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The Packets Must Get Through

steven.titch@reason.org (Steven Titch) — Thu, 19 Nov 2009 15:21:00 EST

The Consequences of Net Neutrality Regulations on Broadband Investment and Consumer Welfare

This essay originally appeared in "The Consequences of Net Neutrality Regulations on Broadband Investment and Consumer Welfare" published by the American Consumer Institute.

To the ears of the American consumer, a rule that would require phone, cable and wireless companies to treat all Internet and Web applications the same way—with no favoritism shown—might sound like a fair deal.

From its start, open access is what the Internet has been all about. Indeed, consumers should be able to access the Internet and Web applications they wish. Any individual, business or organization who wants to set up a web presence, from a personal blog to a major e-commerce site, should face no barrier to reaching users.

No one wants to take the Internet’s resources or utility away. Yet the proposal by the Federal Communications Commission (FCC) to create a “non-discrimination” rule, which would come under the general heading of network neutrality, although intended to preserve robust, open and quality access to all Internet applications, stands to have the opposite effect.

The non-discrimination rule, if enacted, would prohibit telephone companies, cable companies, wireless companies and other Internet service providers (ISPs)—the companies that built and own the local and long distance networks that carry Internet traffic—from applying any technology, technique or software that would prioritize, organize or otherwise structure Internet traffic so that it is delivered faster, has a guaranteed level of quality, or is partitioned in such a way that it does not slow or impede other traffic. While the FCC’s Notice of Proposed Rulemaking on network neutrality, released October 22, 2009, would allow vaguely defined “reasonable” network management, the NPRM also stated “that a bright-line rule against discrimination… may better fit the unique characteristics of the Internet.”^₅₆

To support his point, FCC Chairman Julius Genachowski says the non-discrimination rule was a founding principle of the Internet.57 To call it a “principle” is somewhat misleading. It is true that when network engineers developed the Internet Protocol (IP), it was designed to use the intelligence in the computers and routers at each end of the connection. That was because at the time, the late 1960s and 1970s, there was no intelligence in the telephone network to perform even the most basic of quality and prioritization functions. Non-discrimination was a necessary condition of the early Internet, not a prescribed rule as to how Internet transmission would always work.

The Internet: Then and Now

Today, 40 years since the first Internet connection was set up, network transmission technology is far different. The public communications network does hold the intelligence to improve, enhance and prioritize Internet traffic. In private networks, it already does. In wireless, the entire history of technology evolution is about finding ways to fit more data into a radio channel of fixed space. Some of these techniques, because they grant transmission priority to certain applications over others, allowing data applications on devices like iPhones and BlackBerrys to work, would likely be considered discrimination under the FCC’s new rule.

Second, and perhaps more important, today’s Internet applications are a far cry from the simple text characters transmitted at 300 bits-per-second (b/s) over those first connections.

Think of the ways you’ve used the Internet today. You’ve probably sent email, maybe with photos or lengthy documents attached. Perhaps you’ve made a clothing purchase, or paid your credit card bill. Maybe you’ve downloaded some music, or watched a video from YouTube, Netflix or Hulu.

Did you use your wireless phone to send a text message on your way to work? To update your picture on Facebook? To check up your fantasy football team? Your cell phone uses the Internet, too.

When you badged into your office, your building’s security system likely used the Internet to verify your employment status and let you in. In fact, your company’s entire security network, from video surveillance to fire alarms, probably uses the Internet, especially if it is spread over several buildings and locations.

Then there are all the unseen transactions that occur within the network itself. Search engines constantly crawl the Web collecting keyword data from Websites worldwide. When you perform a Web search, data from thousand of servers are instantly correlated, packaged and delivered to your desktop, with ad links that correspond to your search parameters. The Web-based financial transaction that occurs in seconds involve multiple links and data exchange between you, the retailer, your bank, the retailer’s bank, a credit verification database and any other party with a stake in the transaction.

As you might imagine, all this adds up to an enormous amount of data moving across the network. Indeed, Bart Swanson and George Gilder have been tracking the growth of Internet traffic since early this decade. In January 2008, using data from Cisco Systems, the world’s leading supplier of Internet switches and routers, Swenson and Gilder reported that monthly Internet traffic in 2007 had reached 2.5 exabytes, or 2.5 quintillion bytes (2.5 x 1019), up from approximately 1 exabyte in 2005. Cisco projected monthly Internet traffic would reach 5.5 exabytes by 2009 and 9 exabytes by 2011.58

While there is vast amount of bandwidth capacity in the public network, vast does not mean unlimited. And while investment in infrastructure continues, the costly deployment of more physical facilities—fiber optics and cell antennas—should not be legally locked in as the only solution growing bandwidth consumption.

Besides, construction of more physical facilities only addresses the congestion problem. You may indeed speed traffic by building more lanes, but the expanding diversity of Internet and Web applications creates quality requirements that can’t be solved by the addition physical facilities alone.

This is where the non-discrimination principle of network neutrality would create massive problems for users and applications providers. In order for some applications to function correctly, their data may require special treatment as it crosses the network. This is especially true with video, which is both data-intensive (a 10-minute, low-resolution YouTube video can be 100 megabytes) and error-sensitive. In fact, enterprises which put a lot of video on their networks, such as in the building security example above, use techniques such as bandwidth management, partitioning and packet prioritization to make sure video is transmitted effectively yet does not interfere with the flow of mission-critical enterprise data. It’s troublesome that the FCC would prohibit in the public sphere techniques that are indispensible to smooth operation of business networks.

Packets and Prioritization

Since it is key to understanding the unintended consequences network neutrality presents, let’s examine what we mean by data packets and packet prioritization.

The way the Internet Protocol is engineered, data—all those ones and zeros—travels the network in packets. The term is apropos. Think about the way you send a letter. You write your message on a piece of stationary and place it in an envelope, which you then address and mail. The post office uses the information on the envelope to route your letter to the intended recipient. If there is a problem, the letter is returned to sender, using the return address, also written on the envelope.

Data packets work the same way. A string of data is bundled into an electronic packet. The packet’s envelope, or header, contains the destination information, in the form of an IP address. The network routers read this information and send the packet to its destination. If something goes wrong and the packet can’t be delivered, the network signals the transmitting end, akin to a “return to sender.” The transmitting computer or router sends the packet again and continues to do so until the machine at the other end acknowledges receipt.

The only difference is that on the Internet, an application, be it an email, image or video, contains thousands, if not millions, of packets. When we mail a letter, we can send the whole message in one envelope. On the Internet, it is more akin to sending your letter one word at a time, leaving it up to your recipient to wait for all the envelopes to arrive, then to assemble the message. And, as with the post office, on the Internet packets may not arrive in the order they were sent. As a sender, you will have to rely on the intelligence of your recipient to reorder the packets and reconstruct your message. If one packet is lost or damaged on the way, your recipient may have to deduce the missing information. This, of course, adds time to the ultimately delivery and communication of your message. In Internet lingo, this delay is called latency.

This is why the Internet transmission is often referred to as “best effort.” It is practically the same principle as first-class mail. Computers send out data packets, they are transmitted across the network and arrive at their destination essentially when they get there.

Best effort is not as big a problem for email, documents and small files which can be assembled quickly. These applications can better tolerate latency and errors.

Other applications are far more sensitive to errors and latency. Take video streaming, for example. Video not only consists of much more data than most files, it also has to be delivered in the right order and needs to be assembled quickly.

Almost everyone has experienced freeze-ups while watching Internet video. These can be annoying with free services such as YouTube and Hulu. Imaging paying $10 to $20 for a streaming video only to have it fail partway through.

Latency is a major issue in gaming. If you’ve played Resident Evil online you know how frustrating it is to be killed by an oncoming zombie while you’re firing away with your mouse yet seeing no result on screen.

Fortunately, the post office does not employ the non-discrimination principle. In mail or shipping, senders can pay more for one- or two-day delivery. They can request a return receipt. They can insure valuable items against loss. All of these come at an extra cost, but they are not seen as unfair to individuals who use regular mail, nor do “fast lane” services interfere with standard delivery.

Under the FCC’s non-discriminatory rule, there would be no ability for providers of sophisticated applications to pay a premium to guarantee a higher level of performance. Nor could service providers charge the companies that use immense amounts of bandwidth—search engines, studios, media companies, peer-to-peer services—fees that would reflect the cost of the added management strain they place on the network. While the motivation is preservation of an open Internet, the outcome would be the opposite. The rules would demand ISPs follow 40-year-old data communications architectures that have already been surpassed. The result would be an expensive, slow, poorly performing Internet that would be unable to support bandwidth-rich applications.

On the other hand, there is every sign that foregoing Internet regulation would lead to the development of business models and market-based solutions that would create an environment where all types of applications could be supported and delivered; getting the network management support they need while avoiding interference with applications that work just fine with best effort.

The FCC argues that the market alone cannot manage competing interests when it comes to applications management on the Internet. Yet there has been no pattern of abuse. The non-discrimination rule comes in response to a single incident where a service provider used network technology to manage the way a third-party application worked. In October 2008, Comcast, the nation’s largest cable company, confirmed reports that it was intentionally slowing down the rate of voluminous video files that were being transferred via BitTorrent.com, one of many so-called peer-to-peer (P2P) sites that allow users to search for and exchange movies and TV shows between and among their own PCs. BitTorrent software is designed to set up as many simultaneous connections as possible between the user’s PC and BitTorrent’s file sharing site (the more connections, the faster the transmission). To keep BitTorrent users from flooding the network, especially at peak times, Comcast introduced software that limited the number of simultaneous connections the BitTorrent software could set up. BitTorrent users could still reach the site, but the rate of transfer was slowed. Comcast argued this network management decision was made to ensure service quality for the vast majority of Comcast Internet customers whose high-speed connections would be slowed by the amount of bandwidth P2P applications were gobbling up. Even cable industry critics such as George Ou, writing on ZDNet, conceded Comcast was within its rights to do so:

We can think of it as a freeway onramp that has lights on it to rate limit the number of cars that may enter a freeway… If you didn’t have the lights and everyone tries to pile on to the freeway at the same time, everyone ends up with worse traffic.^₅₉

What’s more, Comcast and BitTorrent negotiated an amicable solution that respected each other’s interest. Government handwringing over network neutrality has gone on for at least four years, yet the one instance of a dispute between a service provider and an applications provider over applications prioritization was resolved by market forces within weeks._⁶⁰

The necessity of the FCC’s network neutrality rules is questionable in general, but its Non-discrimination mandate is downright counterproductive. Consumers will be better off without it. In summary, here are some reasons why:

Regulation will increase consumer costs

The cost of the management required to support sophisticated applications should be borne by the companies that produce, market and profit from these applications. Network neutrality, especially the non-discrimination principle, will force service providers to shift those costs onto the public in the form of higher broadband fees. Even network neutrality proponents, such as Computerworld’s Mark Gibbs, admit this. “Now the downside: We’re going to have to pay more. There’s little doubt that regulated Internet service will probably be more expensive but that’s the consequence of doing what’s right for our society.”_⁶¹

Gibbs worries that if phone and cable companies can charge applications providers for prioritization and management, it will stifle innovation. That is not true. Fee-based network management services would, however, force entrepreneurs to develop business plans that account for the full cost of delivering service, a disciplined approach that is much more likely to yield long-run success all around. The network neutrality alternative sets up a dubious scheme that permits a business to privatize its gains from Internet commerce, while socializing its costs. It’s hard to see what’s “right for our society” about this.

