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Some Perspective on Virginia's IT Contract Controversy

leonard.gilroy@reason.org (Leonard Gilroy) — Sun, 25 Oct 2009 17:19:00 EDT

In a recent column I argued that the political controversy over Virginia's IT modernization contract with Northrup Grumman should not distract policymakers from the correct course forward—identifying the implementation challenges and working with the contractor to correct them and right the ship. Fairfax City Councilman Daniel Drummond (and former Northrup Grumman consultant) reaches a similar conclusion in this Richmond Times-Dispatch op-ed today that offers some important perspective on the project that shouldn't get lost amid the current kerfuffle:

To fix the problems, though, we need to understand why we are here in the first place. This deal wasn't about technology alone. In addition to fixing the state's ancient and vulnerable IT systems, it was about job creation, economic development, and introducing a new way of governing through a public-private partnership.

When then-Gov. Mark Warner announced the awarding of the 10-year, $2 billion contract in November 2005, state agency IT departments were already being put under one roof known as VITA. The next step of this transformation was to find a private partner to modernize the state's woefully inadequate computer systems. Highlights of the inept system included state employees using 12 separate e-mail services, some agencies using Windows Office 97, and millions of dollars' worth of illegal copies of software floating around.

The modernization concept (and how to pay for it) was this: Turn IT into a service similar to a utility, not much unlike the telephone or electricity. So instead of individual agencies buying their own computers and software, they instead would now buy "seats" that in turn got them not only the latest equipment, but also enhanced security and technical know-how.

In finding a partner, the state was looking for the company to make a significant investment in Virginia by building two new data centers (including VITA's new headquarters) in addition to paying for all of the computers, wires, software, and widgets needed to revitalize the state's IT infrastructure.

The General Assembly also insisted that the contract be equal to the same amount the state would have been paying for its IT services -- not a dime more. To make this happen while also satisfying the need to make a profit, Northrop Grumman would take the financial risk, but it would be allowed to leverage the state's IT network and sell services to local governments, higher education institutions, and the private sector.

The true genius of this was to find a partner that could help expand economic opportunity throughout the state. In other words, this wasn't just a contract -- it was a job creator. Not just the 400 Northrop Grumman jobs the company expects to ultimately create, but the ancillary employment and economic development opportunities that would result.

It worked: In Lebanon, for instance, CGI built its facility next to Northrop Grumman's IT facility, creating an additional 600 jobs in the rural part of the state. That's 1,000 new jobs in Russell County directly attributable to this project. The state also got the added benefit of having 600 VITA employees become Northrop Grumman employees, thus coming off the state's pension and health insurance plans and eventually saving taxpayers millions of dollars.

Clearly, there are difficulties facing this marriage. This deal has not lived up to expectations and both sides are to blame. But with a $400 million break-up fee hanging over its head, the commonwealth can't afford to walk away. Nor can Northrop Grumman, as its reputation and prestige are on the line.

With the upcoming legislative session certain to bring proposals to reform the contract and VITA itself, it's time to take a step back and see what's worked and what hasn't. And those working to salvage this deal need to remember that this partnership isn't about them. Rather, it's about the people who now have jobs in Russell County, the chance to save taxpayers money, and creating a partnership that will be a model for other states to follow while moving Virginia forward.

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

New at Reason: IT Controversy Shouldn't Spoil Public-Private Partnerships in Virginia

leonard.gilroy@reason.org (Leonard Gilroy) — Wed, 14 Oct 2009 15:18:00 EDT

In my latest column, I write that the controversy over the Virginia Information Technology Authority's handling of its ten year, $2.3 billion IT contract with Northrup Grumman should not curb Virginia's desire to engage in public-private partnerships (PPPs). Commonwealth policymakers should recognize that challenges occur and focus on fixing problems, not politicizing them. Here's an excerpt:

...Virginia's had a long history with successful PPPs and is widely recognized as a state leader. State officials recognize by now that PPPs come in all shapes and sizes. An IT modernization project is a lot different than a toll road partnership, which is in turn a lot different from a partnership to modernize a state psychiatric hospital. Virginia's undertaken these and many other types of PPPs over the last two decades.

Commonwealth policymakers should have a sophisticated enough understanding by now of the nuances and varieties of PPPs, recognizing that there is no cookie-cutter template. Each PPP is a unique vehicle structured to achieve a set of specific goals, and each type of contract has to be carefully constructed and monitored to ensure that both the state and their private sector partners deliver on their commitments. And if you run into a situation where one party or the other fails to deliver, then you remember that it's a partnership, where the parties work to resolve implementation issues.

Read on for a look at how other states have handled similar controversies. The key for policymakers is to tune out the politics and stay focused on understanding and resolving the implementation challenges.

For more on Virginia's IT contract, see here and here.

IT Controversy Shouldn't Spoil Public-Private Partnerships in Virginia

leonard.gilroy@reason.org (Leonard Gilroy) — Wed, 14 Oct 2009 03:14:00 EDT

Bacon's Rebellion

Could the high-profile kerfuffle over the state's contract to consolidate and manage the state's information technology (IT) infrastructure diminish the state's appetite for outsourcing and public-private partnerships (PPPs)?

That's a question suggested in a recent Richmond Times-Dispatch article on the simmering controversy over the Virginia Information Technology Authority (VITA)'s handling of its ten year, $2.3 billion IT contract with Northrup Grumman.

The answer is, it shouldn't. Virginia's had a long history with successful PPPs and is widely recognized as a state leader. State officials recognize by now that PPPs come in all shapes and sizes. An IT modernization project is a lot different than a toll road partnership, which is in turn a lot different from a partnership to modernize a state psychiatric hospital. Virginia's undertaken these and many other types of PPPs over the last two decades.

Commonwealth policymakers should have a sophisticated enough understanding by now of the nuances and varieties of PPPs, recognizing that there is no cookie-cutter template. Each PPP is a unique vehicle structured to achieve a set of specific goals, and each type of contract has to be carefully constructed and monitored to ensure that both the state and their private sector partners deliver on their commitments. And if you run into a situation where one party or the other fails to deliver, then you remember that it's a partnership, where the parties work to resolve implementation issues.

Resolving challenges can take a variety of forms. It may necessitate, as in the case of Indiana's troubled welfare eligibility modernization project, requiring the contractor to implement a corrective action plan and allowing sufficient time to evaluate the results before considering a cancellation of the contract.

Similarly, when Florida ran into similar challenges with three major IT outsourcing initiatives a few years ago, they had to adjust contracts and project timelines when the projects bogged down in implementation. One of the main reasons was that end users-primarily state agencies-weren't ready to ditch the antiquated systems they had gotten accustomed to and inundated the contractors with hundreds of customization requests, which complicated the implementation significantly. However, as Florida's Council on Efficient Government detailed in an excellent post-implementation review of these projects, the state and its private partners ultimately were able to navigate the challenges and deliver on the projects.

With any large-scale privatization initiative, especially those involving complex system overhauls like an IT modernization, you have to expect upfront that there will be obstacles. This would also be the case if government was doing the exact same work in-house-large-scale projects are inherently tricky. It's all about how you deal with the inevitable challenges.

Unfortunately, as we're seeing in Virginia, some policymakers and officials have a tendency to turn expected implementation challenges into political footballs. It was no different in Indiana and Florida, but administration officials wisely tuned out the politics and focused on keeping their PPP projects moving forward.

We haven't seen that in Virginia with the IT initiative. Instead we've seen state officials fired, fingers pointed and a general lack of focus on getting the project back on track, as Reason Foundation colleague Steven Titch details here.

If there are legitimate implementation issues that have arisen thus far, the proper response for the state would be to sit down with its private partner, understand the challenges, and develop a plan to address them. The contractor doesn't want to lose the contract and the state doesn't want to stop a major overhaul midstream, so the incentives are aligned to work things out. And the state needs to perform the due diligence of closely monitoring the contractor's performance every step of the way-holding their feet to the fire with penalties if appropriate-while also ensuring that agency staff aren't presenting internal obstacles to successful implementation.

Virginia knows how to do PPPs well. The problem is that officials are simply not living up to their own standards in their handling of the IT contract and should quickly adjust course. And allowing what are likely resolvable outsourcing challenges to become heavily politicized unnecessarily exacerbates the situation.

Despite Virginia's reputation in the PPP industry as a state with broad-ranging experience, political flare-ups like the one we're seeing today can begin to change that perception. If contractors believe that their projects might be thrown to the political wolves, they may think twice about bidding on contracts in Virginia. Or at the very least they may factor political risk into their pricing, driving up costs.

Policymakers should see the forest through the trees and remember that PPPs have had a long and successful track record in Virginia and are a proven tool for doing more with less in state government.

With revenue shortfalls continuing to drive state fiscal woes for the next several years, Virginia officials will need to do more PPPs, not less. It's time for officials to turn down the politics and focus squarely on righting the IT project. In the long-run, fixing it will be much more productive than politicizing it.

