Convergence 2.0

With the notable exception of video programming, the FCC has traditionally focused its regulatory efforts on certain portions of our communications infrastructure: The public switched telephone network, the coaxial cable plant, the cellular network, broadcast towers, and satellite space and earth stations. To the extent computing capability and devices (though arguably inappropriate, let’s call computing capability and devices “nodes”) have been considered by the FCC at all, it has targeted the treatment of nodes by the operators of certain portions of the Internet’s infrastructure rather than the manufacturers and distributors of nodes themselves. The FCC has also regulated various portions of the Internet’s infrastructure using separate regulatory regimes based on their technical characteristics.

Convergence 1.0 – the convergence of communications and computing capabilities – began disrupting this “stovepiped” regulatory model in 1966 when the FCC began is Computer Inquiries. Convergence 2.0 – the complete integration of computing, networks, nodes, software, services, and content – is now rendering the model hopelessly obsolete:

• Computing capabilities have become inseparable from network infrastructure;
• Different network infrastructures (e.g., mobile and fixed) are beginning to provide integrated services;
• A single type of node can access different network infrastructures (e.g., a smartphone can access a fixed or mobile network);
• Multiple types of nodes can use the same operating systems and software (e.g., a converged OS X and iOS are expected to power the Apple iPhone, iPad, Apple TV, Apple laptops, and Apple desktop computers with in the next two years);
• Multiple network and node types can provide the same type of services; and
• Content can be created and distributed by anyone using any combination of service, software, node, network, and computing capabilities.

The convergence of networks, nodes, software, services and content into platforms offering seamless communications experiences is already driving disruptive competition in the communications sector. I expect it will soon be driving disruptive regulatory change as well.

Cloud Computing

Cloud computing isn’t new. It’s on the list because it is only now beginning to impact end-user behavior – the issue at which the FCC tends to target its regulation.

As cloud computing matures, it is making users truly node and location independent. Services like Dropbox and Evernote synchronize all of a user’s files across all their nodes and the nodes of others with whom they wish to share. Automatic syncing of files and preferences is making it easy for families to share nodes. If I need to work with image files, I might take my 17-inch laptop on the road while other family members use the desktop and iPad. When I return and want to use the desktop, they can use the laptop knowing that all the files and preferences they’ve changed while I was away will be there waiting for them. Although smartphones are still generally tied to particular users based on phone numbers, services like Google Voice are rendering this limitation on node sharing less relevant. All nodes are becoming capable of providing both phone and computing capabilities that differ primarily in form factor rather than use.

Cloud computing is also proving to be one of the “killer apps” driving the mobile data explosion and spectrum crunch. When the “need for speed” was debated in the National Broadband Plan proceeding, many assumed additional capacity would be needed to accommodate future applications with high peak or sustained throughput. Greater capacity is needed right now due to the use of existing applications that are leveraging the capabilities and convenience of the cloud. “Applications” that once required little or no Internet bandwidth at all – e.g., transferring a file from home to the office using a thumb drive – now generate Internet traffic multiple times per day to access the cloud’s enhanced capabilities. Cloud computing also generates traffic by making current applications more convenient to use. Recent reports indicate that Apples’s cloud-based Siri application has already doubled data use on the iPhone.

As these shifts in usage become more prevalent, the FCC’s current approaches to many issues will have to shift as well. I never thought I’d say this, but it’s time the FCC put its head in the cloud.

Hotspot 2.0

Wi-Fi is increasingly being used to offload data traffic from mobile networks, but generally doesn’t provide as seamless an experience as a mobile network, primarily due to authentication and security issues. Hotspot 2.0 promises to bring the mobile network’s end-user experience to Wi-Fi through a standards-based approach. A complementary initiative, the Next Generation Hotspot, is addressing interoperability between Wi-Fi and mobile network operators and service providers on the backend. Together, these two initiatives could break down the walls that currently divide licensed and unlicensed networks.