There will be no cost check on commercial bandwidth consumption

When commercial bandwidth costs are socialized—that is transferred to consumers—businesses have no incentive to limit their exploitation of Internet capacity. The exaflood will only get worse as the largest users, immune from paying the cost of their consumption, grab as much bandwidth as they can. So in addition to paying more, as net neutrality enthusiast Gibbs states, consumers will find the Internet a slow, frustrating experience. Wealthier consumers may have the option of purchasing higher bandwidth options, such as fiber to the home, but with no check on the supply side, even that capacity stands to be consumed.

Smaller players will be hurt, not helped

The final irony is that non-discrimination is supposed to protect the proverbial “little guy.” Yet, with no partitioning or prioritization available for deep-pocketed companies, the smaller operations will be run off the road first. It would make sense for Fox or Universal to purchase a “fast lane” for its video feeds that are routinely downloaded by millions of users. The quality of this video might be better than what a local blogger can afford, but then again Fox and Universal can afford many things the lone blogger can’t. The point of the open Internet isn’t what the small Web site can afford; it’s whether the small Web site can be heard. When heavy traffic can be prioritized and partitioned, the small site gets through.

Many innovative applications will never be developed

Policymakers argue that non-discrimination on network management is needed to ensure the Internet remains an incubator for innovation. To counter this, let’s return to the post office analogy. Those who have visited Seattle may have come across the Pikes Place Fish Market, where each morning you can buy Alaskan king salmon that had been swimming the icy Pacific waters just hours before. At one time, if you wanted the best fish in the Northwest, you had to live in the Emerald City. Today, because of overnight shipping, Pikes Place Fish Market can deliver anywhere in the U.S.

For Pikes Place Fish Market, normal shipping (i.e., “best effort”), which can take three to seven days, was never an option, for obvious reasons. Its access to the national market, and the chance for consumers in Texas to buy superior seafood fresh from the catch would not have been possible without a premium choice for delivery.

The Internet works the same way. We already can name many existing services, like video and gaming, which would benefit from a fast lane. What we don’t yet know are the applications and services that will be created because there is a fast lane. Regulation closes these opportunities off.

For all the talk about preserving a free and open Internet, network neutrality’s non-discrimination rule would do neither. As bandwidth consumption increases almost geometrically, today’s Internet needs commercial options that include prioritization, bandwidth optimization, applications partitioning and packet prioritization. If the Internet’s going to work, the packets must get through.

Notes:
_⁵⁶ Federal Communications Commission, “Notice of Proposed Rulemaking: In the Matter of Preserving the Open Internet Broadband Industry Practices,” GN Docket No. 09-191, WC Docket No. 07-52, Oct. 22, 2009.
_⁵⁷ Julius Genachowski, “Preserving a Free and Open Internet: A Platform for Innovation, Opportunity, and Prosperity,” speech to Brookings Institution, Sept. 21, 2009.
^₅₈George Gilder and Bret Swanson, Estimating the Exaflood, Discovery Institute, January 2008. Available at http://www.discovery.org/scripts/viewDB/filesDB-download.php?command=download&id=1475.
_⁵⁹ George Ou, “A Rational Debate on Comcast Network Management,” ZDNet, Nov. 6, 2007, available at http://blogs.zdnet.com/Ou/?p=852.
_⁶⁰The Comcast-BitTorrent example, along with the two other cases on which the FCC is building its case for Internet regulation, as discussed in depth in my policy study “The Internet is Not Neutral (and No Law Can Make It So),” Reason Foundation, May 2009.
_⁶¹Mark Gibbs, “Network Neutrality: Doing the Right Things” Computerworld, Oct. 1, 2009. Available at http://www.computerworld.com/s/article/9138792/Network_neutrality_Doing_the_right_things?taxono myId=16&pageNumber=2.

Steven Titch is a policy analyst at Reason Foundation.This essay originally appeared in "The Consequences of Net Neutrality Regulations on Broadband Investment and Consumer Welfare" published by the American Consumer Institute.

Taxing Internet Retailers Like Brick-and-Mortar Stores

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

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

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

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

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

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

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

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

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

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

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

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

Steven Titch is a policy analyst at Reason Foundation.

Rethinking Universal-Service Policy in a Broadband Internet Era

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

Historically, government initiative was behind the great water and power infrastructure projects undertaken during the Progressive Era. Many see parallels between the need for electricity and running water in the past and the need for broadband today, and are calling for even more federal and state government involvement in the construction and deployment of broadband. The general belief is that broadband, like water, power and one-time narrowband phone service, is a utility.

Broadband, in truth, has little in common with classic utilities. The only real similarity is that the underlying infrastructure is expensive to build. Utilities require high investment up front, which can be amortized over several decades. Broadband requires not only high investment up front but continued high investment thereafter. Technology cycles are short. Entire network platforms change every five to ten years. Broadband is also competitive across multiple facilities platforms—telephone, cable and wireless—each with relative advantages and disadvantages. Competition in broadband is a critical dimension and is why government funding and subsidy programs carry a much greater risk of failure, or mere ineffectiveness, wasting public capital and resources.

While the goal remains to bring inexpensive broadband connectivity to as many people as possible, a more enlightened approach shifts away from large infrastructure projects to making the benefits of broadband relevant to all classes of potential users. The best way to accomplish this is to promote universal-service policies that:

• Engage all segments of the broadband industry,
• Create climates conducive to investment,
• Reduce or eliminate central infrastructure planning at the federal level, and
• Energize leadership and expertise at the state and local levels.

Who Pays For Google Voice?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Steven Titch is a policy analyst at Reason Foundation.

FTC's Blogger Disclosure and Ethics Rules Are Terrible Idea

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

Bloggers who test and review products, get freebies from companies, or make money from clients have been warned: the government is watching you.

In a move that would mark a major step into regulating online speech, the Federal Trade Commission (FTC) is planning to issue guidelines for individuals who write, review or comment about commercial products and services on their own blogs or in the comments sections of websites.

The FTC rules would require bloggers and commenters to back up any claims they make and disclose whether they received any pay or benefits from the companies they cover. Some of the things bloggers might have to disclose to the feds include any gifts or direct payments, companies who buy advertising on the blog or site, and commissions on “clickthroughs” they receive from website ads. Failure to disclose such arrangements could mean substantial fines and potentially staggering legal costs.

The new guidelines, which are expected to be voted on later this summer or fall, are spurred by anecdotal reports that some bloggers have accepted perks such as free laptops, trips to Europe, gift cards or even thousands of dollars in exchange for a 200-word blog post.

“Online, if you think that somebody is providing you with independent advice and ... they have an economic motive for what they’re saying, that’s information a consumer should know,” Rich Cleland, assistant director in the FTC’s division of advertising practices, told the Associated Press.

The FTC regulates what advertisers can claim and how they say it. In the proposed blogging guidelines, the government is poised to apply a sledgehammer to a non-problem. The guidelines will do more harm than good, constraining vigorous online discussion and endangering developing business models that could support greater expansion of the Internet.

In looking at the rules, constitutional questions immediately come to the forefront. Can the government mandate editorial policies for online writers, particularly if the consequence is a choice between self-censorship or a government inquiry? Can the FTC fairly and reliably act as after-the-fact arbiter, determining what constitutes editorial content and what constitutes advertising? These are rules that would be difficult to impose on tradition print publications. In broadcasting, attempts to regulate product placement (that strategically placed can of Coca-Cola) on TV shows have proved troublesome. And the regulating the Internet will be a lot more difficult than that.

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

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

Ostensibly, the rationale behind the FTC’s advertising regulation is consumer protection. The idea is that big corporations can control the marketing message, which traditionally has been tailored toward a mass audience and one-way (think TV and print). Blogs subvert this model, however.

When advertisers approach the Internet, they look to leverage characteristics intrinsic to connectivity. The medium is interactive, and feedback can be immediate. Commercial messages can be viral. At the same time, successful promulgation of a message is not guaranteed, as the very viral nature of the web also reduces advertisers’ power to control the medium. Blogs are vital to getting the message out.

Bloggers, commenters, and reviewers, the vast majority of which are unpaid, can quickly endorse or refute marketing claims. In some cases, shills are easily identified. Movie studio publicity departments regularly try to mimic “fanboy” postings, complete with misspellings and grammatical errors, in order to slip favorable movie reviews onto Harry Knowles’ influential Ain’t It Cool News site. But legions of legitimate commenters will immediately point out that the comments are clearly planted by those attached to the film. The FTC needs to give readers some credit for being able to separate the hype from the real.

Finally, given the massive size of the blogosphere, the FTC cannot fairly regulate it. As of April 2008, there were 112 million blogs worldwide, with 175,000 more being added every day, according to Technorati, a blog search engine. There is simply no way to police every blog. On top of that, the FTC also plans to police the countless comments readers post on blogs about products and services.

Unless the FTC is planning on launching the biggest federal bureaucracy ever (and I’m not putting it past them), the government’s enforcement of these proposed blogger rules will be completely arbitrary. The likely victims of the policy will be bloggers who are lucky enough to build an audience, gain some influence with readers and thus appeal to advertisers. In a nutshell, the FTC will punish bloggers for their success.

The Internet is thriving without regulation and the last thing it needs are a bunch of federal nannies policing blog posts and the comments sections on websites.

Steven Titch is a policy analyst at Reason Foundation.

Government to Examine Exclusive Cell Phone Deals

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Steven Titch is a policy analyst at Reason Foundation.