Leonard Gilroy is Director of Government Reform at Reason Foundation and Senior Fellow for Government Reform at the Thomas Jefferson Institute for Public Policy. This column was originally published at Bacon's Rebellion

Amid Budget Woes, Governments Turn to Technology to Drive Streamlining

leonard.gilroy@reason.org (Leonard Gilroy) — Sun, 11 Oct 2009 15:29:00 EDT

Steve Lohr at The New York Times writes today that the pressure to solve state and local fiscal crises may be prompting a fresh look at how technology can drive government streamlining and performance:

Local governments, like many businesses, are struggling with a data glut. Agencies collect huge amounts of information about topics as diverse as building permits, potholes, Medicaid cases and foster-child placements. Technology, according to computer experts and government officials, can be a powerful tool to mine vast troves of government data for insights to streamline services and guide policy.

"The mistake people make is to think that collecting the data is the endgame," said Michael R. Bloomberg, the mayor of New York. The real payoff, he said, takes another step. "We actually use the data," he noted.

Indeed, New York has been a pioneer among cities in the use of computing firepower to sift through data to improve services. It began in the 1990s with the city's CompStat system for mapping, identifying and predicting crime. The system, combined with new policing practices, reduced crime rates in New York and was later adopted by Los Angeles, Philadelphia, Baltimore and other cities.

In 2002, the city began its "311" telephone number for answering questions about government services and to report problems down to missing manhole covers. The service receives 50,000 calls a day, and earlier this year began operating on the Web as well. Complaints, response times and resolved problems are tracked and measured to improve performance.

In 2006, the city began an online service, NYC Business Express, to make it easier and faster to start a business. The average time to obtain a building permit, for example, has been cut to 7 days from 40. Such seemingly mundane improvements can add up to big gains in the efficiency of government service systems, experts say, nurturing productivity and growth in local economies. The process, they say, is similar to "lean manufacturing," a system first mastered by Toyota in which step-by-step changes on the factory floor, made repeatedly, translate into major advances in quality and productivity.

Linking government databases can be crucial. The New York Fire Department, in partnership with I.B.M., is developing a system that combines information on building floor plans, inspections and code violations from city agencies and then uses software to analyze and make predictions. Firefighters will be able to call up building information on hand-held wireless computers on their way to a fire. The real-time system, scheduled to be deployed next year, should help guide firefighting tactics and help firefighters avoid some dangers.

Read on to learn more about efforts in Alameda County, California and Dubuque, Iowa to leverage technology to drive efficiency. And in case you missed it the first time around, be sure to re-read former NYC Mayor Rudy Giuliani's article in Reason Foundation's Innovators in Action 2007—"Management Requires Measurement: The Key to New York City’s Renaissance"—where he details NYC's CompStat and other city efficiency initiatives implemented during his tenure as mayor.

Taxing Internet Retailers Like Brick-and-Mortar Stores

steven.titch@reason.org (Steven Titch) — Thu, 17 Sep 2009 09:30:00 EDT

When someone from the government says, “The Internet has added complexity to…” you can bet it will usually be followed by an attempt to justify a new tax.

According to legislators in California and at least four other states, the Internet has muddled the role of brick-and-mortar retailers. Customers travels to brick-and-mortar stores, select merchandise from a shelf or rack, and pay for it at a counter. For sales tax purposes, a judge would call the shop a “nexus,” that is, a physical location where business occurs.

Under current law, online retailers are only required to collect sales taxes on their merchandise if they have a nexus in the state where the transaction was initiated. This law dates back to 1992, when the U.S. Supreme Court ruled that sales tax collection constituted an onerous burden on out-of-state retailers and violated the commerce clause of the Constitution. As a result, Internet purchases remain largely tax-free. For example, only Washington state residents pay sales tax on Amazon.com purchases, because that’s where Amazon has its nexus.

Internet sales are estimated to be around $200 billion a year in the U.S. The loss in tax revenue from these sales has irked state governments for some time, and legislators in an increasing number of states are now trying to workaround federal law by creatively redefining a “nexus.” California sought to join New York, North Carolina and Rhode Island in passing legislation that would define any Web site that accepted sales commissions from Internet-based retailers as an in-state “nexus” of that retailer that is subject to sales taxes. The bill stalled in Sacramento in the face of strong opposition from online retailers and a veto threat from Gov. Arnold Schwarzenegger, but its backers, which include Berkeley Assemblywoman Nancy Skinner, promise they will try again next year.

While the bill’s supporters acknowledge the “nexus” rule, their argument hinges on the idea that the Internet has changed the definition of “physical presence” or “brick-and-mortar.” Online affiliates of out-of-state retailers, they say, should count.

An affiliate is someone with a contractual agreement to advertise an online business. For example, a Californian who blogs about hiking could recommend trail guides to readers and provide a link to Amazon.com. If a sale results, Amazon pays the blogger a commission. According to the Sacramento Bee, legislative analysis of the bill found that Amazon.com alone has “hundreds, if not thousands” of affiliates in California who receive commissions on sales. This doesn’t count other Web retailers, such as Overstock.com, that use similar models.

Fortunately, most people don’t think a button or banner on a Web site is equivalent to a brick-and-mortar store, on which rent is paid and in which inventory is stocked. Common sense may be the main reason the bill has had spotty success. In addition to California, similar efforts failed in Hawaii and Minnesota.

But the idea that an online affiliate is a nexus is wrong-headed for a number of other reasons. It’s likely unconstitutional, given the 1992 Supreme Court decision. On these grounds, Amazon and Overstock, along with the non-profit Performance Marketing Alliance, which was formed to represent affiliates of online retailers, have asked a New York state court to overturn the law there.

Then there are the practical problems. The tax punishes in-state businesses that are affiliates of out-of-state retailers, while doing little to actually capture a tax. Since the tax is only assessed on affiliate clickthroughs, state residents can easily avoid the tax by going directly to the retail site. According the blog, Marketing Pilgrim, some New York state affiliate marketers lost upwards of 80 percent of their income after the law was passed. Amazon severed ties with its affiliates in North Carolina and Rhode Island in order to avoid charging sales tax to its customers in those states.

Finally, the law creates technical problems. It can be very difficult for online retailers to determine exactly where their affiliates are located. A California resident may be an Amazon affiliate, but what if his blog is housed on a Web server in Texas? Where’s the actual nexus? It’s an important legal question. For example, California cannot collect sales taxes from a store in Reno, Nevada, even if its owner lives in nearby Lake Tahoe, California.

The Internet creates no confusion about a physical nexus. Brick-and-mortar is brick and mortar. The Internet is bits and bytes. The only “confusion” about their meanings is being created by tax-and-spend legislators in a grab for more money.

Steven Titch is a policy analyst at Reason Foundation.

Obama's Coming War with Silicon Valley

steven.titch@reason.org (Steven Titch) — Fri, 11 Sep 2009 14:52:00 EDT

Clint Boulton at eWeek.com has compiled a slide show looking at 10 Google services that failed. The look back is important for a couple of reasons. First, on a granular level, it is a reminder that the Google, whatever its perception among government regulators, has not come close to dominating every segment it has entered.

The controversial idea of pre-emptive anticompetitiveness: that a single strong company poses a monopoly threat because by entering a related business segment, even if it possesses nothing to leverage, it scares off all other would-be entrants, has driven European antitrust thinking for several years. Unfortunately, it has found an adherent in Christine Varney, Obama’s chief antitrust enforcer at the Department of Justice. Varney has made no secret of her desire to pursue and curtail Google. Her basic reasoning is that its search engine business is so strong, it can’t help but unfairly tilt business in its direction wherever else it may choose to go.

If so, why, as eWeek shows, did Google fail to gain traction in so many areas, including radio and print advertising? This is significant because Varney has been particularly concerned as to whether Google illegally monopolizes the ad market. But that case only can be made credibly (and not definitively) if you isolate Google's ad market metrics solely to the Web. Google has garnered a 30 percent share of Web advertising, but this still amounts to less than 3 percent of total ad dollars spent across all media.

Second, on a broader level, Google’s approach to business demonstrates why it’s dangerous to introduce government regulation into the IT sector, something the Obama administration has signaled its willingness to do through the appointments of Varney and its tacit approval to allow FCC Chairman Julius Genachowski to investigate the handset distribution agreements forged by Apple, Palm and BlackBerry maker Research In Motion, companies and businesses that never before have come under FCC jurisdiction.

Google typifies the intense trial-and-error approach the high-tech industry takes to its ventures. Try this. If it doesn’t work, try that. It’s been par for the course at companies like Apple, Microsoft and Cisco Systems for years. Google, however, may have mastered it, especially in terms of aggressiveness and speed of decisionmaking. If something works, run with it. If it doesn’t, kill it quickly.

Yet it’s antithetical to current policy thinking. If the same central management model Obama is applying to the banks and car companies is attempted in high-tech, innovation is dead. Nothing would be allowed to happen until every agency is allowed to judge every angle and likely outcome. At the policy level, that means questioning every private sector initiative or venture as to its potential affect on competition, pricing, market share and disruptiveness. Remember, Obama himself has spoken of his desire to temper excessive risk and boom-and-bust cycles. He has even begun pushing for sweeping regulation of venture capital funds, confusing entrepreneurial risk with systemic risk. Since VC is the lifeblood of the high-tech sector, these regulations, if enacted, would have a sclerotic effect on cash flow to start-ups. Yet it’s another example of the undeniable way Obama prefers stability over dynamism.

