Occupy Wall Street acted as the main catalysts of the discussion, today the debate erupts from all sides of the issue.

Billboards in San Francisco decry the efforts to raise the minimum wage as a job-killer, while many around the country begin their “live the wage campaign”. Nick Hanauer, self-proclaimed plutocrat, warns his fellow .01%ers that unless economic inequality is reduced soon, the proverbial pitchforks will come for them. Sen. Ted Cruz continues to predictably denounce “job-killing minimum wage legislation,” while the Obama administration continues its equally predictable relentless barrage of advertising insisting that the current minimum wage is not a living wage.

Read the full article at The Hill.

The Australian: Mobile broadband boosts Australian economy by $34bn

Posted on by The Progressive Policy Institute

This week PPI is in Australia to discuss a new policy report on the Australian tech economy. In the report PPI Chief Economic Strategist Michael Mandel  found that app jobs make up a large portion of the Australian economy, and growing. The Australian covered PPI’s policy report in an article written by Chris Griffith:

Figures released today by the Washington based Progressive Policy Institute show that from May 2012 to May 2013, the number of Australians with a smartphone rose by 29 pc, while the number of Australians using the internet via their mobile phone rose 33pc in the 12 months to June 2013.

“It’s astonishing how fast many companies have embraced the App Economy, hiring the workers needed to develop mobile applications at a rapid rate. We are seeing the creation of new specialties and new ways to interact with customers and employees,” the PPI said of its findings.”

You can find the full article on The Australian website.

In Its Dealings with ISPs, Netflix is Holding a Powerful Card

Posted on by The Progressive Policy Institute

By producing compelling online content and interfacing directly with its customers, Netflix is holding a powerful card—and I’m not talking about its Emmy-award-winning show. Rather than playing this card, Netflix is asking the Federal Communications Commission (FCC) to intervene in its dealings with Internet service providers (ISPs). Before delving into Netflix’s potential counter-strategy and the need (if any) for regulatory intervention, a bit of background is in order.

FCC Chairman Tom Wheeler announced last week that the agency is launching a new investigation of “interconnection” agreements, which as the name suggests, govern connections between Internet networks. Interconnection has taken center stage since Netflix struck deals with Comcast and Verizon in February; prior to those direct connections with ISPs, Netflix paid “transit” providers such as Cogent and Level 3 to obtain access to the ISPs’ networks. Presently, interconnection arrangements are governed by private contracts.

Interconnection issues are not implicated in the FCC’s pending Open Internet proceeding, which addresses the treatment of traffic within an ISP’s network, as opposed to on its doorstep. Yet some companies are trying to conflate the issues and leverage the religious fervor and grassroots political machines of the net neutrality movement. Adding to the drama is Netflix’s suggestion that it was forced to accept terms for direct connections at gunpoint; according to some accounts, the counter-parties were purposefully degrading the quality of the connection with Netflix until Netflix coughed up some cash.

Is there a constructive role for the regulator? The Progressive Policy Institute (a D.C. think tank with which I am affiliated) held a conference on interconnection last month, and invited Wharton Professor Kevin Werbach to make the case for FCC regulation of interconnection. At the conference and in his writings, Werbach cited some classic interconnection showdowns, including Comcast-Level 3 and Verizon-Cogent, as the basis for intervention: A benevolent referee could resolve these disputes quickly, Werbach argues, and get traffic flowing to Internet customers.

To evaluate the potential benefits of intervention, I looked into these disputes and was surprised by what I found: Based on historical frequencies, the likelihood of a dispute between networks is rare, and the likelihood of a dispute leading to a service outage for consumers is even rarer. By my count, there have been just six major interconnection disputes since 2002 (five of which involved Cogent)—about one every other year—and the average number of days without service across these disputes was close to zero. In other words, even when these disputes occur, traffic generally continues to flow pursuant to a standstill agreement while the dispute is worked out. Unless something has radically tipped the balance of power in the Internet ecosystem, history suggests that the benefits of the FCC’s intervening in these affairs—in terms of forgone service outages—are likely small.