The Internet Is Not Neutral (and No Law Can Make It So)

steven.titch@reason.org (Steven Titch) — Thu, 28 May 2009 18:14:00 EDT

The Internet is a complete success story by almost all accounts. More people have more access to more information and connections with other people than ever before. And all of this happened without government regulation or control. Yet, net neutrality proponents claim the Internet is in danger. They say Congress needs to pass legislation regulating the way Web content flows through networks and government must require cable companies and Internet service providers to treat all customers and content alike. A new Reason Foundation study, however, finds net neutrality would stifle the very innovation that has allowed the Web to grow so quickly and become such a powerful, integral part of our lives.

The Reason study says to get the most out of the Internet we should promote competition, not neutrality. Network neutrality proponents fear that companies will risk alienating their customers by blocking websites, directing traffic only to powerful corporate Websites, and charge prices that drive bloggers and casual Internet users out of the market. But, according to the study, this speculation is unfounded and doesn’t reflect market realities that companies must fight to keep their customers by delivering the services (and Websites) that they want at prices they can afford.

Net neutrality would actually punish companies that seek to improve or optimize their networks or Internet offerings, creating red tape and strangling future advancements.

“Net Neutrality would open the door to unprecedented government intervention in all aspects of the Internet,” said Steven Titch, a policy analyst at Reason Foundation and author of the study. “Placing regulations and legal limits on the Internet won’t bring neutrality, it will stagnate the Web’s remarkable growth. The Internet has been doing splendidly without government, why on earth would we want them involved now?”

California Wants to Ban Your Big Screen TV

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

FreedomPolitics.com

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

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

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

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

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

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

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

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

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

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

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

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

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

Making Sure the Broadband Stimulus Money Isn't Wasted

steven.titch@reason.org (Steven Titch) — Fri, 20 Mar 2009 11:11:00 EDT

It’s discouraging that after a daylong, standing-room-only meeting on the allocation of broadband stimulus funds the two federal agencies responsible for spending the cash couldn’t even define the meaning of an “unserved area.” They couldn’t agree on which areas don’t have, and aren’t likely to get, Internet access in the foreseeable future.

Normally, this wouldn’t matter. The government shouldn’t be in the broadband business anyway. But, as part of the $787 billion stimulus bill, the American Recovery and Reinvestment Act, Congress set aside $7.2 billion for development of rural broadband. The National Telecommunications & Information Administration (NTIA) and the U.S. Department of Agriculture’s Rural Utilities Services (RUS) are charged with dispersing the funds.

While broadband service is available from a mix of phone, cable and wireless providers in even smaller cities, statistics show availability lags in some rural markets. The Pew Internet & American Life Project’s May 2008 survey found that 38 percent of rural residents polled said they have broadband at home, compared to the overall national rate 55 percent. Even so, Pew found rural broadband penetration had grown 23 percent from 2007.

With rural users steadily catching up, there’s a good case to be made that the private sector doesn’t need help in identifying or reaching these customers. But since Congress and the Obama administration are determined to send billions out the door, it’s time to make the best of it.

To be fair, one reason the government is struggling with the rural broadband issue is that each special interest group likes to frame the problem in ways that reflect best on their own solutions.

Incumbent phone and cable companies cite their experience with high-end platforms such as fiber optics, yet bemoan the large capital expenses. Wireless Internet entrepreneurs say they are more deserving of subsidies because their infrastructure is less expensive to build. Municipal broadband supporters insist that the private Internet companies have failed - and high-speed, high-quality rural broadband service can only be provided through local government ownership and operation.

Too often the Internet access debate devolves into techno-speak about the relative merits of fiber vs. wireless; whether market failure means there are no broadband providers, or simply one or two companies in a single town and thus not enough ‘competition’ for some in government’s liking; or if stimulus-funded networks should be “neutral.” This debate distracts from what should be an easily measurable goal—how to wisely bring broadband connectivity to areas without it (and unlikely to get it).

Broadband is a lot like money—no one feels they have enough. The trick is to drill down into the data to find places where there is actually no terrestrial broadband (fiber or wireless) and reasonable likelihood that there will be no commercial construction in the next 12 to 18 months. Kentucky and North Carolina offer models on how to do this.

Agencies in both states used data from Geographic Information Systems (GIS) to correlate information about socioeconomic status, educational systems and health care facilities with geographic availability of high-speed Internet access. Using these numbers, these states have been able to apply funding to areas that truly need it and commensurately improve rural penetration.

Under the ConnectKentucky initiative, broadband availability went from 60 percent to 95 percent between 2004 and 2007, according to ConnectKentucky’s 2008 Progress Report. Further, broadband subscription increased 100 percent and there has been a 24 percent surge in home computer ownership.

Using the methods pioneered in Kentucky and North Carolina, there’s no reason Washington can’t find the areas that private companies are not likely to target for the foreseeable future. Once that is done, choosing the right technology gets a lot easier.

Fiber advocates often muddle the benefits broadband offers residential consumers with the benefits it offers businesses and institutions. There’s no question that fiber delivers high speeds for critical applications in health care, manufacturing, education and other commercial sectors. Connections of 100-megabit per second (Mb/s) are necessary for telemedicine, distance learning and data center operation, and thus can be extremely valuable to hospitals, schools or office parks. But does funding fiber to a rural hospital mean providing the same expensive line to every rural home?

For residential users, a 100 Mb/s remains high-end choice for high-volume users. Even most tasks required for home-based businesses or telecommuters--email, document transfers, basic uploading and downloading of work files, and Web-based teleconferencing can be accomplished by the basic 4 to 6--Mb/s connection delivered by most wired broadband systems today.

The stimulus money needs to be geared toward getting people who don’t have any Internet options connected now, using the technology best-suited to their needs.

Stimulus dollars can be applied to the expansion of wireless systems, because they stand to offer a far greater return than fiber. Wireless is not second-class broadband. Although not as fast as fiber, wireless broadband, which approaches 3 Mb/s today, offers the added benefit of mobility. The popularity of iPhones and BlackBerry smartphones among consumers attest to this. These pocket-sized devices integrate phone, email, texting, GPS and Web access. Meanwhile, employers are finding more and more applications that rely on mobile computing. Perhaps, then, the scope of wireless connectivity will be more critical than conventional wired Internet.

Stimulus policies that respect the private sector’s investment, diversity and expertise will go a long way toward achieving ubiquitous broadband. The government should be looking to partner with the private sector, not making attempts to create competing government broadband operations. To date, no government-run municipal broadband operation has made good on its triple promise to offer lower rates, universal connectivity and better quality service than commercial competitors. The stimulus is about delivering broadband to those in need, not to bailing out municipalities that have shown they can’t.

Combined, telephone, cable and wireless companies invested close to $115 billion in 2007 in infrastructure, much of it going to broadband upgrades. That investment came on the heels of the $350 billion invested in the four years prior, according to the Bureau of Economic Analysis.

ConnectKentucky, mentioned above, achieved most of its penetration goals by helping commercial companies understand the opportunities that existed in rural areas. The result was $860 million in private capital investment being spent in the state.

State and city governments can be excellent facilitators. In Ft. Wayne, Indiana, former Mayor Gavin Richard brought Verizon together with the area businesses that saw local broadband as a strategic investment. Verizon got first-hand information about market demand. Ft. Wayne businesses understood the immediate payoffs of fiber-based infrastructure. A commitment from area employer Raytheon sparked Verizon to build its first citywide fiber-to-the-home project in Ft. Wayne. Public-private partnerships can be used to bring users and providers together and can touch off a torrent of private sector capital, laying the groundwork for even more investment and technological advancements.

Congress and the federal government shouldn’t be in the broadband business. But now that they are, the feds owe it to taxpayers to wisely invest in projects in the neediest areas.

Steven Titch is a policy analyst at Reason Foundation.

Kevin Martin's Kiddie Internet Plan

steven.titch@reason.org (Steven Titch) — Thu, 11 Dec 2008 00:00:00 EST

Later this month, the Federal Communications Commission (FCC) is scheduled to take up a plan that would rig wireless Internet auction rules in favor of companies that promise to provide a tier of free, nationwide wireless Internet service. What it wants in return is a G-rated World Wide Web.

The proposal, to be voted on Dec. 18, is a pet project of FCC Chairman Kevin Martin, who sees it as a double-whammy, a chance to get the government involved in regulating both Internet business models and Internet content.

Although Martin has not singled out any particular company as an example, M2Z Networks Inc., a California start-up, claims to have a business plan that mirrors Martin's idea and uses its Web site to urge support for it.

Companies like M2Z would benefit greatly from such a plan because the established wireless companies-AT&T, T-Mobile and Verizon Wireless-whose business models, not to mention the sunk costs, make it difficult for them to offer free service and thus would likely sit out the bidding. That means the FCC's winning bidder would stand to pay a lot less for its spectrum than it would in a true open auction. It's this discount that offsets the potential loss of revenues from free service. But the discounts come at the expense of taxpayers-the U.S. Treasury would get far less for the frequencies than they are worth. Free wireless isn't really free. The public is indirectly subsidizing it through the rigged auction rules.

In return for these regulatory-based discounts, Martin demands that the winner block any and all Internet and Web content deemed inappropriate for children. The winner will be required to block access to Web sites at the server end, as is done in China and other countries that censor the Web.

Although users can already do their own filtering with parental control software, Martin's plan wants central control. The proposal's language is sweeping. Not only must the licensee block "obscenity" and "pornography," it will be required to block "any images or text that otherwise would be harmful to teens and adolescents." In an Orwellian twist, the proposal defines a teen as any child aged 5 to 17.

This standard is so subjective it is impossible to meet. It's a false promise by the government to make the idea of a taxpayer-backed Internet more palatable to conservatives who would otherwise resist this level of government involvement in the market.

For example, Apple's iTunes carries R-rated movies and music recordings with warnings of explicit lyrics. Will iTunes be blocked because it fits the definition of content inappropriate for children? You can argue that it does. You can find several versions of the Kama Sutra on Amazon.com. Some have cover art that would fit the definition in Martin's plan, too. The FCC clause could be used to block any newspaper, blogs or video sharing site that gears news, commentary and entertainment for adult tastes. Who's going to be the arbiter?

Other than the colossal censorship requirements, the FCC will ask very little of the auction winner. Free service is only required to operate at a paltry 768 kb/s, compared to the 1 to 2 Mb/s current wireless systems deliver and the 6 to 10 Mb/s cable modems provide. The FCC will also allow it to be advertiser-supported - which means a lot of pop-up ads and other screen clutter. Given how downscale the "free" service will be, it sparks a question as to whether the winning company simply will use it as a marketing ploy to hook customers who they can then migrate to their paid tier of services.

