Finger on the Trigger: The FCC Needs to Get Spectrum Auction Rules Right

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The FCC is set to vote on the final rules for the upcoming 600 MHz incentive spectrum auction tomorrow, in accordance with the goals of the National Broadband Plan that were reiterated by Congress. Chairman Wheeler and the rest of the FCC’s commissioners are about to take a very important step to free up valuable low-band spectrum, a necessary input for the provision of wireless broadband coverage.  As the FCC has repeatedly said, this auction is a “once-in-a-generation” opportunity to feed the fast-growing demand for high-quality spectrum.

Given that these auctions are rare, the 600 MHz incentive auction presents the FCC with a unique opportunity to foster competition and innovation in wireless markets.  As the FCC’s decision to block the T-Mobile-AT&T merger and the FCC’s most recent “Mobile Wireless Competition Report” illustrate, the mobile broadband marketplace faces key competitive challenges.  The two biggest network providers, AT&T and Verizon, command nearly 70% of the industry profits and control nearly three-fourths of the high-quality, low-band spectrum.  To his credit, the FCC Chairman acknowledges these issues.  In a 2014 blog post on the 600 Mhz spectrum auction, Chairman Wheeler stated:

Today, however, two national carriers control the vast majority of that low-band spectrum.  This disparity makes it difficult for rural consumers to have access to the competition and choice that would be available if more wireless competitors also had access to low-band spectrum.  It also creates challenges for consumers in urban environments who sometimes have difficulty using their mobile phones at home or in their offices.

This is why the Commission has proposed creating a 30 MHz block of “reserve spectrum”, eligible only to non-dominant carriers.  According to the Chairman, the point of the reserve is to prevent the dominant carriers from sweeping the auction and to maintain a “vibrant and competitive” auction.MORE »

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The Digital Single Market and A Duty of Care: Preserving the Transatlantic Legal Foundation of a Thriving Internet

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As part of the Digital Single Market (DSM) communication, the European Commission has discussed the possibility of imposing a “duty of care” on Internet intermediaries, which would require Internet platforms to take a more active role in policing user content.  Forcing Internet intermediaries to monitor and remove their users’ communications is ill-advised from both an economic and human rights standpoint.

The rapid growth of the Internet was not merely the function of technological innovation.  This fundamental restructuring of commerce and communications would not have been possible but for substantive legal reforms that adapted legacy legal concepts to comport with the realities of a hyper-connected Internet age.  Arguably the most important legal and legislative development of the Internet era was the concept of intermediary liability limitations for Internet service providers.  Or, stated in a less legalistic way, the policy choice that Internet services should not bear blame for bad people saying or doing bad things on the Internet.  Given the size and scope of the Internet and the volume of online communications, it is safe to say that Facebook, Twitter, Google, Yelp, YouTube, Allegro, and Dailymotion would not exist today if the law evolved to hold websites and Internet services liable for the actions of their users. Further, imagine operating a telecommunications network with the sum of all this information passing through without being shielded from responsibility for the actions of all of your users.  What venture capitalist in her right mind would invest in a platform that was exposed to liability for billions of websites beyond its control or trillions of posts composed by third parties?  What would Internet business models look like if companies had to pre-screen all user communications before they went live?

Recent developments in Europe, including the Delfi ruling and the DSM “duty of care” proposal, suggest that Internet services may soon be asked to take a more active role in filtering user content. Yet even with advanced filtering tools, unlawful speech is almost always context dependent.  Libel and defamation would not be obvious to a filter.  Even more complex is when lawful speech is used unlawfully, as in the case of copyright and trademark infringement.  Given that rules about these various types of speech are often the product of complex legal cases, even human review of every online communication would not completely shield an Internet company from liability, given that different people can come to different conclusions about whether speech is “harmful.” Not to mention that standards for what is permissible speech vary widely from country to country.

Besides the commercial impact, the implications for free speech would also be disastrous. Protections from intermediary liability enable platforms to give people around the world a simple way to express themselves and to share what they love with the world, and to challenge the restrictions of oppressive governments. One study found that when online platforms are regulated on the basis of content submitted by their users, they remove large amounts of controversial but legal content for fear of facing penalties. The UN’s Joint Declaration on Freedom of Expression on the Internet recognizes the success of laws such as the CDA, DMCA, and the E-Commerce Directive, stating that “intermediaries should not be required to monitor user-generated content and should not be subject to extrajudicial content takedown rules which fail to provide sufficient protection for freedom of expression.”

