Reason Foundation

CISPA Circumvents Fourth Amendment, Allows Warrantless Online Surveillance

Posted on April 23, 2013, 8:09am | Cathy Reisenwitz

The Cyber Intelligence Sharing and Protection Act, or CISPA, recently passed through the House of Representatives and is on its way to the Senate. The bill is supposed to help companies and government work together to help fight cyber attacks. However, it poses some real threats to Americans’ Fourth Amendment privacy protections. As Steven Titch recently wrote in the Federal Government section of Reason’s Annual Privatization Report 2013:

While most analysts agree that the U.S. needs to do more to defend its assets from potential cyberattack, policymakers are divided over how best to do this.

The main arguments against the bill are that CISPA makes it much easier for government agencies to put politically disfavored people in prison, government’s shoddy secret keeping may mean CISPA actually makes data less secure and that data suggests that U.S. businesses would rather see the private sector develop cybersecurity solutions.

While the bill has many similarities to last year’s widely reviled SOPA, CISPA enjoys far more corporate support, which has led to a much more muted response online. Anonymous called for an Internet blackout but giants like AT&T, Comcast, Verizon and tech policy group TechNet, whose members include Facebook and Google, all support CISPA. You can see a full list of CISPA supporters here.

One major reason companies support CISPA is that it actually protects them from being sued if or when they break their Terms of Service in order to give government agencies like the National Security Administration their users’ private data, as long as the government claims it’s for cyber security. Even with this handout to tech companies, over 300 websites participated in a blackout Monday. the largest of which was Reddit.

A big problem many people have with CISPA is that it, as Mediaite put it, “effectively creates a ‘cybersecurity’ loophole in all existing privacy laws.” This is done mainly in two ways. First, it expands allowable warrantless government surveillance. Under CISPA, government agencies can collect information on users of sites like Facebook and Twitter, even when that information is supposed to be private under existing Terms of Service. All this can be done without warrants and without warning. Second, and as previously mentioned, it immunizes those companies against lawsuits for violating their Terms of Service.

How much data would CISPA give the government has access to without a warrant?

TechCrunch is reporting that Facebook has plans to build a billion-dollar data center that will cover “1.4 million square feet and serve as what the company says will be ‘the most advanced data center in the world.’” Combine the fact that the average American commits three felonies a day due to vague and broad regulations with the once-unimaginable amounts of data law enforcement can now troll through and CISPA makes it extremely easy for law enforcement to find reasons to imprison unfavored but harmless citizens. Simply put, CISPA makes it much easier for government officials to find reasons to put people it doesn’t like in prison.

Not only does CISPA threaten citizens’ safety from unreasonable searches and seizures, but it may not even keep citizens’ data safe from attackers. As Reason’s Titch wrote:

In August 2012, the U.S. Government Accountability Office (GAO) reported that federal data breaches involving unauthorized disclosures of personally identifiable information increased by 19 percent, or about 13,000 to 15,500, from 2010 to 2011. As if to punctuate the GAO findings, that same month, the Environmental Protection Agency separately disclosed that a security breach exposed social security numbers, banking information and home addresses of some 8,000 people.

Whether due to concerns about effectiveness or privacy, research data suggests that U.S. businesses would rather see the private sector develop cybersecurity protocols and policies for the government, rather than the other way around. Titch again:

Information security professionals say private sector security protocols, honed bottom-up through multi-lateral, multi-stakeholder processes, are far better at securing data than over-reliance on technology and government-driven directives.

Bit9, a security market research firm, released its 2012 Cyber Security Survey of 1,861 IT professionals (1,533 in the U.S.) across a wide range of industries, including government, which found 58 percent of respondents said implementing best practices and better security policies would have the biggest impact on improving the state of cybersecurity. By contrast, only 7 percent said government regulation and law enforcement and 15 percent said better technology.

The Electronic Frontier Foundation has been a vocal critic of CISPA. On warrantless wiretapping, they wrote:

Early in his first presidential campaign, then-Senator Obama was a leading critic of giving telecom companies like AT&T immunity for breaking the law to assist in the government in warrantless wiretapping.

President Obama promised to veto CISPA. This is a move to be applauded as CISPA circumvents Fourth Amendment privacy protections, won’t even guarantee citizens’ data will be kept safe from attackers and is unnecessary as private companies are already hard at work and working together to develop way to keep their valuable data secure.

Spectrum allocation: Time to get on with it

Posted on April 17, 2013, 2:14pm | Steven Titch

My new policy brief urges the Federal Communications Commission to get on with the business of allocating the necessary spectrum to meet the burgeoning demand for wireless services.

The paper was finished before Chairman Julius Genachowski announced his resignation last month. At the risk of sounding harsh, that might be addition by subtraction. One of the big disappointments of Genachowski's tenure was the lack of significant movement to get spectrum freed up and auctioned. In fairness, there were the interests a number of powerful constituencies to be balanced: the wireless companies, the broadcasters, and the federal government itself, which is sitting on chunks of prime spectrum and refuses to budge.

But that's the job Congress specifically delegated to the FCC. We'd be closer to a resolution--and the public would have been better served--had the FCC put its energies into crafting a viable plan for spectrum trading and re-assignment instead of hand-wringing over how to handicap bidders with neutrality conditions and giving regulatory favors to developers of unproven technologies such as Super WiFi. Instead of managing the spectrum process, the FCC got sidetracked trying to to pick winners and losers.

A new chairman brings an opportunity for a new direction. Spectrum relief should go to the top of the agenda. And as I say in the policy brief, just do it.

New at Reason: Looking Back at the Last Year in Federal Government Privatization

Posted on April 15, 2013, 3:47pm | Leonard Gilroy

The rollout of Reason Foundation's Annual Privatization Report 2013 continues today with the release of the Federal Government Privatization section—authored by Reason's Adam Summers, Anthony Randazzo, Steven Titch and Victor Nava—which offers an overview of the latest on postal service reform, space privatization, financial regulation, telecommunications and more. Topics include:

• BCFC Outlines $795 Billion in Federal Budget Savings
• Congress Takes on Postal Service Reform—Again
• Space Privatization Update
• ANALYSIS: Google, Facebook, Antitrust and the “Public Good”
• ANALYSIS: Private Sector is Best-Positioned to Lead Cybersecurity Policy
• ANALYSIS: Privatization of Financial Regulation is Not Impossible

» Annual Privatization Report 2013: Federal Government Privatization
» Complete Annual Privatization Report 2013

Four Unintended Consequences of Misapplied Privacy Regulation

Posted on March 28, 2013, 1:51pm | Steven Titch

Today Reason has published my policy paper addressing privacy concerns created by search, social networking and Web-based e-commerce in general.

These web sites have been in regulatory crosshairs for some time, although Congress and the Federal Trade Commission have been hesitant to push forward with restrictive legislation such as “Do Not Track” and mandatory opt-in or top-down mandates such as the White House drafted “Privacy Bill of Rights.” An the U.S. seems unwilling to go to the lengths Europe is, contemplating such unworkable rules like demanding an “Internet eraser button”—a sort of online memory hole that would scrub any information about you that is accessible on the Web, even if it is part of the public record.

In my paper, It’s Not Personal: The Dangers of Misapplied Policies to Search, Social Media and Other Web Content, I discuss the difficulty of regulating personal disclosure because different people have different thresholds for privacy. We all know people who refuse to go on Facebook because they are wary of allowing too much information about themselves to circulate. Where it gets dicey is when authority figures take a paternalistic attitude and start deciding what information I will not be allowed to share, for what they claim is my own good.

Top down mandates really don’t work, mainly because popular attitudes are always in flux. Offer me 50 percent off on a hotel room, and I may be willing to tell you where I’m vacationing. Find me interesting books and movies, and I may be happy to let you know my favorite titles.

Instead, ground-up guidelines that arise as users become more comfortable with the medium, and sites work to establish trust, work better. True, Google and Facebook often push the envelope in trying to determine where user boundaries are, but pull back when run into user protest. And when the FTC took up Google’s and Facebook’s practices, while the agency shook a metaphorical finger at both companies’ aggressiveness, it assessed no fines or penalties, essentially finding that no consumer harm was done.

This course has been wise. The willingness of users to exchange information about themselves in return for value is an important element of e-commerce. It is worth considering some likely consequences if the government pushes too hard to prevent sites from gathering information about users.

Free Services Go Away

Hundreds of thousands, if not millions, of sites support themselves through targeted advertising. If the federal government began to clamp down on websites’ ability to use consumer information to target ads, an immediate consequence would be a decline in the amount of free content, information and services available on the Web. A University of Toronto study of Web sites in Europe, where targeted advertising is heavily regulated, found that advertising effectiveness decreased 65 percent relative to counterparts in the rest of the world, and predicts that of European sites will see a declining share of the $8 billion in global online ad revenues decrease over time because they can’t effectively deliver an audience of interested customers.

This may explain why there are no European search of social media sites that rival Google and Facebook, and why Hyves, a Netherlands-based social networking sites, charges a fee for users access most of the benefits Facebook, LinkedIn, Google+ and Pinterest users get for free.