This is a common enough tactic, and normally there's nothing wrong it. The problem here is the government will be propping up the free service through a discounted spectrum. This is unfair to consumers, whose tax dollars will be supporting a competitive Internet service they may not ever use. It is also unfair to other companies who paid full price for their spectrum and have designed business models to account for it.

Furthermore, companies like Google are already experimenting with free wireless models that don't need government help. On top of that, users would keep the right to choose what content they wish to filter. So the market may yet deliver on Martin's idea without regulatory interference.

While 'free Internet' will sound cool to many, the FCC's plan will amount to a rent-sought bonanza for the winning licensee. Given the requirements in the proposal, the FCC's mandated "free" service will be slow, shoddy and censored. Nonetheless, it will provide the winner with a database of millions of potential customers for its for-profit competitive Internet access service with none of the usual start-up or customer acquisition costs. Those will come courtesy of you and me.

In Defense of Indecency

steven.titch@reason.org (Steven Titch) — Tue, 04 Nov 2008 00:00:00 EST

On Tuesday, the Supreme Court will hear arguments in FCC v. Fox Television Stations, marking the first time in 30 years it has taken up broadcast regulations on decency and language.

Until now, the guiding principle on indecency has been the Supreme Court's 1978 decision in FCC v. Pacifica Foundation, which arose from a listener complaint to an afternoon airing of George Carlin's "seven dirty words" sketch. The Court's decision gave the Federal Communications Commission authority to regulate broadcast content when it has reason to believe children might be in the audience.

The current indecency case arose out of three incidents. During the 2002 Billboard Music Awards show, Cher said, "People have been telling me I'm on the way out every year, right? So [expletive] 'em."

During the 2003 Billboard show, Nichole Richie said, "Have you ever tried to get cow [expletive] out of a Prada purse? It's not so [expletive] simple."

Initially, the FCC ruled that the language amounted to "fleeting" exclamations. But after U2's Bono celebrated a moment as "[expletive] brilliant" during the 2003 Golden Globe Awards, the commission changed its policy, declaring any use of vulgar words on the air illegal.

FCC Chairman Kevin J. Martin has sided with content watchdog groups like the Parents Television Council, who want the government to "do something" about what they see as the growing coarseness of television and radio content. Martin has also made no secret of his desire to expand his power to include cable and satellite, where the laws of broadcast decency don't apply. No regulatory body likes to see its influence diminished, but about 85 percent of Americans now subscribe to cable or satellite television services.

To these Americans, there's little distinction between over-the-air broadcast, cable and satellite service. Retaining different content rules for broadcast outlets, because they use a big antenna to broadcast entertainment, is arbitrary and capricious. The FCC would like the decency laws that apply to over-the-air broadcasters to be applied to cable and satellite. The opposite is true. In this day and age government should not have any role at all in regulating content.

It's not the government's job to be the guardian of taste or a filter against coarseness. People choose to have televisions in their homes. And if you make that choice, it is your responsibility to monitor what your kids watch. Martin and the nanny staters might not like to hear it, but with hundreds of TV and radio channels, the bulk of the responsibility for content control falls on to the individual household. The tools are available and easy to use. As a parent of a 5-year-old I can sympathize with the challenge but attest to its being the most effective solution.

Numerous cable television stations define their brand by appealing to families and offering programming suitable for all audiences - Nickelodeon, Disney Channel, Discovery are just a few examples. Mandating that all TV and radio entertainment be appropriate for viewing by 9-year-olds is unworkable. Digital video recorders, which allow viewers to record shows and watch later at their leisure, have made government-designated "family hours," a thing of the past.

Somewhere, at this very moment, there's something on TV and radio that is offending someone. From a legal and constitutional point of view, one hopes the Supreme Court concludes that it is far wiser for folks to just change the channel, or turn the TV off, than it is to let the FCC play nanny and censor.

DirecTV-Dish Network Merger, Round 2

steven.titch@reason.org (Steven Titch) — Fri, 12 Sep 2008 00:00:00 EDT

Get ready for another new media antitrust rumble.

According to media reports, DirecTV and Dish Network, the two major providers of direct broadcast satellite TV, are pondering another merger attempt. Although neither side so far has confirmed negotiations are taking place, some reticence is understandable considering the 500-day ordeal Sirius and XM Satellite endured before the government green lit their deal. DirecTV and Dish tried this route back in 2001, but regulators, in an exceedingly narrow definition of the TV and video distribution market, blocked the merger as anticompetitive.

If this second attempt proceeds, it will likely provide a first glimpse into the telecom and media policy approach of the next administration. The hope is that whichever party claims the White House will demonstrate an understanding of convergence and intermodal competition that, evident as it was eight years ago, is undeniable now.

But it's hard to be optimistic given how the Sirius-XM deal went. Consumers see satellite radio as one of several choices for radio entertainment that also includes conventional AM and FM, not to mention the playlists on their own iPod and MP3 players that can now be plugged into many car audio systems. And since satellite radio is a choice for home listeners, we can add Internet radio as a competitor, too.

The satellite radio players also saw themselves as part of a bigger competitive field. When Sirius gave Howard Stern the big bucks, the shock jock was working for a conventional radio conglomerate, not XM. The Stern deal should have been a big hint to bureaucrats that Sirius and XM were battling AM/FM, not just each other, for listeners.

Unfortunately, the antitrust forces did not see it that way. Instead, the Department of Justice, the Federal Trade Commission and the Federal Communications Commission got hung up on the idea that one satellite radio broadcaster would constitute a dangerous monopoly and pose significant harm to consumers.

Because listeners of satellite radio paid for commercial-free service, both agencies tried to argue that satellite constituted a completely different segment than terrestrial AM/FM radio. Yet neither agency could adequately explain how, as a merged provider, Sirius-XM Satellite could truly harm consumers. After all, they were providing the same service that conventional broadcast stations still provided for free. This fact itself was a chief barrier to consumer uptake. Price-gouging wouldn't exploit customers. It would just increase their reluctance to sign up, or to stay with the service.

In March, as both companies struggled amid falling stock prices and "fence-sitting" by customers who were deferring a purchasing decision in order to see which of the two companies would be left standing, the FTC and the Justice Department finally came around to realizing that consumers would benefit more from having one satellite radio service provider than having none at all. However, FCC chairman Kevin Martin, demonstrating his usual astuteness for the industry he regulates, delayed a decision for four more months as he tried in vain to find a convincing reason stop the Sirius-XM deal. In July, he dropped all objections and basically agreed that that a Sirius-XM deal was not a danger to competition for broadcast audio and would not hurt consumers.

Neither will a prospective DirecTV-Dish merger. Worse, video consumers will not be served if regulators repeat the Sirius-XM episode and allow drag out antirust deliberations indefinitely.

Since little is likely to happen before the November election, if DirecTV and Dish proceed with a merger plan, the new administration will have a chance to show it can regulate media like it is 2009, not 1979.

Satellite broadcasters are not the companies they once were. In the 1980 and '90s, by leveraging popular distaste for the local cable monopolies and providing cable-equivalent programming in areas the cable companies didn't serve, satellite TV companies carved out a 25 percent share of the market. Yet, as far back as 2001, they could see their business was peaking as the telephone companies made their first hesitant steps into video. Still, their attempt to merge back then was blocked by a lack of regulator foresight.

Today, satellite companies are in a position of weakness. They have no real high-speed Internet play, as do cable and phone companies. They have had problems adding high-definition channels. And their video-on-demand choices to do not stack up well compared to cable and telephone competition.

Their competitive problems are reflected in their numbers. Dish Network just saw its first net quarterly loss of customers. And both companies are failing to win a significant share of new customers for multichannel video services. A study last year by Kagan Research found that between 2005 and 2006, telephone companies share of multichannel subscribers grew to 8.7 percent from 0.1 percent. Satellite stayed nearly flat, growing to 29.7 percent from 29 percent.

But that brings us back to the big question: will the Justice Department, the FTC and the FCC regard now-established video services like Verizon's FiOS, AT&T's U-verse, plus the upgraded cable service offerings, not to mention Netflix, and Web-based video on demand services like Hulu.com, and Amazon Unbox, as legitimate market alternatives for the services DirecTV and Dish provide? It would make a world of sense if they did.

And let's not forget that there is a substantial portion of the population that has chosen satellite TV and, we can assume, enjoys it. If we reached a point, and it seems we have, where the market can support just one video provider using a satellite platform, let the merger happen. And as long consumers have a choice of multiple services providing them with the video and TV they prefer, there's no threat of a monopoly danger from the one provider who happened to use direct broadcast satellite as a means of TV delivery. As with satellite radio, affording consumers one option of a satellite provider beats not having any at all.

New York, Connecticut May Ban Targeted Web Advertising

steven.titch@reason.org (Steven Titch) — Wed, 20 Aug 2008 00:00:00 EDT

One of the great things about the World Wide Web is that much of the content is free. If you are a regular Web user, chances are that you used your Internet connection today to get something that only a few years back would have meant an out-of-pocket cost for you.

A trip to the news rack once would have set you back at least two quarters. Now you can read articles from not just about any newspaper in the U.S., but around the world.

Hulu.com delivers free movies. Network TV Web sites, like ABC.com or NBC.com, let you catch up on past television episodes of Lost, Heroes and The Office. Why rent the DVDs?

For pure utility, Google and MapQuest provide up-to-date local street maps and turn-by-turn directions, replacing those bulky foldout maps, which, at a couple of bucks a shot, always seemed to lack pertinent details like street names and cul de sacs.

Of course Web content isn't really free. Most of us pay a connection fee. And someone's bearing the cost of creating, storing and delivering all that valuable information. In most cases it is advertisers. And given the wealth of content we can get on the web, combined with early doubts about the viability of Web advertising as a business model, it's turning out to work quite well.

But recent legislative moves in the name of consumer protection threaten to end this consumer-business win-win. Earlier this year, New York State Assemblyman Richard Brodsky (D-Greenburgh-Mt. Pleasant) proposed a bill to outlaw the use of consumers' Web browser information to transmit and display (or "serve," as its called in Web circles) a specific advertisement based on that data. In Connecticut, the state assembly's General Law Committee has also introduced a bill to prohibit the practice, known as targeted Web advertising.

One of the concerns for consumers and Internet companies is that, given the borderless nature of the web, if a single state bans targeted advertisements it would amount to a total ban in many ways. Ad servers have no way of verifying where a computer is located. In order to assure they were compliant with a New York or Connecticut law, ad delivery companies would have to end targeting all together.