The integration of unlicensed spectrum into mobile networks raises several questions at the FCC. If these initiatives are successful, should unlicensed spectrum be included in spectrum aggregation analyses (i.e., the spectrum screen)? If enterprise vendors of unlicensed networks using new Wi-Fi technologies are able to successfully compete with licensed mobile network operators, should the FCC attempt to address the potential regulatory disparities between licensed and unlicensed networks? I expect these questions won’t be easy to answer.

Small Cells

Small cells are like Wi-Fi hot spots that use licensed spectrum and are already integrated into mobile networks. Some argue that the spectrum crunch can be solved by increasing capacity with small cell deployment. However, there are both economic and regulatory barriers to widespread deployment of small cells. According to a Gartner report, global mobile data traffic is expected to grow 26-fold between 2010 and 2015, while revenue is expected to double. The gap between data revenues and traffic will tend to limit the availability of capex for extensive small cell deployment.

The regulatory barriers are actually more daunting. Operators often are required to reach agreements with municipalities before deploying small cell networks. AT&T initially submitted an application to the City of Palo Alto on January 14, 2011, to build a small cell network, but is still awaiting a decision more than a year later. The availability of backhaul is also a significant problem. Laying fiber to thousands of small cells mounted on light poles is cost prohibitive and impractical. Wireless backhaul solutions will likely work in many situations but may be unable to handle large numbers of small cells. Cable plant may offer the most practical solution in many instances, but now that cable is entering the mobile space through its relationship with Verizon, cable may not be willing to share its plant with potential competitors. The FCC has taken steps to lower regulatory barriers to antenna siting, but it may need to move faster and go further before we see widespread deployment of small cells.

Although I appreciate the FCC’s desire for unlimited authority, it isn’t surprising that the House has proposed to limit the scope of the FCC’s delegation over spectrum policies granting special market privileges to favored technologies, services, or industry groups. Rather than make things better, FCC attempts to fine tune the market through government privilege typically result in unintended consequences that make things worse.

Spectrum Cleared at Auction Should Not Be Allocated on an Unlicensed Basis

Although the FCC’s policies authorizing the use of encumbered spectrum bands on an unlicensed basis have generally proven successful, the FCC’s attempt to make cleared spectrum available for unlicensed use in the PCS band was largely considered a disaster. Unlicensed advocates are nevertheless urging that Congress permit the FCC to authorize unlicensed use of TV band spectrum that has been cleared through an incentive auction – spectrum that would otherwise be ideal for licensing by auction.

Harold Feld recently extoled the ability of unlicensed devices in the TV bands to work “really well for mobile broadband” and send signals “up to 60 miles.” If Harold is right, such devices could be used to provide mobile broadband services that compete directly with services provided by operators who paid for spectrum licenses at auction. Why should the FCC use the proceeds from the auction of one block to clear another spectrum block and authorize its use for free when both blocks will be used to provide competing services? The FCC hasn’t attempted to answer that question. In the absence of an FCC analysis supported by persuasive evidence demonstrating that the proposed unlicensed approach would be preferable to proven spectrum policy, unlicensed advocates are asking Congress to take a leap of faith. Congress should not accept an invitation to yell “Geronimo” when the U.S. is in the midst of a spectrum crisis that is threatening its competitiveness.

The Case for Unlicensed Spectrum (“Milgrom”) offered by unlicensed advocates asks more questions than it answers. Unlicensed advocates say “the primary benefits of unlicensed spectrum may well come from innovations that cannot yet be foreseen.” (Milgrom at p. 2.) They rely on the “story of Wi-Fi” to provide evidence that unlicensed spectrum increases the “pace of innovation.” (See Milgrom at pp. 9-11, 15.). Wi-Fi is an innovative technology, but it took longer to develop and deploy than mobile technologies. The FCC first set aside spectrum for cellular services in 1981 and spectrum for unlicensed use enabling Wi-Fi in 1985. The first Wi-Fi standard (a spread spectrum technology) wasn’t finalized until 1997, and the first Wi-Fi capable laptop wasn’t released until 1999, almost twenty years after unlicensed spectrum was first made available for spread spectrum technologies. (See Carter, Lahjouji, and McNeil here at pp. 23, 28-29.) By 1999, spread spectrum technology was already widely deployed in licensed mobile networks, and in 2000, the 3GPP standards body released its third-generation standard for mobile networks. Unlicensed advocates don’t attempt to explain why unlicensed and mobile technologies developed at such different rates.

