Thursday, July 29, 2010

It's a Small World After All--Even on Facebook

The Walt Disney Company announced Tuesday that it was paying $563 million to acquire "social gaming" company Playdom, the maker of Sorority Life and Mobsters--popular games on Facebook, MySpace, and mobile phones. Apparently social games are quite popular--according to this Business Week story, approximately 42 million people regularly play Playdom games each month. Another such game, Farmville, lists nearly 60 million active users on Facebook alone.

CNET notes that other major media companies are expected to jump on this social gaming bandwagon, too. Google has been considering whether to launch its own social networking site centered on such games. Dan Porter, CEO of an independent social gaming company called OMGPOP, is quoted in the story as stating: "Expect more deals as competing media companies like Viacom, Fox, IAC and others as well as large public game developers and Asian gaming giants roll through and answer back."

Monday, July 26, 2010

Hope and Public Financing

I agree with Joe (see this post a few days ago) that Lessig's presentation is worth watching, and raises some fascinating issues. Lessig uses three areas of policymaking--broadband, cybersecurity, and copyright--to demonstrate how the legislative process is fundamentally broken. Lessig's fundamental point is that Congress is no longer run "for the people," but for special interests. Certainly not breaking news, but a point that cannot be highlighted enough.

But what to do about it? Joe notes that Lessig seems to be promoting a public campaign financing bill through the group Fix Congress First. I have not yet looked at the specific bill that they are proposing, but wanted to share my quick take on whether the concept of public financing is viable in light of the current Supreme Court composition. (I would love to provide a more detailed discussion down the road, if time ever permits.)

There have been two important Supreme Court rulings this term that bear upon this question. First, in Citizens United v. Federal Election Commission, the Court struck down previous limits on corporate independent expenditures. According to the Court, the concerns about corruption (or the appearance of corruption) are not sufficient to justify such a far-reaching ban on political speech. Furthermore, the Court held that First Amendment protections extend equally to corporations as to individuals. Importantly, the decision does not affect bans on direct contributions to candidates--although that may prove to be a distinction without a difference.

The second ruling, which has received much less attention, is an unsigned order the Court released late in the term involving Arizona's public financing program. The basic issue in that case is whether it is unconstitutional to provide additional matching funds to candidates who participate in the voluntary public financing system when opponents spend above a certain amount. The Ninth Circuit held that Arizona's system was constitutional, but the Supreme Court enjoined Arizona from providing any such matching funds until it has an opportunity to hear the case next term (note that the parties have not even asked the Court to hear the case yet, but the Court's order is a pretty clear indication that it will take the case.)

As I read the current jurisprudence, I don't think the Supreme Court is likely to declare public financing unconstitutional, but that approach would be completely ineffective without some restriction on private campaign financing or some other mechanism (such as Arizona's matching funds approach) to make the public financing scheme a meaningful option for those who choose to participate. In other words, public financing is a solution without any teeth if candidates can opt out of the program and do better through acceptance of individual and corporate funding--but the Supreme Court is likely to strike down any rules designed to encourage public financing over private campaign funding.

In my view, any solution has to be found in the masses. I agree with Joe that it seems like a very hard thing to do, but I am not sure there is any way around it. I like the way that Lessig frames the issue--we have to get at the root of the problem if we expect to make any significant policy changes in this country--but I think he does not dig deeply enough. I would trace the problems back to the poor understanding that most Americans have of the major policy debates going on in the country, which is due in part to the laziness of the people and also to the corporate media.

Sunday, July 25, 2010

The Optimal Solution

Here's another telecom post (I've got some non-telecom stuff lined up for the near future). As I noted in my post last Wednesday, while net neutrality is currently a necessity, it is a far from optimal solution. It is exceedingly difficult to scope and define. For one, it typically relies on a nebulous concept of "reasonable network management practices" which are considered to be acceptable forms of discrimination. Also, it is difficult to figure out how to make it address service providers segmenting their network connection to deliver managed services (primarily video and voice) over bandwidth kept separate from the Internet segment of the connection without becoming increasingly invasive and intrusive into service provider business practices.