On the other side of the ledger, inserting the FCC into these negotiations could impose significant costs on society. For example, mandatory interconnection at regulated rates could undermine the incentive of ISPs to expand or enhance broadband networks. Some have blamed mandatory roaming for certain wireless operators’ decision not to build out in high-cost areas (but rather rely on roaming). Moreover, the FCC’s assistance could discourage access-seeking networks, including transit providers and some large content providers such as Google, from expanding their networks into last-mile services. According to this cost-benefit analysis, the FCC should stay out of these affairs.

Two other considerations should give the Chairman pause about intervening on interconnection. First, for customers who are hooked on Netflix exclusive content, such as House of Cards or Orange Is the New Black, Netflix is the “must-have” network. I could access the Internet at super-fast speeds through my cable operator or my telephone provider (and soon through my mobile device), but there is no good substitute for what Netflix is producing. So if push came to shove, and my ISP started fooling with my Netflix connection, I would consider switching ISPs to see whether Frank Underwood maintains his presidency or Piper Chapman gets out of jail. Although this choice in super-fast connections is not available to all customers—by the FCC’s latest count, nearly three-quarters of U.S. households are served by two or more wireline ISPs with download speeds of at least 6 Mbps—the choice is available to enough households to make the ISPs think twice about degrading Netflix.

Second, Netflix has a potent counter-strategy that, if deployed, could be significantly more powerful in its dealing with ISPs than regulation: By charging its subscribers different prices based on their ISP, Netflix can gently steer its customers to “low-priced” ISPs—that is, ISPs that charge low or no interconnection fees. For example, Google Fiber, an ISP with a limited national footprint, recently announced that it would abstain from charging Netflix (or any content provider) an interconnection fee.

Like a credit card, Google Fiber is best understood as a “platform provider” that connects end users with content providers. When certain credit cards sought to impose relatively higher fees on merchants, merchants countered by imposing surcharges (or discounts) on the merchandise to steer customers to the lower-priced cards. Some large banks responded by imposing a “no-surcharge rule” on merchants, forcing merchants to charge the same price for goods regardless of which card was used. Following the abolition of no-surcharge rules in Australia (a similar movement is afoot in the United States), the number of merchants surcharging payment card transactions has increased steadily over time, leading to a significant reduction in merchant transaction fees.

Applying that lesson here, Netflix could charge Google’s customers a discount (say $6.99 per month as opposed to its standard $7.99 charge) for Netflix service. Alternatively, Netflix could charge customers of a high-priced ISP a surcharge (say $9.99 per month). By revealing to its subscribers the identity of the low-priced ISP, this counter-strategy could temper the interconnection charge of the high-priced ISP. Unlike cable networks, which rely on the cable operator to interface with the video customer, Netflix and other online providers are customer-facing and thus wield significantly greater bargaining power in their dealings with the platform provider—as long as they are willing to use it.

I asked a Netflix spokesperson at a recent Aspen Institute event whether Netflix has contemplated this counter-strategy. His answer, which begins at about 1:50:32 on the video, was (1) he has at least considered it, but (2) the interconnection fee charged by ISPs to date was “so small” in relation to Netflix’s content costs that a surcharge would not make sense. Admittedly, my question was tough, but this answer does not engender much sympathy for Netflix’s plight.

Before seeking further regulatory intervention, Netflix should avail itself of all potential counter-strategies in its dealings with ISPs. To do anything less is to ask the FCC to carry your water. As Frank Underwood put it, “There is but one rule: Hunt or be hunted.” Netflix is holding a powerful trump card that potentially obviates the need for regulation, but it seems disinclined to use it. Until Netflix has gone on the hunt and failed, the Chairman should shelve interconnection rules and focus his attention on the Open Internet rules now pending before him.

Twitter: @halsinger

This article was originally posted at Forbes.com

The State of U.S. Broadband: Is It Competitive? Are We Falling Behind?

Posted on by The Progressive Policy Institute

Advocates for new regulation of the U.S. broadband Internet base their case on the related contentions that (i) our nation lags behind the rest of the world in quality, price, and deployment of broadband, and (ii) the market for U.S. broadband service is not competitive. This paper analyzes the latest U.S. and international data on speed, price, profits, and investment, and concludes that both of these contentions are false.