Unlicensed advocates also argue that free access to unlicensed spectrum “encourages a more competitive market structure” because the cost of deploying an unlicensed network is “extremely low” and the “services that operate on unlicensed spectrum increasingly compete with services offered by operators that rely on license spectrum.” (Milgrom at p. 15.) Fair competition benefits consumers, but promoting competition through disparate regulatory treatment of competitive services distorts economic incentives and outcomes. (One of the FCC’s fiscal year 2010 performance goals is to “ensure harmonized regulatory treatment of competing broadband services.”) The low cost of deploying unlicensed networks is in part explained by such regulatory disparity. Unlike licensed spectrum users, unlicensed network operators have no build out requirements and aren’t subject to government oversight of their deployments. They also are not subject to other public interest obligations generally imposed on licensed mobile service providers (e.g., hearing aid compatibility requirements). Given these advantages, operators using TV band spectrum to support mobile services would be free to cherry-pick the most valuable customers while leaving costly deployment in rural areas and lower income communities to licensed operators who are subject to greater regulatory scrutiny. Unlicensed advocates do not attempt to address the competitive or public interest impact of such a policy regime.

Finally, unlicensed advocates argue that using an auction to determine the relative allocation of licensed and unlicensed spectrum would be untenable. (See Milgrom at p. 24-26.) The advocates recognize that the “beneficiaries of unlicensed spectrum are the manufacturers of all these devices,” but then make the mistake of assuming that these manufacturers would be unable to compete in an auction. (See Milgrom at p. 15.) Device manufacturers know how to form consortiums that value and monetize usage rights made available for collective use: They are called patent pools. Google was willing to pay $12.5 billion for Motorola’s patents in order to protect the open use of Android, Google’s mobile operating system. That’s more than double what Verizon Wireless paid to outbid Google for a nationwide spectrum license in the 700 MHz auction. If unlicensed use of cleared, nationwide spectrum in the TV band were as valuable as unlicensed advocates suggest, Google would have had an incentive to actually win the spectrum and make it available on an open basis (known as a “private commons”) similar to its practices with Android. Google could have recouped its investment through fees assessed on other device manufacturers (akin to patent royalties), fees to end users, or a dynamic auction mechanism. Alternatively, a consortium of manufacturers could have bid on the spectrum and made it available to its members as a private commons (akin to a patent pool or the work of the Open Handset Alliance). Unlicensed advocates don’t explain why manufacturers can form consortiums to pool patents or develop a mobile operating system (the Open Handset Alliance is comprised of 84 different companies), yet it is untenable for them to form a consortium to bid on a spectrum license.

If auctioning unlicensed spectrum is possible and unlicensed spectrum provides as much value as licensed spectrum, why do unlicensed advocates so strenuously oppose unlicensed auctions? I can think of at least two reasons. First, if a manufacturing consortium buys spectrum at auction and makes it available as a private commons, the consortium’s use of the spectrum would be subject to the public interest obligations applicable to licensed spectrum (e.g., build out obligations). Second, the manufacturers would have to invest their own capital to buy the spectrum and bear the risk that use of the spectrum on a private commons basis proves less valuable than projected (it is the taxpayer who bears that risk if the spectrum is made available for free). Why should manufacturers pay for spectrum subject to costly public interest obligations and market risk when they can try to convince the government to give them unregulated spectrum for free through the art of political compromise? Congress doesn’t need unlicensed advocates to answer that question.