Indeed, as I concluded that post, it would be far better to negate the need for net neutrality by forcing carriers to provider open access to the local loop to their competitors. This solution, however, has its own problems. The biggest one is a pricing problem. When you force open access, you also have to set rates. Set them too high, and you've accomplished nothing because the competitors will be unable to compete with the incumbent and no competition materializes. Set them too low and the incumbent gets choked for revenue and cannot profitably maintain its infrastructure. Accurate, objective pricing data will be difficult to come by, and both sides will have strong motives to skew the numbers in their favor. It will be a constant back-and-forth battle, rife with lobbying, and with regulators ultimately picking winners and losers (either intentionally or accidentally).

No, the optimal solution is this solution. One government-funded fiber network to rule them all. For a one-time investment of about $38b US dollars, Australia will provide an essentially permanent solution to the broadband needs of all of its citizens. The network will be open access, allowing multiple service providers to compete to provide Internet access. It eliminates the natural monopoly of the last mile by making it a publicly-owned utility asset. And by wiring every home with fiber, it eliminates the need to ever perform a major network upgrade again. From here on out it will just be a matter of maintaining existing plant, and occasionally upgrading the optics at each end of the pipe.

Obviously, this would cost a lot more in the US. Looking at just in terms of the population ratio you'd figure that it would cost something like $400-500 billion to do the same thing here. Given the current fiscal situation, that's pretty unlikely to happen. But any municipal or county government with access to some cash really should be doing this.

Saturday, July 24, 2010

This Isn't What Social Democracy Looks Like

Before I start generating new content, I am going to cheat one more time and post an email I wrote in January in response to this article by Jim Manzi proposing an alternative to what he perceived as a drive towards social democracy in the United States:

I have a couple key points of difference with Manzi. First, I think his conception of government intervention in markets is misguided and outdated. Second, I think his proposed solutions do little to address the social cohesion problems that he pretty aptly identified.

On the first point, Manzi's conception of government interference seems rooted in opposition to command and control regulation. To this extent his discussion of Reagan-era regulatory reform makes some sense. It was during this period that the government generally began to abandon command and control-styled regulation in favor of the market-oriented regulatory frameworks that prevail today. In some respects this means less regulation (which fits Manzi's conception), but often it just means different regulation. Consider telecommunications. For many decades the telecommunications market operated with relatively little regulation, governed essentially by a handshake agreement (and settlement of several antitrust cases) between the federal government and AT&T, whereby the government allowed AT&T to exploit a natural monopoly and ruthlessly crush its competition, and in exchange AT&T would provide near-universal service at geographically-equalized rates (subsidizing areas with high costs of service with profits from areas with low costs of service). This arrangement produced little regulation and an unproductive and stagnant, if stable, market. In natural monopoly markets like telecom, market-based regulation facilitates competition and drives innovation and productivity. Regulation of financial markets (including the sort recommended by Manzi) is typically intended to prevent fraud and improve the information available to investors, facilitating increased market competition. Carbon tax or cap and trade policies are designed to internalize external costs so that competition produces market-optimal production levels (including driving competition and innovation in clean tech). And so on.

Health care reform is a bit of an odd duck in that it merely codifies an existing broad social judgment that we as a society are morally and ethically unwilling to live with the consequences of a pure market for health care. You could say that this is a case of Manzi's tradeoff between market efficiency and social cohesion. But it's not as if health care reform is shifting society on that scale. That judgment was made a long time ago--we already treat anyone who walks into an emergency room in need of care. But we provide non-market-based care in a pointlessly inefficient manner. Moreover, various features of the current system inhibit worker mobility (most especially the combination of employer-based health insurance and pre-existing conditions), reducing the efficiency of the labor market. Ideally, smart regulation should be able to remedy these inefficiencies while carving out space for competition in the areas where it makes sense and does not directly contradict our general sense of social justice.