As to the first component of the advocates’ argument: the U.S. ranks 10th in the world in average broadband speed among nations surveyed by Akamai, and trails only South Korea and Japan among our major trading partners, countries with extraordinarily high urbanicity. We trail only Japan in the G-7 in both average peak connection speed and percentage of the population connection at 10 Mbps or higher. On price, the record is even more clear—the United States has the most affordable entry-level prices for fixed broadband in the OECD.

Other measures also belie the claim that U.S. broadband lags behind our international peers. Our per capita investment in telecom infrastructure is 50 percent higher that of the European Union, and as a share of GDP our broadband investment rate exceeds those of Japan, Canada, Italy, Germany, and France.

In short, when looking holistically at data on rankings, investment, prices, and affordability in their entirety, no evidence suggests that the United States is an underperforming dullard sitting in the back row of the broadband room. Our networks are faster, our prices more competitive, and our investments larger than mostof the world’s other major industrial nations.

The second pillar of the critics’ argument is also tenuous. U.S. broadband is provided in a dynamic, quickly changing market marked by dramatic shifts in products, services, and competitors, and breakneck innovation. In such a market, the best evidence that competition is working and producing good results is the high quality of service and affordability that we see in the United States today. Critics often claim that the purportedly “small number” of broadband providers is evidence that the U.S. market is uncompetitive, although the significant capital costs of creating these networks, while limiting the ultimate number of providers, also compels them to compete to rationalize their investments. And to the extent that a narrow focus on the number of competitors in the market has any relevance, it is noteworthy that 90 percent of Americans can choose between at least one wired and one wireless provider offering four Mbps broadband, and 88 percent of Americans can choose from at least two different wired services providers.

Moreover, the profit margins of U.S. broadband providers are generally one-sixth to one-eighth of those companies (such as Apple or Google) that use broadband, contradicting the idea of monopolistic price-gouging by providers.

The result of this competition is that 96 percent of U.S. households have access to speeds equal to or greater than 10 Mbps, and 99 percent of Americans can now access service of at least 3 Mbps. Over 50 percent have access to service at 100 Mbps or more. This perhaps is the best evidence that critics of U.S.broadband performance misrepresent the state of broadband in America today.

We should want U.S. broadband to be diffused rapidly, priced reasonably, and used to build social, political, and economic citizenship. The evidence presented here shows that the current approach to broadband regulation is serving these goals admirably. To go further, we will need government to develop policies and programs that achieve these goals in a way that supports the current regime of high investment and continuous innovation by competitive broadband providers, not in a way that would limit or upend it.

Download the complete report. 

The New York Times: Shifts in Wireless Market May Sway a Sprint Deal

Posted on by The Progressive Policy Institute

Edward Wyatt’s piece this morning, “Shifts in Wireless Market May Sway a Sprint Deal,” examines how the evolving mobile and wireless markets affect the prospects for a possible Sprint and T-Mobile merger.  PPI’s senior fellow Hal Singer is quoted commenting on how the lines separating once discrete markets seem to be fading, and whether this trend affects the deal’s chances:

If regulators continue to see the wireless and wireline business as discrete markets, they will continue to be skeptical,” said Hal J. Singer, a principal at Economists Incorporated and a senior fellow at the Progressive Policy Institute. “But if they can be convinced that the lines between wireless and wireline are beginning to blur,” there might be a chance for a merger to be approved, he said.

You can read the full article on The New York Times website, here.

Gigaom: The FCC cares about peering fights, but how will it act?

Posted on by The Progressive Policy Institute

On May 27th PPI hosted an event titled “Should the FCC serve as Internet Cop?”  The event consisted of a panel discussion as well as a keynote speech from Ruth Milkman, Chief of Staff to the FCC Chairman Tom Wheeler. Milkman discussed the role of the FCC in relation to Internet Service Providers (ISPs).

“Ruth Milkman, Chief of Staff for FCC Chairman Tom Wheeler discussed the fights in the interconnection market today at a speech at the Progressive Policy Institute, signaling that the FCC may be ready to act on the issue of last mile ISPs such as Comcast, charging content companies like Netflix, Apple or Google for the right to directly interconnect with their networks.”

Read the full article on Gigaom’s webiste.

Mandatory Interconnection: Should the FCC Serve as Internet Traffic Cop?

