The Columbus Compact

Forgive us if we start at the end. Or, not to put too fine a point on it, an end of a beginning, perhaps. Federal Communications Commission Chairman Tom Wheeler returned to Ohio State University (sorry – The Ohio State University) this week to deliver the first of what he promises to be a series of speeches that will articulate his regulatory philosophy. There is great symbolism in returning to his alma mater, he said, because “the dateline of my first speech sends a more powerful message than anything you’ll find in the transcript.” He wanted to stress, not just in his words, but in his presence, that the American people is the FCC’s constituency. “That how we connect determines how jobs are created and lives are lived. And that your FCC believes its mission is as integral to the prosperity of the Ohio Valley as Silicon Valley.” The Chairman characterizes himself as “the public’s advocate in the midst of an historic revolution.” So let’s pause to parse out what he sees as the FCC’s role in the revolution.

First, although many think of Chairman Wheeler as a businessman and lobbyist, he is also a passionate historian. He’s identified what he calls the four network revolutions:

• Gutenberg’s Printing Press, which enabled the original information revolution;
• The Railroad -- the first high-speed network -- which enabled the Industrial Revolution;
• The Telegraph, which converted information to signals, paving the way for the telephone, radio and television, and eventually the binary on-off signaling of computers and computing networks.

We are living through the fourth revolution right now, Chairman Wheeler says -- the marriage of computing and connectivity, which some have labeled the information age. Today’s new networks haul isn’t an input to a product, it is the product itself. Our growth industries are today based on the exchange and use of digital information. As such, information networks aren’t ancillary; they are integral. The new networks are even more important to society than were the old ones. “The public,” Chairman Wheeler said, “has the right to be represented as we go through the transition that is the fourth network revolution.”

How we connect with friends and family, how our homes use energy; the efficiency of our transportation network; how we elect our public leaders and engage with government; all are impacted by our new networks. Historically, networks have been a centralizing force, pulling users closer to the place where the technology resided. The new network operates in an opposing manner, pushing activities outward to the edge of the network. The result is an explosion in individual opportunity -- a re-birth of the entrepreneurial dynamism that characterized the pre-industrial era of our nation.

The FCC was born to oversee the third-generation networks of telephony and broadcast and, eventually cable and wireless carriers. The FCC was charged to protect “the public interest, convenience, and necessity” of the nation’s networks. In serving the public interest, the FCC has focused on dual responsibilities:

• First, facilitating dynamic technological change to ensure the U.S. has world-class communications networks.
• Second, ensuring that our networks reflect our civic values, most notably our belief that communications networks should be accessible to all.

Chairman Wheeler identified the great telecommunications transition that the FCC, as the public’s advocate, must help negotiate: a transition from the traditional telephone network many of us grew up with to new, more flexible and efficient digital networks. “The networks of the 21st century,” Chairman Wheeler said, “bear scant physical resemblance to the networks that defined the 20th century.” But the evolution of network technology changes neither the responsibility of networks to the greater society, nor the FCC’s mission to protect the public interest.

Chairman Wheeler said that to fulfill the FCC’s responsibility, he will be guided by competition policy and what he calls the “Network Compact.” Competition, Wheeler notes, is our fundamental national economic policy. He argues that competitive markets produce better outcomes than regulated or uncompetitive markets. “We must protect competition where it exists,” Chairman Wheeler said. “We must promote competition where it may not be fulsome.” The FCC, he said, will work to make sure competitors have key inputs necessary to build out and operate networks and Wheeler used the allocation of spectrum to wireless carriers as an example. “Here’s the bottom line on competition. Our goal should be to ask how competition can best serve the public – and what, if any, action (including governmental action) is needed to preserve the future of network competition in wired or wireless networks.” But, Wheeler added, “It is important to remember… that competition does not and will not produce adequate outcomes in the circumstance of significant, persisting market power or of significant negative externalities. Where those occur, the Communications Act and the interests of our society – the public interest – compel us to act and we will.”

Wheeler defined the Network Compact as the basic rights of consumers and the basic responsibilities of network operators. He identified three key elements of the compact:

• Accessibility: ensuring every American has access to our wired and wireless networks. He highlighted a number of related challenges here: 1) getting the 20% of U.S. households who don’t current subscribe to broadband to adopt it; 2) delivering high-capacity broadband to every school; 3) protecting the right of broadband users to access all lawful content on a network; and 4) ensuring persons with disabilities can get online.
• Interconnection: ensuring the Internet exists as a collection of open, interconnected facilities.
• Public safety and security: ensuring 911 calls go through and that our networks are secure from cyber threats.

Chairman Wheeler’s prepared remarks were quickly applauded. He seemed to be signaling an intention to take a combative stance against any efforts by the telecom giants to squash competition. And, although saying “Regulating the Internet is a nonstarter,” he added, “The Internet is not a law-free zone. It depends upon standards of conduct. And it depends on the ability of the government to intervene in the event of aggravated circumstances.”

Analysts said Chairman walked a careful line and presented himself as a moderate. “He doesn’t want to be pigeon-holed,” said Gene Kimmelman, a former senior antitrust official at the Department of Justice. “His speech comes across as forceful pragmatism.”

But remarks made by Chairman Wheeler in a question-and-answer session after the speech raised some eyebrows.