And Manzi's criticism of the Recovery Act and TARP fail to address the ultimate aims of those regulations--preventing complete economic meltdown. There is a broad (though certainly not universal) consensus among economists that these policies have worked, and that true disaster was averted. Sure, as Manzi points out, the Recovery Act (though not so much TARP) puts a big dent in the federal coffers, but the Great Depression cut federal tax revenues by 2/3s against the pre-depression levels--how would that have impacted the federal debt level (to say nothing of its human costs)? And while Manzi criticizes the takeovers of AIG and Citigroup and the government's intervention in the cases of Bear Stearns, Merrill Lynch, Fannie Mae, and Freddie Mac, there is again a considerable amount of consensus that the one event that pushed the financial system to the brink of utter collapse was the government's decision, in an effort to impose market discipline, to allow Lehman Bros. to go under. It's not as if the government had a lot of options in these cases. This is hardly, as Manzi would have it, the realization of some scheme to nationalize key market segments. The intervention in the auto industry is less defensible, but nonetheless represents essentially a judgment that the existing bankruptcy system does not provide an efficient mechanism to unwind a massive business concern without inflicting unnecessary collateral damage. I don't know if this is correct, but I am quite confident that the Obama administration has no real interest in running the auto industry. And I feel obligated to point out that Manzi's assertions about the Recovery Act are just plain wrong. He states that the Recovery Act is "dominated by outright social spending." In fact, the sort of social spending Manzi mentions (e.g., food stamps) is a) only about 10% of the cost of the Recovery Act, and b) one of the most effective means to actually stimulate the economy. By contrast, tax cuts represented about 35% of the Recovery Act (and sadly do a poor job of stimulating the economy).

In the end, there is no evidence of an actual shift towards a social democracy ... which is probably unfortunate, because, as Jonathan Chait points out in a response to Manzi, European-style social democracy seems to work really well. Manzi's whole foundational assumption that the U.S. economic system is superior to the European version has little evidentiary support. European social democracies are quite competitive.

Which gets to my second point: Manzi doesn't appear to have a solution to the problems he posits.

Manzi provides several suggestions to address the perceived threat of social democracy, but only two that could possibly address the issues Manzi identifies regarding social cohesion: increased school competition and immigration reform. His suggestions on both fronts seem sensible, but also modest, and not nearly up to the scale of the problems he identifies. Manzi's school proposals would, I think, be an incremental improvement, but I don't think they would nearly equalize the quality of education obtained by the high income and low income groups Manzi identifies. And I think just about everyone agrees that immigration reform would be a good idea, but I suspect that Manzi perceives immigration to be much bigger problem than I do. Together, these reforms would probably put a dent in the emerging levels of social inequality, but a small one. I appreciate that Manzi is thinking in productive directions about policy reforms aimed at social cohesion, something few of his contemporary conservative comrades are willing to do. However, if he rejects the sort of broad-reaching social safety net that European social democracies employ, particularly while resting on unfounded assumptions about the economic costs of this approach, I think it's incumbent on him to propose an alternative that can have a similarly broad-reaching impact on social cohesion. He doesn't come close.

Wednesday, July 21, 2010

Some Old News (Net Neutrality)

In an effort to continue to add some new blog content, I'm going to cheat and recycle a blog-worthy (I hope) email I sent a few months ago in response to inquiries from a couple of folks about my opinion on a) this article by Tim B. Lee and b) the D.C. Circuit's opinion in Comcast v. FCC. My reply follows:

Tim B. Lee's (not to be confused with Internet pioneer Tim Berners-Lee) paper has a lot of good content. Where it falls apart is on its competition analysis. Lee's fundamental premise is that interfering with network openness decreases the value of the network, service providers have an interest in maximizing the value of the product they're selling, and, therefore, service providers will not want to interfere with the openness of the network. On p. 23, Lee says this will hold true even in the case of a monopoly. This analysis, I think, ignores a critical factor: the elasticity of the market. Lee's argument holds true only in an elastic market, where consumers will be highly responsive to changes in the value of the good. I would argue that broadband Internet access is a very inelastic market. If you look at usage statistics for people under the age of 65 (and even more dramatically for those under 50), virtually everyone uses the Internet. It plays an integral role in virtually every facet of people's lives--personal communication, social and family relationships, entertainment, education, work and employment-seeking, access to government services, etc. It is not something people will do without based on incremental changes in the value of the product. So if you are hypothesizing a monopoly market, consumers have very little leverage with which to discipline service providers. Service providers would have to do tremendous damage to the product value before they saw a significant change in consumer behavior. Consequently, service providers are free to consider ways in which to make the network more lucrative for themselves (charging content providers for access to exclusive fast lanes and the like), even if it moderately decreases the value of the product they are offering consumers.