For all that politicians love to talk about Internet innovation, every time the Internet delivers something truly innovative, their first reaction is to ban it. It happened with Internet auto sales, wine retailing, poker, auctions and ticket sales. Now it's happening with online advertising business models.

Targeted Web advertising replaces an earlier advertising model that mimicked print ads. An advertiser paid for a "banner" or "button" that the publisher would place on its site, the same way an advertiser would buy a page in a magazine or newspaper. It was a two-party deal between the advertiser and web-based content provider.

Targeted advertising has only emerged in the last few years, but its growth coincided with the explosion of free media on the web. Third-party companies, including DoubleClick, 24/7 Media, Flycast and AdSmart now broker ad placement between advertisers and the millions of ad-supported sites that have exploded across the Internet.

Many would agree that at first blush targeted advertisements, pulling data from your browser, sounds a little invasive. But most fears of Big Brother dissipate once the process is fully understood.

It works like this: When you visit a Web site that works with one of these display ad providers, the site places a small data object called a tracking cookie, in your browser. A cookie is not spyware. Nor does it disrupt or change your PC operation in any way. Then, when you visit another client site, the cookie correlates your previous Web surfing patterns, reaches into a database of ads and chooses one that is based the themes of the sites you've visited.

That's why if you spend a half-hour searching for airfares on Expedia, Orbitz and Priceline, then go over to WashingtonPost.com, you might see a banner ad from the Virginia Tourism Authority.

The theory is that by serving users ads that are based on apparent interests, they are more likely to "clickthrough" - actually click on the ad. Since most advertisers compensate content providers on the basis of the number of clickthroughs, the hope is that more revenue can be generated by offering an ad for a product or service in which the user might actually be interested, as opposed to something random. And remember, advertising revenue allows the site to provide its content or service for free. Everybody benefits.

Yet lawmakers like Brodsky, out of a visceral and misguided reaction to the way the application works, believe that targeted ads are nothing short of criminal invasion of privacy. But there's a simple way to get rid of targeted ads that doesn't require the government or new legislation - with two or three mouse clicks, you can turn cookies off.

(Explorer users, look in the "Tools" pulldown menu, then click on the "Privacy" tab and make your choice. Firefox users, simply use the Tools pulldown and click "clear private data." There, cookies gone. No muss, no fuss.)

Browsers even let you elect to accept cookies from some sites while blocking cookies from others.

Targeted Web ads can be understood as an exercise in statistical correlation. It's a well-known marketing technique-if someone shows interest A, there's a good chance they might buy B.

Some complain that if you turn off cookies, Web browsing becomes more cumbersome. For instance, weather-related sites might require you to re-enter your zip code each time you visit. Map sites might not recall your frequent trips or your starting address.

It echoes the 'we-want-it-both-ways' whine we hear whenever legislators discuss regulating supermarket loyalty cards. The grocery store cards offer consumers discounts in exchange for tracking their purchases. Some feel this is too intrusive on their shopping habits. Fair enough. No one is forcing anyone to sign up for a card. But at the same time, lawmakers protest that some are being denied the discounts available to those who sign-up for the cards.

Loyalty cards and Web cookies offer a similar deal: If you allow me to collect some data about you so I can improve my business, I'll give you something back. To demand food discounts without shopping data, or a universe of free Web content without a means for optimal ad placement, replaces a voluntary commercial arrangement with a coercive demand. Unfortunately that's frequently what so-called consumer protection legislation does. Brodsky's bill is no different.

The New York and Connecticut bills are all the more egregious because targeted Web advertising works and there has been no demonstration of consumer harm. Consumers benefit from the free content and applications they enjoy, plus the delivery of advertisements for products and services they actually might want. Advertisers reach more customers. Web content providers do more business. Nothing can be more foolish than to make it illegal.

Americans Need an IT Bill of Rights

steven.titch@reason.org (Steven Titch) — Fri, 18 Jul 2008 00:00:00 EDT

President George W. Bush recently signed the new Foreign Intelligence Surveillance Act (FISA), bringing an end, at least for now, to a year-long dispute between Congress and the White House over their respective war powers.

Unfortunately, politics obscured important constitutional questions that the issue raised about search and seizure in today's information age. In the end, aside from granting phone companies immunity when they comply with the FISA warrant, I'm not sure what changed. Some say new amendments strengthen judicial oversight, but there are enough loopholes in the definition of "oversight" that the executive branch can move forward with a surveillance order while delaying court authorization indefinitely. It's questionable if there were any new civil liberties safeguards. Americans sure could use them though, especially as we become more reliant on information technology in our everyday lives.

In the FISA case, the federal government sought to intercept cell phone calls and examine the international calling records of Americans without a warrant. Elsewhere, the government has floated the idea of tracking Web search queries and compiling a database on individual online purchases. U.S. Customs and Border Protection agents already examine files on laptops at border entry points (see "Government Wants to Know What Is On Your Computer and Cell Phone," March 5, 2008).

The FISA case really highlights two trends that threaten Americans' civil liberties and should be of concern to all of us. The first is that the U.S. government, when it comes to IT-related matters, tends to deputize the industry into law enforcement. The second is that, since the 9/11 terrorist attacks, the government seems to be sending a message that when it comes to IT and telecommunications, a different set of citizen privacy and security rights apply.

The Fourth Amendment guarantees the right of Americans to be secure in "their papers and effects." Today, many of those papers and effects are stored electronically, either on a home PC or an Internet server owned by a third party. The Fourth Amendment can only meaningfully safeguard Americans' civil liberties in the IT age if the connection between today's storage and networking technology and the country's founding principles is sharpened. Here then, I propose an IT user's Bill of Rights.

The right to be secure in one's electronic documents, whether created and stored on a personal device, such as a PC, PDA, or phone, or on a third-party server or servers, shall not be violated. No warrants shall be issued, but upon probable cause, supported by legal due process, naming the subject of the search and describing the device to be searched and the documents to be seized.

This language comes directly from the Fourth Amendment. It aims to spell out that electronic documents are subject to the same constitutional safeguards as letters, journals, photos, and other material on paper.

All government agencies shall take necessary and proactive steps to protect any personal data it collects, stores, or copies from unauthorized access, loss, or theft.

In May 2006, the Veterans Administration lost 26 million Social Security numbers and tried to keep it secret. A House investigation that same year found that most government data breaches stem from the theft of laptops, drives, and disks, as well as unauthorized use of the information by employees. If, as a matter of course, the government must collect information on its citizens, there needs to be strong and specific policies in place that assure security and accountability for the protection of that personal data.

Individuals shall have an expectation of privacy for their electronic documents.

Courts allow surveillance photos and video taken in public places to be admitted as evidence because there is no expectation of privacy. A wily government attorney might argue that a computer or server is "public" because its files can be shared over the Internet. This provision establishes that when a user takes reasonable safeguards against unauthorized access to certain data, a zone of privacy exists around the material.

Third-party companies shall not be held legally liable for the destruction, deletion, or erasure of client documents and records if such erasures are a regular part of business operations.

There are already federal and state legislative moves afoot to set regulations on the retention of data by Internet service providers. Such rules stand to impose greater costs on businesses while providing opportunities for electronic "fishing expeditions" by law enforcement officials and private investigators. There are laws regarding the preservation of evidence when an investigation is underway. Absent that, if it's the policy of an Internet service provider to dispose of client electronic records after a fixed number of days, weeks, or months, and it is consistent in applying that standard, it should be free of any legal liability when it does so.

A third-party company shall not provide any government agency with access to a customer's electronic documents or records unless the agency has followed legal due process.

While the new FISA law protects telecommunications companies from lawsuits if they comply with a warrant, this provision calls on third-party companies to require law enforcement agencies to have obtained a warrant and to be in compliance with federal, state, and local laws before allowing them access to customer records or calls.

No user shall be held liable for following, in good faith, IT security policies of his or her employer regarding the confidentiality and protection of corporate information.

This protects employees when they follow corporate directives designed to prevent unauthorized access or copying, such as disabling flash drives, encrypting proprietary information, and deleting or offloading hard drive contents before traveling.

The pervasiveness of data networking means that we can't help but lose some control over where our data goes in this day and age. Yet, the government seems to be more interested in exploiting these vulnerabilities than respecting the privacy of its citizens. Due process asserts that the government, to conduct a search, must show probable cause. Whether it's the desktop drawer or the desktop computer, the same rule should apply: No warrant, no access.

Does the FCC Think We're All Zombies?

steven.titch@reason.org (Steven Titch) — Tue, 01 Jul 2008 00:00:00 EDT

It wasn't the first paid product placement, but it may have been the most famous. Back in 1982, film director Steven Spielberg and his production executives approached Hershey's with an offer to feature the candy company's Reese's Pieces products in a scene in E.T. The Extraterrestrial in return for a fee.

The film, of course, went on to be a blockbuster. Reese's Pieces saw an increase in sales of 65 percent the month the film was released, according to a contemporary account in Time magazine. The tale was all the more compelling because Hershey's was the second company the producers approached. Mars turned down a similar offer for the use of M&Ms, giving media industry pundits a handy "old vs. new" angle to hammer. And in media, no one wants to be "old."

Now, 26 years after E.T. found adventure in following a trail of candy-coated nuggets of peanut butter and chocolate, the Federal Communications Commission finds product placement appalling, at least on TV, the one segment of media where it still has a modicum of regulatory power. The FCC already requires programmers to disclose paid product placements, but these notices can be easily missed in the speedy credit rolls that appear at the end of most television shows. Certain that American viewers are being duped by "Trojan Horse" advertising, the FCC is opening a formal proceeding aimed at creating new rules that would require greater disclosure.

The practice has grown extensively in broadcasting since digital video recorders (DVRs) have made it easier for viewers to bypass conventional commercial breaks. According to the Nielsen Co., product placements on broadcast TV shows rose almost 40 percent in the first quarter of 2008 compared to the same period in 2007, and product-placement spending increased 34 percent to $2.9 billion in 2007 from a year earlier, according to PQ Media, a market-research firm in Stamford, Connecticut.

Reality shows like The Biggest Loser, American Idol and The Apprentice get the most placements, according to Nielsen, although scripted shows see their share. Michael Scott, the clueless manager of the Scranton branch of Dunder-Mifflin Paper Co. on The Office, hosted a staff party at the restaurant Chili's, and the computer network at Jack Bauer's Counterterrorism Unit on 24, at least up to its most recent season, is powered by Cisco Systems technology.

The assumption of course, is that Americans are too dumb to know when they are being pitched. We can be thankful the FCC seems to have balked at the demand from consumer groups who want a "paid advertisement" notice to appear on the screen every time a brand name product does. But still, commissioners are considering the requirement of voiceovers, akin to what we here at the end of political advertising, informing us of any paid placements.