• Asked if he specifically favors restricting the ability of the biggest mobile companies to bid in the auctions, Chairman Wheeler said: “You’re going to have to wait for that answer. We’re going to come out with a rule that explains that.” But he specifically mentioned an April filing by the Department of Justice urging the FCC to craft auction rules that ensure AT&T and Verizon Wireless aren't able to gobble up all the spectrum below 1 gigahertz. The Justice Department argued T-Mobile and Sprint need the spectrum in order to compete with AT&T and Verizon. It said rules favoring the smaller companies "could improve the competitive dynamic among nationwide carriers and benefit consumers." A number of House Republicans have argued that barring the biggest carriers from the auction may depress bidding and ultimately cost taxpayers money.
• In the Q&A, Wheeler said television broadcasters should consider cashing in their existing channels during the FCC’s upcoming incentive auction -- then continuing operations through channel-sharing arrangements with other broadcasters: “That, to me seems, to be a pretty good deal.” He said the sharing deals are particularly sweet for broadcasters because FCC must-carry rules would ensure that the broadcasters’ TV transmissions continue reaching consumer homes through cable-system carriage in their markets. In addition, the channel-sharing deals would give “forever cash-starved” public broadcasters a “pot full of cash” that they could use as an endowment to keep their noncommercial operations going while using spectrum more efficiently.
• In response to a question, Wheeler indicated that he would not oppose some type of usage-based broadband pricing, with Internet service providers charging so-called data hogs different amounts for service depending on how much data they receive and transmit. Those types of pricing plans have been strongly opposed by some consumer-protection groups. Wheeler said variable pricing and service plans represented the effects of competition. “We might see a two-sided market,” he added, in which a company like Netflix might pay an Internet service provider to guarantee that Netflix customers get the best available transmission speeds.

The last point really rubbed public interest advocates. “Allowing such anti-competitive practices would be antithetical to his promises to police market abuses and promote competition. Letting incumbent phone and cable companies exploit their dominant position by charging people more to use certain websites and services is a disastrous idea,” said Craig Aaron and Derek Turner of Free Press. Internet service providers “should not be allowed to charge some websites or services extra just so those websites and services actually work. ISP subscribers are not hostages to be auctioned off to web services. There are all sorts of reasons for this but, just to pick one, in order for this type of “fast lane” to make sense there needs to be a “slow lane” that is bad enough to make someone like Netflix need to pay to get out of it. And just to pick two, this sort of pricing structure works to freeze out new innovation from companies that cannot afford to outbid incumbents,” said Public Knowledge’s Michael Weinberg. Both groups called on Chairman Wheeler to clarify his remarks.

Writing for the American Enterprise Institute’s TechPolicyDaily, Boston College Law School assistant professor Daniel Lyons defended Wheeler’s remarks saying Wheeler seems to define competition to “include competition among different pricing structures and business models. Consumers ultimately benefit from efforts by broadband providers, and Internet content providers, to find new and potentially more efficient ways to serve consumers. Companies with popular pricing structures will attract consumers. Bad pricing models will wither on the vine.” Lyons concludes, “Regulators should resist pressure to disrupt this virtuous cycle and pick winners and losers. Rather, they should intervene primarily when companies abuse market power in ways that harm consumers. Overall, consumers benefit from companies’ experiments to find new and more efficient pricing structures to govern an increasingly diverse marketplace.”

Interestingly, Lyons questions the FCC’s “checkered history of using regulations and subsidies in largely unsuccessful efforts to manufacture competition,” but seems to ignore the market failure of deregulation. David Lazarus of the Los Angeles Times notes that since regulators deregulated the market in California, monthly landline telephone rates have risen 260% in the last five years. Meanwhile, quality of service declined substantially earlier this year when AT&T slashed the number of minutes available under its measured plan 25%, to 168 a month from 225, and raised the price of extra service to 6 cents from 4 cents a minute. Natalie Billingsley, a senior official at the Division of Ratepayer Advocates in the California Public Utilities Commission, didn't mince words when asked about the effect of phone deregulation: "It has substantively been a failure. All we have seen since deregulation is a constant increase in prices."

"What you have to remember," Billingsley said, "is that, by law, phone companies are required to share their landline networks with competitors. They don't have to do that with wireless. So they're doing everything they can to push people into wireless."

Lazarus writes, “I suspect that neither AT&T nor Verizon would shed a tear if they could get away with shutting down their landlines completely, which a growing number of states seem open to allowing. Florida, North Carolina, Texas and Wisconsin are among those that already have passed laws permitting phone companies to end landline service. AT&T and other telecom companies failed in a bid to weaken California landline regulations this year. In the meantime, prices will keep going up and service will keep diminishing.”

Which brings us around to our start. Who will advocate for consumers as we transition from the old, regulated, monopoly-provided telephone system to the new wireless and Internet networks of tomorrow? We end with Chairman Wheeler’s message in Columbus:

“The most important thing I hope you will take away from my remarks today is not what the FCC is doing, and but why we are doing it. And the answer to that question is that we are the people's representatives, acting on behalf of the public, who have the responsibility to maintain the values you find important.” He added: “the new world of networks can be – must be – innovative and dynamic and competitive and serve consumer expectations.”

We’ll have more news on the digital transition next week. Until then, we’ll see you in the Headlines.

Note:

In addition to the Columbus speech, Chairman Wheeler also released a free e-book this week. NET EFFECTS: The Past, Present, and Future Impact of Our Networks. It’s a look at the history of the three network revolutions -- the printing press, the railroad, and the telegraph and telephony -- and how the fourth network revolution -- digital communications -- will be informed by those experiences.