As far as IT goes, he might be wrestling with a tiger. Excessive risk and boom-and-bust are amplified in high-tech, which is the reason it has been one of the most innovative sectors for the past 30 years, although not always the safest for investors. And if anything’s been borne out in high-tech, it’s that you can’t predict winners or losers, let alone engineer them. Varney, without any sense of irony, belied this when she told the American Antitrust Institute, as Wired reported in August, that the Microsoft antitrust case fizzled because the government waited too long to bring it. In other words, she admitted that market realities made Microsoft’s monopoly ephemeral. It was not a long-term threat. Microsoft could not, as Justice claimed, leverage its Windows operating systems to the point it would squash competition, illegally or not. Sadly, the only lesson Varney came away with is to speed the Google prosecution before market circumstances inevitably undermine her (already weak) case.

Still, the Obama administration and Google (and by extension all of Silicon Valley) appear to be on a collision course. Despite their mutual admiration during last year’s campaign, their underlying philosophies are exactly opposite. America’s high-tech industry is the country’s best example of a functional free market. Innovation and disruption is valued and barriers to entry are low. It is filled with entrepreneurs who thrive on high-risk and high-reward. But it’s this culture of free-wheeling capitalism that’s in the White House crosshairs. Ultimately something’s going to give.

IT Outsourcing in Mississippi

steven.titch@reason.org (Steven Titch) — Thu, 10 Sep 2009 17:47:00 EDT

Mississippi’s Department of Information Technology Services (ITS) awarded a three-year contract with Infinite Group, Inc. (IGI) to provide virtualization services to state agencies, beginning this fall, according to CivSource, a website that follows government IT policies and trends.

The move is part of an overall strategy by the state to streamline operations and modernize statewide use of IT.

Virtualization is one the more abstract terms in IT, and can mean several things. In this case, Mississippi is seeking to consolidate a large number of agency hardware, software and applications into an environment where, to state employee users, they appear to be running on one system (hence the term “virtual machine, or VM, and its corollary, VMware).

Typically, a virtualization project reduces the number of servers and data centers an organization uses. This leads to a commensurate--and significant—reduction in space, storage devices and, notably, power consumption.

Here’s more from CivSource:

According to IGI, Mississippi state agencies can migrate applications into ITS’ virtual data center environments, where IGI will manage and implement server consolidations that migrate physical servers to virtual machines.

The first agency planning to utilize the new cloud computing service is the Mississippi Department of Human Services, with more agencies expected to follow as the physical footprint and energy-saving benefits of virtualization become realized. Other public entities will also be enabled to purchase virtualization services from IGI under the terms of the agreement.

Virtualization is not a simple process, but the field is competitive and, since it is mostly back-end, it can be done incrementally without risking the type of disruption a wholesale system change-out can. This, plus the savings it invariably produces, makes it one of better places for states to begin and IT outsourcing/privatization project.

The Policy Goal is Inclusion, Not Infrastructure

steven.titch@reason.org (Steven Titch) — Wed, 02 Sep 2009 11:14:00 EDT

Today, the Reason Foundation publishes my study examining the universal broadband service policies, their administrative problems and potential ways to foster a system that can be successful at extending broadband penetration, not just to areas without the physical connections, but to portions of the population who lag general broadband adoption trends.

The digital divide is largely a social problem. Policy, however, tend to approach it as an infrastructure problem.

Numerous government programs, run by several cabinet-level agencies, are geared for the funding of telecommunications infrastructure and applications in high-cost areas. The Federal Universal Service Fund (FUSF), which in 2005 paid out $6.8 billion, may be the best-known. There is also the Department of Agriculture’s Rural Broadband program, which lent $1.22 billion in its first five years of existence, and the USDA’s umbrella Rural Utilities Services program, which in 2007 had $500 million banked for broadband grants and loans.

Then there are programs run by the Departments of Commerce, Health and Human Services, Homeland Security, and even some federal-state partnerships. There’s no dearth of programs or funding, either in the form of grants or low-interest loans. And don’t forget the $7.2 billion allocated to broadband expansion in the 2009 economic stimulus bill, which centers on funding infrastructure.

But is penetration low because of market failure, or because of government programs themselves? In fact, when considering the number of government programs that address rural universal service, and the amount of money the government allocates to the problem, why is rural broadband penetration, going by research from the Pew Internet and American Life Project, still only at 38 percent?

The real question, then, is how well they are being administered.

Although conventional wisdom suggests subsidies are the only way to close the digital divide, there have been some signs that digital inclusion solutions can run in sync with market mechanisms. Private capital for broadband is flowing into rural areas. Zayo Group (formerly Zayo Bandwidth), based in Louisville, Colorado, and launched in November 2006, has begun offering high-bandwidth connections to second- and third-tier cities through its acquisition of a series of regional fiber networks. With $225 million in venture capital funding, Zayo is strategically positioning itself to cover areas not well-served today.

States also are rethinking their approach to broadband by shifting their focus to development of services and applications while reaching out to the private sector for funding and partnerships.

Herein lie the seeds of a new universal-service policy built around the unique nature of broadband to offer various degrees of value to different individuals. While the goal remains to bring inexpensive broadband connectivity to as many people as possible, a more enlightened approach shifts away from large infrastructure projects to making the benefits of broadband relevant to all classes of potential users.

In my report, I suggest that the best way to accomplish this is to promote universal-service policies that:

* Engage all segments of the broadband industry;

* Create climates conducive to investment;

* Reduce or eliminate central infrastructure planning at the federal level; and

* Energize leadership and expertise at the state and local levels.

For example, although nominally under the Federal Communications Commission, the FUSF is administered by a board of directors that mainly reflects the funds net recipients--rural phone companies, education and state utility agencies. Its governance reflects but one part of what has become a very broad telecommunications industry with diverse segments, all with a stake in universal service and with different ideas as to how the requirement can be met. The board needs representatives from wireless carriers, Internet service providers (ISPs), cable companies, Internet software and applications developers, and venture capital firms that do a predominant amount of investment in telecom-related start-ups. It is imperative that the federal government’s largest organization devoted to universal service reflect the diversity of stakeholders in the U.S. telecommunications industry.

From there, FUSF reform could get away from its regime of corporation-to-corporation transfers and examine new concepts that can reduce costs yet address needs more effectively. These include reverse auctions and vouchers.

One of the better elements of the broadband stimulus it that it sets aside funds specifically to measure rural service penetration in a better way. The plan is for a more precise state-by-state study to locate rural areas where broadband is not available, where it is, and where there is more than one provider. This information will replace the broader yet misleading measurements of broadband availability by zip code. Yet the stimulus also puts the cart before the horse, calling for all funds to be allocated before data from any study can point to the real problems.

Broadband planning and development may in fact best be driven by focused efforts at the state and local levels. There, it already has been learned that large-scale infrastructure initiatives rarely work and that the key to creating digital inclusiveness is a willingness to work in concert with communities to develop broadband applications that appeal to low-income users who might otherwise believe the Internet offers little value to their lifestyle.

The e-NC Authority and ConnectKentucky, state authorities in North Carolina and Kentucky, are trailblazers in creating broadband-development strategies that leverage the commercial sector, nonprofits, enterprise users, and state and federal funding mechanisms to engineer broadband growth.

Both authorities drilled down to the county level to assess infrastructure requirements. The authorities also used geographic information systems to correlate information about socioeconomic status, educational systems and health-care facilities with geographic availability of high-speed Internet access. This information can be used to develop more effective programs and recommendations suited to specific county and community needs.

Both states saw industry as a partner, not a competitor. Both authorities get money from state and federal sources, but they also were wise enough to understand that there was more to broadband infrastructure than fiber-optic cables. They reached out to companies, enterprises and associations across the industry supply chain.

The problem of universal broadband service will not be solved by redirecting subsidies into greater quantities of infrastructure. The digital divide represents the gap between those who appreciate the benefits of broadband and those who don’t. That gap can be closed through education, applications development and targeted community programs that provide everything from wireless hotspots to PCs and computer training for low-income people.

Reliance on market mechanisms poses nowhere near the risk to rural consumers that regulators and rural telcos believe. On the contrary, today it’s only the transport portion of the network, especially in rural areas, that’s regulated and subsidized. Considering what this industry, when left unregulated and driven only by its need to attract willing investors, has accomplished in delivering the benefits of personal technology and networking to a wide range of Americans of all means, it is time to extend the same freedom to the service-provider sector.

Who Pays For Google Voice?

steven.titch@reason.org (Steven Titch) — Thu, 27 Aug 2009 18:00:00 EDT

There is one question that needs to be answered in the Federal Communications Commission’s investigation of the wireless industry: Who is paying the network cost to support Google Voice?

Google Voice is an iPhone application that, for all intents and purposes, allows users to make free wireless calls. Apple, the iPhone manufacturer, recently decided to block the application. Some critics have suggested that AT&T, Apple’s partner for iPhone sales and service, was behind the ban; however, Apple denies this and there is no concrete evidence to support the charge.