Even if pre-screening and filtering at scale were feasible, the value of each individual communication — whether it takes the form of a website, a tweet, a Facebook post or a YouTube video — is negligible, where the potential legal exposure is huge; the potential damages for copyright law can reach $150,000 per work infringed.  So, in a world where Internet companies were liable for the communications of their users, a rational company would be incentivized to aggressively censor content, leading to significant blocking of ostensibly legal speech as the costs of under blocking are significantly more than the costs of over blocking.MORE »

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Time to Stick a Fork in These Android Competition Complaints

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Here we go again.  Another Android antitrust drumbeat.  In April, the European Commission announced a formal investigation into Google’s Android operating system.  This is not the first time antitrust allegations have been leveled at Android.

Let’s take a short trip back in time.  In early 2014, a flurry of media reports emerged accusing Google of anticompetitive conduct surrounding its Android licensing arrangements.  The reports cited industry insiders and experts who had “examined” contractual arrangements that surfaced through an unrelated court proceeding between Google and Oracle on intellectual property claims.  Much of that early reporting was fueled by a detailed blog post and paper by longtime anti-Google “consultant” Ben Edelman which accused Google of leveraging its monopoly power through secret nefarious contractual arrangements with device manufacturers (most of which actually had nothing to do with the Android operating system itself).  Unfortunately, much of the reporting (and much of Edelman’s analysis) turned out to be misleading or just plain wrong. Industry followers, open source experts and academics followed on to poke skyscraper-sized holes in the initial reporting.  (I had my own take.)

FairSearch, an organization funded by Google’s competitors aimed at bringing regulatory scrutiny on the Mountain View company, used the Edelman claims as the basis for a complaint it filed in April 2013 with the European Commission — shortly after the original round of media coverage — claiming that Google’s below-cost distribution of Android (read: free, open source) was predatory pricing that made it difficult for Google’s competitors to compete.  It also claimed that Google’s practice of offering its suite of mobile applications in a package instead of a la carte (via so called MADA agreements) foreclosed competition in mobile platforms and applications.

In short, the claims were laughable.  The open source community cried foul, pointing out the dangerous implications such a precedent would set given that all open source software is available for free.  Furthermore, commenters noted the irony of a group funded by proprietary software companies attacking the free distribution of open source software as “predatory.”  Others pointed out that the MADA agreements are standard operating procedure for companies trying to build user friendly products and ensure that customers have an expected suite of services available to them “out of the box.”  At best, I thought, these claims were a sideshow.  A PR stunt orchestrated to keep Google’s PR and legal teams fighting on multiple fronts and that they would fade quickly.

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Big Stills, Small Jugs, and Stupid Laws: Florida Growler Fight is a Microcosm of U.S. Anti-Consumer Beer Regulation

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We have been a little boozy here at DisCo.  A couple of years ago myself and my colleague Matt Schruers had a mini blog symposium of sorts where we used alcoholic anecdotes to illustrate larger policy points about the nature of competition and innovation.  Last week, fellow DisCo writer Ryan Heath used a Belgian beer example to illustrate the success of crowd funding.  In this post, I turn to U.S. beer regulation and market structure as an illustrative example of a phenomenon that has plagued the tech world: out-dated regulation that artificially props up legacy middlemen and harms innovative competitors.

Against that backdrop, let’s turn our attention to a fight brewing in Florida between craft brewers and beer distributors (and the major beer brands) in the state legislature.  At the end of last week, a Florida Senate Committee approved a bill that would allow craft brewers to sell 64oz growlers to their consumers.  Presumably, the bill will soon be voted on by the full Senate.  Similar legislation is also winding its way through the Florida House.  According to the Sarasota Herald-Tribune, the bills “could make it easier for grocery stores to sell hard liquor and brew pubs to sell more of their products.”