To take that one step farther, if service providers can get away with decreasing the current value of the network, they have absolute freedom with respect to controlling the emergence of future services that might add value to consumers. They already have a captive market based on the present value of the offering, so they would have nothing to lose by steering future developments in ways that benefit their bottom line, even if in doing so they diminish the overall value of these developments to their consumers. This is the most concerning aspect. It would be bad to diminish the availability or value of existing Internet-based services, but it would be tragic to undermine the Internet as a source of creativity and innovation.

The crux of this dispute, at present, is video services. Based on the history of the Internet, I think we have to assume that there will continue to be unforeseen developments and emerging new services, and some of these will probably require very high bandwidth connections. But at present, the only applications that really require 30+ Mbps connections are video services (and even then this is mostly for high def, and, in the relatively near future, 3d video). Lee touches on the fact that cable and fiber-based service providers already have a walled-garden for video, but acts as if this stands separate from the net neutrality discussion. It doesn't. I have participated in discussions on net neutrality with the Assistant Secretary for NTIA (outside of the 5 FCC commissioners, probably the most influential government official on this matter), and these walled-off video services were very much a part of the discussion. And the service providers are hardly content to rest on the status of their present walled-gardens for video. Look at the pricing for FiOS or for the emerging DOCSIS 3.0 cable services. Low speed Internet connections (5-20 Mbps) are priced similarly to the prices from other Internet service providers, but the high speed connections (50+ Mbps), which could potentially threaten their video services, are always set at such a high price point that the Internet-only price exceeds the price of getting a lower-speed video connection bundled with video service. It's a pricing structure designed to protect the video services. Meanwhile, Time Warner and Comcast are openly attempting to lock down online distribution rights for cable TV content. They have stated that they will make online access to this content contingent on the user having a subscription to their video service. AT&T and Verizon have not publicly disclosed any parallel efforts, but I would be shocked if they were not working behind the scenes to lock down content of their own. And Comcast is now in the midst of a high profile effort to acquire NBC Universal, bringing in a huge library of content and programming to add their exclusive access system. Acquiring NBC will also give Comcast partial control over Hulu, which will be one of its primary online TV competitors.

All told, this is a broad and comprehensive effort to lock down a high-value, high-bandwidth data service. And the general unavailability of high speed connections combined with market uncertainty over licensing and content access issues has successfully prevented the development of any true innovative competitors in the IPTV space. Moreover, because one element of the service provider strategy is to price high speed connections out of the market, this has had the collateral effect of slowing or preventing the development of other potential high speed services and applications (this is why Google is now proposing to create a city-wide testbed for a 1 Gbps fiber-to-the-home network). Letting Internet service providers into the online content and services market completely upends our expectations, per Lee, of how they should behave to improve the value of their Internet service product. Net neutrality advocates need not restrict themselves to worrying about hypothetical future harms, the real thing is happening right in front of our faces.

In discussing the potential threat of walled-gardens, Lee raises the example of AOL. AOL famously began as a walled-garden with exclusive content, then eventually, grudgingly, gave their users access to the Internet, and finally the exclusive content was dropped entirely. According to Lee, this illustrates that walled-gardens are not profitable. The key point that Lee omits is that AOL was not a monopoly (or even a duopoly). AOL's actions were driven by intense competition, mostly with mom-and-pop Internet service providers, at a time when all it took to be an ISP was to park a computer at the end of a copper phone line. The current service providers are generally monopolists or duopolists. The cost of entry to the market is prohibitively expensive (and economically inefficient). And the incumbents are so large that their collective actions can shape the development of content and services on the Internet in a way that AOL never could. The fact that walled-gardens failed in the 1990's tells us nothing about whether they could be economically viable for Comcast, Verizon, AT&T, and TWC today.