Do really we need a new set of extensive regulations so we know that, yes, Coca-Cola, paid the Fox Network to have Simon Cowell sip its soda while making snarky comments on a contestant's talents? If by some reason, the viewer feels the urge to drink a Coke while watching the broadcast, has any harm been done? A thirsty viewer is just as likely to have a Pepsi, or a bottle of fruit juice in the fridge. Trouble is, those who seek to regulate advertising tend to see people as mindless lumps of clay--zombies whose behavior is shaped by Madison Avenue. The notion that individuals are capable of rational choice gets no regard. Sure, sometimes they might be persuaded, influenced or inspired by a TV character, that's why product placement is popular. But that only goes so far. Coca-Cola may sell a few more cans of soda, but I have yet to hear of any 24 viewer who green-lighted the purchase of a multimillion dollar corporate data network from Cisco on the basis that the company was the choice of a fictional defense agency. And I'm not sure how well it reflects on Chili's when it's endorsed of one of television's most dim-witted characters.

But then again, the FCC lately has not been giving Americans must credit for common sense. Convinced that it knows what's best for viewers, its nannying has grown relentless, especially under the watch of current Chairman Kevin Martin. Martin, for example, continually presses cable companies to offer a la carte services, that is, giving consumer the choice to pick and choose only the specific channels they want. Although Martin says such packages are in consumers' interest, several studies, including one of the FCC's own, conclude that such offerings would lead to higher prices and a decrease in channel choices.

Martin's FCC again showed its tin ear for the public interest when it was only government agency to give a sympathetic hearing to the National Football League when- although the NFL was demanding 80 cents per cable subscriber a month for what amounted to eight football games per season-it asked federal and state lawmakers to force cable companies to bundle the NFL Network into its standard line-up.

Study after study shows Americans are hip to paid product placements. That fact itself leads to some self-regulation. If producers and networks overdo it, they could find themselves out of favor, especially with the highly-targeted 18-29 set. There's always a risk that paid product placement could fast get old. And in media, no one wants to be old.

NY Internet Sales Tax Is Illegal - and Bad Business

steven.titch@reason.org (Steven Titch) — Wed, 21 May 2008 00:00:00 EDT

Call it one of former Gov. Eliot Spitzer's parting shots at the consumers of New York.

Attempting to close a $4.3 billion budget deficit, Spitzer, last November, attempted to ram through a questionable law that would allow New York State to collect sales taxes from out-of-state merchants - particularly those who sell on the Internet. Although his initial attempt failed, and Spitzer has since left the scene, his corrosive taxation idea survived to pass the New York State Legislature this spring.

The new law affects New York residents, who will begin paying an average of 8 percent in taxes on their online and catalogue purchases from out-of-state retailers. Moreover, the law imposes tax collection burdens on out-of-state businesses, something that has always been constitutionally prohibited.

Most catalogue and e-commerce shoppers realize that states can't impose sales tax collection burdens on a business that has no physical presence, or "nexus," in that state. The legal reasoning, affirmed in 1992 by the U.S. Supreme Court in Quill Corp. v. North Dakota, was that more than 6,000 separate sales and local tax jurisdictions in the United States amounts to an unreasonable burden on interstate commerce. In short, the court said, attempts to force out-of-state merchants to collect state and local sales taxes are unconstitutional.

Using overreaching definitions that border on the absurd, however, the state legislature decreed that if an on-line merchant uses a New York-based Web site to advertise, refer or link electronically to the merchant's site, the merchant, de facto, has a physical "nexus" in the state.

How's that again? By virtue of this law, on April 15, Web-based retailers across the country such as Amazon.com, eBay, Overstock.com, not to mention thousands of smaller operations who contract with Web sites based in New York State for ads, buttons or hot links, became New Yorkers overnight, at least for tax purposes.

For example, Amazon.com, through its 'Amazon Associates' affiliate marketing program, provides hundreds of thousands of Web sites with a link to its site in exchange for commissions of up to 10 percent. Amazon reckons about it has 10,000 affiliates with New York addresses. Online retailers who use New York-based Web sites for advertising and referrals have until June 1 to register as New York businesses or risk civil or criminal action.

The backlash has already started. On April 25, the same day it registered with the state if only to be in compliance, Amazon.com filed a lawsuit in the New York State Supreme Court, challenging the law on, among other points, the Quill ruling. Meanwhile, rather than register, Overstock.com reportedly is severing all business ties with advertising affiliates in New York State, potentially costing real New York businesses - those owned by New York voters - millions of dollars in lost commissions.

One hopes the court makes a quick decision in favor of consumers and small businesses. Beyond running counter to Quill, the law's convoluted method of defining physical presence by virtue of an association with another New York business defies common sense. Even existing New York law holds that advertising alone does not equate to having a "nexus."

The downside, of course, is that, if the law is upheld, other cash-strapped states will attempt to imitate the New York model. That would be unfortunate because, in addition to adding needless cost and compliance burden on U.S. Internet retailers, at a time of slowing economic growth, the tax would take more money out of consumers' pockets. It would also divert revenue away from many small entrepreneurs seeking opportunities in Internet and e-commerce, and for whom commissions from Amazon and other large retailers are an important source of quick and early cash flow.

If New York State, as so many of its lawmakers want, is to gain a foothold in the digital economy and be the state that is home to the next Google, Amazon or Yahoo, this tax is no way to do it.

Don't Panic! Fiber Is Coming

steven.titch@reason.org (Steven Titch) — Tue, 29 Apr 2008 00:00:00 EDT

The municipal broadband fad has thankfully peaked as more and more cities see the financial havoc such plans can wreak on their budgets and credit ratings.

So, to the benefit of local taxpayers and their annual budgets, smarter cities have become more wary of mounting competitive broadband service. But what about areas where there is no broadband service at all? In many of these cities, usually with populations of less than 10,000, officials who otherwise lean toward fiscal prudence, say the only way to assure their residents will get broadband is if the city itself takes on the project.

Overlaid on this is the broader debate over fiber-to-the-home (FTTH). Pundits point to Japan and South Korea's commitment to FTTH. If these countries are doing it, shouldn't the U.S.?

True, the majority of U.S. broadband today is offered either with cable modems or copper digital subscriber line (DSL). For both, the latest versions deliver a maximum of 15 megabits per second (Mb/s). Translated into user terms, that means about 20 to 30 seconds to download a three-minute video. FTTH, which can offer 100 Mb/s, is indeed superior.

FTTH is available to only about 10 million U.S. homes, about 10 percent of all the homes in North America, according to an April FTTH Council report prepared by RVA Market Research. Of that group, about 2.9 million households have purchased service. While, penetration is still low, it's rising fast. Some 770,500, or 27 percent, of those 2.9 million fiber homes were added in the last six month, the FTTH Council reports.

Fiber is the future. Private capital is becoming available. The only question is how fast it begins to penetrate mid-level and rural markets. There is no doubt that within 12 to 24 months some consumers will be filling a 100 Mb/s pipe. At the same time, however, there will continue to be a substantial portion of households that will only need 10 Mb/s for the foreseeable future. Balancing the cost of fiber construction against FTTH take rates and ongoing demand for, dare we say, pedestrian broadband is going to be tricky. That's why government officials, from the local level on up to Washington, need to be careful about government-funded fiber.

For starters, despite all the attention the Koreans and Japanese receive for the fiber deployments, we don't know how much it's costing citizens in the long run. Foreign service providers are subsidized and competition is managed. Even though 100 Mb/s per second is being delivered to homes in these countries, we don't know the average bandwidth users are consuming. If it is only 10 Mb/s, 20 Mb/s or even 50 Mb/s, they are underutilizing capacity. This extracts an economic cost, because the Japanese and Korean service providers are not getting full value for their investment. In the end, that translates to higher costs for consumers in those countries, although the actual cost might be masked by subsidies, transfers and taxes.

In the U.S., the lack of rural broadband is a business plan problem. Right now, demand for 100 Mb/s and the cost of providing it do not intersect at a profitable point. There's no reason to expect it will stay this way. The history of broadband shows that demand for bandwidth continues to increase while costs continue to decrease. There's also no reason to think rural areas will follow the same deployment curve the big cities are - several years of cable modems and DSL before FTTH.

In the 1970s and '80s, telephone technology in most rural markets jumped from electromechanical to digital switching, skipping the generation of automatic electronic switches that were used in big markets until the early '90s. The current situation of slow rural broadband development is, at worst, is a failure of creativity, not of the market in general.

The key to speeding rural broadband - and broadband deployment anywhere - is to encourage a climate where investment is welcome and works in tandem with market forces. Already communities in at least 10 states can take advantage of cable franchise reforms the way Fort Wayne, Indiana, did. After franchise reform opened all markets in Indiana to telephone company entry, the Ft. Wayne city government aggressively pursued Verizon to invest $10 million in its FTTH rollout there.

There's no reason to limit thinking to incumbent telephone and cable companies. So-called competitive local exchange carriers (CLECs), such as Covad Communications and Level 3, have the resources to build local fiber backbones. Often they will look to serve an area business first, but that can anchor more growth and stimulate more demand. Local governments and state agencies such as ConnectKentucky and North Carolina's e-NC Authority specialize in helping local communities develop broadband applications and then bringing them together with service providers. Not only do the local incumbents support their efforts, but so do information technology companies such as IBM, Dell, Apple and Cisco, all of whom have a stake in seeing greater broadband deployment, especially on fiber optic platforms.

Still, will there be instances where government is the only option? Perhaps. But, unlike municipal models to date, investments do not have to be speculative. Governments run into problems when in attempting to be service providers. They risk millions of dollars in hopes they can effectively deliver sophisticated, tailored services that the private sector itself often struggles with.

A better approach might be similar what a few states are doing with toll roads. States have begun leasing toll roads to private operators, usually for a substantial upfront fee (see the Chicago Skyway and Indiana Toll Road).

The private operator is completely responsible for maintaining the highway and expanding it as needed. The company charges user fees to recoup its investment. State taxpayers benefit because they pay less in road taxes. Drivers "pay for use," but at a lower net cost gained from having a business, not the government managing the road. The large upfront payments in these leases can then fund much-needed infrastructure projects that the state couldn't have afforded otherwise.

Likewise, it is easy to imagine a scenario in which a small town builds a fiber network, than leases it, again at a substantial upfront cost, to a network management company, which then takes on the responsibility of signing up retailers and ensuring delivery of services. The municipality benefits from recouping its initial investment, through the initial payment and then through regular lease payments which service the remaining debt. Taxpayers end up far less liable, yet the community will end up being served by one, two or more providers who buy capacity on the backbone.