Currently, in Florida, it is unlawful for breweries to sell half-gallon size growlers — a staple product for craft brewers seen as the “industry standard” — to consumers.  This is because Florida, like all other states (except for Washington), utilizes a “three-tiered” alcohol distribution structure where (1) wholesalers are required to sell to (2) distributors who then sell to (3) retailers.

Florida has an exception to the three-tiered system, however: A law pre-dating the rise of craft breweries, which was designed to allow beer giant Anheuser-Busch to sell beer directly to consumers in the days when they owned the Busch Gardens theme parks, allowed craft brewers to pour pints and sell cans on their premises (thus avoiding beer distributors).  Under the complex and capricious Florida beer laws, craft breweries were able to sell quarts and gallon jugs of beer, just not the popular half-gallon size.  When legislation last year looked poised to fix this curious 96 ounce exception, it was derailed by language added at the behest of beer distributors.  The new language required, among other things, craft brewers to sell their wares to distributors who would then sell it back to them (at a healthy markup, of course) before they would be able to sell them to brewery visitors!  With their typically smaller profit margins, craft brewers — who often face a daunting journey just to turn a profit — saw this unnecessary layer of costs as a threat to their businesses.  In fact, “holding the growler hostage” was merely a strategy of “Big Beer” to attack the craft brewers’ right to sell directly to consumers.  (They said so themselves.)  The craft brewers — in good disruptive innovator fashion — turned to Indiegogo to fund their lobbying efforts against big beer.

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Is Big Data an Entry Barrier? What Tinder Can Tell Us

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Big data, and its effects on online markets, has been thrust into the center of the tech policy chattering class debate.  In the last few weeks, events have been held on both sides of the Atlantic focusing on the concept of big data as an entry barrier.  (The topic has also come up in speeches by FTC Commissioners [and a paper], in discussions surrounding the EU’s forthcoming Digital Single Market strategy, and is the frequent topic of recent academic writing.)  Specifically, the concept being debated is whether the accumulation of data by Internet companies hinders competition because the new entrants will not be able to compete effectively with the first mover in the marketplace.  In this post, I will address why startups and entrepreneurs should not be overly concerned.

In a stylized view of the Internet economy, as a platform (such as Google, Facebook, Amazon, Pinterest or Twitter) achieves scale and gains users, it acquires more data.  This data leads to product improvement, which leads to more users and, subsequently, more data.  The process repeats.  According to proponents of the data as a barrier to entry theory, this leads to an unbreakable positive feedback loop that makes effective competition impossible.

However plausible this argument sounds, a review of the short history of the Internet economy, which has been characterized by intense competition and frequent disruption, seems to cast doubt on the soundness of the theory.  (See Andres Lerner’s discussion of the User Scale – Service Quality feedback loop.)  Besides the common examples of Facebook overtaking Myspace and Google overtaking prior search competitors (who, at the time, were predicted to be unassailable largely on account of the User Scale – Service Quality feedback loop discussed above), a casual look at online markets illustrates how competitive the market is.  Why are online markets so competitive even though some firms are believed to have an unassailable advantage in big data?

First, this view of Internet markets is extremely simplistic.  Data is just one input of many in the process of innovation and market success.  Second, unique economic characteristics of data — such as it being non-rivalrous and the diminishing marginal returns of data — mean that the accumulation of data, as opposed to other barriers to entry like intellectual property portfolios or high-fixed capital costs, in and of itself does not function as much of a barrier at all.  When you couple these characteristics with the fact that data, and the tools to use and analyze data, are readily available from numerous third party sources, the notion of an iron-clad data feedback loop falls apart.

I’ll break this down piece by piece.

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Online Competition Thriving Since the Closure of the FTC’s Google Investigation

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Today, the Wall Street Journal published an article after getting its hands on a confidential FTC memo from the now settled U.S. antitrust investigation of Google.  The document, an internal memo by the FTC’s Bureau of Competition recommending that that the Commission proceed with an antitrust case against Google for a variety of allegedly anticompetitive actions, was mistakenly released in response to a FOIA request.  The Journal also reports that the FTC’s Bureau of Economics disagreed with the Bureau of Competition, recommending that the agency not proceed with charges — a recommendation the agency ultimately followed.  Also, and perhaps most interestingly, the Bureau of Competition’s recommendation advised against proceeding with the most high-profile accusation, search bias, which is now the focus of the European Commission’s competition investigation.  As most DisCo readers probably remember, the FTC eventually voted to close its investigation of Google (and dismissed the search bias accusations outright) after the company addressed several of the practices outlined in the Bureau of Competition’s memo.

