Coop's Corner

Hi there. We're here from Uncle Sam, and we want to help.

(Credit: Federal Communications Commission)

Let me see if I've got this right. Federal regulators determined on Friday that Comcast broke the law by slowing Internet traffic for subscribers using BitTorrent to swap large files with other people. But then the FCC decided it was enough to issue a press release declaring the victory of the rule of law and now it's time to move on.

Not a penny in fines was assessed and not the slightest penalty suggested.

(Credit: CNET News)

OK. Post-Enron, post-Bear Stearns, post the subprime debacle, I'm long past being surprised by big corporations trying to cover their posteriors for posterity. But what's really amusing here is that Comcast thinks even this rap on the knuckles is undeserved.

"We believe that our network management choices were reasonable, wholly consistent with industry practices," a company spokeswoman said in a statement.

But this is less about Comcast's ham-handed ways and more about the absence of leadership in Washington. The Federal Communications Commission, a notoriously political institution, is being forced to figure out federal Internet policy on its own. Pulled and pushed in different directions, is it any wonder that the FCC decision comes off as inconsistent?

Critics correctly note that Congress still has not given the FCC explicit authority to decide Internet policy. Even as the FCC issued its decision, Chairman Kevin Martin went on record writing that while Comcast had no right to prioritize Internet traffic, it's fine to prioritize voice over IP:

We do not tell providers how to manage their networks. They might choose, for instance, to prioritize voice-over-IP calls. In analyzing whether Comcast violated federal policy when it blocked access to certain applications, we conduct a fact-specific inquiry into whether the management practice they used was reasonable. Based on many reasons, including the arbitrary nature of the blocking, the lack of relation to times of congestion or size of files, and the manner in which they hid their conduct from their subscribers, we conclude it was not.

We do not limit providers' efforts to stop congestion. We do say providers should disclose what they are doing to consumers.

So it's OK to put individual data packets under a magnifying glass? But in its group statement--which Martin presumably signed off on--the FCC approvingly cited MIT professor David Reed, a respected Internet notable, who believes "that "(n)either Deep Packet Inspection nor RST Injection"--Comcast uses both to manage its network--"are acceptable behavior."

This takes Emerson's apercu that a foolish consistency is the hobgoblin of little minds to an extreme. Maybe the private sector can figure things out without confusing itself over regulation from bureaucrats. But they first need clear rules of the road to follow. Otherwise, expect more of the same.

From time to time, I'm going to open up this space to guest writers with an interesting point of view. This week, Gregory L. Rosston is taking a turn in the spotlight. Rosston is the deputy director of the Stanford Institute for Economic Policy Research and of the Public Policy program at Stanford University. He served as the deputy chief economist of the Federal Communications Commission from 1994 to 1997.

The Federal Communications Commission is about to continue its anticompetitive policy of protecting incumbent telecommunications providers at the expense of consumers. The FCC has one focus--making consumers better off by forcing suppliers to compete. Yet, nearly every recent FCC decision seems to promote incumbents instead of consumers. Next up is the FCC's proposal to cap universal service funding for new entrants, while maintaining excessive subsidies for incumbent telephone companies.

Ever look at the details on your telephone bill? It shows some, but not nearly all of the money you pay for inefficient "high-cost" subsidies to telephone companies. It's about 10 percent of your bill. That adds up to more than $4 billion per year to subsidize telephone service in certain locations. The costs of this system could grow substantially if Congress or the FCC votes to include more advanced services. The FCC has a chance to revamp the system to inject competition, or even better to eliminate completely the inefficiencies.

Why do we give a $4 billion gift to "rural" incumbent telephone companies? Because they have high costs--even they admit higher costs than their newer competitors. A normal market rewards more efficient providers. But this is the bizarro world of regulation. In this bizarro world, the incumbents are rewarded for their inefficiency. They keep the same subsidies even as they lose customers. Instead of encouraging more efficient competitors and penalizing less efficient competitors, regulators are set to cement in place a system that does the opposite, at the expense of consumers across the country.

High cost "universal service" programs are grossly inefficient because they tax the wrong things and the wrong people, and subsidize many who could easily afford service or who would pay for it themselves. No serious economic analysis shows otherwise.

But rural interests have political power out of proportion to their numbers. That's why taxpayers subsidize rich farm corporations and why urban telephone customers subsidize rural telephone customers, rich and poor alike. Even worse, low-income urban subscribers pay fees to universal service funds that benefit upper- and middle-income residents of suburbs and rural areas. A separate program offers subsidies to low-income consumers, but this program, which at least make distributional sense and is not at issue here, is only a small fraction of size of the high-cost fund.

The FCC has a problem--new entrants are taking customers away from incumbents. Since the new entrant gets a subsidy when it steals a customer but the incumbent never loses a subsidy, competition paradoxically increases the total subsidy.

The obvious solution to this "problem" is to end this mindless pork barrel. At the very least, the FCC should cap the total subsidy and divide the subsidy according to the proportion of rural customers each firm serves. Congressman Joe Barton just introduced a bill to do at least this. Instead of following that logic, the FCC is proposing to cap payments to the successful new entrants, but to maintain fully the payments to the incumbents who are losing customers. The Barton bill actually adds another potentially beneficial step--using "reverse auctions" to drive down the subsidy dollars in each area.

Far better than even the Barton bill would be for Congress and the FCC to declare the high-cost universal service program a success and close it down. The entire program could be capped this year and then phased out over the next five years. A gradual elimination of the program would allow firms to cope with the transition, but it would mean a real transition.

In five years most rural areas are likely to still have service from well-funded rural telephone companies--the cost of continuing to serve a customer is a small fraction of the cost of installing a high-cost telephone line to that customer, and most of those lines were installed years ago. In addition, wireless providers continue to expand their coverage areas, and satellite technology is already making Internet service available anywhere in the country. But these competitive alternatives are less likely to sprout and thrive if they have to compete with an unfairly subsidized provider.