'Mother, May I?' trumps experimentation

Regulation forces companies to evaluate compliance issues before pursuing a potentially innovative product or service direction. As a result, innovation is slowed, or does not happen at all, not because of market considerations, but on the advice of legal counsel. This is a major risk of any regulation or legislation in technology, an area that is constantly changing and evolving, and where success and survival often hinge on out-of-the-box thinking. It is another reason why guidelines are preferable to law.

Regulations against information-sharing undermine the community-building benefit of the medium

One of the reasons people go online is to meet and interact others who share interests and passions. Individuals with unique interests—from birdwatching to Axis & Allies gaming—can connect with far more like-minded individuals than they might in their own geographic community. These communities in turn build knowledge bases that the general population of users can turn to from time to time. For example, someone planning a vacation in New York City can use Google to find a bevy of bulletin boards and forums, some quite granular, that provide information about shows, restaurants and attractions, all from people who have shared their experience. These boards thrive because search engines like Google and social networks like Facebook drive traffic to them—all based on preferences. Regulate this technology away and the Web loses its unique community-building character.

Privacy regulation won’t address information security issues

Politicians often conflate privacy and security. The two are related, but are not the same thing.

Security pertains to the protection of critical user information that, if disclosed, can result in theft or fraud. Neither Do Not Track nor the on-line privacy “bill of rights” truly addresses security issues related to on-line information.

Wire fraud laws already make it illegal to steal user information. Identity theft and identity fraud are crimes. Companies that fail to adequately protect confidential and sensitive information, such as social security numbers, banking information or specific health-related data, that in the wrong hands could be used for malicious purposes. By contrast, the information websites collect, collate and process for targeted marketing is not highly personal and confidential, but has to do with individual habits and preferences that could otherwise be easily observed—does the person prefer beer or wine? The Cubs or the White Sox? Mystery novels or biographies? For the most part, it is anonymized. True, Facebook and other sites allow users to post pictures and disclose more intimate personal details such as religion or sexual orientation, but again, users can decide whether to disclose these facts and, if they do, decide who may see them. Opt-in, Do Not Track and privacy bills of rights are all about substituting government mandates for individual discretion. They do not strengthen or expand on any current laws against online fraud or theft, which by themselves are quite strong.

Make no mistake, personal choice must be respected, and the right to confidentiality should be protected. Yet specific harms must be understood, delineated and targeted in any legislation or regulation before it goes forward. The information economy is called so for a reason. Nothing would be more counterproductive to it than clumsy government policies designed to generally inhibit the voluntary exchange and use of information. Right now, search, social media and informational websites are the most visible users of consumer information, but in the background, many of the automated, intelligent services we expect the Web to support will need to trade in user information. These include such basic applications as Web-enabled home appliances, such as refrigerators that sense when you’re low on milk to more critical services such as health care management. This is why it’s best to derive privacy policies from a strong and constantly evolving knowledge base of best practices, rather than to codify them into laws that, in their failure to foresee innovation, will discourage it.

Six principles for successful Internet gambling regulation

Posted on November 13, 2012, 12:38pm | Steven Titch

Today the Reason Foundation publishes my policy brief on keys to successful state regulation of Internet gambling.

Thanks to a Department of Justice's December 2011 memo on the parameters of the Wire Act, states can now license real-money intrastate online casino games. Earlier this year, Nevada became the first state to permit online wagering, and in August granted the first online operating license to South Point Poker LLC, which was to have launched trials last month. Since the Reason report went to press, South Point disclosed that its software is still undergoing independent testing but hopes to have its site up by the end of the year.

Elsewhere, Delaware has enacted legislation to authorize online gambling under the auspcies of the state lottery commission and Illinois has begun selling lottery tickets online.

It goes without saying that U.S. citizens should be free to gamble online, just as they legally can in casinos throughout the country. The degree of regulation is subject to debate, but unfortunately remains a necessary element in policy. Yet lessons about taxation and regulation can be learned from experiences in Europe, as well as from regulation of brick-and-mortar casinos in the U.S. With a better understanding of usage trends, consumer game choices and operator cost models, legislators who want to offer constituents the freedom to play online can craft an environment that supports a robust online gaming climate, as opposed to one that drives legitimate operators away.

Regulation should derive from an enlightened approach that respects the responsibility and intelligence of its citizens. Internet gambling can be a safe, secure pastime. Overall, the government's only goal should be to protect users from theft or fraud. Gambling should not approached as an activity that needs to be controlled or discouraged under the rationale that it is a "sin" (to moralists) or "destructive behavior" (to social utilitarians), and then, hypocritically, politically tolerated so it can be excessively taxed on those rationales.

Although it is likely states will differ in the particulars of how they structure the license and tax arrangements, a successful climate for legalized Internet gambling is likely to derive from the following fundamental principles. Lawmakers should heed the following guidelines:

Create a competitive environment

Consumers are best served when there is ample competition. The greater the competition, the more incentive competing companies have to offer better value-both to win new customers, and to keep existing ones loyal.

The state government itself should not compete for players

As a corollary to the competition guideline, states should not attempt to operate online casinos themselves. They should also be wary of giving incumbent lottery management companies a built-in advantage, such as an automatic license set-aside. Experiences in Europe, where some countries initially granted exclusive Internet poker and other gaming licenses to lottery operators, have shown that such ventures are rarely competitive, are inefficiently run, and do not draw players.

Recognizes intrastate online gambling has different cost structure than brick-and-mortar casinos

States that do not account for the difference in cost models between brick-and-mortar casinos and Internet counterparts are setting themselves up for failure. An Internet gaming site can be established with a capital investment that is a fraction of that required to build a land-based casino. But revenues scale down as well; one reason an online poker room can support penny-ante games. States must grasp the lower revenue and tax expectations and set up tax and licensing structures so they are compatible.

Tax operators not players

On the other hand, states should avoid creative new tax structures purely on the justification that some hold the opinion that gambling is a vice or sin. Players should not be taxed through levies on their accounts or through "hand charges" that are paid directly to the state, as some European countries have attempted (again without success; players migrated to Internet casinos in countries without such taxes). Meanwhile, winning players under law are obliged to report winnings (and are often held accountable though W-2Gs). Anything else is double taxation.

Do not attempt to "protect players from themselves."

State legislatures tend to have a love/hate relationship with gambling. They covet the tax revenues, yet they believe that they are being "responsible" by creating artificial notions, such as limiting casinos to "riverboats" or out-of-way locations, in the belief that this will somehow either mask or temper the popular appeal of gambling. The ineffectiveness of these measures is seen in how these conventions gradually fall by the wayside. Likewise, regulations that infantilize players, such as a since-revised Missouri rule that limited player chip purchases to $200 per hour, have proved ineffective and easy to defeat.

Don't discount the market as an effective regulator

The Internet itself offers numerous resources in the form of information sites, message boards and discussion groups where players can exchange information about the quality and reliability of particular sites, the general skill level of players, and any concerns about sites that might be cheating or too tolerant of collusion or poker bots. Independent game analysts have proved adept at identifying problem software and posted their findings.

The return of Internet gambling is only a matter of time; the consumer demand is there and the fiscal situation in many states makes the taxation opportunities attractive. While a number of states will resist, for most, the issue should lead to serious debate. The paper, in addition to making the principled case for legalized Internet gambling, addresses and recommends policy approach with an aim toward creating win-win-win regulatory environments for consumers, game site operators and state governments.

The full report can be downloaded here.

The Troubling Persistence of Policy Clichés

Posted on August 21, 2012, 5:08pm | Steven Titch

A cable TV monopoly is imminent and high prices loom, at least as far as the Associated Press is concerned.

That was the angle of a widely syndicated AP story last week reporting that in the second quarter of this year, landline phone companies lost broadband subscribers while cable companies gained market share.

Beneath the lead, Peter Svensson, AP technology reporter, wrote:

The flow of subscribers from phone companies to cable providers could lead to a de facto monopoly on broadband in many areas of the U.S., say industry watchers. That could mean a lack of choice and higher prices.

In the news business, the second graph is usually referred to as the “nut” graph. It encapsulates the significance of the story, that is, why it’s news.

It’s interesting that Svensson, with either support or input from his editors, jumped on the “de facto” monopoly angle. There could be any number of reasons why cable broadband is outpacing telco DSL, beginning with superior speed (to be fair, an aspect noted in the lead).

However, AP defaulted to the clichéd narrative that the telecom, Internet and media technology markets inevitably bend toward monopoly (see here, here, here and here for just as a sample). Moreover, that the money quote came from Susan Crawford, President Obama’s former special assistant for science, technology and innovation policy, and a vocal advocate of broad industry regulation, was all the more reason it should have been countered with some acknowledgement of the growing data on how consumer behavior is changing when it comes to TV viewing. Arguably, at least, the cable companies, far from heading toward monopoly, are sailing into competitive headwinds stirred up by video on demand services such as Netflix, Hulu and iTunes.