Apple’s decision to ban Google Voice is the peg on which the Federal Communications Commission (FCC) has hung its plan to investigate whether there is enough competition in the wireless industry and whether service providers like AT&T and Verizon Wireless wield too much market power.

For the FCC and its new chairman, Julius Genachowski, proving that the wireless industry lacks competition is going to be an uphill battle. Five or more wireless companies serve most markets, and consumers have countless cells phones and wireless plans to choose from—free cell phones, phones offered under contract, prepaid phones, phones that record and play video, phones that incorporate music players and GPS receivers—all at a variety of makes, models and prices. The FCC’s own data shows that in 1994 the average cost-per-minute was 48 cents and average monthly use was 100 minutes. By 2006 average per-minute cost had dropped to 6 cents and average monthly use had risen to 800 minutes.

The Google Voice issue, however, strikes a nerve. On the surface, it does appear to be a case of one player, in this case Apple (and indirectly AT&T), using its clout to unfairly keep another player, Google, from offering a competing service.

Google Voice is a Voice of Internet Protocol (VoIP) application. It converts voice signals into digital bits and transmits them by the same means as text messages and other digital multimedia applications that have become common on cell phones. Calls made this way do not register as standard wireless calls, typically billed in minutes. Instead, like text messaging and wireless Internet service, they are measured in kilobytes of data use. Since VoIP uses comparatively small amounts of data, with Google Voice, higher “voice” calling costs can be avoided and, with the proper data plan, can even be free.

From a technical perspective, Google Voice is not much different than Vonage or Skype. However, as broadband-based services, Vonage and Skype do not rely on the conventional landline phones. Google Voice, on the other hand, requires an iPhone and the entirety of the local, national and international wireless network infrastructure in order to function. Therefore, before reaching a conclusion about whether wireless service providers are acting illegally by blocking Google Voice, the question of whether Google is offering service providers adequate compensation for use of these facilities needs to be answered.

While Google has the right to seek new ways to use technology to deliver inexpensive voice services, AT&T and Apple also have the right to protect their investments. A free market allows me to open a discount clothing store to compete with a high-priced boutique. But it does not allow me to open my store in the boutique’s storefront without paying any rent. To claim that I was offering clothing at half or one-quarter the cost of the competition, thereby “acting in the interest of consumers,” is no defense against my transgression.

The Google case is difficult because it comes at the intersection of traditional common carrier rules and the privatization of telecommunications. But there are at least three facts to keep in mind.

First, common carrier law has always allowed for just compensation. Trucks, trains and telephone companies have to accept all traffic, but customers still have to pay the fare.

Second, from its inception, U.S. wireless network was built with investor dollars, not public funds. Few of the facilities—and virtually none owned by the major wireless carriers—were subsidized to the degree that landline networks were. Nor did wireless carriers benefit from a legacy of government-regulated monopoly. They were initially set up as separate subsidiaries that were competitive from day one. It is not the case that wireless infrastructure is a “public good” subject to special rules permitting free access. The majority of wireless networks in the U.S. are private property built with private funds.

Third, Google’s business objective is not to be a competitive wireless service provider in the vein of AT&T and Verizon. Google is remarkably skillful at creating an exploiting “mash-ups” that combine two or more Internet applications to create a third, value-added service. These mash-ups fuel Google’s primary revenue stream, which is Web-based advertising. Google Voice is such a mash-up. It uses the iPhone and AT&T’s wireless network as a means to Google’s end—more ad dollars.

Just as in any situation where an individual requires the use of the property of another in pursuit of a profit, wireless carriers are entitled to choose whether they allow their property to be used in such a way and, if they do, to collect compensation. If the FCC sides with Google, they would fly in the face of this principle.

It may be true, as Andy Kessler noted last week in the Wall Street Journal, that the comparatively low cost of VoIP approaches like Google’s will cause VoIP to ultimately replace wireless voice technology. It’s up to the marketplace to hash out the costs and contracts that will make this transition happen. The FCC should not be in the business of protecting business models, and that is not what I’m advocating here. But, it is equally wrong for the FCC to use its regulatory power to forcibly undermine one company’s business model in support another’s.

For argument’s sake, let’s say the FCC requires AT&T to support Google Voice without condition. If a majority of consumers were then to adopt the application, would the very wireless networks on which Google Voice depends become financially unsustainable? Would other carriers be interested in bidding to sell new versions of the iPhone if it meant allowing an application that would cost them business?

A healthy business relationship is symbiotic. Both parties see mutual benefit. The danger of Google Voice is that it could be parasitic. Google drains revenue from AT&T and Apple, but fails to make clear what monetizable benefit it offers in return. Until that benefit can be shown, Apple and AT&T have a right to say no.

Steven Titch is a policy analyst at Reason Foundation.

Broadband Stimulus Deadline Extended Amid Clogged Servers and Confusion

steven.titch@reason.org (Steven Titch) — Thu, 13 Aug 2009 17:01:00 EDT

The $7.2 billion broadband stimulus is off to an inauspicious start. In two articles this week, Telephony Online has reported on the flood of applications that have crashed government servers (where have we heard that one before), resulting in a one-week extension of the application deadline to August 21.

Telephony interviewed Craig Settles, an industry consultant specializing in broadband infrastructure issues, who said applicants are submitting multiple applications to cover different parts of their broadband projects rather than putting all their eggs in one application basket for fear of seeing their entire funding request rejected on a technicality. “It’s been clear from the beginning if there is a technical error, if you omit some data or it is not formatted correctly, your application will be rejected,” Settle told Telephony.

“The volume of applications is making things worse,” Settles said. He had advocated a 30-day extension back in mid-July when the volume of applicants became apparent, but that idea was rejected.

Those who applied early are in the best shape, Settles said. He’s concerned that a one-week extension may not be enough for those who waited.

“For those folks who got ahead of the curve, they are in great shape, but for others, it’s going to be an ordeal,” Settles said. “I have no idea how many servers they are able to add or what kind of capacity they have behind the scenes for this. People are frantic, they’re upset. What happens if, even with a one-week extension, some applications can’t be finished?”

The problem, Settles said, is that this kind of fast-paced process has not been attempted before, making it harder for the federal government to prepare technology resources. Previous grant programs were done over much longer periods of time. “They haven’t done this dance before,” he said. “Murphy’s Law of technology will always rear its head.”

Nonetheless, a number of winners have already been announced, primarily for the “mapping broadband” phase. In a second story, Telephony reports on the overall confusion that’s become inherent in the broadband stimulus process.

While the pace of the overall broadband stimulus process has overwhelmed many would-be applicants (to the point where many of them are skipping the first round and focusing on the second), the broadband mapping component of the plan has been regarded as especially confusing. To better understand the nation’s broadband needs, the federal government has allocated some $350 million to create a national broadband availability map that won’t be completed until early 2011, long after stimulus funds have been awarded.

“It strikes many of us that we put the cart before the horse,” said Joel McCamley, senior vice president and division manager of telecommunications and technology services for L. Robert Kimball Associates, which is helping broadband stimulus candidates apply for funding.
While it’s true that this rushed pace is likely to result in some sloppiness in the way that broadband is funded and deployed (and could even give rise to fraud, as Yankee Group analyst and Telephony alum Vince Vittore recently told BusinessWeek), the immediate goal of the stimulus program is more about feeding employment than it is about achieving universal broadband. Critics of the stimulus plan sometimes confuse the plan’s long-term stimulus ambitions — which come from more widespread use of broadband — with its short-term job-creation imperatives. For now, whether the cart goes before the horse or vice versa is less important than whether or not they are both put to work.

More information about the broadband stimulus can be found in the telecommunications section (p. 114) of Reason’s 2009 Annual Privatization Review.

Virginia Unnecessarily Mingles Politics and IT

steven.titch@reason.org (Steven Titch) — Thu, 06 Aug 2009 16:29:00 EDT

Information Technology (IT) outsourcing is one of the bright spots in terms of privatization trends. As I note in Reason Foundation’s 2009 Annual Privatization Review (page 117),

Government IT outsourcing generates far less controversy than outsourcing and privatization initiatives in other areas, such as roads, prisons and airports. This is due to several factors. First, IT was never a “traditional” responsibility of government, the way other services supported by heavy infrastructure—transportation, utilities and schools—are perceived. Second, government IT operations are inwardly focused—they support the day-to-day processes of government departments and employees. Hence, politically, there’s no negative perception among voters that a “free” government service is being transferred to a corporation that will run it for profit. Quite the opposite: To the extent that the public sees a benefit from improved IT, it’s in the way they can handle their government business online. If anything, the private sector has raised constituents’ expectations about Web- and Internet-based applications such that frustrations will grow if people can’t find critical information, submit forms or make payments via the Web.

The APR, however, went to press just as news was breaking about the contoversy at the Virginia Information Technology Authority (VITA). This has been an unfortunate development, as Virginia was among the first states to launch a large-scale statewide IT outsourcing project aimed at consolidating and streamlining its many isolated information systems. Projects like these, although carry big price tags and can take five to ten yeasr to run their course, pay much more in dividends in terms of increased productivity, more efficient and economical use of IT assets, and far, far less redundancy in hardware and data.