This brings us to the D.C. Circuit's decision last week. In 1996, Congress passed a Telecommunications Act that set up a regime for competitor access to the phone companies' last mile networks, allowing them to compete with the phone companies to provide phone and Internet service over their own infrastructure. At the time there were no commercial cable Internet service providers. As the cable companies became a larger and larger part of the broadband Internet service market, the disparity between phone companies (who were forced to share their plant with competitors) and cable companies (who weren't) became pronounced. Lawsuits by competitive Internet service providers attempting to gain access to the cable companies' plant forced the FCC to make a decision as to how to reestablish parity between the phone and cable companies. By this time (2002), Bush II was in office, and the default Republican position of helping the big guys prevailed. The FCC decided to designate Internet service as an "information service". The Communications Act gives the FCC a powerful tool box of regulatory controls over "telecommunications service" (generally referred to as Title II), but very little authority over "information services". The FCC had to shamefully torture the statutory definitions for telecommunications service and information service in order to make this determination, but that is neither here nor there. Several years later, after the case of a small phone company (Madison River Communications) blocking VoIP services that competed with its voice services, the Commission realized that they might want to regulate the behavior of Internet service providers in some cases. Having excluded Internet service from Title II, they didn't really have the statutory authority to do so, but decided to release a list 4 of non-binding network openness principles. A couple years after that, various members of the public were able to definitively prove that Comcast was interfering with BitTorrent traffic on its network, and they filed complaints with the FCC. After a long proceeding, in 2008, the Commission found the Comcast had violated the 4 principles, and required them to stop. Comcast challenged in the D.C. Circuit, asserting, among other things, that the FCC lacked statutory authority to enforce the 4 principles. They were right. Immediately following the FCC's Comcast decision, I did the first draft of a memo on the decision for a client. I predicted that Comcast would win the case in exactly the manner they did. So I can't say that I disagree with the D.C. Circuit's opinion.

At this point I think there is little question that the FCC will continue to enforce net neutrality principles. It was really the only big ticket item in Barack Obama's 2008 platform that related the FCC. Obama has reiterated his commitment to net neutrality on multiple occasions since taking office. It has to be at the top of the Democratic FCC commissioners' priority lists. So, to me, the question is not if, but how. Already there is a lot of talk on Capitol Hill about creating new legislation to give the FCC authority to enforce net neutrality. However, given the state of the senate, and the other major legislative efforts under way, it seems unlikely that anything like this could become law for a year or two, if at all. One quick way for the FCC to fix the problem by themselves would be to reclassify Internet service as a Title II telecommunications service. Two of the Democratic commissioners (Copps and Clyburn) appear to be inclined to doing this. The chairman, however, has indicated reluctance to do so. Reclassification would not only allow the Commission to enforce net neutrality, but would expose service providers (now including cable providers) to a whole suite of requirements under Title II. This would be a major change in regulatory approach, and the service providers will spend hundreds of millions of dollars over the next year or two to lobby against it. And even once the Commission acts, the service providers will then tie it up in lawsuits for years (as they did to the 1996 Act, from the time it was passed until the Bush-led Commission threw in the towel). It wouldn't be a pretty picture. But I nonetheless think it would be the right thing to do.

Moving Internet services back into Title II would allow the Commission to enforce net neutrality, but more importantly it would give them the tools to force the service providers to open their network to competitors. If done well, that could negate the need for net neutrality. Net neutrality is a regulatory framework designed for non-competitive markets. In a competitive market, consumers can respond to changes in the value of goods being offered, and Lee's thesis above would actually apply. Service providers that cripple their networks in the interest of building walled-gardens will see their subscribers go elsewhere, and the market will provide sufficient discipline to ensure good behavior. The only net neutrality regulation that would be required would be a network management disclosure requirement to ensure that consumers were making informed decisions. I think net neutrality is necessary given the current state of the market, but it is not an optimal solution. Competition would be far preferable. And, of course, for the service providers, competition is a far scarier prospect that net neutrality. Consequently, what we are likely to see is Chairman Genachowski publicly wavering on whether to join with his fellow Democratic commissions in favor of classifying Internet service as a Title II service until the service providers cry uncle and agree to some sort of non-Title II regulatory framework in which the FCC will be able to enforce net neutrality. Again, not my preferred solution, but it's what I view as the most politically feasible approach for Genachowski, and it has a distinctly Obama-esque feel to it.

Tuesday, July 20, 2010

Hope and Change and Broadband

I am looking forward to viewing the presentation that Joe linked to in the previous post, and I am thrilled that the BWJ revival post involves the perennial favorite issue campaign financing. I hope to comment more on the state of Supreme Court jurisprudence in the coming days.

