Tuesday, March 2, 2010

Abolish The FCC

Once upon a time, when I was a student of economics and foreign policy, we had to learn about government five-year plans to accomplish this or that. "The central government is marshaling the productive forces to build X, Y or Z for the people" and so forth. Fill in the blanks depending on the day or year. In those days, the subject geography was the Soviet Union.

Fast forward a few decades, and we now have adopted the government five-year planning syndrome right here at home in the United States. From the auto industry to the banking industry, student loans, energy policy -- you name it. The Federal Communications Commission is on the case with broadband.

So what is the pretext for this new Soviet-style FCC plan to do something with broadband? The argument goes that broadband is too slow, and that too few people have access to it. Let's first state where we are today. In terms of wired broadband, approximately 95% of U.S. households have access to cable modem, DSL or fiber optics. The 5% that don't basically live in very rural areas where the investment required to pull wires aren't paid for by users.

In terms of Internet speeds, when cable modems and DSL were first launched on a broad scale in the second half of the 1990s, speeds started at little over 1 MB/s. For natural reasons such as distance attenuation with DSL, as well as the obvious fact that investment isn't uniform, speeds have come to vary widely. Some remain stuck around 1 MB/s, whereas others get around 100 MB/s. Most people with a cable modem (priced at around $40/month) get more than 10 MB/s.

Basically, in less than 15 years, speeds have gone up by approximately 10 times on average, while prices have remained the same on a non-inflation-adjusted basis.

On the wireless side, things are more complicated. Ninety-five percent or so of Americans have access to four wireless networks: AT&T, Verizon, Sprint and T-Mobile. Other networks cover significantly fewer cities, but some of them are game-changing. In particular, Clearwire now covers 27 cities (over 30 million people) and will be at 120 million people by year-end. The primary reason wireless Internet speeds remain low today, and are typically capped at 5 GB/month, is the limited amount of spectrum used.

Really the only good thing I am hearing out of the FCC these days is the desire to privatize more spectrum. The FCC is talking about 500 MHz over 10 years. This is excellent, and indeed it should do even more. If you know why Clearwire is the only wireless operator not capping its users at 5 GB/month, it's because the company has an average of 120 MHz spectrum depth per market, which is dramatically much more than its competitors. Privatizing more spectrum is the key to better wireless.

Beyond privatizing spectrum, there is no intelligent role for the FCC.
If we want more broadband investment, the building of broadband needs to be deregulated and taxed less. Investors in broadband are now scared stiff as a result of various threats of "Net Neutrality" legislation or regulation. "Net Neutrality" is akin to rent control for apartment buildings.

As an investor, you want your company to be free to offer any service at any price and in any manner the owners so choose. Any encroachment upon this basic constitutional private property right will discourage investment in broadband.

The FCC's view of broadband appears to be: If it moves, tax it. If it keeps moving, regulate it. If it stops moving, subsidize it. We are now in the last phase, the subsidization phase. Under the guise of "universal coverage" and "stimulus," we are now going to use taxpayer money to build stuff that the market doesn't want to invest in otherwise, in part because of the threat of "Net Neutrality" regulation. It's the simultaneous stick-and-carrot from the FCC.

Whip the industry with "Net Neutrality," but hand it billions of taxpayer funds if the companies jump through certain hoops such as pull cables in very rural areas where the number of Internet users is very small. Think "The Bridge to Nowhere."

How should we encourage a sound broadband industry? I have a simple five-step plan:

1. Remove the treat of "Net Neutrality" and all similar regulations.

2. Abolish the FCC and replace it with a Spectrum Privatization Board, whose sole purpose will be to do what its title says: Sell government property to the highest bidders.

3. Declare that all telecom and technology will be 100% unregulated by the federal government.

4. Abolish all taxes on telecom and technology. The basic telecom tax was instituted in 1898 (yes, 112 years ago) in order to pay for the Spanish-American War. I believe that war ended already, and in fact Cuba has changed regimes a few times since. So we can safely remove this telecom tax now.

5. Repeat the equivalent of 1-4 above on the state and local levels.

Just look at your iPhone bill and you will see how much this nonsense adds to the cost.

The bureaucrats won't like my five-step plan above because it means that 99% of bureaucrats involved in taxing and regulating broadband would have to find real jobs, where they don't parasite upon real people who do real work. However, this five-step plan will encourage massive new investment in broadband, now that this industry would no longer be penalized. Broadband providers would be able to focus on expanding services, instead of worrying about government punishment.