While in Virginia there have been some serious problems with the deliverables, Gov. Tim Kaine’s decision to replace fire the state’s chief information officer and subsequent attempt to bring VITA under the control of his office was the wrong response and will likely prove counterproductive in the long term.

Virginia’s ten-year, $2.3 billion IT outsourcing contract with Northrop Grumman is highly visible and although he did not initiate the plan, Kaine, as governor, does have substantial political capital at stake in its success. However, despite the rhetoric and nomenclature one tends to see in press releases, the state of Virginia is Northrop Grumman's customer, not its “partner.” So when state CIO Lemuel Stewart Jr. questioned a $14.3 million bill claiming that certain certain goals had not been met on time, Kaine should have backed Stewart, not sacked him. Worse, Kaine’s replaced Stewart with Leonard Pometa, a member of Kaine’s cabinet. The matter is that much more exacerbated by the fact that Northrop Grumman reportedly is a Kaine campaign contributor. All this has prompted the Virginia Assembly to begin an investigation into Stewart’s dismissal.

Now what had been a good plan, and an opportunity for Virginia to demonstrate leadership in the IT sphere, risks getting swamped in a sea of politics. The logical solution is for the governor’s office to step back and re-assert VITA’s independence and allow it to manage the state’s relationship with Northrop Grumman. This would mean hiring a new CIO with no ties to the executive mansion. Indeed, IT independence is crucial to the success of any IT outsourcing project because it serves as a buffer against the sort of conflicts of interest, or appearance of such, that arise as part of the campaign funding process.

The lesson other governors should take form this is to be a little less sensitive. No IT overhaul project goes smoothly. And one of the best talents a CIO can have is the ability to separate the run-of-the-mill grumbling that occurs when employees are forced to change their technology habits (you can see this reflected in a lot of Web comments to the various news articles that have run on the VITA controversy), with critical feedback as to whether the necessary changes are being implemented correctly and are delivering the increased productivity. In the private sector, large users have learned the only way to get what they want is to hold their contractors’ feet to the fire. And this sometimes means withholding payment. Kaine may yet regret coddling Northrop Grumman. He’s certainly not doing any favors for VITA nor the Virginia taxpayers of the state.

For more background, follow these links:

The Washington Post

TradingMarkets.com

The Richmond Times-Dispatch

Taxing the Net

bdoherty@reason.com (Brian Doherty) — Mon, 03 Aug 2009 14:04:00 EDT

A coalition of 22 states wants Washington to help them extract cash from the purchases their residents make over the Internet. It won’t be easy, thanks to a 1992 Supreme Court decision that limits local jurisdictions’ ability to collect sales taxes on online and mail-order transactions. Still, as e-commerce grows and state revenue shrinks, states are finding the Internet an irresistible target.

At press time, Rep. Bill Delahunt (D-Mass.) and Sen. Michael Enzi (R-Wyo.) were preparing to introduce a bill requiring online retailers to collect taxes from customers who live in any of the 22 states participating in the Streamlined Sales Tax Project. By standardizing rates and the list of taxable goods, the participating states hope to get around the Supreme Court’s concerns about the burden of forcing online merchants to follow different states’ varied and complicated sales tax rules.

Why not treat online purchases like in-person sales, where the tax is determined by the state where the business is located? Because that approach provides an advantage to states with no or lower sales taxes. It also gives every state an incentive to lower tax rates, a fine outcome for buyers and sellers but not for governments looking to beef up tax revenues.

Adam Thierer of the promarket Progress and Freedom Foundation has spent years tracking such attempts toimpose state taxes on interstate commerce. Those 22 states are “proposing to abandon true federalism,” he says. “State and local officials would prefer to create a cozy tax cartel instead of relying on a ‘laboratories of democracy’ model of competition between the states.”

This column first appeared at Reason.com.

In Love With Yesterday's Policies

steven.titch@reason.org (Steven Titch) — Tue, 28 Jul 2009 14:47:00 EDT

Economist Thomas Hazlett has a great column in Business Week (also cited earlier by Adrian Moore) on ill-conceived attempts to ban exclusive handset arrangements, such as the AT&T-Apple iPhone deal and the similar, more recent agreement between Sprint and Palm for the Pre.

Hazlett recounts the arguments and observations about how such agreements, far from restricting competition, instead intensify it. He also discusses at length how these models, which subsidize the cost of handset by stretching it out over the course of a one- or two-year service contract, work to keep cost of the latest technology within reach of consumers. Finally, he also addresses how wireless business regulation is loosening up in Asia and Europe, which until recently embraced the regulatory controls Congressional leaders and Obama administration officials suggest we adopt in the U.S. So, in telecommunications, as with environment, trade and taxation, Washington is glomming onto the same progressive policies the rest of the world already tried and is discarding as unfruitful. As Hazlett notes:

In South Korea, regulators have sponsored temporary bans on subsidies, explicitly increasing carrier profits by slashing subsidy costs and thereby cutting a line item that plagues financial results for wireless carriers everywhere. But the policy clearly harms customers.

Restricting subsidies also hurts technology adoption. In Belgium—the sole European Union country to ban phone subsidies (under a 1935 statute banning sales tying a product to a service)—the iPhone went on sale for $1,000, its highest price in the world. The EU recently struck down the subsidy prohibition as anticompetitive in a case brought by Belgian gas stations that objected to a rival offering customers free towing service if they bought so many liters of gas. The EU (correctly) upheld the discount and tossed the law. Now Belgian iPhone buyers will benefit via lower prices. Perhaps they'll also get free towing.

Finland banned handset bundling until 2006. The rule was scrapped by the Finnish government because individual customers were not buying new, expensive 3G phones. This gave application developers little incentive to design useful add-ons, further reducing 3G handset demand in a vicious circle of stagnation. When the ban was dropped, new technology adoption took off, courtesy of network subsidies—and customer contracts.

Please, Let's NOT Regulate Wirelesss

adrian.moore@reason.org (Adrian Moore) — Tue, 28 Jul 2009 13:55:00 EDT

The always brilliant Tom Hazletton the latest bad idea in telecom regulation.

Senator John Kerry (D-Mass.) has called for an inquiry into the Apple iPhone and BlackBerry Storm, the Senate Commerce Committee has held hearings, and the U.S. Justice Dept. has opened an investigation. Their concern? Wireless carriers market these expensive, cutting-edge smartphones by subsidizing the handsets and requiring two-year service agreements. What they lose on the phones they make back in monthly fees.

To some, this seems unfair and anticompetitive. But calls for regulation are perverse. Indeed, Senator Kerry performs a great favor by singling out the iPhone and the Storm—iconic examples of dynamic, productivity-fueling innovation—as the root of the problem. These products are precisely the disruptive technologies that policymakers should herald. Yes, we need to investigate them—to figure out how to encourage more of the same.

Read the rest here.

Got a blog? Here come the Feds!

steven.titch@reason.org (Steven Titch) — Mon, 20 Jul 2009 20:46:00 EDT

The Federal Trade Commission is considering rules that would require bloggers to disclose any remuneration they may have received from companies they cover. This would include advertising or any commissions from clickthroughs (although this would be fairly obvious).

In doing so, the FTC is mandating for policies and rules for online publishers that are purely voluntary (if customary) in the print media. This is not governments role. Plus given the millions of blogs out there today, consistent enforcement of such rules would be impossible. To many individuals who are trying to make a go at the new, low cost business models blogging presents, this represents a business-killer.

Here's an excerpt from a Web commentary posted earlier Monday.

In a story about the looming FTC plan, the Associated Press featured Rebecca Empey, a New Hartford, N.Y., housewife who makes $800 a month from five blogs. Empey has received a bird feeder, toys, books and other free goods from advertisers—gifts she disclosed to her readers. Now she worries that even a casual mention of an all-natural cold remedy she bought herself could trigger an FTC probe. “Will I be sued because I didn't hire a scientist to do research?” Empey asked.

The ethical thing for bloggers is to disclose what compensation or sponsorship agreements they have—and many already do. Even if they don’t, it’s not the government’s job to make ethical decisions for bloggers. Remember that blogs, like their print counterparts, succeed or fail based on the quality of their content. A blogger who gets the reputation as a shill will see a falloff in credibility and visits. An honest writer, on the contrary, will draw more readers and offer advertisers a better value proposition. The audience can determine the trustworthiness of sources without the government’s help.

The full commentary can be found here.

Your Handy Guide to Obama-Era High-Tech Antitrust Policy

steven.titch@reason.org (Steven Titch) — Fri, 10 Jul 2009 16:36:00 EDT

You may have heard that the Obama Justice Department promises to become much more aggressive in pursuing antitrust action against the high-tech sector. Taking its cues from the European Union, which, in a series of rulings against Microsoft, Apple and Intel, has shown that it sees its primary role as protector weaker competitors and unpopular products, even if it comes at the expense of lower consumer prices and innovation. Hence, the antitrust venue-shopping in Brussels, where the EU courts have prosecuted and penalized companies solely for their size, efficiency or size of market share and absent of any evidence of abuse.

