Scott Wallsten

[Commentary] A fun aspect of this Federal Communications Commission’s modus operandi of announcing new rules and rule changes by op-ed and “fact-sheet” is all the hours one can spend speculating on what the upcoming rule will say. In my case, that mostly involves not having enough information to facilitate useful discussion and epic confusion about how to evaluate proposals that aren’t actually proposals. Recently, for example, I fretted about the potential issues raised by the “standard license” the fact sheet discussed. This week, my confusion regarding the standard license continues, spurred by the fact sheet’s claim that the FCC will be a “regulatory backstop.”

Let’s review the standard license paragraph: "Standard License: The proposed final rules require the development of a standard license governing the process for placing an app on a device or platform. A standard license will give device manufacturers the certainty required to bring innovative products to market. Programmers will have a seat at the table to ensure that content remains protected. The license will not affect the underlying contracts between programmers and pay-TV providers. The FCC will serve as a backstop to ensure that nothing in the standard license will harm the marketplace for competitive devices." What is the FCC backstopping and what does that mean? Perhaps the FCC intends to give itself veto power over the creation of the standard license that is to be designed by some group that remains undefined but for programmers who “will have a seat at the table.” Someday we’ll know what the FCC means to include in a standard license and the back of what, exactly the FCC intends to stop. When that happens some people will breathe a sigh of relief and others will protest loudly. We just don’t know which groups will be doing which yet.

Even though the election is still weeks away, it’s useful to look at one goal that most people share across the political spectrum: closing the digital divide, especially one based on income. Republican Federal Communications Commission (FCC) Commissioner Ajit Pai, for example, recently released his own plan intended to spur broadband infrastructure investment in low-income areas. Given this bipartisan agreement about the goal, it’s time to think seriously about how to get there. As it turns out, we really don’t know the answer yet.

Like any normal good, where demand increases as income rise, wealthier people adopt broadband earlier and are willing (and able) to pay more for higher quality. Unlike many normal goods, as a society we hope that broadband access can help mitigate problems related to income inequality rather than being another symptom of it. The problem is that despite the FCC’s commitment to spending $2.5 billion per year subsidizing broadband for low-income people, we simply do not know how to close this divide. Broadband subscription rates for low-income people have increased rapidly, just as they have for upper-income people, but the gap in broadband adoption across income levels has remained relatively constant.

[Commentary] It can take weeks, and sometimes months, for the Federal Communications Commission to release an order they voted on. Unfortunately, this process is standard operating procedure at the FCC.

The key question is whether the absence of a public text of what the commissioners voted on plus editorial privileges allows for substantive changes in the order or simply fixing typos. Small changes can tilt rules to favor or disadvantage different groups enough to be valuable to someone but not enough to cause an uproar. Such changes should not be possible to make in the shadows.

One simple change to the FCC's rule-making process would address the problem: For final orders, publish the text on which the commissioners will vote before the vote begins. The commission could still grant editorial privileges, but it would then be possible to see what has changed between the vote and the final, published rule.

[Wallsten is vice president for research and senior fellow at the Technology Policy Institute]

[Commentary] Despite the controversy surrounding the proposed merger of Comcast and Time Warner Cable, "the question regulators and antitrust authorities must answer is the same as it is for any merger."

Regulators must determine if "expected benefits that flow from increased efficiencies outweigh the chances that the merger could increase the incentive and ability of the combined firm to behave in anticompetitive behavior and the magnitude of those effects."

A merger would potentially yield benefits to business customers because the increased area the merged companies would cover would make it less costly to connect customers with multiple office locations. The benefits for residential customers would be dependent on such factors as the schedule for infrastructure upgrades and how much current TWC consumers value the expanded video-on-demand library and faster broadband connection speeds.

It is difficult to predict the effect on innovation, because although fewer firms in an industry "may reduce the number of innovative paths explored," larger firms could have stronger incentives to innovate if scale allows higher returns to investment. In addition, it is not clear how much increased revenues expected from cost efficiency will affect prices for the consumer.

I find no realistic theory why larger distributors would receive better carriage deals for content than smaller distributors. The primary reason for the theoretical ambiguity is that while the content provider needs access to subscriber, the distributor needs content to distribute. Regardless, a better negotiating position does not necessarily mean harm for consumers.

Given rapidly increasing programming costs, a reduction in the rate of increase due to an improved negotiating position may benefit, rather than harm, consumers if it has any effect at all. Concerning broadband, I warn regulators and antitrust authorities against simply determining if the merged company has the incentive to bock or degrade online content.

The question is whether the merger increases the incentive and ability to do so and, if so, does the increase pose an anticompetitive threat. I also warn against considering such issues as customer satisfaction when considering the effects of the merger. Comcast and Time Warner Cable rate similarly in customer surveys, and no evidence suggests that the merger would make it worse.

[Commentary] The White House is touting its plan to upgrade Internet connections to schools, and the Federal Communications Commission -- nominally, an independent regulatory agency -- has announced a $2 billion “down payment” using cash from “reserve funds.” Why, one might ask, does the Federal Communications Commission have bigger reserves than a Fortune 500 corporation? The FCC has over a billion dollars, growing fast and burning a hole in its pocket, due to recent “reforms” of the scandal-plagued high-cost portion of the Universal Service Fund (USF).

The program is supposed to extend phone service to outlying areas via the “High Cost Fund,” recently renamed the “Connect America Fund.” Rather than let the program wither, the FCC continued to collect USF taxes, diverting them to a slush fund. In 2012, $560 million poured into it; in 2013 it collected $700 million more. Stunning as it may sound, the money comes largely from low-income telephone users who pay a hefty 16.4 percent tax to make long-distance phone calls the old-fashioned (pre-Skype) way.

“E-Rate” is now called “ConnectEd.” Proponents of increased spending have not presented a shred of evidence that additional spending on the program is worth the cost, and act as if dreamy stories about “ultra broadband” and “technology in the classroom” justify the mission. Yet, while the asserted results are illusory, the costs are real, and the tax that funds it falls disproportionately on low-income consumers. It’s a “soak the poor” scheme that has no justification in law or policy.
[Hazlett is H.H. Macaulay Endowed Professor of Economics at Clemson University. Wallsten is vice president for Research and senior fellow at the Technology Policy Institute and senior fellow at the Georgetown University Center for Business and Public Policy]