But even then, municipal ownership should be the final option, not the first. In broadband and information technology, nothing stands still. Demand is there and dollars are there. Fiber is coming. Don't panic.

iProvo Revisited: Another Year and Still Struggling

steven.titch@reason.org (Steven Titch) — Tue, 01 Apr 2008 00:00:00 EDT

...

Government Wants to Know What Is On Your Computer and Cell Phone

steven.titch@reason.org (Steven Titch) — Wed, 05 Mar 2008 00:00:00 EST

Traveling abroad on business? Don’t be surprised if, upon your return, a U.S. Customs and Border Protection (CBP) officer asks for your laptop in order to inspect and copy all the personal and business information that’s stored on it, especially if you are an Asian- or Arab-American. And should you be so unfortunate to be singled out, don’t expect your equipment to be returned anytime soon.

The searches are becoming common enough that, according to the Washington Post, a number of companies are advising employees who travel internationally to wipe their hard drives before leaving the country in order to prevent disclosure of proprietary or highly secure information.

The Asian Law Caucus, with support from the Electronic Frontier Foundation (EFF), filed a lawsuit sparked by 15 searches and seizures of laptops, cell phones, MP3 players and other electronics. Almost all of these cases, said the Post, involved travelers of Muslim, Middle Eastern or South Asian backgrounds who were either U.S. citizens or foreign nationals employed by U.S. companies, including Internet infrastructure powerhouse Cisco Systems and Radius, a leading corporate travel management company.

In some instances, travelers have had to wait weeks for their property to be returned – and an executive from Radius is still waiting for CBP to return a laptop seized more than one year ago.

Meanwhile, a Freedom of Information Act request by the Association of Corporate Travel Executives (ACTE) asking for the guidelines CBP uses for search and seizure of electronic equipment, and the policies regarding the data copied from them, has yielded nothing.

For its part, CBP equates inspecting the contents of laptops with inspecting contents of suitcases. A laptop or other device, the agency says, may be seized if it contains information possibly tied to terrorism, narcotics smuggling, child pornography or other criminal activity, a CBP spokeswoman told the Post.

Trouble is, in none of the cases that the EFF and Asian Law Caucus is handling, was there any suspicion of a crime, nor was any criminal charge ever brought. Far from identifying threats, this latest episode of “security theater,” as Reason Foundation Founder Robert Poole calls it, is purely a fishing expedition that directly violates the Fourth Amendment:

The right of the people to be secure in persons, houses, papers, and effects against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause…

No other federal, state or local enforcement agency could demand you turn over the information on your PC or other personal technology devices without a search warrant. The only reason CBP is getting away with this is because they have the authority to open and inspect luggage at border entry points.

But laptops and cell phones are not suitcases. The CBP’s mandate is border protection. They are not PC police. The 68-page “Know Before You Go” is clear on what inbound travelers may bring into the U.S., what they may not, and what is subject to customs duties. The brochure makes clear that when a customs officer inspects your luggage, he or she is looking for undeclared merchandise or contraband, not what you’ve recorded in your diary, address book, corporate and personal papers - whether electronic or on paper.

And, beyond obviously pirated material, CBP provides no information as to what it might consider illegal electronic content. If it was about enforcing anti-piracy laws, CBP would not be copying emails, web histories, calling records and other personal data. The whole process is an unconstitutional overreach. In rifling through your laptop, the CBP is not looking for items you might be bringing in; it is looking for information about who you know, what you did and what you think.

Finally, CBP has yet to explain how all of this protects us from terrorism. After all, a U.S.-based Al-Qaeda operative does not have to travel abroad to communicate with a foreign cell. Would a genuine terrorist bent on harm bring his own cell phone into the U.S., or would he buy a prepaid, untraceable phone as soon as he hit the streets here?

And what exactly happens to all this data CBP is collecting? CBP assertions that these agents are “trained” in handling data are hardly comforting. The U.S. government employee who had a laptop containing millions of names, addresses and social security numbers stolen from his home had been “trained” not to take laptops out of the office. For all we know, the entire set of access codes for Cisco’s top-tier Internet servers, or the travel habits of some of America’s Fortune 50 executives, are sitting on a Flash drive carelessly left next to the coffee maker in an airport staff break room.

CBP’s seizures of laptops and other electronic devices continue the troubling pattern on the part of the federal government to erode civil liberties in the name of security. Rather than make us safer, they likely put Americans and American interests at greater risk because they expose private and secure information. They yield little to nothing in terms of actionable intelligence while egregiously violating the rights of U.S. and non-U.S. citizens alike. They serve no reasonable purpose. The courts need to stop these unlawful searches now.

Municipal Broadband Fails - Again

steven.titch@reason.org (Steven Titch) — Mon, 28 Jan 2008 00:00:00 EST

City officials in Provo, Utah, are still scratching their heads over the persistent low revenues and high subscriber turnover from iProvo, the city's municipal broadband network.

iProvo, the $39.5-million wholesale fiber-to-the-premises network, is halfway into its fourth year. In December, Provo Municipal Council Chairman George Stewart, told the city council that the operation is still behind on its business plan in terms of revenues and number of customers. After receiving nearly $1 million in extra funding last year, iProvo asked the city to budget and additional $1.2 million to cover expected losses for the current fiscal year, which ends June 30, 2008. In its December 2007 report, iProvo said losses from July through October 2007 totaled $214,000.

What can't iProvo gain traction? To understand why, let's start with the reasons for its creation.

At heart, iProvo was supposed to assure local residents and businesses would not be left out of the so-called digital economy. But from a practical policy perspective, iProvo's experience, which tracks with most other cities that have mounted similar attempts at large-scale municipal broadband, including Ashland, Oregon; Lebanon, Ohio; and Marietta, Georgia, to name three, shows that simply building a municipal broadband network does little for the wider adoption of broadband services. All cities do is waste resources when they go this route.

Construction and expansion of a broadband network is purely a matter of physical and capital resources, all of which can be obtained through a variety of means. The City of Provo chose to finance and build this infrastructure itself. It did this in direct competition with commercial providers and just as the private equity market was beginning to fund commercial projects.

This was the city's first mistake. It called on its own citizens to shoulder the cost of building and financing a network that private shareowner capital was available for. Provo, like many other cities, did so with eyes wide open. Comcast executives told city officials in 2003 that by 2007—now—they would have broadband service available not only in Provo, but the entire Wasatch Valley, a schedule it has made good on.

That brings us to the second mistake Provo and other municipal broadband systems make. To achieve their goal of wider availability of broadband service, they force themselves first to create a successful cable TV franchise. This all but guarantees that after borrowing or allocating millions to build the infrastructure, municipalities will have to keep on borrowing and spending millions just to stay competitive with other providers.

Right now, iProvo isn't so much a broadband network provider as an ailing cable TV company. Stewart admits that iProvo's financial struggles stem from lower-than-expected take-up of the triple-play combination of phone, cable and Internet. And while iProvo's retail partners are signing up customers at a rate of 260 a month, those gains are offset by a monthly average of 140 customers who drop service. Unlike overruns that occur on an infrastructure project of fixed duration, say a highway expansion, which are most often related to time and materials, iProvo's losses stem from marketing problems and subjective consumer perceptions about quality of service. They will be difficult, if not impossible, to contain.

For several years, Reason Foundation and like-minded policy think tanks were warning that cities were basing municipal broadband plans on market misperceptions. The past year has seen cities that were once enthusiastic about the idea back away because the growing number of muni failures can no longer be ignored or explained away.

What cities are learning, however, is that local non-profits and neighborhood-level technology programs can be highly effective at addressing the digital divide. Agencies such as New York's NYCwireless, Cleveland's Computer Learning in My Backyard (CLIMB), One Economy Miami and SimHouston all help provide broadband access, equipment, training and technology assistance to inner-city areas. Many are funded by private sector companies and rely on little or no government money. Since they are managed by focused and motivated personnel, these initiatives stand to achieve greater digital inclusiveness than multimillion dollar government infrastructure projects.

If it truly wants inclusive broadband in Provo, the city should treat the commercial sector as a potential partner, not an antagonistic competitor. It should see beyond Comcast and Qwest. Apple, Cisco Systems, Google, Intel and Microsoft are just six major companies that have an interest in the spread of broadband. Rather than working against the industry, iProvo should work with it to identify and encourage grassroots initiatives aimed at educating individuals who feel cut off from the digital revolution. It's far less grandiose than a fiber-to-the-home network, yet it would be a far more responsible use of taxpayer money and yield a far more gratifying result.

Michigan's Proposed Telephone Tax Will Burden Consumers

steven.titch@reason.org (Steven Titch) — Fri, 13 Jul 2007 16:14:00 EDT

Detroit News

The Michigan House of Representatives will vote soon on a proposed public safety surcharge of $1.35 on all phone bills to fund a variety of law enforcement programs -- most of which have nothing to do with telecommunications. But what's even worse is that this tax will diminish access of Michigan individuals and businesses to phones and the Internet, making them less productive and competitive compared to other states.

According to the Tax Foundation, Michigan's slew of business, sales and income taxes have made it 12th in the nation in terms of tax burden per dollar of state gross domestic product. But telecommunications has so far been a bright spot in Michigan's otherwise dismal tax picture.

In fact, in a survey of 59 large-and medium-sized markets published by the Chicago-based Heartland Institute this May, Michigan had the distinction of imposing the smallest tax burden on communications services -- 5.81 percent, or about $11 on an average combined household bill of $152 for land line, wireless, cable TV and Internet services. That was almost half the national average of 13.52 percent -- or $20.50 on average.

All this might change. The bill, HB 4852, would raise all land line and wireless phone bills by at least $1.35. Since the bill's language calls for a tax on each "user," it is unclear whether the surcharge will be assessed per account or per line. If the latter, a family with two conventional phone lines and four cell phones will have to pony up another $8.10 a month. For a Michigan business, it would amount to a head tax on every mobile employee in its organization.

The bill's authors have dubbed the bill the Emergency Telephone Service Enabling Act. Nothing could be more misleading given that only about 24 percent of the revenues generated by the tax would actually go toward an emergency telecommunication system for Michigan public safety agencies. About 1 percent will go to the 911 non-emergency division. The remaining three-quarters will fund the Forensic Science Division of the Michigan State Police, the Traffic Law Enforcement and Safety Fund, a state criminal justice information system and the Michigan Commission on Law Enforcement Standards. The tax will also support probation and parole monitoring systems, the Bureau of Fire Services, and the Detroit Police Development crime lab.