In the U.S., on the other hand, for more than a generation, consumer harm was the measure of an antitrust violation. Now, Christine Varney, President Obama’s head of antitrust enforcement at the Department of Justice, has openly talked about moving U.S. enforcement toward the European model. "I believe that greater coordination with the FTC and foreign antitrust authorities is in the best interests of America's business community and consumers," Varney told the U.S. Chamber of Commerce in May, just days before the European Union announced its $1.44 billion judgment against Microsoft.

The EU has fined Intel over the discounts and rebates it offered personal computer manufacturers that purchased the company’s microprocessors in large volumes. While the EU found that Intel’s pricing was not predatory and acknowledged that the computer chip discounts significantly lowered the prices of all PCs sold in Europe, Brussels nonetheless found Intel guilty of illegal behavior. Its reasoning was that simply because Intel was able to use its larger market share to put pressure on prices, Advanced Micro Devices, Intel’s chief competitor (and a healthy, profitable company), was at an unfair disadvantage.

The New York Times led the cheering section for U.S. adoption of this idea in a May 22 editorial:

In the Bush administration’s view, to get in trouble a monopolist must do worse than use unfair methods to undermine a competitor. Regulators must usually prove that consumers were directly hurt, typically through high prices. When the wrongdoing is to offer a client conditional rebates — meaning lower prices — that can be especially hard to prove.

That view of consumer harm is too restrictive. It often seems to ignore the fact that a dominant firm that uses unfair tactics to marginalize its rivals deprives consumers of choice, another form of harm. Without competitors there is no competition. Without competition there is no incentive for innovation, or to reduce prices.

The Obama administration has a different view. The Justice Department’s antitrust division has rescinded Bush administration guidelines intended to shield monopolies from antitrust accusations. The FTC is also likely to be more active under its new chairman, Jon Leibowitz. He is already considering pursuing future antitrust cases with a little-used provision of antitrust law that directly outlaws unfair methods of competition.

Even though in the last 25 years, prices across the board in high-tech have done nothing but fall, products and services have proliferated beyond count, and each year, there seem to be a spate of entrepreneurial success stories, the telecom, computer and Internet industry seems to in the antitrust crosshairs of both DoJ and the FTC. Varney wants to investigate exclusive wireless handset deals and Leibowitz has already signaled that Intel might be a target, as will other high-tech successes like Google and Hulu, the video streaming service.

Now that it looks like proof of consumer harm is no longer the gauge for antitrust prosecution, and that any strategy or tactic used by one company to gain an edge could be ruled as inherently anticompetitive, in the spirit of public service, I offer the following points for high-tech companies to avoid, at least for the duration of the Obama administration:

Don’t cut prices.
This is how Intel got into trouble. Although it’s time-honored practice to charge less to a customer buying in volume (one for $10, three for $25), in part because it improves cash flow and reduces inventory costs, the new attitude at the Justice Department is to view discounts with grave suspicion. Price-cutting could be an attempt to drive out competitors and dominate the market for computer chips for a generation. Never mind that with computer chips, a generation lasts 18 months before the processing power doubles and its cost halves, necessitating the need to regularly scrap yesterday's chips and develop new, faster ones or lose business.

Don’t do anything innovative.
Forget about attempting any sort of disintermediation, which means using a new technology, method or process to supplant a range of existing products. This tendency repeatedly has caused Microsoft problems, starting when it began integrating early stand-alone PC applications, such as Internet browsers, media players, photo editors and viewers, pocket calculators and such into its Windows operating system. This was, of course, unfair to anyone who wanted to sell these applications separately, even if it meant a net higher cost for consumers. This leads us to the next point.

Never, under any circumstances, give your product away for free.
This is worse than discounting. Younger readers may not know that at one time, if you wanted to surf the Web, you had to purchase an Internet browser from a company called Netscape. When Microsoft offered Internet Explorer for free, the Justice Department sued to stop it on grounds that it was unfair to Netscape. Varney, our new antitrust enforcer, was a Netscape lobbyist who pushed the Clinton administration to pursue this case. So don’t say you haven’t been warned. Is it any wonder then, that Varney has called Google, which offers a plethora of valuable Internet services free of charge, the new Microsoft?

Likewise, Hulu, which by virtue of moving quickly in the emerging area of video streaming, has locked up some large exclusive content deals plus financing from Disney, NBC Universal and News Corp., may find itself in legal trouble simply for not slowing down to allow its competitors to catch up. Hulu, of course, is free, but monetizes its exclusivity through online advertising. Let alone the fact that business models for online advertising and content are still shaking out and someone may yet develop a new approach between now and the time you finish reading this blog post, the Feds appear ready to clamp down.

Avoid high brand recognition.
Hulu’s big mistake may have been advertising during the Super Bowl. Sure things move fast in the tech business, but if regulators are to be believed, in the space of 30-second ad spot, Hulu went from struggling entrepreneurial venture to being a step away from dominating the Internet.
As far as DoJ, the FTC and Congress are concerned, what matters is not how many competitors you actually have, only the competitors they can name off the top of their heads. When lawmakers accuse AT&T of unfairly locking up “the best” technology on the market, they are buying into Apple’s well-cultivated brand cachet, not the reality that there are at least a dozen other iPhone-like devices on the market whose makers would happily contest claims of iPhone superiority.

Don’t be hip and popular.
If you are, you might as well be waving a sign that says “Prosecute Me!” After giving away products for free, the worst antitrust sin is to create an item that lots of people want to use, either because it’s fun, simple, cool or immensely useful and productive. But be warned, if you get this far, it’s usually because you’ve already engaged in the type of anticompetitive behavior set out already. Look at Facebook: It’s free, easy to use, proving more appealing to a demographic beyond teens (adults, professionals, user groups) and has high brand recognition. Given the recent layoffs at MySpace, Facebook may be deemed a monopoly threat. Again, that will be due to brand recognition. Since you never hear anyone talk about Plaxo and LinkedIn, in policy circles, they don’t exist.

Twitter, the short message service that’s all the rage, also better watch it. Never mind that it’s free, or that its business model is murky. If it has no competitors therefore must be reined in. Tinyurl.com, the site that condenses lengthy web addresses into short ones that can be packed into 140-character Tweets, could be in trouble for similar reasons.

What hope can I offer to high-tech entrepreneurs? Well, if you’ve got a telecom or IT product or service that’s overpriced, unappealing, has a high failure rate, is difficult or clunky to use, doesn’t work well with any popular hardware or software, this is your time! You can now sue competitive innovators for, well, being competitive innovators. Contact your local DoJ or FTC office today. Attorneys and regulators are standing by.

Real Broadband Growth: There's China, There's the U.S. and Then There's Everybody Else

steven.titch@reason.org (Steven Titch) — Fri, 10 Jul 2009 12:18:00 EDT

While stimulus apologists insist the U.S. has fallen way behind in terms of broadband, actual numbers bear out the opposite. In terms of broadband connections, as of the end of the first quarter 2009, the U.S., with 84 million, is second only to China’s 88 million, according to Point Topic, a U.K.-based research firm that has been tracking broadband numbers for more than a decade. After China and the U.S., numbers dramatically drop off. Japan ranks third, but with 30.6 million. South Korea, often held up as the example of broadband progress, ranks seventh with 15.4 million connections (see graph below). The report measures worldwide DSL, cable modem and fiber connections, but does not count wireless broadband. Unlike broadband research of the Organization for Economic Cooperation and Development (OECD), which uses older data supplied by government agencies, Point Topic’s research is more up-to-date and independently done.

China and the U.S. also leads in broadband connections added in the first quarter. The Middle Kingdom’s added 4.72 million subscribers; the U.S. with 3.34 million new subscribers, according to the research firm. They were the only two countries to add more than 1 million customers in the first quarter, Germany, in third place, came close with 946,200. As a percentage over Q4 2008, connections in the U.S. grew by 4.14 percent. What’s more significant is that the U.S. leads economically developed nations in both connections and quarterly growth. Germany and France, with quarterly growth of 4.08 percent and 2.95 percent are closest. But then, as with connections, numbers fall off. Here again, South Korea and Japan, the bêtes noirs of U.S. broadband policy, are less than impressive, with 1.52 percent and 1.01 percent 1Q growth. This suggests while they lead the U.S. in penetration, broadband growth in these countries is reaching maturity.

Critics of market models often site OECD penetration statistics, which rank the U.S. between 15th and 20th. Point Topic numbers reflect this as the U.S. did not make the top ten. At the same time, the Point Topic numbers also reflected the correlation between high penetration, and both geographic size and dense populated, which is also seen in the OECD numbers. Hence, as of the first quarter, the highest broadband penetration rates were in Monaco, Luxembourg, Denmark and Iceland, Point Topic found.

While there are pockets of the U.S. that do not have broadband, these numbers shatter the myth that the U.S. is falling behind the rest of the world in terms of broadband. It certainly raises the question as to whether a $7.2 billion government stimulus is needed to spark a broadband rollout, when these metrics show that U.S. rollout and adoption are not only keeping pace, but going faster than comparable economies.

Download the full Point Topic report here (free, but registration is required).