Although the WSJ article is certainly an interesting read, the fact remains that there are many checks and balances within the FTC and — with the benefit of hindsight — it is pretty clear that the Commission’s decision not to proceed on the charges of “search bias” was the right call.

Let’s look at what has happened in the marketplace since the FTC settlement.

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Globalizing European Internet Regulation Will Not Necessarily Benefit European Companies

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Günther Oettinger, the European Commissioner for Digital Economy and Society, recently gave a keynote address at the #Digital4EU Stakeholder Forum, in which he discussed the importance of a Digital Single Market in Europe and uniform Internet regulations.  He also spoke of the need for Europe to catch up in digital innovation.  Although I plan to address some controversy in the remarks, it is important to note that much of what Oettinger said was on target.  Streamlining digital rules across the 28 member states of the European Union and ensuring that Europe produces (and attracts) more programmers and IT experts will go a long way to making Europe even more competitive in the digital economy.  (I have also discussed some other issues not addressed by Commissioner Oettinger, which would also go a long way into making Europe more competitive.)

On the more worrying side, Oettinger’s speech veered fairly overtly into jingoistic territory:

The Americans are in the lead, they’ve got the data, the business models and so the power… They come along with their electronic vacuum cleaner and suck up all the data, take it back to California, process it and sell it as a service for money.

This is not surprising.  Politicians playing to a domestic audience is par for the course.  Furthermore, consumers and innovation across the world benefit from more competition, whether it comes from Silicon Valley, Berlin or Beijing.  Besides a stylized version of how Internet companies actually operate, what was misguided is the notion that using the size of European markets (the EU is the world’s biggest economy) to drive companies to adopt European regulatory standards as the de facto global standard is going to benefit European companies (whether they benefit consumers is an entirely different matter).  This was an implicit assumption underlying Oettinger’s remarks, and was made explicit in other commentary from top European politicians:

Still, said Jan Philipp Albrecht, chief negotiator for the European Parliament on the EU’s new data protection law, “If you can achieve…a standard [globally] that is somehow near…your own, then this is an advantage.”

The Wall Street Journal surmised the takeaway from this series of statements as:

Their hope: As rules such as the right to remove Web links to personal information spread, European companies would get a leg up in the next era of Internet commerce.

But is this correct? To answer that question, it is helpful to break down this line of thinking into two questions: (1) whether large markets can drive regulatory norms, and (2) whether high levels of regulation would advantage European enterprise.

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Big Data, Differential Pricing and Consumer Empowerment

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Last Wednesday, the White House released a report on “Big Data and Differential Pricing.”  The reason you have probably not heard much about it is that it was about as exciting as an Economics 201 lecture.  If you have heard about it (and you are not tenured faculty in an economics department), you may have meandered across an article such as this one, whose headline seems to imply that there is a problem that regulators need to solve.

However, if you take time to read the report, the conclusions (to the extent there are conclusions) are far more balanced and restrained.  In fact, the report notes that price differentiation is not widespread, usually beneficial, and certainly not unique to the online world.  Where differentiation is potentially problematic (not necessarily for economic reasons, but for matters of “fairness”) is in risk-based pricing markets (such as insurance, employment or credit-issuance).  But in risk-based markets, the takeaways are not unidirectional either.  In these scenarios, differential pricing is often a good thing, as it can discourage risky behavior upfront (and guard against adverse selection).  Indeed, the report recognized these types of benefits.  For example, if health insurance companies offer lower rates to non-smokers or generally healthy individuals who eat-well or exercise regularly, this can encourage healthy behavior upfront.  The report recognizes other benefits as well, such as expanding output.  To again use the health insurance market as an example, if health insurers couldn’t differentiate pricing and had to offer uniform prices, those who engage in risky behavior (e.g. smoking) would be forced to subsidize those who engage in non-risky behavior, causing fewer low-risk individuals to purchase health care plans.  Even in non-risked-based markets, differential pricing often leads to more efficient outcomes (particularly in high-fixed cost markets).