What numbers does AP base its monopoly supposition on? Their own tally from separate phone company reports finds that the eight largest phone companies in the U.S. collectively lost 70,000 broadband subscribers between April and June. Meanwhile, the top four public cable companies reported a gain of 290,000 subscribers. Assuming most of the 70,000 the telcos lost was DSL-to-cable churn, that still leaves cable with a net gain of 220,000 broadband subscribers (although some likely switched from satellite). So another way to read these numbers is that U.S. broadband subscriptions increased by nearly a quarter-million households in the second quarter. Too much of a smiley face? OK.

Then consider this:

Balancing the AP’s reporting of cable dominance is the Convergence Consulting Group’s finding that between 2008 and 2011 2.65 million people have dropped cable entirely in favor of alternative methods. Separate research from Nielsentracked with this, finding that the number of households paying a multichannel provider last year declined by 1.5 million, which suggests the rate of cord-cutting is increasing.

In an excellent analysis of these trends, Engadget’s Brad Hill, no fan of cable, looks at how the cable companies are slowly getting boxed in between the on-demand alternatives and their traditional tiered pricing model, which day-by-day appears less and less price-competitive.

My purpose here has not been to pile on AP’s or the mainstream media’s technology reporting. But the danger in defaulting to the monopoly angle reinforces erroneous perceptions that persist in policy circles. I can't predict how it's going to turn out, but if consumers are to be served, broadband providers, as well as companies in any other segment of the digital economy, need the freedom to respond to market conditions. Regulations that restrain now-competitive companies as if they were once-and-future monopolies is not going to promote innovation. If progress is to be made on broadband policy that truly benefits consumers, lawmakers and regulators have approach the industry as it exists today—not as it was one, three, five or ten years ago. I’ll be the first to say legacy perceptions are hard to dismiss. But responsible reporting and analysis contributes to greater clarity and does not reinforce outdated notions.

Obama's Flawed Cybersecurity Strategy

Posted on August 15, 2012, 9:46am | Steven Titch

President Obama seems to be poised once again to use executive powers to get what Congress won't give him.

In this case, it's the imposition of a sweeping set of cybersecurity mandates and regulations on the private sector. My latest commentary at Reason.org addresses the problems of the original Cybersecurity Act, which did not muster enough support in the Senate to get to a vote, and why a White House decision to implement it by executive order simply expands the government's surveillance and datagathering power while doing little to secure the nation's information infrastrucuture.  

Find the commentary here.

Facebook Tests the Waters of ’Net Gambling

Posted on August 7, 2012, 4:23pm | Steven Titch

Facebook has quietly launched a real-money online gambling application in the U.K., marking a major thrust of the social networking site into online gambling.

The Financial Times is reporting that starting today, Facebook will offer users in the U.K. ages 18 and over online bingo and slots for cash prizes. Slate.com  picked up the story this afternoon.

“Gambling is very popular and well regulated in the U.K. For millions of bingo users it’s already a social experience [so] it makes sense [for us] to offer that as well,” Julien Codorniou, Facebook’s head of gaming for Europe, Middle East and Africa, told the Financial Times.

It’s telling in and of itself that Facebook has a gaming chief for the EMEA region. The synergies of social media and gambling has been seriously discussed for several years, mostly in foreign venues,  as the U.S. government until recently, has been hostile toward Internet gambling.

However, the recent thaw on the part of the Department of Justice, seen most recently in its settlement (don’t-call-it-an-exoneration) with PokerStars, plus state action toward legalization in in states such as Nevada and Delaware, point to eventual legalization of Internet gambling in the U.S.

In that respect, look for Facebook to be ready. Research from The Innovation Group,  a gaming marketing research company, shows that more than half the users on online gaming come in through social media or search. Companies such as Zynga, which began by offering multiplayer social games such as Cityville, Castleville and Mafia Wars on Facebook, are particularly well-positioned. Zynga’s most popular on-line game is poker, and Zynga and companies like it have a logical growth path into online gambling. Given their established connection with social networks, it's a good shot we'll see virtual online casino environments emerge within social networks such as Facebook, Google+, Orkut and others.

The natural convergence of social media and gaming environments has been explored fairly extensively. European researchers such as Jani Kinnunen of the Game Research Lab at Finland’s University of Tampere finds this running both ways. As social networks explore gaming, gaming sites explore social networking.

Skill gaming sites can be excellent examples of new forms of gambling. Casual web-browser based games (any game can be a gambling game). Players can place a monetary bet on their games and play against each other, which requires social interaction between player.

Moreover, games and game-related interaction don’t have to be situated in the same place. Kinnunen notes that online poker sites and player forums are usually separated. Poker forums are online communities where players can interact with each other before and after playing, communicating, learning new skills, exchanging tips for good gaming sites and so on.

What we have yet to learn is how Facebook is setting up age-verification and security procedures, as well as location-based restrictions. All of these will be part of the picture once Internet gambling moves forward in the U.S., and they represent technology skill strengths Americans have. The central takeaway today, however, is that a major U.S. company has entered the international online gambling market, where legitimacy has long been established. Facebook’s move is another step toward extending that legitimacy to the U.S.

Users Experience Symptoms of the Spectrum Crunch

Posted on August 7, 2012, 1:06pm | Steven Titch

Some 77 percent of wireless phone users who use their phones for online access say slow download speeds plague their mobile applications, according to a new survey from the Pew Internet and American Life Project. Of the same user group, 46 percent said they experienced slow download speeds at least once a week or more frequently (see chart below).

While the report, published last week, does not delve into the reasons behind the service problems, it does offer evidence that users are noticing the quality issues wireless congestion is creating. Slow download speeds are a function of available bandwidth for mobile data services. Bandwidth requires spectrum. The iPhone, for instance, uses 24 times as much spectrum as a conventional cell phone, and the iPad uses 122 times as much, according to the Federal Communications Commission.  As more smartphones contend for more bandwidth within a given coverage area, connections slow or time out. Service providers and analysts have warned that the growing use of wireless smartphones and tablets, without an increase in spectrum, would begin to degrade service. There have been plenty of anecdotal instances of this. Pew offers some quantitative measurement.

While technologies such from cell-splitting to 4G offer temporary fixes, the quality issue will not be fully addressed until the government frees up more spectrum. While the FCC hasn’t helped much by blocking the AT&T-T-Mobile merger and joining with the Department of Justice in delaying the Verizon deal to lease unused spectrum from the cable companies, at least the agency has acknowledged the problem. Right now, as Larry Downes reported on Technology Liberation Front last week, the National Telecommunications and Information Agency (NTIA), which has been charged with the task of identifying spectrum the government can vacate, is stalling.  It would be nice to see the FCC apply the aggressiveness it brings to industry regulation to getting NTIA off the schneid. At the same time, the Commission needs to put aside its ideological bent and do what it can to make more spectrum available in the short term.

PokerStars, Full Tilt Poker, the U.S. Attorney and What Just Happened

Posted on August 2, 2012, 2:44pm | Steven Titch

Yesterday brought a spate of news reports, many of them inaccurate or oversimplified, about a settlement the U.S. Attorney’s office in Manhattan reached with two major international Internet poker sites—PokerStars and  Full Tilt Poker.

The buried lead--and very good news for online poker players--is that Internet poker site PokerStars is back in business. Manhattan U.S. Attorney Preet Bharara ended his case against the site and it is now free to re-enter the U.S. market when states begin permitting Internet gambling, which could start as early as this year in states such as Nevada and Delaware.

The three-way settlement itself  is rather complicated. Full Tilt Poker will have to forfeit all of its assets, at this point mostly property, to the U.S. government. PokerStars will then acquire those forfeited Full Tilt Poker assets from the feds in return for its own forfeiture of $547 million. PokerStars also agreed to make available $184 million in funds in deposits held by non-U.S. Full Tilt players, money players believed was lost.

What the shutdown did reveal, however, was a shortfall in player deposits at Full Tilt, which led prosecutors to charge that Full Tilt was illegally paying investors out of player funds in a Ponzi-like scheme. Those charges, which look to be more serious then the UIGEA violations, still have yet to be resolved. The deal prohibits Full Tilt management and investors to have roles in PokerStars.

The U.S. government seized these funds on April 15, 2011 when it shut down Full Tilt, PokerStars and a third site, Absolute Poker, on charges of money laundering. The date has become known as Black Friday in the poker community. Specifically, the three sites were charged with violation of the 2006 Unlawful Internet Gambling Enforcement Act (UIGEA), which prohibited U.S. banks from transferring funds to off-shore Internet poker and gambling sites. To combat the measure, sites such as PokerStars and Full Tilt began using payment processors that allegedly lied to U.S. banks about their ties to gambling sites. Although this would be fraud under the letter of the law, the U.S. government never claimed payment processors stole money from players or banks and no evidence suggests they did.

PokerStars, however, is clean. In the settlement the site admits no wrongdoing. While $547 million is far from nominal, it’s a far cry from the money-laundering convictions and 20-year prison sentences that were talked up when the charges were first brought.  In reality, the resolution of the case is PokerStar’s takeover of one of its largest competitors and the opportunity to reposition itself for the U.S. market, perhaps getting its deal with Wynn Resorts back on track.