Contrary to What Congress Thinks, It's the 'Summer of Handsets'

steven.titch@reason.org (Steven Titch) — Tue, 30 Jun 2009 15:25:00 EDT

As influential lawmakers such as Sen. Jay Rockefeller (D-WV) and Rep. Ed Markey (D-MA) seek to end to exclusive handset agreements in the name of protecting consumers from an erstwhile AT&T-Apple iPhone monopoly, Wireless Week has proclaimed it the "Summer of Handsets."

To see how out-of-touch Congress is regarding the wireless handset market, click here for a list of smartphones that rolled out in the two weeks between June 6 and June 19. FCC Chairman Julius Genachowski, who was confirmed Friday, promised an inquiry into whether AT&T and Apple are hurting consumers by unfairly crowding out competitors. Looks like he can start and end his investigation here.

Is It Your Right to Own an iPhone?

steven.titch@reason.org (Steven Titch) — Tue, 30 Jun 2009 10:30:00 EDT

My new column takes a look at the Senate calling on the FCC to investigate cell phone exclusivity deals like AT&T's iPhone arrangement. Excerpt:

The FCC will have a tough time proving that exclusive agreements are detrimental to the buying public.

For starters, the iPhone model that debuted 24 months ago at $599 now costs $99. Apple priced its latest, new and improved iPhone 3GS offerings at $199 and $299. That's pricing from a company well-aware it is competing with others.

The iPhone certainly doesn't have a monopoly on the smartphone market. While it is exclusive to AT&T, it is just one of a number of smartphones that are available to consumers from other service providers. In addition to the new Palm Pre, there’s Research in Motion’s very popular BlackBerry line, and an assortment of highly functional devices from Samsung, LG, HTC, Motorola and Google, whose Android operating system, compatible with any wireless system, makes it something of an anti-iPhone.

Full Column

Reason's Telecom Research

Government to Examine Exclusive Cell Phone Deals

steven.titch@reason.org (Steven Titch) — Tue, 30 Jun 2009 10:16:00 EDT

If you want an iPhone you need to be an AT&T customer. Sprint is the sole supplier of the Palm Pre. Are these exclusive deals between wireless phone companies and handset manufacturers anticompetitive and monopolistic?

Policy momentum against such agreements has been building in Congress since AT&T and Apple rolled out iPhone in June 2007, selling more than 1 million of them in the first few weeks of introduction. Debate in Washington intensified again in recent days; just as the Palm Pre and the new iPhone 3GS were hitting the streets. Federal Communications Commission (FCC) Chairman-designate Julius Genachowski, in response to comments by Sen. Jay Rockefeller (D-WV) during Genachowski’s confirmation hearings, said he would investigate whether such exclusive handset agreements are hurting consumers.

Exclusive sales agreements between service providers and handset makers are not new. For its first year on the market, Motorola’s RAZR, the thin flip phone that became the “must-have” model of 2004, was available only from AT&T. The iPhone, however, with its touchscreen interface, integrated music player, intuitive web browser and library of third-party applications, was truly innovative in terms of design and function. That, along with Apple’s brand name, market clout and a well-cultivated media presence, made the iPhone one of the most hyped wireless devices to ever hit consumer consciousness. But to use the iPhone, you had to sign up for AT&T’s wireless service. If you weren’t an AT&T customer and wanted an iPhone, it meant changing service providers, perhaps incurring an early termination penalty. If you lived in a market that AT&T didn’t serve, you couldn’t get an iPhone at all.

Sen. Rockefeller believes exclusive agreements are anti-competitive and anti-consumer. He claims consumers in markets not served by the major service providers are hurt because they don’t have access to the latest technology, and he argues that exclusive agreements harm regional wireless service providers, such as Alltel, Cellular South and U.S. Cellular. With national coverage and deeper pockets, AT&T, Verizon and Sprint can easily outmuscle the smaller players when it comes to bidding for exclusivity.

Rockefeller, along with along with other congressmen like Rep. Ed Markey (D-MA) of the House Subcommittee on Communications, Technology and the Internet, is seeking legislation or FCC rules that would either ban or regulate exclusive handset agreements. Essentially, no service provider would be able to negotiate an exclusive right to sell one brand or model of handset. This would represent a massive government intrusion into established wireless marketing strategies amid dubious assertions that such agreements are monopolistic.

First, exclusive distribution agreements are a standard competitive practice, not just in cell phones, but across many consumer industries. They add an element of differentiation to products or services that consumers see as easily substitutable. For example, to get consumers to shop at its stores instead of Wal-Mart’s, Target crafted an agreement with designer Isaac Mizrahi to sell his apparel exclusively under the Target brand.

Second, national and global companies have always had a size advantage over regional and local competitors. But rarely has the ability to leverage size or capitalization in and of itself been considered illegal or unfair. Starbucks can afford to market coffee in ways local coffee shops can’t. True, this meant some Mom-and-Pop stores went out of business, but other operations, just as small, thrived by meeting the competitive challenge in other ways.

That’s just what’s happened in wireless. Given the interest in, and demand for, new services, applications and price cuts that the AT&T-iPhone deal touched off, the FCC will have a tough time proving that exclusive agreements are detrimental to the buying public.

Consumer enthusiasm for smartphones, sparked by innovations driven by competition, is a bright spot amid the recession. Even as overall worldwide sales for wireless phones dropped 14.5 percent in the first quarter of 2009, smartphone sales were up 12.7 percent, according to market research firm Gartner.

In light of these facts, it’s hard to see exclusive handset agreements as anticompetitive and anti-consumer. Rapid price declines, a growing number of product choices and double-digit sales growth simply do not occur in a monopoly market.

While it’s true not every consumer can get an iPhone, every consumer has a choice of a number of feature-rich smartphones. No one has locked up the market. Contrary to Rockefeller’s assertion, regional carriers have not been frozen out. U.S. Cellular has the Samsung Delve and the BlackBerry Curve. Cellular South sells the Samsung Finesse. Alltel sells the LG Tritan. They may not have the cachet of the iPhone, but that’s a challenge that should be met with skillful and creative marketing, not intrusive regulation.

Steven Titch is a policy analyst at Reason Foundation.

Florida IT Contract Draws Scrutiny

leonard.gilroy@reason.org (Leonard Gilroy) — Thu, 04 Jun 2009 13:15:00 EDT

FL State Sen. J.D. Alexander is questioning the Florida Department of Management Services (DMS) for its decision to consider extending a contract with the current operator of its human resources functions:

The state's decision to consider a no-bid contract extension for a controversial human-resources company has renewed criticism from a leading state senator who says privatization initiatives have cost taxpayers $200 million with little to show for the money. Senate budget chairman J.D. Alexander persuaded fellow lawmakers during the spring legislative session to increase scrutiny of large state contracts -- only to see Gov. Charlie Crist veto the proposal last week.

When Alexander got word Tuesday that the state's Department of Management Services might offer a five-year extension on a contract for state human resources services to Ohio-based Convergys, the Lake Wales Republican urged Crist to solicit bids for the contract. "There have been problems with this vendor before, so I'm not sure it's a good idea to give them $44 million more a year without seeing if there's a better option out there," Alexander said.

Convergys stands by its work and issued a statement that said: "The Legislature itself hired a third-party consultant to review the . . . contract and that consultant recommended the contract be renewed."

But Crist agreed with Alexander, saying the project should be rebid. "I think we always need open bids, good competition," Crist said. "I think he's right on point. I agree with the senator." Still, Crist vetoed Alexander's contracting oversight bill, saying it went too far by requiring too much legislative oversight. Under one interpretation of the legislation, lawmakers would have had to sign off on some state agency purchases of items as insignificant as office furniture.

The contract to centralize and consolidate the state's massive payroll system was one of the first large-scale privatization efforts to draw fire in Florida, in 2002. Paychecks came late, cost savings were lower than anticipated, and some state employees worried about identity theft after personal data was released to a subcontractor in India.

It is indeed true that the human resources privatization, known as People First, came under fire early in its rollout. However, having read the Council on Efficient Government's (CEG) 2008 report on this and other major IT initiatives (as reported in Reason's Annual Privatization Report 2008), it's pretty clear that the major problems with People First were in large part centered on the state's poor planning and its inability to rein in the demands of its agency staff for customization of the new systems. But let's go back to the beginning.

People First was developed to streamline and automate the state's human resource, payroll administration, staffing and benefits functions by consolidating the seven different legacy IT systems into one. In 2002, DMS entered into a seven-year contract with Convergys Customer Management Group, Inc. valued at $278.6 million. The contract term was subsequently amended to extend through 2011, increasing the total contract value to $350 million. Since 2005, the People First project team has deployed 330 system modules and releases. Today over 50 state agencies and entities, including 132,120 active employees, 48,261 benefits-only employees and 47,809 retired employees, use People First in some way.