Posted on by The Progressive Policy Institute

Since the agreement between Comcast and Netflix was struck in February 2014, several parties have called on the Federal Communications Commission (FCC) to regulate dealings between networks that comprise the Internet generally, and to dictate the terms of interconnection by Internet service providers (ISPs) in particular. This Policy Brief considers the costs and benefits to consumers if the FCC interferes with the terms under which ISPs connect with transit providers, content providers, and others. A key lesson from the economics literature that informs this question is that antitrust enforcement acts as a substitute for sector-specific interconnection obligations in industries that have made sufficient progress along the “deregulatory arc.” Because the communications sector was set on a deregulatory path nearly 20 years ago, has the time come to rely on antitrust to adjudicate interconnection disputes on the Internet?

Introduction
To date, interconnection agreements between the networks that comprise the Internet have been privately negotiated without a regulatory backstop. The vast majority of these negotiations have gone down without a hitch. Some notable interconnection disputes in the United States involved Cogent-AOL (2002), Cogent-Level 3 (2005), and Cogent-Sprint (2008). While transit companies such as Co-gent and Level 3 have complained about the quality of interconnection with certain Internet service providers (ISPs), consumers have largely been unaffected; rarely does a dispute turn into a prolonged service disruption for customers. Yet the question of the FCC’s role in dealings among these “core” networks is front and center inside the Beltway.

The interconnection controversy is playing out as the FCC grapples with new rules to “Protect and Promote an Open Internet,” which are designed to protect “edge” providers such as content providers, application providers, and device makers. In its May 2014 Notice of Proposed Rulemaking, the FCC tried to distinguish interconnection from so-called “net neutrality” issues:

Separate and apart from this connectivity [to the Internet by the ISP] is the question of interconnection (‘peering’) between the consumer’s net-work provider and the various networks that deliver to that ISP. That is a different matter that is better addressed separately. Today’s proposal is all about what happens on the broadband provider’s network and how the consumer’s connection to the Internet may not be interfered with or otherwise compromised.

Although the Open Internet proposals are designed to address the management of traffic within an ISP’s network, the FCC also seeks comment on how it can ensure that an ISP “would not be able to evade [its] open Internet rules by engaging in traffic exchange practices that would be outside the scope of the rules as pro-posed.” The issue is clearly timely and ripe for resolution.

Some scholars have advocated for greater FCC involvement in interconnection disputes. For example, Werbach (2014) suggests that the FCC’s mobile-data-roaming order could serve as a regulatory template for compelling interconnec-tion on the Internet. Under this approach, networks could negotiate terms for interconnection; where conflicts arise, the FCC would provide a backstop for dispute resolution. Narechana and Wu (2014) advocate that the FCC classify the ISP’s transfer of data from content providers to consumers as a telecommunications service, subject to “common carrier” regulation. The authors argue that “because such sender-side regulation focuses on incoming traffic, it also provides a useful framework for addressing interconnection disputes between broadband carriers and content providers.” This more invasive approach would give the FCC power to compel interconnection without need for voluntary negotiations, and interconnection rates could be set by regulatory fiat.

Missing from much of this debate is an analysis of the social costs and benefits associated with mandatory interconnection. This Policy Brief seeks to identify these effects from the consumers’ vantage and offers an economic principle that may guide policymakers to a narrowly tailored solution. In their review of inter-connection obligations across several network industries, Carlton and Picker (2006) explain that sector-specific interconnection obligations and antitrust enforcement serve as complements in partially deregulated industries; in fully de-regulated industries, antitrust enforcement acts as a substitute for sector-specific interconnection obligation. Because the communications sector was set on a deregulatory path nearly 20 years ago, has the time has come to rely on antitrust to adjudicate interconnection disputes on the Internet?

Download the complete brief.

Where are the Big Data Jobs?

Posted on by The Progressive Policy Institute

The recent White House report on big data has garnered a great deal of public attention, both for its strong support for big data as a “driver of progress” and for its highlighting of privacy concerns. The bottom line of the report: “Americans’ relationship with data should expand, not diminish, their opportunities and potential.”