Real problems can arise when factors outside one’s control (genetic predispositions) or protected classes (race, sex, age, sexual orientation, etc.) are used to directly disadvantage consumers.  However, these problems are not unique to the online/big data world, and — as the report points out — antidiscrimination provisions of existing laws (such as the Fair Credit Reporting Act and the Civil Rights Act) already apply in these situations.

Nevertheless, some voice Orwellian fears that Internet-enabled big data might allow sellers to more precisely gauge individuals’ willingness to pay, thus transferring wealth (i.e. “surpluses” in economic terms) to producers.  This is “first degree” or “perfect” price discrimination in economic textbooks, which is hardly elaborated upon outside of theoretical models because it is virtually impossible in the real world, and — despite overblown concerns — still nearly impossible in the online world as well.

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Tech Policy and the State of the Union: What to Watch For

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Besides cold temperatures, inevitable musings about an Ovechkin-led Capitals being positioned to make a run at the Stanley Cup (followed by them falling off a cliff), and the occasional wayward arctic fowl, January in the District of Columbia comes with at least one constant ritual: the time honored tradition of speculating on what will be included in the State of the Union.  (And, in recent times, the SOTU-themed drinking games that flow from the anticipation… even the Washington Post has one this year).  Although some of the suspense has been dampened with media leaks and a multi-week presidential tour highlighting important SOTU themes, some surprises remain.

With political watchers fixated on what President Obama will and will not include in this year’s SOTU, I thought it was a good time for DisCo to lay out a potential tech policy roadmap for what to watch for this year in the President’s annual “setting priorities” exercise.

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Have Drone Will Travel: Slow-Moving Regulators Force Innovation Overseas

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Drones are leaving the U.S. for greener pastures, according to several media outlets (e.g., WSJ and Bloomberg).  In response to slow-moving U.S. domestic policy on commercial drone use, innovators are moving abroad, to jurisdictions where regulations have been updated to delineate when drones may be used in the commercial context.  (Keep in mind, we are not talking about fixed wing Predator drones with Hellfire missiles, but aircraft that are already available commercially with much of the same technology already incorporated into our mobile phones.)  Besides smaller companies actually moving abroad to places where they can sell their wares, even the likes of Google and Amazon have moved their drone testing to Australia and India, respectively.

Making matters worse, export control policies are poorly targeted, and prevent some drones made with widely available technology built in the United States from being sold overseas.  In fact, according to the Wall Street Journal, 3D Robotics — a San Diego-based company that specializes in drones with video capability — was only allowed to resume selling some of its products in a number of countries because the drones were manufactured in Mexico:

Export rules prompted 3D Robotics to temporarily halt shipments to 44 countries this spring. It has since secured a new classification from the U.S. Commerce Department, in part because it manufactures its drones in Mexico, allowing it to resume foreign sales.

And for those inclined to view this as a minor development in a niche market, at least one study predicts that allowing commercial drone use in the United States could create 100,000 new jobs and $82 billion in economic impact over the course of the next decade.

A lot of smart people have already said a lot of smart things about the drone situation, so I won’t delve too deeply into the nuances of streamlining commercial drone policy making.  Clearly, there are good reasons why commercial drones can’t take to the sky without some rules, but it is imperative that regulators move efficiently to establish a framework where, for example, a real estate agent or a surveyor can survey a property with a drone (in the same way it is currently legal for a non-commercial user to fly an off-the-shelf drone in her backyard).  That is not happening now.  According to the Department of Transportation’s own Inspector General, the FAA is likely to miss its Congressionally mandated deadline in coming up with rules that allow for the expansion of commercial drone use.

There’s a general point here worth expanding on: even if a country does everything right, creating a fertile environment for research, investment, and innovation (aka the hard stuff), innovation will nevertheless move overseas if outdated regulations impede the lawful sale or use of a product or service.  It does not matter if the United States has the brightest minds, best expertise and easiest access to venture capital; if you can’t sell, test or export drones here, then we will see those jobs and that talent go overseas to more fertile ground.  In fact, this is already happening.  And even if the FAA eventually comes up with a workable set of regulations that allow commercial drone activity, in fast moving industries — where first mover advantage is enormous — bureaucratic delays can be terminal.

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