Digital Referee: How the FCC Balances Innovation and Consumer Needs

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FCC chairman Tom Wheeler's interview on the Knowledge@Wharton show on SiriusXM.

An early 19th century poster from Philadelphia warned citizens against the “dangers” lurking behind a project to link a railroad from the north to a railroad in the south. “Outrage!” it screamed in big, bold letters below an illustration of a runaway locomotive sideswiping a man driving a carriage, as an anxious mother, protectively clutching her baby, looked on. “Mothers look out for your children! … Dreadful casualty!” And if Philadelphians do not oppose the railroad linkage, the poster suggested, they could end up as – quelle horreur — a “suburb of New York!”

Behind the poster were businesses that served people who alighted from one train and took the other. They would lose sales if the trains went straight through. This poster hangs in the office of FCC chairman Tom Wheeler, serving as a reminder that industry incumbents whose businesses were threatened would try hard to impede progress. And it is his responsibility as head of the FCC to make sure the communications industry continues to advance in a way that promotes competition and innovation for the public interest.

The FCC oversees such areas as net neutrality, cable programming, spectrum auctions and reallocation, industry mergers and acquisitions, and broadband service, among other things. It has made some bold moves, including setting down reconfigured open Internet rules right after they were defeated in court over similar rules proposed in 2010, reallocating spectrum from TV stations in a first-of-its-kind auction, and blocking a high-profile cable merger that Wall Street had considered a done deal. The next big thing: The FCC is getting ready to propose a set of rules to safeguard the broadband privacy of consumer information based on the core concepts of security, transparency and choice.

But Wheeler does not see the FCC as the cop of the industry. Rather, he views it as more of a referee who applies “just and reasonable” decisions instead of always acting to quash business. He says he understands their needs since he was an entrepreneur himself. “I’m a capitalist with a capital ‘C’. I’m a business person first,” said Wheeler, who spoke this week at Wharton’s Mickey L. Tarnopol Dean’s Lecture Series and on the Knowledge@Wharton show on Wharton Business Radio, SiriusXM channel 111.

“I’m a capitalist with a capital ‘C.’ I’m a business person first.”

Leading Amid Tumult

Wheeler explained that the FCC’s mandate has changed over the decades. When each market was served by only three TV networks and one phone company, the commission’s job was to “micromanage how those companies work” to protect the consumer. But today, the FCC’s role is to make sure there is sufficient competition and enough capacity for innovation to thrive.

Wheeler said the FCC has acted to foster competition in several instances — by sending clear signals it will not support a merger between Sprint and T-Mobile, blocking the merger of Comcast and Time Warner Cable, pre-empting state bans on municipal networks and imposing broadband expansion conditions on AT&T’s acquisition of DirecTV, among others.

His advice to companies is don’t ignore the regulatory climate: “There is nothing that can happen today, particularly in this evolving technological world, in which you can afford to have a policy tin ear.” Twitter  Companies that operate without paying attention to policy will regret it. “Tell that to Uber,” he noted. Uber has been facing a raft of challenges from various U.S. municipalities regarding passenger safety, taxes and the like. The company has also been shut out of many cities around the world amid large protests.

The big challenge for Wheeler, a former lobbyist for both the cable and wireless industries who has spent his career at the intersection of business, technology and policy, is to balance the often-conflicting demands of government, business and consumers. How does he lead in such a tumultuous environment?

“A colleague asked me earlier today, ‘What do you want to be remembered for?’” Wheeler said. “I want to be remembered for deciding. A decision was made to make a decision — not to just ask questions or to have hopes, but to make decisions.” And he is not hesitant to change his decisions in the face of new or more information. “It’s called learning. It’s calling thinking,” he said, noting that critics will call it flip-flopping.

It was his own thinking – reportedly not a nudge from the Obama administration — that caused him to push for a reclassification of wired and mobile broadband service under Title II of the Communications Act. That meant broadband would be regulated in a similar way as landline phone service but with some notable exceptions, such as rate regulation.

The Third Rail

Putting broadband under Title II as a common carrier service, where it could be more heavily regulated, has long been considered by the industry as touching the “third rail.” Prior to the FCC’s move, broadband fell under the “information services” category, which let providers generally manage networks freely, including slowing down certain types of traffic such as online video to ease Internet congestion. That means companies decide which traffic to favor, not consumers. Wheeler saw the reclassification of broadband as protecting network neutrality — the free movement and equal treatment of Internet traffic – something many consumer advocates have long championed.