Auctions Should Not Be Subject to Eligibility Restrictions

The FCC’s attempt in the mid-1990’s to implement policies restricting auction eligibility proved disastrous. In so-called “entrepreneur auction” completed in 1996, the FCC restricted the bidding to small businesses and allowed them to pay 90% of their winning bids through installment payments over ten years. Less than one year after the auction was completed, it was apparent that many bidders would be unable to raise enough money in the private capital markets to meet their obligations to the government, so the FCC suspended their payment obligations. (See CBO Report here.) It took nearly ten years to resolve the legal issues plaguing these licenses and reassign them to operators capable of providing service to the public. Rather than create additional competition, the FCC’s eligibility restrictions deprived the mobile industry of approximately 30 MHz of nationwide bandwidth for close to a decade at a cost to society of $65 billion. (See Hazlett, Porter, and Smith here at pp. 16-18.)

When the 700 MHz auction closed in 2008 (Auction 73), the FCC noted the auction had produced approximately as much revenue for the U.S. Treasury as all other previous auctions combined (excluding the 2006 AWS-1 auction (Auction 66)). (See exhibit here.) Auction 73 generated approximately $19 billion in net winning bids while all other FCC auctions (sans Auction 66) generated approximately $45 billion in net winning bids. (See FCC auction results here.) Although those auctions raised $45 billion on paper, the U.S. Treasury only received approximately $19 billion. Where did the other $26 billion go? It was lost through defaults, bankruptcies, and other licensing debacles enabled by the auction policies Chairman Genachowski wants authority to implement. Twenty-six billion dollars in lost revenue is more than enough evidence to justify limiting the FCC’s authority on this issue.

The House Bill Offers Significant Compromises to the Senate

Those who disfavor Congressional limits on the FCC will try to use the reconciliation process to force “compromise” on these issues. The problem with that approach is that the House bill already offers significant compromises to the Senate. House Republicans initially opposed the Senate’s proposal to reallocate the D-block to public safety, but embraced it in the bill as passed. The House bill also preserves the white spaces concept in the TV band and provides for additional unlicensed allocations in other bands. If the unlicensed and auction eligibility issues ultimately bring the entire spectrum reform bill down, it won’t be due to the unwillingness of House Republicans to compromise. It would be a sign that real compromise was never possible.

“People love to categorize.” Categorization helps us make sense of a complicated world. But, when categorization doesn’t reflect substantial similarities, it obfuscates as much as it illuminates. So it is with communications policy, which is categorized primarily by the technologies used to deliver communications services (“stovepipes”) rather than their impact on consumers. This approach to categorization obfuscates the relevant question – whether a particular regulatory approach maximizes consumer welfare (rather than the prospects of particular competitors).

If the government subsidizes universal broadband, it would render government subsidization of over the air broadcast duplicative.

The ongoing debates about broadcast incentive auctions and universal service reform offer a poignant example of such obfuscation. Because the services that are the subjects of these debates use different technologies, and are thus categorized separately, these debates are being conducted independently. When viewed from the perspective of consumer welfare, however, these debates are inherently interrelated. They both involve regulations that are intended to address the same concern – the widespread dissemination of information to consumers from a multiplicity of sources.

The core question in both debates is to what extent the government should subsidize consumer access to information. Because broadband service provides access to far more information than is possible through over the air broadcast, answering this question in the universal service debate informs the incentive auction debate: If the government subsidizes universal broadband, it would render government subsidization of over the air broadcast duplicative.

The Government Subsidizes Both Universal Service and Television Broadcast

The government subsidizes universal telephone service through mandatory fees. As I explained in a previous post, the broadcast industry is subsidized by the government through the imposition of must-carry obligations on cable providers:

As a result of the success of cable television, it had become clear by 1992 that broadcasters lacked a viable business plan. Because fewer and fewer people were watching broadcast television over the air, broadcasters were having a more difficult time selling advertisements. To prop up the dying broadcast industry, Congress decided to force cable providers to carry broadcast channels on their cable systems. Forced cable carriage ensures that broadcasters reach enough “eyeballs” to satisfy advertisers, which is how broadcasters make money.

Because only about 10% of the population actually watches television transmitted over-the-air, without government mandated must carry, most broadcasters couldn’t sell enough advertisements to survive. Forced cable carriage of broadcast signals is thus an indirect government subsidy financed by cable consumers. (For a detailed must-carry discussion, see Turner Broadcasting System, Inc. v. FCC, 512 U.S. 622 (1994) (Turner I).)