For now, however, I wanted to draw attention to a recent report from Nokia Siemens Networks entitled the Connectivity Scorecard (h/t Talking Points Memo). There is no question that America lags many other developed countries on infrastructure, as reflected in key measures such as broadband speed and penetration. But the report argues that the notion of connectivity should be expanded beyond basic infrastructure to encompass how the network is used (such as time spent online, take-rate of internet-based services, and usage of websites by businesses). And under this broader understanding of connectivity, the Connectivity Scorecard puts United States second behind only Sweden. (The U.S. was #1 in the previous two years that the report had been published. Fucking Swedes had to rain on our parade.)

I recognize there is a lot of subjectivity built into a report such as this. And it does not diminish the importance of continued investment in broadband infrastructure--nearly 20 million Americans live in areas that are not served by a single broadband provider, and only 35 percent of homes with annual incomes less than $50,000 subscribe to broadband. But perhaps we don't suck that bad. I bet Americans have more Facebook friends than other comparable countries. And probably more trolls per capita too. Seriously, though, my point is that Americans as a whole are pretty Internet-savvy, and that should count for something.

Monday, July 19, 2010

I'll Have Another Hit of Hope and Change, Please

So it's been, hoo boy, over a year since I posted anything here. I'm once again going to try to get in the habit, and I figure I should start out with something strong. So here's an amazing presentation by Larry Lessig that provides a useful primer on the topics of broadband policy, cybersecurity, and copyright, then bends all three of these topics into a larger point about America's political process. It is very much worth the time to watch.

It's almost an hour long, but I think it stops 20 minutes too soon. He never answers the question of, well, what do we do now? I see that he's promoting a website for Fix Congress First. They appear to have a well-thought-out public campaign financing bill. But is that really the answer? Is there any real possibility this can get passed? (My guess: no.) Could it stand up to Supreme Court review? (Probably not, unless one or more of the conservative justices keels over while the Democrats still hold the White House.) If it did become law, would it solve the problem? That's hard to say, but at least it would be a huge improvement.

In any case, this seems like a hard thing to do as an insurgency. Lessig hits the crux of the problem when he notes that people commonly react that of course the powerful business interests run everything--it's always been like that! Certainly there has always been a certain amount of influence-trading in Washington D.C., but I have a hard time believing that it has always been like this. Nonetheless, I think the tendency among the public to believe that this is the way it always has been and always will be, until the end of time, amen, may present an insurmountable barrier for the popular uprising approach to political reform.

What I'm trying to say, in a long-winded way, is that my one source of crushing disappointment with the Obama administration has been its complete unwillingness to confront any powerful business interest. There were many things I admired about candidate Obama, but highest among them was his apparent dedication to changing Washington and improving the political process. I had hoped it would be the administration, rather than Lessig and his merry band of outlaws, spearheading the movement for political reform. I had hoped that he would confront entrenched interests and use his platform to show how badly they had served the public in the past and how directly their current interests conflicted with the public interest. None of this has happened.

Obama prevented a depression, passed landmark health care legislation and financial reform, and has done a lot of other good things. But he has done nothing in the realm of political process reform. Lessig is right that the FCC totally rolled over on the broadband plan. And Greenwald is right the administration only made it past the entrenched interests on health care reform by buying them out. And something not so different just played out on the banking regulations. It is honestly shocking to me how fearful this administration has been of entrenched business interests. Given the populist mood in the country, I should think the White House would relish a good fight with an unpopular industry (like the banks, or the health insurance companies, or Comcast). That, frankly, is the sort of press they need. But instead, when they get even a whiff of a fight like that coming, they turn tail and head for cover.

I don't know what to conclude. The Obama administration having been a letdown on this, I don't see any viable path towards political process reform in the near future. Between that and the new requirement for a super-majority to pass anything in the Senate (fodder for another blog post), the federal government has truly reached a new level of dysfunction. Despite Obama's legislative successes of the past couple years, I am deeply dismayed about the prospects of the federal government competently addressing any of the major challenges that will come its way over the next 10+ years. We are in a bad way to be sure.