However, the authors of the White House report paid little attention to one important economic topic: Big data as a jobs creator. Big data is creating a wide variety of jobs, from data analysts to software developers to the people who run the massive data warehouses that are essential to almost every large company these days. This jobs impact should be an important part of policy considerations about big data.

In this memo, we estimate the number of ‘big data’ jobs in the U.S. economy as of May 2014. We define a big data job as a computer and mathematical occupation that uses big data skills, such as data analytics or knowledge of big data programs such as Hadoop or Cassandra. We track these big data jobs using a want-ad methodology developed by South Mountain Economics LLC in a series of papers on App Economy employment and a forthcoming analysis of big data and medtech jobs in Great Britain.

We find that the United States now has about 500,000 “big data” jobs. Roughly 100,000 of these jobs are in California, and another 100,000 are in New York, Texas, and Washington. Table 1 lists the top ten states for big data jobs, as of May 2014.

Download the policy brief.

Letting Innovation Out of the Box

Posted on by The Progressive Policy Institute

Innovating in the digital age requires flexible rules that keep pace with the latest technology. This is especially true in the video services market, where change has been fast and furious. That’s why Congress should act to repeal an expensive and innovation-restricting requirement on the design of set-top cable boxes.

Currently the FCC mandates that each cable box — the electronic device in your home that links your TV with your cable provider — use a particular type of technology known as a “CableCARD” that contains the security mechanisms needed to receive programming. The FCC’s rule, formally known as the “integration ban,” requires that these security functions cannot be hard-wired or otherwise integrated within the rest of the box.

The CableCARD requirement is a classic example of prescriptively regulating in order to reach a certain outcome. In this case, the desired outcome was competition, to create a retail market for set-top boxes. In its order the FCC stated the integration ban would “result in a broad expansion of the market for navigation devices so that they become commercially available through retail outlets.” The idea was for customers to buy cable boxes instead of leasing them, a universal box that could be used across providers with a removable CableCARD. It would be a marketplace similar to telephones.

But the intended outcome, a retail market for set-top boxes, never developed. Consumers just didn’t want to mess around with another piece of electronics that could potentially become outdated or incompatible. Instead, the overwhelming majority of consumers lease their set-top boxes through their cable provider. Moreover, an increasing number of consumers access digital programming from smart devices outside of traditional TV, such as tablets and smartphones. And, perhaps most telling, the introduction of YouTube, Hulu, Netflix, Amazon Prime and other delivery channels created different ways to access digital programming without a cable box. Recent research shows more people are cutting the cord on their cable subscription, particularly young people that are a key customer-building demographic.

The integration ban may have been well-intentioned, but the rule now accomplishes little more than impose old technology onto cable providers and consumers. Innovators are in the process of developing a “boxless” method of delivering cable service, where all control and delivery processing occurs in the cloud. But that requires flexibility in the evolution of box design, rather than the current rigid set-top box integration ban rule. Cable customers ultimately pay the price of the ban by missing out on the potential pace of innovation.

Fortunately there is an opportunity to repeal this outdated rule, with fresh momentum in Congress. The House will likely pass the repeal with bipartisan agreement, and it is now up for discussion in the Senate. Importantly, the current proposal preserves the CableCARD standard for use in retail devices like the TiVo, only affecting how these security features are embedded in boxes leased from the cable company. Customers can therefore continue to purchase their boxes, and retail sales could still become a bigger share of the set-top box market if that is the direction in which it evolves.

The world of digital programming no longer revolves around cable companies. It is time policymakers recognize the new face of competition in the video industry and let the tremendous pace of investment and innovation speak for itself. Repealing the set-top box integration ban would be a small but positive step forward in modernizing regulation for the data-driven economy.

This op-ed was originally posted by RollCall, you can read it on their website here.

What’s Missing from the Net Neutrality Debate? A Principle for Designing Good Remedies

Posted on by The Progressive Policy Institute

The reaction from netizens was swift and fierce: Chairman Wheeler’s proposal to permit paid prioritization on the Internet—with an offer to stamp out discriminatory conduct on a case-by-case basis—was considered a betrayal of President Obama’s net-neutrality pledge. Protesters gathered in front of the Federal Communications Commission (FCC ), and petitions made the rounds on Twitter.

