THE DIGITAL PAST AS PROLOGUE: How a Combination of Active Public Policy and Private Investment Produced the Crowning Achievement (to Date) of Progressive (American)

Mark Cooper, Director of Research, Consumer Federation of America, