Discovery Institute

September 11, 2015
More On What's In Store for the FCC's Open Internet Rules

Hal Singer has discovered that total wireline broadband investment has declined 12% in the first half of 2015 compared to the first half of 2014. The net decrease was $3.3 billion across the six largest ISPs. As far as what could have caused this, the Federal Communications Commission's Open Internet Order "is the best explanation for the capex meltdown," Singer writes.

Despite numerous warnings from economists and other experts, the FCC confidently predicted in paragraph 40 of the Open Internet Order that "recent events have demonstrated that our rules will not disrupt capital markets or investment."

Chairman Wheeler acknowledged that diminished investment in the network is unacceptable when the commission adopted the Open Internet Order by a partisan 3-2 vote. His statement said:

Our challenge is to achieve two equally important goals: ensure incentives for private investment in broadband infrastructure so the U.S. has world-leading networks and ensure that those networks are fast, fair, and open for all Americans. (emphasis added.)

The Open Internet Order achieves the first goal, he claimed, by "providing certainty for broadband providers and the online marketplace." (emphasis added.)

Yet by asserting jurisdiction over interconnection for the first time and by adding a vague new catchall "general conduct" rule, the Order is a recipe for uncertainty. When asked at a February press conference to provide some examples of how the general conduct rule might be used to stop "new and novel threats" to the Internet, Wheeler admitted "we don't really know...we don't know where things go next..." This is not certainty.

As Singer points out, the FCC has speculated that the Open Internet rules would generate only $100 million in annual benefits for content providers compared to the reduction of investment in the network of at least $3.3 billion since last year. While the rules obviously won't survive cost-benefit analysis, I'm not sure they will survive some preliminary questions and even get to a cost-benefit analysis stage.

Continue reading at Technology Liberation Front

August 24, 2015
Special Access Regulation Would Harm Competition

A British telecom executive alleges that Verizon and AT&T may be overcharging corporate customers approximately $9 billion a year for wholesale "special access," services, according to the Financial Times.

The Federal Communications Commission is presently evaluating proprietary data from both providers and purchasers of high-capacity, private line (i.e., special access) services. Some competitors want nothing less than for the FCC to regulate Verizon's and AT&T's prices and terms of service. There's a real danger the FCC could be persuaded-as it has in the past-to set wholesale prices at or below cost in the name of promoting competition. That discourages investment in the network by incumbents and new entrants alike.

As researcher Susan Gately explained in 2007, a study by her firm claimed $8.3 billion in special access "overcharges" in 2006. She predicted they could reach $9.0-$9.5 billion in 2007. This would mean that special access overcharges haven't increased at all in the past seven to eight years, implying that Verizon and AT&T must not be doing a very good job "abusing their landline monopolies to hurt competitors" (the words of the Financial Times writer).

As I wrote in 2009, researchers at both the National Regulatory Research Institute (NRRI) and National Economic Research Associates (NERA) pointed out that Gately and her colleagues relied on extremely flawed FCC accounting data. This is why the FCC required data collection from providers and purchasers in 2012, the results of which are not yet publicly known. Both the NRRI and NERA studies suggested the possibility that accusations of overcharging could be greatly exaggerated. If Verizon and AT&T were over-earning, their competitors would find it profitable to invest in their own facilities instead of seeking more regulation.

Verizon and AT&T are responsible for much of the investment in the network. Many of the firms that entered the market as a result of the 1996 telecom act have been reluctant to invest in competitive facilities, preferring to lease facilities at low regulated prices. The FCC has always expressed a preference for multiple competing networks (i.e., facilities-based competition), but taking the profit out of special access is sure to defeat this goal by making it more economical to lease.

July 2, 2015
Google probe may be revived

Attorneys general from forty states and the District of Columbia have asked the United States Court of Appeals for the Fifth Circuit to lift a preliminary injunction preventing a state attorney general from investigating Google's business practices.

In 2011, Google signed a non-prosecution agreement with the U.S. Department of Justice in which it acknowledged that it improperly assisted Canadian online pharmacy advertisers target U.S. consumers. Google agreed to forfeit $500 million and to adopt compliance and reporting measures.

"State Attorneys General have reason to believe that Google's services are still being used for unlawful activities," according to a brief filed on behalf of Mississippi AG James M. Hood, III at the end of June.

Google asserts that it's not liable for displaying information created by third parties. "Congress broadly immunized interactive computer service providers from state regulation for displaying information created by others," according to the company's December 2014 motion for preliminary injunction.

However, three federal appellate courts have ruled that Section 230 of the Communications Decency Act, to which Google refers, does not confer unlimited immunity.

Continue reading "Google probe may be revived" »

June 9, 2015
Modernize the Copyright Office

The U.S. Copyright Office would be given greater autonomy pursuant to a proposal unveiled by two members of Congress last week, and the agency's Director would be appointed for a ten year term by the President upon the advice of a bipartisan, bicameral commission and with the consent of the Senate.

The Copyright Office was established as a separate department in the Library of Congress in 1897. The head of the Copyright Office, known as the Register of Copyrights, serves at the pleasure of the Librarian of Congress. But the Copyright Office has outgrown the Library of Congress. For example, the Library of Congress hasn't delivered the necessary information technology environment so the Copyright Office can meet or exceed customer expectations in the Digital Age.

An efficient copyright system increases the supply of creative content by incentivizing content creators and rewarding investors who underwrite the cost of bringing the creations to market. The Copyright Office must make extensive use of IT to process copyright registration applications, preserve deposited copies of copyrighted works and maintain records of the transfer of copyright ownership. If the Copyright Office fails, there could be unintended consequences for the copyright system.

Continue reading "Modernize the Copyright Office" »

April 19, 2015
The Wrong Way to End the Terrestrial Radio Exemption

A bill before Congress would for the first time require radio broadcasters to pay royalty fees to recording artists and record labels pursuant to the Copyright Act. The proposed Fair Play Fair Pay Act (H.R. 1733) would "[make] sure that all radio services play by the same rules, and all artists are fairly compensated," according to Congressman Jerrold Nadler (D-NY).

... AM/FM radio has used whatever music it wants without paying a cent to the musicians, vocalists, and labels that created it. Satellite radio has paid below market royalties for the music it uses ...
The bill would still allow for different fees for AM/FM radio, satellite radio and Internet radio, but it would mandate a "minimum fee" for each type of service for the first time.

A February report from the U.S. Copyright Office cites the promotional value of airtime as the longstanding justification for exempting terrestrial radio broadcasters from paying royalties under the Copyright Act.

In the traditional view of the market, broadcasters and labels representing copyright owners enjoy a mutually beneficial relationship whereby terrestrial radio stations exploit sound recordings to attract the listener pools that generate advertising dollars, and, in return, sound recording owners receive exposure that promotes record and other sales.
The Copyright Office now feels there are "significant questions" whether the traditional view remains credible today. But significant questions are not the same thing as clear evidence.

Continue reading at Technology Liberation Front

February 5, 2015
This Is Not How We Should Ensure Net Neutrality

Chairman Thomas E. Wheeler of the Federal Communications Commission unveiled his proposal this week for regulating broadband Internet access under a 1934 law. Since there are three Democrats and two Republicans on the FCC, Wheeler's proposal is likely to pass on a party-line vote and is almost certain to be appealed.

Free market advocates have pointed out that FCC regulation is not only unnecessary for continued Internet openness, but it could lead to years of disruptive litigation and jeopardize investment and innovation in the network.

Writing in WIRED magazine, Wheeler argues that the Internet wouldn't even exist if the FCC hadn't mandated open access for telephone network equipment in the 1960s, and that his mid-1980s startup either failed or was doomed because the phone network was open whereas the cable networks (on which his startup depended) were closed. He also predicts that regulation can be accomplished while encouraging investment in broadband networks, because there will be "no rate regulation, no tariffs, no last-mile unbundling." There are a number of problems with Chairman Wheeler's analysis. First, let's examine the historical assumptions that underlie the Wheeler proposal.

Continue reading at Technology Liberation Front

January 6, 2015
Secret conspiracy to revive SOPA?

According to Google, the Motion Picture Association of America (MPAA) has:

  • "conspired to achieve [the Stop Online Piracy Act (SOPA)]'s goals through non-legislative means,"

  • "pointed its guns at Google," and

  • "did the legal legwork for the Mississippi State Attorney General."

Where to begin?

If MPAA and its members are protecting their rights through "non-legislative means," is that a bad thing? Absolutely not. It simply means they are attempting to protect their rights on the basis of pre-existing law rather than trying to enact new law. Who could object to this? What does one say in response to Google's allegation that motion picture studios have pointed their guns at the search engine? That they have the power to pull the trigger a kill Google? Is this paranoid, delusional, hysterical or all three?

Jim Hood, the Attorney General of Mississippi, is also president of the National Association of Attorneys General. As chairman of NAAG's intellectual property committee, Hood sent a letter to Google in November, 2013 that began as follows:

As you are aware, the overwhelming evidence shows that Google facilitates and profits from numerous illegal online activities ranging from piracy to illegal drug sales and human trafficking. Yet Google has repeatedly refused to take reasonable but important steps that would reduce the ability of criminals to profit from their crimes. Google's inaction is not merely a failure to do the right thing. Rather, it raises serious questions as to whether Google is engaged in unlawful conduct itself.

Continue reading "Secret conspiracy to revive SOPA?" »

November 19, 2014
The Myth That Title II Regulation of Broadband and Wireless Would Be Comparable

Supporters of Title II reclassification for broadband Internet access services point to the fact that some wireless services have been governed by a subset of Title II provisions since 1993. No one is complaining about that. So what, then, is the basis for opposition to similar regulatory treatment for broadband?

Austin Schlick, the former FCC general counsel, outlined the so-called "Third Way" legal framework for broadband in a 2010 memo that proposed Title II reclassification along with forbearance of all but six of Title II's 48 provisions. He noted that "this third way is a proven success for wireless communications." This is the model that President Obama is backing. Title II reclassification "doesn't have to be a big deal," Harold Feld reminds us, since the wireless industry seems to be doing okay despite the fact mobile phone service was classified as a Title II service in 1993.

To be clear, only mobile voice services are subject to Title II, since the FCC classified broadband access to the Internet over wireless networks as an "information" service (and thus completely exempt from Title II) in March of 2007.

Sec. 6002(c) of the Omnibus Budget Reconciliation Act of 1993 (Public Law 103-66) modified Sec. 332 of the Communications Act so commercial mobile services would be treated "as a common carrier ... except for such provisions of title II as the Commission may specify by regulation as inapplicable..."

The FCC commendably did forbear. Former Chairman Reed E. Hundt would later boast in his memoir that the commission "totally deregulated the wireless industry." He added that this was possible thanks to a Democratic Congress and former Vice President Al Gore's tie-breaking Senate vote.

Continue reading at Technology Liberation Front

November 14, 2014
Combating online piracy with better and more convenient legitimate services

The motion picture industry has established a search site to help consumers find non-pirated movies and TV shows available on the

A study by NetNames estimated that 23.8% of all the bandwidth consumed in North America, Europe and Asia-Pacific in January 2013 was used to access pirated content.

There are more than 100 legal online services offering movie and television content in the U.S., according to Chairman and CEO Senator Chris Dodd of the Motion Picture Association of America, and a study by KPMG found that 94% of the most popular and critically acclaimed films were legally available online in December 2013.

In the opinion of Google, which has taken steps including downranking (in search results) sites that generate a large number of removal notices pursuant to the Digital Millenium Copyright Act,

Piracy often arises when consumer demand goes unmet by legitimate supply. As services ranging from Netflix to Spotify to iTunes have demonstrated, the best way to combat piracy is with better and more convenient legitimate services. The right combination of price, convenience, and inventory will do far more to reduce piracy than enforcement can. is an important step in that direction, however it's hard to compete with free. Both enforcement and convenient legitimate sources are needed to combat digital piracy.

October 30, 2014
How Much Tax?

As I and others have recently noted, if the Federal Communications Commission reclassifies broadband Internet access as a "telecommunications" service, broadband would automatically become subject to the federal Universal Service tax--currently 16.1%, or more than twice the highest state sales tax (California-7.5%), according to the Tax Foundation.

Erik Telford, writing in The Detroit News, has reached a similar conclusion.

U.S. wireline broadband revenue rose to $43 billion in 2012 from $41 billion in 2011, according to one estimate. "Total U.S. mobile data revenue hit $90 billion in 2013 and is expected to rise above $100 billion this year," according to another estimate. Assuming that the wireline and wireless broadband industries as a whole earn approximately $150 billion this year, the current 16.1% Universal Service Contribution Factor would generate over $24 billion in new revenue for government programs administered by the FCC if broadband were defined as a telecommunications service.

The Census Bureau reports that there were approximately 90 million households with Internet use at home in 2012. Wireline broadband providers would have to collect approximately $89 from each one of those households in order to satisfy a 16.1% tax liability on earnings of $50 billion. There were over 117 million smartphone users over the age of 15 in 2011, according to the Census Bureau. Smartphones would account for the bulk of mobile data revenue. Mobile broadband providers would have to collect approximately $137 from each of those smartphone users to shoulder a tax liability of 16.1% on earnings of $100 billion.

Continue reading at Technology Liberation Front

October 21, 2014
Tax Consequences of Net Neutrality

Would the Federal Communications Commission expose broadband Internet access services to tax rates of at least 16.6% of every dollar spent on international and interstate data transfers--and averaging 11.23% on transfers within a particular state and locality--if it reclassifies broadband as a telecommunications service pursuant to Title II of the Communications Act of 1934?

As former FCC Commissioner Harold Furchtgott-Roth notes in a recent Forbes column, the Internet Tax Freedom Act only prohibits state and local taxes on Internet access. It says nothing about federal user fees. The House Energy & Commerce Committee report accompanying the "Permanent Internet Tax Freedom Act" (H.R. 3086) makes this distinction clear.

The law specifies that it does not prohibit the collection of the 911 access or Universal Service Fund (USF) fees. The USF is imposed on telephone service rather than Internet access anyway, although the FCC periodically contemplates broadening the base to include data services.
The USF fee applies to all interstate and international telecommunications revenues. If the FCC reclassifies broadband Internet access as a telecommunications service in the Open Internet Proceeding, the USF fee would automatically apply unless and until the commission concluded a separate rulemaking proceeding to exempt Internet access. The Universal Service Contribution Factor is not insignificant. Last month, the commission increased it to 16.1%. According to Furchtgott-Roth,
At the current 16.1% fee structure, it would be perhaps the largest, one-time tax increase on the Internet. The FCC would have many billions of dollars of expanded revenue base to fund new programs without, according to the FCC, any need for congressional authorization.

Continue reading at Technology Liberation Front

October 20, 2014
Study shows credit card companies collect millions for cyberlockers that infringe copyright laws

A report by NetNames for the Digital Citizens Alliance has found that the "overwhelming use of cyberlockers is for content theft." At least 79-84% of sampled files on 30 of the most popular online file sharing destinations infringed copyright, according to the analysis.

The report also estimates that the sites generate profit margins of 88-96% on combined revenue of over $95 million per year. The primary sources of income are premium account subscriptions enabled by payment processors such as VISA and MasterCard, and advertising.

Every cyberlocker that offered paid premium accounts to users provided the ability to pay for those subscriptions by Visa or MasterCard, with only one exception. Only a single cyberlocker accepted PayPal.

Continue reading "Study shows credit card companies collect millions for cyberlockers that infringe copyright laws" »

June 17, 2014
First Sale in the Digital Age

The House Judiciary Committee examined the "first sale" doctrine at a recent field hearing in New York City as part of the committee's comprehensive review of copyright. The first sale doctrine made perfect sense during the Industrial Age, but in some respects it's problematic for the Digital Age.

Consumers have the right to give away, lend or sell a book that they own, thanks to a 1908 Supreme Court decision that was subsequently codified by Congress at 17 U.S.C. ยง109(c). There's no dispute that "[p]hysical copies of works in a digital format, such as CDs or DVDs, are [covered] in the same way as physical copies in analog form."

However, consumers with an Internet connection are downloading more and more digital content from remote servers pursuant to license agreements. And the first sale doctrine does not apply to digital files that are transmitted from machine to machine, according to the Copyright Office, because transmission results in two copies (one on each machine).

Continue reading "First Sale in the Digital Age" »

June 2, 2014
Son's Criticism of U.S. Broadband Misleading and Misplaced

Chairman and CEO Masayoshi Son of SoftBank again criticized U.S. broadband (see this and this) at last week's Code Conference.

The U.S. created the Internet, but its speeds rank 15th out of 16 major countries, ahead of only the Philippines. Mexico is No. 17, by the way.

It turns out that Son couldn't have been referring to the broadband service he receives from Comcast, since the survey data he was citing--as he has in the past--appears to be from OpenSignal and was gleaned from a subset of the six million users of the OpenSignal app who had 4G LTE wireless access in the second half of 2013.

Oh, and Son neglected to mention that immediately ahead of the U.S. in the OpenSignal survey is Japan.

Continue reading at Technology Liberation Front

May 29, 2014
Copyright Alert System successfully launches

Over 1.3 million notices of alleged copyright infringement were sent to users of peer-to-peer (P2P) networks suspected of illegally sharing copyrighted material over a ten month period beginning in late February 2013, according to the Center for Copyright Information (CCI).

The Copyright Alert System, a voluntary private sector initiative of the CCI that is "based on the premise that most consumers will take corrective action if alleged copyright infringement involving their Internet account is brought to their attention," generated the notices.

P2P networks are monitored on behalf of recording artists and music producers, filmmakers, and creators and distributors of movies and television shows, and notices of alleged copyright infringement are generated through the use of publicly available IP address data. This information is shared with Internet Service Providers (ISPs), who then deliver up to six separate alerts (for repeat violations) to the corresponding account holders without sharing any personally-identifiable information about their customers.

Continue reading "Copyright Alert System successfully launches" »

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