Corporate Welfare

The FCC's recent call for unbounded spectrum auction authority spotlights an important debate over whether some of this scarce and extremely valuable wireless spectrum should be auctioned or not.

• Ironically the FCC is asking Congress to give it spectrum auction authority to not auction spectrum.
• In other words, the FCC is asking to be unilaterally empowered to decide not to auction some spectrum so it can deem it "unlicensed spectrum," like that used for WiFi and garage door openers.

There are huge fiscal problems with the FCC's position, given our nation's severe fiscal situation: a trillion dollar Federal budget deficit and a ballooning multi-trillion dollar public debt.

First, the real world effect of the FCC's gambit here is to try and get revenue-raising legislation to not raise many billions of dollars.

At CES, the FCC signaled that it opposed any effort by Congress to give the FCC policy direction or to establish any checks and balances on the FCC in authorizing incentive auctions of prime TV broadcast spectrum.

See my Forbes Tech Capitalist post "FCC Seeks Unbounded Spectrum Auction Authority" to see why the the FCC's lack of regulatory humility here is so stunning.

Netflix' continues to exhibit serious difficulties grasping basic economics, competition and value.

First, Netflix is lowering its value to customers.

• Netflix now charges its subscribers' 60% more in September in return for lots less premium content available for subscribers in February, as Netflix just lost Starz,its top premium content provider, which supplies 22 of Netflix' top 100 movies.

Second, Netflix is shifting its costs to its customers.

• Netflix used its abrupt and controversial 60% price hike to force many of its core users away from the DVD model that many prefer and have the viewing technology for (but costs Netflix more), to the streaming model, (which Netflix prefers because it costs them less) even if it costs many of their DVD customers to spend lots more to upgrade their viewing technology to view the streamed content in the way they can currently view DVDs.

Third, Netflix is chasing away the premium content its subscribers demand.

Netflix continues to throw stones at the common economic practice of usage-based pricing, to which broadband carriers are naturally migrating, all while Netflix stands inside a glass house filled with mis-managed usage pricing practices. 

Netflix as Stone Thrower:

In a concerted campaign for net neutrality regulation that would ban broadband usage caps or pricing, Netflix has generated a:

• Supportive Washington Post blog;
• New York Times editorial,
• Wall Street Journal op-ed,
• Shareholder letter, and
• Faux net neutrality complaint with Level III-Netflix.

Netflix as Glass House:

"The Net Neutrality Debate in Europe is Over" per an excellent commentary by Ben Rooney in WSJ TechEurope.

• Mr. Rooney chronicles the evolving public position of EU Digital Commissioner Neelie Kroes from an original pro net neutrality regulation mindset, to now the opposite -- a more pro-competition mindset where "the commissoner's position now [is] that a competitive market should be able to deliver an Internet to which everyone has access."

For those who follow history, it is truly ironic, surprising, and just plain bizarre that Europe is more pro-competition on Internet policy than the U.S. FCC.

How can this be? To understand this wierdness, look at this remarkable development through the lens of industrial policy.

I posit the reason for this European policy outcome is the fact that Europe does not have a Silicon Valley lobby -- with an aggressive corporate welfare agenda seeking government special treatment, regulation of their competitors, and implicit bandwidth subsidies -- like the U.S. does. 

The stark and ironic contrast between the FCC's European-style, interventionist, regulatory approach, and Europe's more American, non-interventionist, competitive approach can only be explained by the presence of the potent lobbying force of U.S. industrial policy national champions (Silicon Valley -- Google, eBay, Amazon, IAC) in the U.S. -- and the absence of European national champions seeking net neutrality in Europe.

It appears as if Netflix' rocket stock and nosebleed market valuation has infected Netflix' CEO, Reed Hastings, with a bad bout of dot.com hubris fever complete with hallucinations that Netflix is somehow a needy online video provider entitled to new massive subsidies under the FCC's Open Internet order.

• In his recent letter to shareholders (see p. 9 under "Challenges)" Mr. Hastings  launches a grandiose diatribe on what prices and pricing models competitive broadband ISPs should and should not be able to charge Netflix in the competitive market place.
  • Mr. Hastings dreams Netflix is entitled to "no-charges" from ISPs for dumping more concentrated asymmetric Internet traffic on them than any entity has ever before generated, despite the fact that Netflix' proposed approach is completely contrary to the way that the Internet backbone peering marketplace has operated for over fifteen years.
  • Mr. Hastings also dreams about what pricing models and prices competitive broadband ISPs should be allowed to charge their customers.

Alarm bells should be going off among Netflix' sophisticated shareholders.

In requesting the FCC and DOJ condition the Comcast-NBCU merger with Title II telephone regulation of Comcast's Internet backbone, Level 3 seeks to achieve through the back door of the FCC what they could not achieve through the front door.

Now we know what "real net neutrality" and "openness" are, and that they are the antithesis of free market economics or competition.

As the FreePress-led letter to the FCC made clear on Friday: "Paid prioritization is the antithesis of openness. Any framework that does not prohibit such economic discrimination arrangements is not real net neutrality."

What is "paid prioritization?"

• It is quality of service guarantees, market economics, supply and demand, market-based pricing, investment incentives, competitive differentiation, and reasonable network management.
• Now we know "real network neutrality" and "openness" is more uneconomics from FreePress and the extreme left.

Remember FreePress' last Uneconomics 101 lesson was that "above-cost pricing" was an "unfair business practice."

The extent to which Level 3's business is underwater is the untold story behind Level 3's regulatory "hail Mary" claim that its Internet peering dispute with Comcast is somehow a net neutrality violation.

• Apparently Level 3 has concluded that since it hasn't found a straight-up way to compete successfully in the Internet marketplace on its own, it wants an Internet regulation bailout from the FCC, in which the FCC would: deem Level 3 a market winner; price regulate the Internet for the first time; and force its competitors to implicitly subsidize Level 3 with mandated Internet peering price subsidies.
  • (To appreciate how bogus Level 3's claims are, click here for a complete rebuttal.)

Why is Level 3 seeking a de facto Internet regulation bailout from the FCC?

First, Level 3 is a financially-sinking business with no legitimate growth prospects.

We learned today that Google has the lowest foreign tax rate of the top five U.S. tech companies, an eyebrow-raising 2.4%, and that Google "cut its taxes by $3.1b in the last three years using a technique that moves most of its foreign profits through Ireland and the Netherlands to Bermuda," per an outstanding investigative expose by Jesse Drucker of Bloomberg.

This exceptional tax dodging feat, while reportedly technically legal, nonetheless raises some important questions that no one has yet asked Google.