Television broadcasters also enjoy subsidized use of radio spectrum worth up to $33 billion. When Congress provided the FCC with auction authority in 1993, it required that FCC auctions promote multiple purposes (see 47 U.S.C. § 309(j)(3)), including:

• development and rapid deployment of new technologies, products, and services;
• recovery for the public of a portion of the value of the public spectrum resource and avoidance of unjust enrichment; and
• efficient and intensive use of the electromagnetic spectrum.

Auctioning broadcast spectrum would support all of these Congressional objectives. For that reason, during the debates that preceded the 1996 Act, multiple bills were introduced proposing to auction digital broadcast channels. (For a detailed history, see Ellen P. Goodman, Digital Television and the Allure of Auctions: The Birth and Stillbirth of DTV Legislation, 49 FED. COMM. L.J. 517 (1997).) But Congress ultimately bowed to broadcast industry pressure and exempted from auction “initial licenses or construction permits for digital television service given to existing terrestrial broadcast licensees to replace their analog television service licenses.” (See 47 U.S.C. § 309(j)(2).) As a result, broadcasters lacked economic incentives to transition to digital technology more quickly or use their spectrum more efficiently, and the public didn’t recover any of the value of the public spectrum resource the broadcasters squatted on for over a decade.

These broadcast subsidies remain in place today even though “the social opportunity cost of using the TV Band for television broadcasting . . . is conservatively estimated to exceed $1 trillion (in present value).” (Thomas W. Hazlett, Unleashing the DTV BAND: A Proposal for an Overlay Auction (2009) at p. 5.) This opportunity cost dwarfs the benefits of over-the-air broadcast television. Only about 10% of the population actually watches television transmitted over the air and there is little evidence all of these viewers actually need subsidized television. Because over the air broadcast subsidies are not targeted to lower income Americans, the 10% of over the air TV watchers includes middle-class and wealthy Americans who have no need for government subsidies. Given the high opportunity costs and limited benefits of over the air broadcasting, it’s hard to understand why there is any interest at all in subsidizing television.

Both Universal Broadband Service and Television Broadcast Serve the Same Purpose

Preservation of free over-the-air broadcasting was originally intended to promote the widespread dissemination of information from a multiplicity of sources. (See Turner Broadcasting System, Inc. v. FCC, 520 U.S. 180 (1997) (Turner II).) In the Turner decisions, the Supreme Court upheld must carry legislation because broadcasting was “a principal source of information and entertainment for a great part of the Nation’s population.” When the Turner II decisions were issued in the 1990s, 40% of American households still relied on over the air signals for television programming. Although consumption of programming over the air had declined by the 1990s, broadcasting was still a significant source of information.

Over the last decade the facts have changed dramatically. As noted above, broadcasters now serve only about 10% of the population over the air. At the same time that over the air viewership has declined, broadband availability and subscription rates have exploded. Approximately 95% of the U.S. population has access at home to broadband service capable of delivering high quality video (4 mbps downloads) (see sixth broadband deployment report, available here), and approximately 66% of Americans use a high-speed connection at home. Because universal service reform would ensure that all Americans – regardless of their income – have access to broadband offering high quality video capabilities (just like TV), there would no longer be any rationale for subsidizing over the air television. The purpose served by over the air television – the widespread dissemination of information from a multiplicity of sources – would be served by universal broadband access.

Although government subsidies can promote consumer welfare, “[i]t is widely acknowledged that subsidies are generally economically inefficient.” (Erwin H. Bulte, Richard Damania, and Ramón López, On the Gains of Committing to Inefficient Production: Corruption and Low Land Productivity in Latin America (2004) at p. 2.) Subsidizing duplicative programs that serve the same purpose would be blatantly wasteful. Such waste would be particularly egregious in this context due to the high opportunity cost of using spectrum for over the air television. Television programming can be (and primarily is) delivered via the wired Internet, cable, and fixed satellite systems; but the wired Internet, cable and fixed satellite systems cannot provide the mobility that broadcast spectrum can enable.