Some of these services are no doubt important -- even critical. But if that's the case, lawmakers ought to give them priority in general fund spending.

Basic phone service provides a foundation for users to migrate to broadband. A tax would diminish access of low-income consumers to the Internet and new telecommunications technologies. In effect, it will widen the gap between the telecom haves and have-nots. The Heartland study found that as a proportion of income, low-income households pay up to 10 times more in telecom taxes than wealthier users.

The Michigan Senate has a proposal to fund emergency communications without a new tax. That bill deserves a closer look. Telecom taxes hurt everybody. They raise the price of a service that is essential for economic growth and empowerment. Slower growth means slower investment. That means less opportunity for Michigan residents. All of which make Michigan's telecom tax a losing proposition.

Net Neutrality Really Means Internet Mediocrity

steven.titch@reason.org (Steven Titch) — Thu, 19 Apr 2007 16:17:00 EDT

Over the past year, legislators in Congress and, more recently, in states such as Maryland, Maine and California, have been calling for laws guaranteeing "network neutrality." Net neutrality laws would prevent service providers from using their own network resources to improve the quality or reliability of increasingly popular Internet applications such as movie downloads and multiplayer games.

As the neutrality bills in Congress and the states stand now, no service provider could offer a third party any sort of network-based prioritization or quality assurance, whether or not a fee is offered. All content must be treated the same way as it crosses the network. Any quality improvement offered to one, must be offered to all.

This legislated mandate for neutrality – which really means Internet mediocrity - is based on the supposition that neutrality was a founding doctrine of the Internet. That couldn't be more wrong. The Internet and its commercial component, the World Wide Web, are what they are today due to the simple principle of free exchange through voluntary agreement. Engineering concepts such as "network neutrality" or meaningless slogans like "information should be free," had nothing to do with it.

The idea of the Internet goes back to the moment when one university professor said to a colleague from a distant institution, "Gee, wouldn't it be great if we could access research stored on each other's computers with the same ease as we can from our own?"

And then some very bright engineers and programmers devised a transmission language called the Internet Protocol (IP) that allowed computers to exchange information over conventional phone networks. Over time, IP spread to phones, PDAs, iPods and set-top cable boxes, creating the amazing, versatile world wide Internet we know today.

The growth of the Internet is one of the best examples of libertarian principles in action. As it expanded into the commercial realm, mechanisms of trust and validation grew out the marketplace's desire to have an open, honest forum for enterprise. Without any government regulation or oversight, people grew comfortable enough to use the Internet to email loved ones, transfer money, purchase cars and airline tickets, even make wagers.

The Internet indeed is an open network. But this is different from asserting, as the network neutrality idea does, that all of the attributes of the physical network infrastructure should either be freely available to any connected party, or else not at all.

Network neutrality in effect would declare the infrastructure in the network—the cables, routers, switches and software—a public resource, even though it is, in reality, private property bought and paid for by investor dollars. Just as in the case with your own PC, these property rights are not waived at the moment of Internet connectivity. Any corporation or individual on the Internet (or anywhere for that matter) has a right to choose what components to make available to whom and on what terms. In commercial language, it translates to the freedom to place a market value on one's proprietary assets to create viable business plans. That has been the case since the first Internet service provider purchased a rack of servers and started seeking customers for hosted email.

Rather than preserving basic Internet principles, network neutrality subverts them. It replaces cooperation with coercion. It would make government bureaucrats the arbiters of the way two or more companies could agree to use their own network resources to deliver consumers the best experience when it comes to content and applications.

The intrusiveness of this level of supply chain regulation is unprecedented. Imagine if the government were able to tell farmers they could not price organic produce higher than crops grown using cheaper large-yield methods; or that TV makers could not charge more for high-definition sets, even though they are more expensive to manufacture. To be sure, such price-control measures might find support in some circles, but the net result is that would-be suppliers of organic produce and hi-def TVs, seeing no profit in the venture, would not put their resources into bringing the items to market, however desired they may be. The same will hold true for Internet quality if lawmakers adopt network neutrality.

But above all, the Internet has never been about regulation. It has been about free exchange. Exchange, however, implies ownership, because at heart, it is the choice to provide something you own for something in return, be it material or goodwill. The government's net neutrality is all about taking resources without compensation.

From both an economic and legal perspective, network neutrality is a non-starter. It doesn't fly legally or ethically. Theft is not a legitimate business model. No enterprise cannot simply claim another enterprise's resources to make money for itself. This has been true as much on the Internet as it has been in the brick-and-mortar world. It's disappointing that so many in Congress are blind to it.

Villaraigosa Should Ask If a WiFi Plan Is Really Necessary

steven.titch@reason.org (Steven Titch) — Mon, 12 Mar 2007 16:20:00 EDT

Los Angeles Business Journal

With the recent announcement that Los Angeles will seek bids for a citywide wireless Internet network, Mayor Antonio Villaraigosa has joined some 300 other U.S. cities and towns hoping to create a low-priced, ubiquitous form of Internet service.

In proposing a private-public partnership Villaraigosa has greatly improved chances for success at the outset. Under the proposed WiFi Initiative, Los Angeles would contract with a commercial service provider. In return for use of city property and right-of-way – light poles, buildings and other real estate – the service provider would agree to cover 498 square miles at an estimated cost of $60 million. The deal might also include a low-price or free tier of wireless service aimed at low-income residents, although more will be known once the city issues a formal request for bids.

The advantage of a private-public partnership is that it places the responsibility of funding, building and operating the system on the private sector. With more than 400 WiFi hotspots already in place throughout the L.A. area, any wireless venture will have plenty of competition from the get-go. So Villaraigosa has wisely taken use of taxpayer dollars and municipal loans off the table.

He knows that, with the exception of a few very small towns, governments that have attempted to build and operate their own wide-area broadband networks have found themselves in deep money pits. Chaska, Minn., for example, ended up spending $900,000, 50 percent more than planned, on its municipal wireless network, before turning to a private partner to solve chronic signal coverage problems. St. Cloud, Fla., spent $2.6 million but couldn't get a signal to most residents in a town of just 28,000.

Right now, San Francisco is the only major city seriously considering a city-owned network. The city's Board of Supervisors is battling Mayor Gavin Newsom because it wants a municipally-owned system, even though Earthlink and Google offered to build it for free.

"We never thought it would be so hard to spend money in a city – or such a hard sell to give something away," EarthLink Vice President Cole Reinwand said.

"I'm not going to take $10 million from poor people to pay for something that a private company has offered to pay for," said Newsome.

Public-private partnerships definitely present less risk, but Villaraigosa should ask if a citywide WiFi plan is even necessary at all. There's a common assumption that government needs to provide some sort of spark for urban broadband growth – a bridging of the so-called digital divide. But all evidence indicates the market is reaching new customers on its own.

Last year, the Pew Internet & American Life Project found there was a 40 percent increase in home broadband adoption from March 2005 to March 2006, double the 20 percent of the previous 12 months. Moreover, in the same period, broadband adoption grew by 68 percent among people living in households with incomes between $40,000 and $50,000 per year, by 121 percent among African-Americans, and by 70 percent among those with less than a high-school education.

Unfair competition

Secondly, even without direct taxpayer funding, municipal agreements may constitute unfair competition. After all, in most cases, the commercial WiFi partner gains exclusive access to city property, which reduces operating costs. Proponents argue that this benefit offsets anything in the deal requiring private partners to serve low-income communities. But that assertion itself assumes that serving low-income users is either undesirable or uneconomical. The evidence from Pew counters this assumption. The low-end broadband market is viable and growing. A government-sponsored project to deliver cheap broadband may not be necessary, and may in the end, serve as a barrier to competition in this segment because the commercial partner is getting a break on right-of-way costs that other companies won't enjoy.

Neighboring Anaheim came up with the best WiFi approach – offering non-exclusive, low-cost access to city right-of-way. As a result, it became one of the first cities to inaugurate a citywide system last summer, with plans ranging from $3.95 per hour or $21.95 per month. It also makes residential service available though partnerships with PeoplePC and DirecTV. Offering right-of-way to all-comers enabled Anaheim to ensure greater competition and avoid lock-in to a specific technology, which could quickly become obsolete.

L.A. seems to have bought in to the notion government needs to "do something" to make citywide WiFi happen. Villaraigosa's plan isn't as good as Anaheim's and isn't as bad as the government-run route pushed by some in San Francisco. The mayor's timetable calls for WiFi roll out in 2009, but chances are that by then, working on its own, the free market may well have pre-empted city's broadband goals.

Better Prices and Better Services for More People

steven.titch@reason.org (Steven Titch) — Mon, 01 Jan 2007 18:00:00 EST

Executive Summary

Franchise reform, the movement to replace local regulatory regimes that govern legacy cable monopolies with statewide franchise agreements that encourage competition and improved service, has taken on new urgency. Encouraged by telephone companies eager to provide an array of new broadband video services to anxious customers, ten states—Texas, Indiana, North Carolina, South Carolina, New Jersey, California and Michigan—have enacted bipartisan franchise reform since 2005.

Franchise reform lowers the legal burdens traditionally imposed by local franchise agencies. These agencies have long regulated local cable monopolies by creating a single statewide franchise application process through which companies can gain access to the entire state’s market. In addition, franchise reforms restrict or eliminate the sometimes arbitrary concessions imposed by local franchise agencies. Franchise reform, however, does not eliminate the fees which are paid by cable or video broadband providers to local franchise agencies.

Where enacted thus far, franchise reforms benefits have been undeniable. Consumers have enjoyed greater choice and a range of new services, including on-demand video and “a la carte” content selection, at lower cost. Legacy cable providers have responded to new competition by lowering costs and improving service.

While critics of franchise reform predict that statewide reforms, which lack build-out provisions requiring broadband providers to serve low-income communities, will privilege wealthy households at the expense of the poor, such concerns have not been borne out by experience. New broadband providers, including AT&T and Verizon, have deployed high-speed broadband services to wealthy and lowincome neighborhoods alike.

Finally, while local governments that depend upon franchise fees for tax revenue have not been harmed by franchise reform, long-term technological trends suggest that municipalities would do well to wean themselves from franchise fee dependence sooner, rather than later.

The benefits to consumers, including greater choice, improved service, and lower cost, require remaining states to bring reforms that help end local monopolies and usher in widespread broadband adoption in the United States.

I Want My MTV

steven.titch@reason.org (Steven Titch) — Mon, 01 Jan 2007 00:00:00 EST

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