If you see something truly punitive here, please comment. The arrangement actually appears to be another concession by the government on Internet gambling. The first, and still most significant, was the Department of Justice’s December 2011 memo to Illinois and New York saying the Wire Act does not prevent them from selling lottery tickets online—or offering any other wagering game on the Internet--as long as customers are in-state. That decision opened the door to state Internet gambling legislation and several states have jumped at it. The New York settlement also strengthens the contention, voiced by some in the gaming law community, that the government, faced with pressure from states who covet tax revenue, the unpopularity of the Internet gambling prohibition, and the difficulty in winning convictions, may eventually grant some sort of general amnesty just to get free of what was, at the end of the day, a political compromise to appease a handful of moralists in Congress.

The PokerStars settlement, while allowing U.S. Attorney Bharara to save face, may be the first step toward that.

Hat tip to Hard Boiled Poker, a blog that adeptly clarifies the media’s inaccuracies and oversights in reporting this story as well outing the inability of CNNmoney.com's editors to tell the difference between a blackjack and poker layout. The blog commends Forbes.com's coverage as the best for grasping the settlement's significance.

Defending Limits on State Tax Powers

Posted on July 31, 2012, 6:26pm | Steven Titch

The U.S. Senate holds hearings Wednesday on the so-called Market Fairness Act (S. 1832), which would be better dubbed the “Consumer and Enterprise Unfairness Act,” as it seeks to undo a critical requirement that prevents states from engaging in interstate tax plunder.

In a series of court decisions that stretch back to the 1950s, the courts have consistently affirmed that a business must have a physical presence within a state in order to be compelled to collect sales taxes set by that state and any local jurisdiction.

That meant catalogue and mail order businesses were not required to collect sales tax from customers in any other state but their own. The three major decision that serve as the legal foundation for this rule, including Quill v. North Dakota,the case cited most frequently.

Quill left room for Congress to act, which indeed it is doing with the Market Fairness Act. The impetus for the act has nothing to with the catalogue business, however. Rather, it’s the  estimated $200 billion in annual Internet retail sales, a significant portion of which escapes taxation, that’s got the states pushing Congress to take a sledgehammer to a fundamental U.S. tax principle that has served the purpose of interstate commerce since 1787.

That’s why the Marketplace Fairness Act is so troublesome. While indeed Congress has the power to create an state-to-state tax structure, it may be imprudent to do so.  In seeking to close what it disingenuously calls a “loophole” that allows Internet sales to remain tax-free, it bulldozes a vital element of commerce law that protects consumers from taxation from other jurisdictions.

That year, of course, is when the U.S. Constitution replaced the Articles of Confederation. One of the flaws of the Articles was that it permitted each of the states to tax residents of others. Rather than get the budding nation closer to the nominal goal of confederation, it was endangering the expansion of vital post-colonial commerce by creating 13 tax fiefdoms and protectorates. The authors of the Constitution wisely addressed this by vesting the regulation of interstate commerce in the federal government.

And that protection is as necessary as ever. As the Tax Foundation’s Joseph Henchman will remind Congress today in his testimony, states have every incentive to shift tax burdens from their own residents to others elsewhere. As an example, take all those taxes attached to hotel and car rental bills.

The Marketplace Fairness Bill puts great stock in the idea that software and technology can relived the “burden” that, according to the courts, state and local tax compliance places on out-of-state business. But even sales tax complexity can’t be solved with the literal click of the mouse. It’s more than just the 9,600 sales tax jurisdictions that need to be factored in. Tax rules differ state to state, city to city and town to town. Sometimes a candy bar is taxed, sometimes it’s not. Every August, some states declare a “sales tax holiday weekend” in hopes of boosting back-to-school business. Dates can vary. Bottom line, there’s no reliable plug-and-play software for this. Overstock.com chairman and CEO Patrick Byrne has said it cost his company $300,000 and months of man-hours to create a solution.

The Marketplace Fairness Bill takes tax policy in the wrong direction, setting up a classic slippery slope that will see states becoming more and more predatory. What’s needed instead is an alternative that respects both state’s rights and the limits set by the Constitution.

But there will be no real progress until state legislators admit what they are trying to do: collect more taxes. That at least makes the dialogue honest. Then the question becomes whether the initiative is necessary to begin with. After that, more reasonable constructs include an origin-based tax system, building on the framework that exists today. When I purchase an item in Sugar Land, Tex, I pay sales tax to Texas and Sugar Land. When I travel to Los Angeles and buy a souvenir from the Universal Studios tour, I pat sales taxes levied there. A more sensible tax structure allows merchants to comply with the tax rules in their own states.

The only objection comes from legislators in high sales tax states who complain origin-based taxation gives businesses that locate in states such as Oregon and New Hampshire, two of five that charge no sales tax, an advantage. My affable reply is “Why yes, it does. Doesn't it?."

A low-tax policy is one way states can compete constructively for commerce and economic growth. Consumers and businesses would be much better off if states looked at e-commerce as an opportunity to boost their economies by welcoming Internet enterprises instead of treating them, and their customers, as just another cash pump.

For more, See "About that Sales Tax 'Loophole'" 

About that Online Sales Tax 'Loophole'

Posted on July 23, 2012, 3:30pm | Steven Titch

Proponents of higher taxes have taken to calling the exemption that out-of-state online shoppers enjoy a "loophole," as if it were an unintended flaw in two established court rulings that addressed the power of one state to tax residents of another.

My latest commentary at Reason.org looks at the so-called Marketplace Fairness Act, a bill that the House Judiciary Committee has scheduled for hearings tomorrow. The bill aims to help states collect sales taxes on out-of-state purchases, typically made via catalogue or, to an ever-greater extent, the Internet. Two Supreme Court decisions, Quill vs. North Dakota and National Bellas Hess vs. [Illinois] Department of Revenue, both of which pre-date Internet shopping, protect out-of-state consumers from the taxman's reach.

As I write:

Editorials and op-eds supporting the bill, such as in the Arizone Daily Star and the Chicago Sun-Times, say it will close a "loophole" that allows Internet purchases to escape taxation.  This is akin to saying the Supreme Court's Miranda decision is a loophole for defendants to escape prosecution. No doubt some overzealous prosecutors may think so, but in truth, Miranda sharpened and affirmed the right of due process already present in the Fourth and Fifth Amendments. Likewise, in Quill and Bellas Haas, the courts sharpened and affirmed the Constitution's commerce clause that prevents one state from taxing residents of another.

Seeing it as counterproductive to an interdependent economy, the Founders did not want states plundering each other's residents and enterprises with taxes. Yet that's exactly the environment the Marketplace Fairness Act sets up. New York State can tax residents of Illinois and the Prairie State can tax Hoosiers.

In doing so, the Marketplace Fairness Act ignores the constitutional underpinnings of the Quill and Bellas Hess decisions and treats the Internet sales tax issue as a procedural issue when the in fact the constitutional bar is set much higher. The giveaway, however, is the portion of the bill that requires states to simplify their state tax collection procedures before launching cross-border taxation. It's an unusual quid pro quo, perhaps because Congress has to offer states the prerequisite of a buy-in. That's because any attempt to impose a tax collection structure wholesale on the states would likely face a constitutional challenge on 10^th Amendment grounds of state's rights.

In reality, the states, struggling as they are with debt crises of their own making, are angling for a greater piece of the $200 billion Americans are spending with Internet merchants each year. Of course, not all of this goes untaxed; on-line retailers who have brick-and-mortar stores within a state must collect tax from residents in that state. Besides creating a mess of competing state tax grabs, this law stands to increase paperwork and complexity for thousands of small online businesses and catalogue firms, who would now be obliged to calculate taxes on some 11,000 sales tax jurisdictions throughout the country. Whether or not it's "simplified" in line with some Congressional definition, it still stands to be the burden as noted in Quill and Bellas Hess.  

But all the talk of loopholes, level playing fields and what does or does not constitute a "burden" diverts attention from the real issue. The Marketplace Fairness Act is not about the Internet, e-commerce, the marketplace or fairness--it's about what the Constitution says about the power of state governments to tax citizens beyond their borders.

DoJ Chokes Wireless Broadband to “Save” Wireline

Posted on July 13, 2012, 3:58pm | Steven Titch

It’s come to this. After more than a decade of policies aimed at reducing the telephone companies’ share of the landline broadband market, the feds now want to thwart a key wireless deal on the remote chance it might result in a major phone company exiting the wireline market completely.

The Department of Justice is holding up the $3.9 billion deal that would transfer a block of unused wireless spectrum from a consortium of four cable companies to Verizon Wireless, an arm of Verizon, the country’s largest phone company.

The rationale, reports The Washington Post’s Cecilia Kang, is that DoJ is concerned the deal, which also would involve a wireless co-marketing agreement with Comcast, Cox, Time Warner and Bright House Networks, the companies that jointly own the spectrum in question, would lead Verizon to neglect of its FiOS fiber-to-the-home service.