Here's a snapshot of the CEG's findings that all parties in the current debate should refresh themselves on:

People First was "a successful migration from the state's legacy system" and "provided a functional interactive platform with little initial capital outlay." The state saved $12 million from staff reductions, $80 million from the cost avoidance of rebuilding its own system and other efficiencies through the elimination of duplicative services between agencies.
The initial expectations were to reduce the human resources workforce by over 1,200 full time positions, contributing to a total savings of $173 million over the original seven-year contract term. DMS subsequently revised the projection to reduce the state's HR-related workforce by 971.5 positions. Thus far, 862 positions have been eliminated, resulting in a 70% reduction in the state's HR-related workforce.
One of the biggest challenges with People First is lack of standardization of business practices across agencies, requiring "excessive" customization to the off-the-shelf software (over 200 customized interfaces). Implementing a standardized, statewide business process "would alleviate some of the trouble of software customization and additional workload issues associated with the divergent business processes."
An internal assessment of hardware and software at each agency was not conducted prior to launching People First, resulting in incompatibilities between the various infrastructures. Implementation and performance issues arose as a result of not establishing this initial equipment baseline.
Most agencies went live with People First in 2004 but were instructed to make staff reductions prior to that. Consequently, due to system-related limitations and the elimination of most HR staff, agencies saw an increase in workload which negatively impacted them. DMS reports, however, that the People First program is stabilizing.
The People First contract was written such that the state turned over its entire HR operations to the vendor; hence, the state will not control or own the software or hardware at the end of the nine-year contract.
DMS recently conducted the first survey of the People First system and found that 59% of the employees surveyed said that People First met or exceeded expectations. Overall, the service center received the best reviews with 70% of the respondents saying they were satisfied or extremely satisfied and 82% saying staff were friendly.
Project management has been a challenge. A full-time project team was not established for People First until 2005 and it has already had three project managers. Some early implementation problems "may potentially be attributed to the lack of a dedicated team to ensure success." However, the CEG report finds that "[t]he current People First team at the DMS is well organized, employee focused and committed to continual improvement."

The report concludes that in the end, the transition was difficult but the privatization is working, which is something that certainly isn't made clear in the article above.

Regarding the central question of re-bidding the contract, I'm obviously a fan of subjecting services to regular bidding as a general rule. Competition keeps all parties honest and on their toes and drives down prices. But what, when and how you do it matters, and there's no doubt that this isn't your typical state landscaping contract—its a complex, statewide technological system that serves over 200,000 people—and the new system is just getting settled, so to speak.

The obvious difference is that standard operational contracts involve operating something, not building and operating something. As you dial up the contractor's responsibilities with the design and development of infrastructure systems, you generally tend to dial up the length of the contracts and the complexity. While I can only offer conjecture, I'm assuming that the state and its advisors view re-competing the contract at this point in time as potentially undermining the progress made on rolling out the system thus far and potentially taking on the risk of high transition costs at a terrible time for the state budget. This isn't a simple decisionmaking process and will be interesting to watch.

Obama's Federal Chief Technology Officer

steven.titch@reason.org (Steven Titch) — Mon, 20 Apr 2009 16:46:00 EDT

President Barack Obama made good on his campaign pledge this weekend, appointing Aneesh Chopra U.S. Chief Technology Officer, a new cabinet-level post. Obama promised to create the CTO post last year during his successful run for the presidency.

Obama’s made no secret of his desire to use IT to improve government communications and transparency, and that, in and of itself, is a worthwhile goal. E-government, if implemented with an eye toward reducing costs and speeding processes, can be transformative. Also encouraging is that Obama reached into the user community—Chopra currently is the state of Virginia’s secretary of technology. His choice came as a surprise to the IT community, who expected Obama to choose 1) a high-profile CEO from the tech sector (speculation centered on Google’s Eric Schmidt, Microsoft’s Bill Gates, and Amazon’s Jeff Bezos, among others).

Although Chopra is somewhat of an unknown, on first blush, the fact he is not affiliated with a major supplier pre-empts the politics that might have accompanied an individual from the manufacturing or services sector. Chopra seems to have more experience in developing IT solutions and best practices, and one hopes that will remain the policy priority, as opposed to a doctrinaire approach, be it network neutrality or open source procurement.

Still, Chopra’s experience with health care IT may point to Obama’s own priorities. Again, improvement in health IT can be enormously rewarding if implemented correctly—the market is already developing a number of approaches. A government-run health IT system, wherein the feds collect and retain massive medical databases on its citizens is rife with problems. There is nothing yet to indicate Chopra leans in this direction. Any IT executive these days is nonetheless familiar with the growing need for strong, workable information security practices and that as of today, the federal government is no model for them.

Where ever he falls politically, my hope is that Chopra’s real world experience will temper some of Obama’s grander notions as to how well government and protection of citizen information will mix.

Your Big Screen TV May Be Banned In California

steven.titch@reason.org (Steven Titch) — Thu, 09 Apr 2009 11:11:00 EDT

My new column at FreedomPolitics.com:

They are coming for your television. The Orange County Register reports the California Energy Commission is considering banning the sale of big-screen TV sets that don't meet new, higher energy efficiency standards.

The proposed regulations will make many big-screen sets illegal. By 2011, the commission wants all large-screen TVs to use 33 percent less power. By 2013, sets must consume 49 percent less power. The bureaucrats say the regulations will reduce global warming and save consumers $18 to $30 a year.

If the law was enacted today, the Consumer Electronics Association says about 25 percent of TVs would be non-compliant, most of those being sets with screens of 40-inches or more. Considering that most manufacturers already work to meet voluntary Energy Star standards, it is questionable how much more state agencies can demand from manufacturers without forcing them to pass on these added costs to consumers, which means more expensive TVs.

There is also a huge question about how such a law would be enforced. Many California consumers would simply choose to purchase non-compliant TVs on the Internet, or drive to stores in nearby Nevada, Arizona or Oregon. As a result, local California-based retailers, who provide jobs and income to state residents, stand to lose the most from the ban.

The Energy Commission insists that it is not "banning" big screen TVs, but simply setting higher efficiency standards. But setting standards that few, if anyone, can actually meet is really just prohibition by another name.

The energy commissioners are really concerned about our prosperity. They fret that too many people are buying bigger TVs, hooking them up to Digital Video Recorders (DVRs), cable boxes, computers and digital cameras. We simply can't have that. These home electronics now consume about 10 percent of household electricity, according to PG&E. So here comes the state's nanny to tell taxpayers how they should be using electricity and to tell us we are using too much of it watching big screen TVs.

Full Column Here
Reason's California Research and Commentary

California Wants to Ban Your Big Screen TV

steven.titch@reason.org (Steven Titch) — Thu, 09 Apr 2009 11:01:00 EDT

FreedomPolitics.com

Ironically, these nanny-state tactics are unnecessary. Bureaucrats don't have to browbeat consumers into saving energy. The cost of power isn't getting any less expensive. You don't have to buy into the global warming doctrine to want to lower your electricity bills.

Many television manufacturers, well aware that their customers want to save money, are developing organic light-emitting diode (OLED) televisions that are much more power efficient than today's sets.

And Wired.com points out "most of the TVs that would be banned by the proposal would be larger TVs that are already losing steam in the market anyway... consumers are already ahead of the game here. No matter what happens with the proposal, energy-hogging TVs will be gone within two years."

As usual, customers and companies are ahead of the bureaucrats. To cover the added $18 to $30 yearly cost of that big screen TV, people might choose to turn down the air conditioner, do a better job turning off the lights around the house, or waiting until the dishwasher is full before running it. People can find plenty of ways to be economical when they have to. They might even choose compact fluorescent light bulbs.

Just as the commission seeks to ban big televisions, the state legislature tried a similar tactic with attempts to ban incandescent light bulbs. But the legislature wisely stopped short of an outright ban in favor of a list of requirements that light bulbs must meet in the future. That list, however, was intentionally malleable so businesses and consumers would have some flexibility. Legislators, unlike the energy commissioners, are elected officials and need to be somewhat sensitive to what voters want.

If the energy commission moves to ban big screens, I suspect the commissioners will learn Californians take their televisions very seriously.

Steven Titch is a policy analyst at Reason Foundation. This column first appeared at FreedomPolicitics.com.

First They Came For The Light Bulbs

steven.titch@reason.org (Steven Titch) — Mon, 23 Mar 2009 15:51:00 EDT

Now, if you live in California, they are coming for your big screen TV.

In a move that is so wrong-headed on so many levels, the California Energy Commission wants to ban large-screen TVs because they allegedly contribute to (alleged) global warming.The wording is parsed to suggest "complaint" models will still be permitted, but it's unclear what the requirements will be.

The OC Register reckons that the CEC proposal would likely remove most models over 40 inches from the market. The agency wants to put the new rules into affect by 2011.

Here we have more enviro-puritanism running amok. After all, people like watching big screen high-def TV, especially when the current economy makes home entertainment an economic option. There’s indication how this might be enforced. You can mail-order big screen TVs from Amazon.com (like I did) and other outlets. Californians can also drive to Arizona, Nevada or Oregon to buy one.

Let’s also mention the cockamamie idea of taking products off the shelves during a recession in a state where a good chunk of the population makes a living producing TV and movies and video games – you know, the stuff that plays well on big screen TVs.

The CEC itself says its goal is to avoid the necessity of building more power plants—a questionable priority to say the least. Instead it has declared of war on plug-in appliances and anyone who dares to use them.