When universal service reform and incentive auction policies are viewed holistically, the best course of action is clear: enact both policies this year. Universal broadband service would give every American consumer access to more information from more sources than could ever be made available via broadcast television, and freeing broadcast spectrum for mobile use would help the United States meet its goal of leading the world in mobile broadband. The resulting win-win would boost the U.S. economy, create jobs, and spur innovation.

Jack: What for?

Annie: Speeding.

Speed (1994).

Yesterday the FCC released its “Measuring Broadband America” report, “the most comprehensive and rigorous assessment ever of broadband performance in the United States.” (See FCC Chairman Genachowski’s statement here.) The report debunks one of the most widely believed broadband myths with actual data.

Myth: “[C]onsumers aren’t getting the service that they are paying for.”

Fact: “DSL, cable, and fiber-to-the-home are all delivering quality service generally consistent with what they advertise.” (Chairman Genachowski’s statement.)

In fact, consumers are sometimes getting service that is faster than that for which they are paying even when measured during periods of peak usage. The report found that, on average during peak periods, fiber-to-the-home services delivered 114% of advertised speeds (DSL-based services delivered 82% and cable delivered 93% of advertised speeds).

It’s refreshing to see an FCC report based on actual data that sets the record straight.

In a recent op-ed in the Wall Street Journal (subscription required), Mr. Hyman urged regulators to prohibit usage-based broadband pricing and bandwidth caps. (Well, to be fair, he used a metaphor about a frog and a pot of boiling water in lieu of an express request for regulation, but strip away the metaphor, and the intent is the same.) Of course, there is nothing anticompetitive or anti-consumer about usage-based pricing: Mr. Hyman admits that usage-based pricing is a standard pricing mechanism in other contexts, e.g., electricity. So what is his real complaint?

Mr. Hyman’s real complaint is that usage-based pricing and bandwidth caps don’t maximize consumer access to the particular service his company provides. Unfortunately for Netflix, that’s not the relevant question. The government doesn’t (or rather, shouldn’t) regulate pricing to maximize the profits of particular companies or services, and it shouldn’t intervene in the market for broadband access service to maximize the profits of Netflix.

TANSTAAFL, and adding more pricing controls to the existing net neutrality regime would impose costs on everyone. As I’ve posted previously, the business case for fiber deployment already entails considerable risk. Further reducing broadband infrastructure investment incentives to boost Netflix’s profits, when millions of Americans still don’t have access to the best broadband technologies available, would be absurd. In its letter to shareholders describing its Q1 2011 results, Netflix showed 95% growth in operating income and 94% growth in net subscriber additions. That hardly sounds like a company that needs government intervention to “compete.”

At the end of the day, those who oppose net neutrality might be thanking Netflix for making its request for Internet price regulation so transparent – a transparency that often appeared lacking in last year’s net neutrality debates. Net neutrality advocates, however, might be wishing they’d gotten Mr. Hyman the memo.

The American Recovery and Reinvestment Act (ARRA) (pdf available here) required the FCC to develop a National Broadband Plan that contained “an evaluation of the status of deployment of broadband service,” which the FCC thought was synonymous with “availability” and did not include “adoption.” (Emphasis added.) But now the FCC has decided that the words “availability” and “deployment” do include “adoption” as used in Section 706. Did Congress intend that “deployment” mean something different in Section 706 than in the ARRA? What do you think?

The performance of Verizon’s FIOS service demonstrates that the business case for deploying FTTP just isn’t very attractive. Verizon apparently invested $23 billion in FIOS. Unfortunately for Verizon, it appears it’s losing money on that investment. Although Verizon denies losing money on FIOS, it has stopped investing in it. Despite its very high throughput and reliability, consumers aren’t subscribing to FIOS in large numbers, and only a small portion of Verizon’s revenue comes from FIOS. The vast majority of Verizon’s revenue and subscribers come from Verizon’s wireless business. Let’s take a look at the numbers from Verizon’s Q1 2011 earnings results.

(Source available here.)

(Source available here.)