There’s no evidence that this might happen, but the fact that DoJ put it on the table demonstrates the problems inherent in government attempts to regulate competition.

For years, broadband competition has been an obsession at a number of agencies, starting with the FCC but also addressed by DoJ, the Federal Trade Commission, Congress and the White House. Federal policies such as UNE-P, network neutrality, spectrum set-asides and universal service funding have all sought to artificially tilt the competitive advantage toward non-incumbent providers, regardless of their overall financial viability (think Solyndra). State and local officials took the cue, and state public utilities commissions developed their own UNE-P-type set-ups and endorsed fiscally suicidal municipal broadband projects, all aimed at providing competitive alternatives to "monopolistic" telephone company broadband service.

So there’s some regulatory whiplash when a major government agency says that a competitively weak Verizon would be bad for consumers.

Nonetheless, this is pure supposition. Verizon shows every sign of remaining a significant competitor. The company is upgrading its FiOS service, offering speeds of up to 300 Mb/s. The Newark Star-Ledger, citing data from the New Jersey Board of Public Utilities, in June reported that cable companies are losing subscribers to FiOS, in the Garden State and the nation. “Verizon FiOS ate up market share in Jersey and the nation, growing nearly 20 percent through 2011 in Jersey, even better than the national gain for paid TV by telecommunications companies, up 15 percent,” the Ledger states.

Balanced against DoJ’s academic speculation is the fact that the cable spectrum is sitting unused amid a dire spectrum crunch. Wireless demand is booming, yet the government’s penchant for precautionary regulation is getting in the way of market-based solutions to real-world problems.

Moreover, as Scott Cleland points out on his blog, the Verizon-cable deal will create more competition as it will allow the four cable companies to bundle wireless service with cable. “The Verizon-Cable spectrum transaction, as currently configured,” Cleland writes, “is now a series of integrated secondary market transactions that result in multiple competitors gaining access to spectrum that they need, which will enable them to offer faster and more competitive broadband offerings, greatly benefiting American consumers.”

Even President Obama’s notoriously activist FCC cleared the spectrum sale, stipulating only that Verizon swap some of the acquired spectrum with T-Mobile (perhaps to abate some of the consequences of the FCC’s competition-obsessed decision to kill T-Mobile’s merger with AT&T, a rant for another day). But that condition itself implied an understanding that getting additional spectrum in play is a paramount goal.

DirecTV's Viacom Gambit

Posted on July 12, 2012, 6:17pm | Steven Titch

I suppose there’s something to be said for the fact that two days into DirecTV’s shutdown of 17 Viacom programming channels (26 if you count the HD feeds) no congressman, senator or FCC chairman has come forth demanding that DirecTV reinstate them to protect consumers’ “right” to watch SpongeBob SquarePants.

Yes, it’s another one of those dust-ups between studios and cable/satellite companies over the cost of carrying programming. Two weeks ago, DirecTV competitor Dish Network dropped AMC, IFC and WE TV. As with AMC and Dish, Viacom wants a bigger payment—in this case 30 percent more—from DirecTV to carry its channel line-up, which includes Comedy Central, MTV and Nickelodeon. DirecTV, balked, wanting to keep its own prices down. Hence, as of yesterday, those channels are not available pending a resolution.

As I have said in the past, Washington should let both these disputes play out. For starters, despite some consumer complaints, demographics might be in DirecTV's favor. True, Viacom has some popular channels with popular shows. But they all skew to younger age groups that are turning to their tablets and smartphones for viewing entertainment. At the same time, satellite TV service likely skews toward homeowners, a slightly older demographic. It could be that DirecTV’s research and the math shows dropping Viacom will not cost them too many subscribers.

This is the new reality of TV viewing. If you are willing to wait a few days, you can download most of Comedy Central’s latest episodes for free (although John Bergmayer at Public Knowledge reports that, in a move related to the DirecTV dispute, Comedy Central has pulled The Daily Show episodes from its site, although they are still available at Hulu).

What’s more, in a decision that should raise eyebrows all around, AMC said it will allow Dish subscribers to watch the season premiere of its hit series Breaking Bad online this Sunday, simultaneous with the broadcast/cablecast. This decision should be the final coffin nail for the regulatory claim of “cable programming bottleneck.” Obviously, studios have other means of reaching their audience, and are willing to use them when they have to.

Meanwhile, a Michigan user, commenting on the DirecTV-Viacom fight, told the MLive web site that “I love [DirecTV] compared to everyone else. I get local channels, I get sports channels. I wouldn't have chosen if it was a problem.”

Now if Congress or the FCC steps up and requires that satellite and cable companies carry programming on behalf of Hollywood, the irony would be rich. Recall that just a few years ago, Congress and the FCC were pushing for a la carte regulation that would require cable companies to reduce total channel packaging and let consumers essentially pick  the ones they want. Even the Parents Television Council is glomming onto this, as reported in the Washington Post, although not precisely from a libertarian perspective.

“The contract negotiation between DirecTV and Viacom is the latest startling example of failure in the marketplace through forced product bundling,” said PTC President Tim Winter in a statement calling on Congress and the FCC to examine the issue. “The easy answer is to allow consumers to pick and pay for the cable channels they want,” he said.

Winter’s mistake is that he views DirecTV’s challenge to Viacom as marketplace failure. Quite the contrary, it is a sure sign of a functional marketplace when one party feels it has the leverage to say no to a supplier’s aggressive price increase. And while I would be against a ruling forcing cable and satellite companies to construct a la carte alternatives, market evolution may soon be taking us there, but perhaps not the way activists imagined.

I’ll hazard a guess to say that today’s viewer paradigm isn’t so much “I never watch such-and-such a channel” than “I only watch one show on such-and-such a channel.” When Dish cuts off AMC and DirecTV cuts off Comedy Channel et al, they are banking that their customers won’t miss the station, just a handful of shows that they will be motivated enough to find elsewhere, if they haven’t done so already.

It might take a pencil and paper, but there is enough price transparency for a budget-minded video consumer to calculate the best balance between multichannel TV program platforms like satellite and cable, pay-per-view video, free and paid digital downloads and DVD rentals. The cable cord (or satellite link) may be difficult to cut completely, but the $200-a-month bill packed with multiple premium channel packages is endangered. The video consumer of the near-future might still keep cable or satellite for ESPN for Monday Night Football, but turn to Netflix for Game of Thrones, iTunes forBreaking Bad, and the bargain DVD bin for a season box set of Dora the Explorer videos. DirecTV and Dish Network are confronting these economics by confronting studios on their distribution strategy. The studios, for their part, may find they can’t aggressively exploit other digital channels and keep raising rates for multichannel operators.

While disputes like this are messy for consumers in the short term, the resolution will be a consumer win because it will force multichannel operators and the studios to adapt to actual changes in consumer behavior, not a policymaker’s construct of competitive supply chain. Washington would be wise to stay out.

Four Ways the Internet Changed Poker

Posted on June 29, 2012, 6:27pm | Steven Titch

The Future of Video? Beggar Thy Competitor

Posted on June 29, 2012, 10:48am | Steven Titch

In an investigation into the "Future of Video" this week, the House Communications and Technology Subcommittee heard testimony from a number of representatives from the cable companies, satellite companies, wireless companies, and providers of "over-the-top" programming on demand via the Internet Protocol (IPTV), including Netflix. The question at hand is whether recent plans by cable companies to shift their Internet pricing from the flat-rate "all-you-can-download" model to tiered rates based on amount of use is anti-competitive. Netflix and Hulu, which deliver programming directly to viewers over a broadband Internet connection say pricing tiers discriminate against them because usage-based data consumption applies their programming, while for conventional cable TV pay-per-view, the usage meter, so to speak, is not running. 

My hope is that Congress and any other agencies watching are cautious. Complaints by IPTV providers appear to be just the sort of "regulate my rival" demands that FCC Commissioner Robert McDowell warned about yesterday in a speech in Rome. 

Indeed, IPTV and cable companies compete for on-demand business. And consumers may not be interested in the distinction between their respective business models; all they want is greater choice in video options. Thus far, all groups--cable players, satellite companies and IPTV providers seem to be meeting that goal. Moreover, far from being victimized, IPTV providers are making significant inroads into the on-demand sphere. Cable providers, which in 1992 had a 92 percent share of paid television viewers, now hold only about 57 percent of the market, according to data cited by the Washington Post.

But before making any decrees about how on-demand downloads should count in any data metering scenario, regulators must consider that cable companies and IPTV providers have selected different platforms for programming delivery. Each platform has its own set of costs and trade-offs which are not functionally interchangeable.

Cable TV companies have traditionally separated TV delivery from their Internet service. Cable pay-per-view is accessed and delivered via the set-top box through an interface that can exploit inherent set-top box capabilities. Cable companies can use the set-top box interface to provide advertising, promotions, trailers and other information aimed at encouraging a sale.

IPTV is set up as a broadband application delivered via cable modem. The user interface is generally loaded onto TVs and game consoles per agreement with device manufacturers. But compared to cable box counterparts, these interfaces are simpler and scaled down.  