At first, Wheeler said he wanted to invoke Section 706 of the Telecommunications Act, which advocates broadband access for all Americans but imposes a lighter regulatory burden, instead of operating under Title II. But he changed his mind after learning that “at the heart of what I was originally favoring was the concept that something is all right as long as it is ‘commercially reasonable.’ The difficulty with that was it was an undefined term.” If his successors were to later redefine the term as what is commercially best for Internet service providers instead of consumers or innovators, then “I would have made a mistake,” Wheeler added.

Recently, the FCC attracted the opposition of the pay-TV industry by pushing for the unlocking of set-top boxes, more commonly known as the cable box. (Wheeler noted they were called set-top boxes because they were boxes that sat on top of TV sets. Now they rest next to the TV.) He said 99% of pay-TV customers are chained to their set-top box and pay an average of $231 a year in rental fees for it. The FCC wants pay-TV operators – cable, satellite and phone companies that offer TV service – to let people watch the TV they paid for on any device they wish, not just through the set-top box.

“There is nothing that can happen today, particularly in this evolving technological world, in which you can afford to have a policy tin ear.”

When pay-TV content is unlocked for use on any device, the hope is that a competitive marketplace will develop and drive down prices. At present, set-top boxes bring in $20 billion annually for pay-TV operators. Since 1994, prices for the boxes have rocketed up 185% while the cost of computers, TVs and mobile phones have dropped 90%, according to the FCC.

While there have been prior efforts to unlock the box that failed, Wheeler thinks it can succeed this time because the technology has changed. Pay-TV operators are switching to IP-enabled boxes, creating a “lingua franca” that did not exist before. Wheeler compares the set-top box monopoly to a time when consumers had to rent their phones from the phone company. Now, people can buy any kind of landline phone they want and plug it into the network – and it will work.

Wheeler also weighed in on the state of broadband in the country — the U.S. is ahead of Europe and most other countries in the world. About 90% of Americans have access to fixed broadband speeds of 25 megabits per second for downloads and 3 Mbps for uploads. Mobile speeds are rising, too, with carriers talking about 5G (fifth generation) instead of 4G (fourth generation) technology.

Unlicensed Spectrum, Starry, Binge On

The other big FCC mandate, besides fostering competition, is to ensure there is enough spectrum capacity – the airwaves used by mobile devices and others — for existing and future technologies. In accordance with President Obama’s National Broadband Plan to free up more spectrum, the commission is urging TV stations to sell excess spectrum under a new auction process, with the proceeds going to the U.S. government.

Wheeler said the goal of the auction is not to “make a killing” but rather to ensure enough spectrum. Nonetheless, the FCC’s AWS-3 wireless spectrum auction that concluded in January 2015 brought in a record $45 billion — four times more than expected. It was the biggest “beach-front” spectrum sale to wireless carriers and other parties since 2008.

Asked why the FCC doesn’t sell the rights to unlicensed spectrum — used by WiFi – Wheeler said this is “where ideas first develop — it absolutely and positively has to be encouraged.” The commission will set aside at least three channels in every market in the prime TV band for unlicensed use. According to Wheeler, unlicensed and licensed spectrum has to co-exist. Again, it is not about the money. Rather, the goal is to make spectrum available to encourage innovation.

“A colleague asked me earlier today, ‘What do you want to be remembered for?’ I want to be remembered for deciding.”

Such innovation includes “Starry,” a high-speed broadband service that promises to provide faster, cheaper and more user-friendly Internet, being developed by Chet Kanojia, the founder of Aereo, a now-defunct broadcast TV-streaming service. It will use high-frequency spectrum bands in the 38 GHz range for wireless data. “I think it’s a great idea,” Wheeler said. Starry uses new technology and adds competition to the broadband market. “We’ll see how it works,” he said. If it does work as planned, the service would connect wirelessly in the home like a mobile phone – fixed wireless broadband — and undercut the prices traditional broadband providers charge.

Another innovation is T-Mobile’s new Binge On service, with which customers can watch unlimited video but only for selected services such as Netflix. Wheeler says it is “innovative and competitive” but the FCC would “keep an eye on it.” Critics contend the service violates net neutrality because T-Mobile selects which video streams to exclude from being counted in the customer’s data plan. The FCC has asked T-Mobile to provide more information on Binge On.

Wheeler said the central concept underpinning the FCC’s decisions is encouraging open and fair competition. Competition benefits consumers, innovators and investors. “Our motto that has become a tagline is competition, competition, competition,” he said. “That’s what it’s all about.”

 

Image: FCC headquarters in Washington, DC (Flickr/Federal Communications Commission)

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