As the above charts show, 63% of Verizon’s revenue comes from wireless while only 14% comes from FIOS Internet subscriptions, and Verizon has about 20x more wireless subscribers (88.4 million) than FIOS Internet connections (4.3 million). Verizon is also adding many more wireless subscribers (1.8 million in Q1) than FIOS subscribers (207,000 in Q1). The most striking statistic is that Verizon added 500,000 LTE subscribers in Q1 2011 – more than twice as many as it added to its FIOS Internet service. With this data its obvious why Verizon isn’t investing more money in FIOS – FTTP is not a strong growth business (presumably because consumers aren’t willing to pay for it).

In OBI Technical Paper 1: The Broadband Availability Gap (available here), the FCC estimated that it would cost $62 billion to deliver FTTP to the 7 million housing units it estimated were unserved by broadband. Can you imagine how the conversation would go if a broadband service provider asked an investor to finance such a build?

Investor: “So you want me to give you $62 billion to serve 7 million households with broadband access that most consumers don’t want when I could build a nationwide 4G LTE network that consumers do want for a lot less money?”

Broadband Service Provider: “Yes.”

Investor: “Are you serious?”

Broadband Service Provider: “Well, Internet advocates want me to build a FTTP network.”

Investor: Laughs and says “Ask them for the money.”

Many Internet advocates would say that’s why government should own and operate an FTTP network. But the government hasn’t built a much less expensive wireless public safety network nearly ten years after September 11. In the current budget environment, good luck relying on government to build FTTP networks any time soon.

The best chance for nationwide broadband is reform of the Universal Service Fund (USF) to support broadband networks. But the FCC’s been working on USF reform for years and hasn’t yet made any real progress. Instead, the FCC’s been hard at work on investment-killing initiatives like net neutrality and roaming. (See my post here.)

If we really want universal broadband access to high throughput wired and wireless networks, it’s time to get serious about adopting policies that promote investment and eliminating policies that kill investment. We need USF reform now and more spectrum for mobile broadband. What we don’t need is more regulation that shifts revenues from infrastructure investment to those who would take advantage of regulatory arbitrage (e.g., net neutrality).

Last Friday the FCC released its Seventh Report on the availability of broadband capability to Americans. (A pdf of the report is available here.) For the second time the FCC found “that broadband is not being deployed in a reasonable and timely fashion to all Americans.” (Report at ¶ 1.)

This is not surprising. As I’ve noted before, the FCC is now using its reports to pursue a more regulatory agenda. The FCC’s rationale, however, is very surprising. Its new interpretation of Section 706 is so broad it empowers the FCC to regulate virtually every aspect of broadband and the Internet.

Its new interpretation of Section 706 is so broad it empowers the FCC to regulate virtually every aspect of broadband and the Internet.

The relevant statute (section 706(b)) requires the FCC to determine whether broadband is being “deployed” to all Americans in reasonable and timely fashion. The FCC complied with that statutory mandate by analyzing actual deployment. The FCC concluded that, because broadband is not currently deployed to all Americans and there may be areas where there is no commercial business case to do so, broadband is not being deployed in a reasonable and timely fashion to all Americans.

The FCC should have stopped there. Whether or not one agrees with the FCC’s conclusion, the FCC had complied with its statutory duty based solely on the extent of actual broadband deployment. There was nothing more the FCC was required to do, and more importantly, nothing more it should do.

But the FCC did not stop there. It separately analyzed whether broadband is “available” to all Americans. Section 706(b) does say the FCC must “initiate a notice of inquiry concerning the ‘availability’ of advanced telecommunications capability to all Americans.” When this phrase is read in context, however, it’s obvious that “availability” is synonymous with “deployment.” But the FCC heard the lid of Pandora’s box creeping open and concluded that “availability” and “deployment” are broader than physical deployment.

Why would the FCC adopt such a tortured construction of an unambiguous statute? The answer is in the FCC’s analysis. The FCC’s analysis of availability focuses primarily on adoption rates, which the FCC uses as a proxy for availability (presumably because the statute doesn’t use the word “adoption”). Defining adoption rates as an issue over which the FCC has jurisdiction, rather than merely physical deployment, gives the FCC an opportunity to regulate virtually every aspect of broadband, including prices and service quality.