The nature of the delivery platform changes the cost equation for a company like Netflix. I'll admit some more research can be done here, but the Netflix cost-model is closer to client-server than the transmission-distribution model the cable companies use. Netflix doesn't need to maintain head-ends for satellite signal reception, and fleets of trucks to maintain physical plant.  

From the supply side, programmers see cable companies and over-the-top providers as two different distribution channels. The fee structure Comcast pays Disney, Viacom and Fox for programming is vastly different than what Netflix's. Licensing rules are different. It's one reason cable companies get pay-per-view rights to film releases within a few months of their theatrical release, or TV episodes the night after they air, while companies like Netflix might have to wait a year. For consumers, the trade-off comes in cost. Generally a recent film release costs $5 to $10 for pay-per-view. Netflix offers unlimited viewing for $8 a month. The difference reflects the cost of the respective platforms.  

Finally, IPTV companies also derive benefits from their decision to ride the Internet independent of a relationship with a cable company. As mentioned above, the cable company is responsible for maintaining its facilities, on which IPTV depends for delivery. The ongoing development of cable modems (e.g., the DOCSIS 3.0 specification), funded by the cable industry, makes quality streaming of high-definition IPTV possible.

So that's why these demands for "fairness" from Netflix and other over-the-top provider ring hollow. Congress should see through this "beggar thy competitor" call for a mandate that forces cable companies to price their own pay-per-view in ways that artificially make IPTV more attractive. There's no evidence that cable companies are blocking service or otherwise interfering with consumer access to service. It's difficult to see how bowing to IPTV provider complaints, and essentially forcing the cable companies (and by extension cable company customers) to shoulder the cost of Netflix's business model trade-offs, would be fair to anyone.  

COPPA, Facebook, and Users Under 13

Posted on June 28, 2012, 10:55am | Steven Titch

My latest commentary at Reason.org is up, revisiting the online age verification and the related controversy over Facebook's suggestion about allowing children under 13 to sign-up, perhaps on a partitioned site created especially for "'tweens." 

As I write in the commentary, The Children Online Privacy Protection Act (COPPA) sets out specific rules and regulations about how websites can gather and use information about children, with the threat of legal penalties behind them. Facebook, for one, finds these rules so cumbersome that, under its terms of service, children under 13 are not permitted to sign up. If it determines that a user is under 13, Facebook will delete the page. Furthermore, if the Federal Trade Commission determines Facebook is not doing enough to enforce its policy, the company may face considerable fines.

The trouble is, there really is no effective way of verifying age online. It doesn't help Facebook that a recent report by a team lead by danah boyd, senior researcher at Microsoft and a research assistant director in the Media, Culture and Communication Department at New York University, estimates that 7.5 million Facebook users are under 13, despite its terms of use. At the same time, it doesn't help the FTC's case that the same research found that 55 percent of parents of 12-year-olds know their children have Facebook accounts and that 70 percent of those kids had assistance from a parent in setting up their page. (Boyd discusses her research in this Surprisingly Free podcast from the Mercatus Center.)

To gain some clarity, let's remember that COPPA is aimed at privacy protection. Its motivations stem from concerns over corporate marketing to children, as well as child predation and cyberbullying, which all rank as parental hot buttons when it comes to their kids' activities online. While the age verification law may have been a response to these concerns, it must also be weighed against the fact that many parents are actively helping their tweens get online. Overall it points to the reality that parents still consider themselves the best and most effective filter for monitoring children's on-line habits.

It's time for lawmakers to admit the ineffectiveness of online age restriction. Social networks are virtual meeting places, just like any real-word public place where kids and adults congregate in groups, be it a shopping mall or public park. By and large, we expect teens and tweens on their own will be safe in these venues, although we do educate them to identify and counteract potential threats. So it must be the case on-line. Arbitrary federal law cannot be a substitute for parental involvement supported by schools, camps and other awareness programs at the local level. 

Read the full piece here.

Yes, Anyone Can Be a Reporter

Posted on June 26, 2012, 8:33pm | Steven Titch

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

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

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

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

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

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

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

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

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

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

We Must Take UN’s Internet Grab Seriously

Posted on June 21, 2012, 5:06pm | Steven Titch

Thanks to our friends Jerry Brito and Eli Dourado at George Mason University's Mercatus Center, and the anonymous individual who leaked a key planning document for the International Telecommunication Union's World Conference on International Telecommunications (WCIT) on Jerry and Eli's inspired WCITLeaks.org site, we now have a clearer view of what a handful of regimes hope to accomplish at WCIT, scheduled for December in Dubai, U.A.E.

Although there is some danger of oversimplification, essentially a number of member states in the ITU, an arm of the United Nations, are pushing for an international treaty that will give their governments a much more powerful role in the architecture of the Internet and economics of the cross-border interconnection. Dispensing with the fancy words, it represents a desperate, last ditch effort by several authoritarian nations to regain control of their national telecommunications infrastructure and operations

A little history may help. Until the 1990s, the U.S. was the only country where telephone companies were owned by private investors. Even then, from AT&T and GTE on down, they were government-sanctioned monopolies. Just about everywhere else, including western democracies such as the U.K, France and Germany, the phone company was a state-owned monopoly. Its president generally reported to the Minster of Telecommunications.

Since most phone companies were large state agencies, the ITU, as a UN organization, could wield a lot of clout in terms of telecom standards, policy and governance--and indeed that was the case for much of the last half of the 20th century. That changed, for nations as much as the ITU, with the advent of privatization and the introduction of wireless technology. In a policy change that directly connects to these very issues here, just about every country in the world embarked on full or partial telecom privatization and, moreover, allowed at least one private company to build wireless telecom infrastructure. As ITU membership was reserved for governments, not enterprises, the ITU's political influence as a global standards and policy agency has since diminished greatly. Add to that concurrent emergence of the Internet, which changed the fundamental architecture and cost of public communications from a capital-intensive hierarchical mechanism to inexpensive peer-to-peer connections and the stage was set for today's environment where every smartphone owner is a reporter and videographer. Telecommunications, once part of the commanding heights of government control, was decentralized down to street level.

There's no going back. Even authoritarian regimes understand this. Fifty years ago, when a third-world dictatorship faced civil strife, it could control real-time information by shutting off its international telephone gateway switch. Not so today. So much commerce, banking, transportation and logistics depends on up-to-the-second cross-border data flow that no country, save for truly isolated regimes such as North Korea, can afford to cut themselves off the global Internet, even for one day.

That's why it's no surprise that the authoritarian regimes of China and Russia, supported by even more despotic states such as Iran, are spearheading the UN/ITU effort. Their politically repressive regimes can't function with the Internet, but their economic regimes, tied as they are to world trade, can't function without it. That's why attempts at Internet control have to be more nuanced and cloaked in diplomacy. 

As we see in the leaked documents, their agenda is masked as concerns about computer security and virus and malware detection, or in arguments about how nation-states have a historically justifiable regulatory responsibility for setting technical standards for IP-to-IP connections. But dig deeper and you find their proposed solutions would give them the power to read emails, record browser habits and extort fees from web sites and services such as Google, Facebook and Twitter (if they aren't going to block them completely).

In the long run, it is doomed to fail. As an organism, the Internet defies top-down control. Every time a country attempts to impede certain types of Internet communications, via firewalls, filters, or outright domain name blocks, individuals create workarounds. It's not that difficult.

That simple fact might engender complacency among netizens here in the U.S. And besides, speaking out against ominous plots by UN agencies makes us sound too much like the nutty neighbor with the backyard bunker.

But there are serious risks to what the ITU and the UN are attempting. Even if only gets part of what it wants, the ITU's Internet grab stands to seriously damage the global free and open Internet.

First, as a multi-lateral "international" agreement, the ITU plan will give repressive regimes cover for Internet clampdowns. Even if the U.S. does not sign on, all it will take is buy-in a few other Western governments, who might just see the treaty as convenient (see the U.K.'s recent Home Office ideas), to allow the more egregious dictatorships in the world to take repressive action.  

The U.S. should be leading all democratic governments in speaking out against the ITU plan. A weak-willed "I'm-OK-you're-OK" approach, or worse, a non-judgmental relativism that suggests American ideas of Internet freedom should defer to a more repressive country's "national culture," are simply not acceptable.  

It seeks to displace multi-stakeholder development. The collaborative culture of the Internet, driven by consensus and undergirded with a commitment to open standards and platforms, is the ITU's primary target. When a nation-states make rules for phone networks, they can specify equipment, favor their domestic manufacturers, create cumbersome compliance rules, and ban possession of non-compliant devices all with the force of heavy-handed law. This is hardly far-fetched. Ethiopia has made Internet phone calls (i.e. Skype) illegal.