The grassroots campaign for reclassifying Internet services from “information” to “telecommunications” served its purpose: The Chairman has essentially changed his position and has put the agency on the path to embracing a more invasive “Title II” approach. In economic terms, this means that the regulator could establish a “zero price” for paid prioritization. And when its price goes to zero, priority delivery will cease to exist.

This is not the agency’s first attempt to regulate paid prioritization out of existence. In a recent decision to toss the FCC’s original Open Internet rules, the D.C. Circuit said that interfering with market negotiations by setting a zero price amounted to “common carriage” regulation, which was legal only if the FCC reclassified Internet service (and then established a regulated rate of zero). Continue reading “What’s Missing from the Net Neutrality Debate? A Principle for Designing Good Remedies” →

PPI Abroad: Digital Trade Study Group Recap

Posted on by The Progressive Policy Institute

Last week (April 22-25), PPI returned to Europe for an intensive round of high-level meetings and one big public event in three capitals, Paris, Brussels and Berlin. It was the third PPI project in Europe in the last 18 months, a sign of our commitment to increasing awareness about the rise of the data-driven economy and its implications for policymakers.

PPI has long been a catalyst for transatlantic dialogue since we helped Bill Clinton and Tony Blair launch the “Third Way” conversations among progressive leaders. Most recently, our work in Europe has centered on measuring the volume and economic value of cross-border data flows.

Our focus last week was mainly on digital trade, and the need to fend off some truly bad proposals in Europe that would at a minimum erect barriers to cross-border data flows, and at a maximum balkanize the Internet by creating an exclusively European cloud. At a time when both America and Europe are plagued by slow economic growth, any actions that would choke off digital innovation and trade make little sense.

To underscore the point, we led a bipartisan “Digital Trade Study Group” consisting of 10 senior Senate and House staffers with expertise in digital policy issues to Europe. They learned much about European attitudes toward data protection and privacy – including the emotional response to the NSA revelations, especially in Germany – and the presence of a bipartisan group of knowledgeable Hill staff impressed upon the European officials we met that Congress has a growing interest in resolving disputes over trade in general and digital trade in particular. From the feedback we’ve received, the trip was a big success.

Here are some highlights:

  • In Paris, the Study Group met with economic researchers with the Organisation for Economic Co-operation and Development (OECD). This meeting made clear that no one has developed a way to accurately capture and measure the contribution of data-driven innovation and trade to economic growth. As Michael Mandel, PPI’s chief economic strategist, has noted in a series of groundbreaking reports on the measurement challenge, this makes it difficult for policymakers to weigh the likely effects of new regulations. In a second session, the group discussed the OECD’s work on tax base erosion. The G-20 has tasked the OECD to explore ways to prevent international companies from sheltering profits and income from national tax collectors.
  • In Brussels, our traveling party met with several high-ranking EU officials who discussed the progress of the transatlantic trade agreement (TTIP), data protection and how Europeans view the crisis in Ukraine. Additionally, our group was briefed by U.S. officials on digital trade issues and received a preview of the upcoming European election.
  • Also in Brussels, PPI teamed up with the Lisbon Council for a major public event on these themes featuring EU and U.S. trade officials, as well as economists and representatives from European businesses. At that event, we released a joint report co-authored by PPI’s Michael Mandel and Lisbon Council’s Paul Hofheinz on “Bridging the Data Gap: How Digital Innovation Can Drive Growth and Jobs.” It highlighted a large and growing “data gap” between the U.S. and the EU that ought to give Europeans pause.
  • We concluded our trip in Berlin, where long-time PPI friend John Emerson, U.S. Ambassador to Germany, kindly hosted us for an insightful breakfast briefing on U.S.-German relations. Next the group met with a representative of Bitkom, the major association of the digital industry in Germany. Our last event was a dialogue with German political, business and intellectual leaders organized by Das Progressive Zentrum, a Berlin think tank. Focusing on the need to rebuild trust between America and Germany in the wake of the Snowden revelations, it was a blunt, intense and illuminating conversation.

This trip was extremely productive and highlighed that PPI is building an extensive network of European contacts and partners who share our commitment to finding common ground on questions of trade, digital innovation and stronger economic growth.