That opportunity derives from the last sentence of Section 706(b), which says that, if the FCC finds broadband deployment is not reasonable and timely, “it shall take immediate action to accelerate deployment of such capability by removing barriers to infrastructure investment and by promoting competition in the telecommunications market.”

There are a lot more “barriers to infrastructure investment” for the FCC to “remove” once adoption rates are read into the statute. According to the FCC, removing barriers to infrastructure investment now “requires the Commission to identify and help reduce potential obstacles to deployment, competition, and adoption.” (Emphasis added.) The FCC’s new list of barriers based on these criteria is astonishing in its scope. It includes: (1) costs and delays in building out networks and offering service; (2) low broadband service quality; (3) lack of affordability of broadband (i.e., broadband prices); (4) consumers’ lack of access to computers and other broadband devices; (5) lack of relevance of broadband for some consumers; (6) poor digital literacy; and (7) privacy concerns.

This set of issues is so broad it’s hard to see any limitation at all on the FCC’s jurisdiction over broadband. With its new interpretation of Section 706(b), the Commission has in a single stroke gone from an agency that had little to no authority over broadband to an agency that can regulate broadband in every particular. The FCC has fully lifted the lid off the Pandora’s box of Internet regulation. It’s now up to the courts or Congress to close it.

Net Neutrality: Last December, the FCC adopted net neutrality regulations (see order available here). These rules shift potential Internet revenue from service providers – the companies that actually deploy broadband infrastructure – to software companies and device manufacturers. The obvious result is to discourage investment in costly broadband infrastructure.

Incentive Auction Authority: Making more spectrum available through incentive auctions would promote significant broadband deployment. The FCC is now working toward this goal, but in 2010, the FCC made net neutrality its top priority rather than incentive auctions. Had the FCC focused on the need for more spectrum in 2010, the FCC might have obtained incentive auction authority already by striking a deal with Congressional Republicans opposed to net neutrality. Instead, the FCC is fighting with broadcasters over incentive auctions in 2011, with the election cycle looming ahead.

Universal Service: Universal service reform is one of the most important regulatory actions the FCC could take to promote broadband deployment. But, while the FCC was busy working on net neutrality regulations last year, universal service reform languished, and another opportunity to promote broadband deployment now was lost.

Roaming: The FCC found in 2007 (see order here), that mobile wireless roaming regulation discourages infrastructure-based broadband deployment if roaming is required in markets in which the requesting service provider holds spectrum licenses. In 2010, however, the FCC changed its mind (see order here), and in 2011 (see order here), it imposed new roaming requirements on broadband service providers. It’s difficult to see how allowing one provider to use another provider’s infrastructure rather than build its own network will promote more infrastructure deployment.

If broadband deployment is lagging, the FCC should point the finger at itself. The FCC needs to get back to the task of implementing policies that promote broadband deployment rather than imposing heavy handed regulation. For starters, the FCC can focus on making more spectrum available and reforming the Universal Service Fund. That would go a long way toward reversing the FCC’s troubling trend of discouraging broadband deployment.

If market analysis isn’t necessary, then what is the empirical basis for imposing regulation? What provides a limiting principal for framing the debate? When asked for evidence of a problem with the Internet justifying regulation, Commissioners relied on the opinions of commenters who expressed concern in the proceeding. But nobody said whether these commenters offered any empirical evidence for their opinions (i.e., any market analysis) or whether these commenters constituted a statistically relevant sample.

This is the crux of the FCC’s existential crisis: the reliance on subjective perception to impose regulation. Reliance on anecdote is the antithesis of a data-driven approach. This is in part why nobody knows what a “net neutrality” violation looks like. “As Eliza Krigman said in a recent PoliticoPro article (no link available), “Internet service providers and consumer watchdogs disagree on what constitutes a net neutrality violation.” Without some empirical framework for analysis, it’s anybody’s guess.