It seeks to normalize government regulation of the Internet. For more than 30 years, deregulation has been the predominant policy toward the Internet. This trend has managed to hold on despite numerous attempts at censorship, "neutrality" regulation and price controls. The most common proposition we hear runs to the effect of the Internet has become so important that it needs regulation. Frankly, the Internet has survived and thrived since its beginning without top-down state regulation. Worldwide access continues to grow. By and large, international data networks operate reliably and inexpensively. If anything, the burden of proof for regulation of the 'Net should be ever higher. Why, exactly, do we need an international regulatory regime for the Internet? So far those who would impose one haven't said so. And sorry to say, because citizens are taking to the streets with their iPhones and demanding basic freedoms is not an acceptable reason.

Five Reasons the DoJ’s Investigation of Data Caps is Misguided

Posted on June 20, 2012, 5:33pm | Steven Titch

Count me among those who are rolling their eyes as the Department of Justice initiates an investigation into whether cable companies are using data caps to strong-arm so-called "over-the-top" on-demand video providers like Netflix, Walmart's Vudu and Amazon.com and YouTube.

The Wall Street Journal reported last week that DoJ investigators "are taking a particularly close look at the data caps that pay-TV providers like Comcast and AT&T Inc. have used to deal with surging video traffic on the Internet. The companies say the limits are needed to stop heavy users from overwhelming their networks."

Internet video providers like Netflix have expressed concern that the limits are aimed at stopping consumers from dropping cable television and switching to online video providers. They also worry that cable companies will give priority to their own online video offerings on their networks to stop subscribers from leaving.

Here are five reasons why the current anticompetitive sturm und drang is an absurd waste of time and might end up leading to more harm than good.

Cable companies set data caps high, really high. Comcast, for example, currently sets its residential data limit at 250 gigabytes (GB). Searching around the 'Net, I've found that a rule of thumb is 1 GB equals 1 hour of video, although quality, frame rate and resolution may affect this measure.  However, this 1 hour = 1 GB tracks with my own household downloading, which varies between YouTube and iTunes downloads, and Netflix HD.

Also, despite the use of the word "caps," residential Internet users are not cut off when they reach the 250 GB threshold. Comcast customers are just charged $10 for another 50 GBs, that is, another 50 hours of video.

The idea of a threshold is not unreasonable. Video delivery requires greater network management to address issues such as latency and error correction, adding costs to network operation. The alternative is for service providers to raise the base price of "unlimited downloads" for all users, essentially spreading the cost of a small percentage of high-volume users across the entire subscriber population. That in itself raises fairness questions. It's a simple trade-off, do we want higher prices across the board, or should the top tier users bear the costs they are responsible for imposing?    

The pay-per-view market is crowded, and cable has a right to compete. Consumers have a fair degree of choice among pay-per-view providers. Cable companies, along with Amazon, Vudu, Cinema Now and Apple's iTunes all have solid selections in terms of recent film releases and TV episodes. These virtual rentals generally cost $5 to $7 for a 24- to 48-hour period. Most also offer viewers an option to buy a digital copy. While Netflix's on-demand menu lacks the timeliness of the others, it compensates in terms of depth, and thousands of titles are available for a relatively low $8 per month subscription fee. Then there's Google's YouTube, the largest server of Internet video, which is trying to expand off the desktop PC and onto the living room big-screen by funding development of new "channels." Although the first fruits of this venture, channels such as The Nerdist seems a bit, come across as a bit, well nerdy, we should know by now not to discount anything Google attempts.

The point is that cable is not somehow shutting down "low-cost" access to video, as the DoJ claims. In truth, alternatives to cable pay-per-view can be less expensive and more varied. 

"Cutting the cable cord" involves a value proposition. Like telephone service before it, household video delivery no longer depends solely on a single hard-wired monopoly infrastructure. For someone not particularly interested in watching TV news, reality shows and real-time sports events, it is possible to do away with cable TV entirely and get one's video fix through DVDs, digital downloads via wireless service providers. Or one could even chose the lowest-priced cable tier, essentially local channels, with Internet access.

But the landline telephone analogy has limits. Wireless service is replacing wireline because it offers much more value than the old home phone. For starters, wireless makes communications truly personal: your phone is associated with you, not a geographic location like your home office. Today's wireless phones also are as much information appliances as they are communications tools.

True, cable companies don't get much love from consumers, but there's still something to be said for watching the NBA playoffs on a 50-inch HD big screen. And contrary to what the DoJ thinks, there is no consumer "right" or entitlement to this service at below-market rates. Saying so--and assigning the social cost on one segment of the value chain, namely the infrastructure owners, stands to create all sorts of problems. For example, why hold the cable company responsible for low-cost video and not the TV manufacturers? Why shouldn't all DVDs rentals be priced at $1 rather than $3 for "new releases?" Why should Apple's iTunes be permitted to charge extra for TV episodes delivered "free" the night before? 

The answer is that there are costs and trade-offs associated with each. An Amazon customer may be able to buy all of season one of Game of Thrones for the cost of one month's subscription to HBO, but she must wait almost a year for the opportunity to do so. In this model, the cable company leverages timeliness, HBO is protects its distribution partners, yet, in the the long run, the programming is available to those who don't want to pay the cable premium. It's difficult to see where consumer rights are being violated.

Wireless is the wild card.  As alluded to above, wireless service may yet be a substitute for cable connections. Spectrum scarcity, however, makes wireless connections more expensive, and therefore usage caps are much lower (unless you're piggybacking on a household WiFi supported to a cable modem). But this is just one more reason to speed ahead with spectrum re-allocation.  

Here's where current policy works at cross-purposes. Fostering greater consumer choice is a laudable goal. But that goal can be achieved faster and more cost-effectively if policy is aimed at increasing market mechanisms - which spectrum auctions, unencumbered by conditions, will do. It beats creating cumbersome regime of subsidized service and mandating prices, which, at the end of the day, is nothing but raiding the wallets of average users to pay the cost of heavy bandwidth consumers.

The TV game is changing. Looking at the current video landscape, I have trouble seeing the cable companies as having any sort of advantageous position right now. Their big competitive differentiator, wide scope of programming, is becoming commoditized. Television audiences are fragmenting, which means even the most popular shows draw lower ratings than in the past. oard. DVRs, DVDs and iTunes allow audiences to avoid advertising, which means the one-time stalwart business model that supported free content since the beginning of broadcasting is changing.  

Truth be told, no one really knows exactly how TV programming content and delivery will change over the next ten years--only that it will. As broadband data capacity and management becomes more germane to video delivery, bandwidth tiers may yet be an important to pay for it and keep content free. At the same time, there is enormous potential for unintended consequences if unwise policy courses are taken. The worse thing right now is for any government agency to start fumbling around with mandates, regulations and directives on broadband video entertainment, whether they address pricing, platforms or business models.    

Let Parent's Decide: What a Concept!

Posted on June 5, 2012, 2:05pm | Steven Titch

Facebook founder Mark Zuckerberg wants to lift the minimum age restriction for social networking, which Facebook's terms of service, in line with the Children's Online Privacy Protection Act, currently sets at 13.

The immediate reaction in Congress, of course, was outrage followed by an interrogatory letter to Zuckerberg from Reps. Ed Markey and Joe Barton, Washington's self-appointed bi-partisan tag team for online in loco parentis (just Google "Barton Markey Internet"), demanding he explain himself.

But given the growth of social media, the time is ripe to revisit these age restrictions, and even to ask whether they are working at all. Research indicates that there are 7.5 million Facebook users under 13, most of whom are there with their parents knowledge and/or assistance. This itself begs the question as to how effective COPPA's age restrictions are.

Last year, a team lead by danah boyd, senior researcher at Microsoft and a research assistant director in the Media, Culture and Communication Department at New York University New York University, found that:

• 55 percent of parents of 12-year-olds know their children have Facebook accounts, with 82 percent of those knowing when their kids signed up, and 76 percent assisting them in the process.
• 36 percent of all parents surveyed (1,007 U.S. parents with children 10 to 14 living with them, from July 5 through 14) said their kids joined Facebook before turning 13, and 68 percent of those also helped their children create their accounts on the social network.
• 53 percent of parents think Facebook has a minimum age requirement, while 35 percent believe it is only a recommendation.
• 78 percent think violating the minimum-age limits for online services is acceptable.

(H/T to David Cohen at AllFacebook.com for bullet points)

This last point is telling. Given the unenforceable age rule, many kids' first lesson about the Internet is that rules and regulations can be safely flouted with a wink from Mom or Dad. This is not the best grounding for dealing with weightier ethical questions about online behavior that will pop up down the line--from cyberbullying to Internet piracy. Unfortunately, the government loves setting arbitrary age points--for drinking, driving, voting, marriage and Facebook membership--when in nature, maturity is not neatly so age-specific. But in light of the pervasiveness of online media at this point in time, age 13 may be too old for children to be officially introduced to the mechanisms of social networking. Certainly many parents think so. I'll only say in response to concerns about privacy and information collection, it's no secret how social media sites work. Parents have all they need to make an informed decision about the degree their kids use social media--and ultimately have the most influence and control.

Reasonable parents may disagree, and what might be suitable for your 11- or 12-year old may not be suitable for mine. The difference is that Facebook is willing to respect your position as a parent, while the government is not.

APR 2011: Universal Service, Spectrum Policy, Online Privacy and Internet Sales Taxes

Posted on May 1, 2012, 2:40pm | Steven Titch

The Reason Foundation today has published the Telecommunications and Internet section of its 2011 Annual Privatization Review.

Although there's been a bit of lead time since the articles were written, they are still timely. Notable is the discussion on the collection of state sales taxes from Internet retailers, back in the news now that Amazon.com has reached an agreement with the state of Texas to collect sales taxes from consumers in the Lone Star State. The settlement concludes a lengthy battle in Austin as to whether Amazon's distribution facility in Ft. Worth constitutes a "nexus" as defined in previous court cases.

While a blow to Amazon's Texas customers (full disclosure: I count myself as one), the action may shed further light on the debate as to how much advantage the Amazon has because it can waive sales tax collection. Competitors such as ailing Best Buy have said it's enough to hurt brick-and-mortar retailers. Amazon points to findings that in New York, the most populous state where it collects sales tax, sales have not fallen off. Soon we'll see if Texas tracks with that data as well. If it does, it will further validate opinions that Amazon and other on-line retailers are succeeding because they have fundamentally changed the way people shop, not because they can simply avoid sales taxes.

Also in the report look for updates on the FCC's options for the next spectrum auction, state and federal policymaking on search engines and social networking sites, and how priorities may change as the FCC migrates from the current Federal Universal Service Fund to its new more broadband-oriented Connect America Fund.

The telecom section of APR 2011 can be found here.

Sales Taxes Aren't Killing Best Buy

Posted on April 13, 2012, 3:52pm | Steven Titch

A few weeks back, now-former Best Buy CEO Brian Dunn blamed the retailer's $1.7 billion quarterly loss and its decision to close 50 stores nationwide on the fact that its online competitors, Amazon.com in particular, "aren't encumbered by the costs of running physical locations and in many cases don't have to collect sales tax."

Dunn's comments rehash the now-familiar meme that forcing e-retailers to collect sales tax is the silver bullet to saving brick-and-mortar retailers. It gives politicians on all sides cover--for some, it's a way to keep revenues coming in for excessive spending. For others, it's a handy way to wave the flag for local commerce.

But slapping consumers with more taxes isn't going to save retailing. In a short piece this week, BusinessWeek explores the fundamental shifts online retailing has created in consumer behavior. Here's a nugget from the article:

Best Buy’s decline reflects a cultural shift that’s reshaping the retail world. All big-box stores, and Best Buy in particular, thrived in an era when comparison shopping meant physically going from store to store. The effort required of consumers was a kind of transactional friction. With the advent of mobile technology, friction has all but disappeared. Rather than ruminate with a salesperson before making a selection, tech-savvy consumers are more likely to walk into stores, eyeball products, scan barcodes with their smartphones, note cheaper prices online, and head for the exit. Shoppers can purchase virtually any product under the sun on Amazon or eBay while sipping a latte at Starbucks. For traditional retailers, that spells trouble, if not death. “So far nothing Best Buy is doing is fast enough or significant enough to get in front of these waves,” says Scot Wingo, CEO of e-commerce consulting firm ChannelAdvisor.

Certainly e-commerce created competitive problems for Best Buy, but the sales tax advantage e-commerce has was likely the least of them. Brick-and-mortar retailing is facing an out-and-out crisis that's going to require creativity and innovation to solve. Taxing consumers who buy online won't do much toward that end.

Maryland Passes Unprecedented (and Unnecessary?) Digital Labor Law

Posted on April 11, 2012, 6:33pm | Harris Kenny

Maryland legislators just passed an unprecedented digital labor law in Senate Bill 433. The bill would prevent employers from asking for passwords to websites such as Facebook and Twitter. While other states like California and Illinois are exploring similar legislation, Maryland appears likely to be the first to move. However despite its popularity, this legislation may not be necessary after all.

The bill has strong support from the legislature, passing unanimously in the Senate (44-0) and overwhelmingly in the House (128-10). If signed by Gov. Martin O’Malley, SB 433 would specifically prohibit Maryland employers from:

• Requesting or requiring that an employee or applicant disclose any user name, password, or other means for accessing a personal account or service through specified electronic communications devices.;
• Taking, or threatening to take, specified disciplinary actions for an employee’s refusal to disclose specified password and related information; and 
• Downloading specified information or data.

Civil liberties advocates have praised SB 433 for it’s expansive scope and hope future provisions will include college students and athletes. Further, the bill will likely save the state a significant amount of money in legal fees and settlement costs. But was this legislation necessary?

On Friday March 23 Facebook’s Chief Privacy Officer Erin Egan issued a warning that Facebook may take action against employers who demand passwords, either through engaging or taking legal action. Egan explains that these demands violate Section 4, Part 8 of Facebook's Statement of Rights and Responsibilities, which reads: 

You will not share your password, (or in the case of developers, your secret key), let anyone else access your account, or do anything else that might jeopardize the security of your account.

By requesting a job applicant’s Facebook password, an employer is demanding the applicant violate Facebook’s terms of service, for which he or she could be civilly liable (and at minimum risk having his or her account terminated.) Beyond Facebook, any website concerned about this issue can incorporate similar language in their terms of service.

Having this type of language in the terms of service makes sense for websites. At first glance, one might assume this story only impacts a handful of job applicants in Maryland. In reality, Facebook has a vested interest in protecting its reputation and the goodwill of its hundreds of millions of users around the world. Social media is built on a foundation of trust whereby users voluntarily submit personal information—in a trusted environment—in exchange for similar information from other users. If one user’s account is compromised through coercion, then the foundation of trust will crumble.

Ironically, Kevin Rector of The Baltimore Sun reports SB 433 was inspired by the Maryland state Department of Public Safety and Correctional Services, who asked a job applicant to turn over his Facebook password during the application process. The department said the policy had been a factor in the denial of employment of seven out of 2,689 applicants over the course of a year. The department specifically sought use or presence of verified gang signs in applicant accounts, which would prove detrimental in a correctional environment. 

After the American Civil Liberties Union (ACLU) filed a complaint, the department made participation voluntary, however this did not meet the ACLU’s concerns. This led the legislature to take action. Rather than the legislature, Gov. O’Malley might have instead addressed this issue since the state is the employer that was responsible for violating Facebook’s terms of service. 

Federal policymakers are also seeking to get involved. U.S. Senators Richard Blumenthal and Charles Schumer recently called on the U.S. Equal Employment Opportunity Commission (EEOC) and the U.S. Department of Justice (DOJ) to launch a federal investigation into this issue. Their press release cites several federal laws and Supreme Court rulings, such as the Stored Communication Act, Computer Fraud and Abuse Act, Pietrylo v. Hillstone Restaurant Group, and Konop v. Hawaiin Airlines, Inc.

There are two market forces already at work solving this problem. First, applicants who view this requirement as onerous won’t apply to work at the businesses that impose it, and those businesses will suffer in the marketplace due to their lower competitiveness in attracting labor. Second and more importantly, Facebook and other websites ultimately have a strong incentive to take legal action to protect their users. Users will patronize websites that meet their needs, including privacy protection, and they will avoid websites that don’t.

The Risks of Misapplied Privacy Regulation

Posted on April 3, 2012, 3:15pm | Steven Titch

Reason.org has just posted my commentary on the five reasons why Federal Trade Commission's proposals to regulate the collection and use of consumer information on the Web will do more harm than good.

As I note, the digital economy runs on information. Any regulations that impede the collection and processing of any information will affect its efficiency. Given the overall success of the Web and the popularity of search and social media, there's every reason to believe that consumers have been able to balance their demand for content, entertainment and information services with the privacy policies these services have.

But there's more to it than that. Technology simply doesn't lend itself to the top-down mandates. Notions of privacy are highly subjective. Online, there is an adaptive dynamic constantly at work. Certainly web sites have pushed the boundaries of privacy sometimes. But only when the boundaries are tested do we find out where the consensus lies.

Legislative and regulatory directives pre-empt experimentation. Consumer needs are best addressed when best practices are allowed to bubble up through trial-and-error. When the economic and functional development of European Web media, which labors under the sweeping top-down European Union Privacy Directive, is contrasted with the dynamism of the U.S. Web media sector which has been relatively free of privacy regulation - the difference is profound.

An analysis of the web advertising market undertaken by researchers at the University of Toronto found that after the Privacy Directive was passed, online advertising effectiveness decreased on average by around 65 percent in Europe relative to the rest of the world. Even when the researchers controlled for possible differences in ad responsiveness and between Europeans and Americans, this disparity manifested itself. The authors go on to conclude that these findings will have a "striking impact" on the $8 billion spent each year on digital advertising: namely that European sites will see far less ad revenue than counterparts outside Europe.

Other points I explore in the commentary are:

• How free services go away and paywalls go up
• How consumers push back when they perceive that their privacy is being violated
• How Web advertising lives or dies by the willingness of consumers to participate
• How greater information availability is a social good

The full commentary can be found here.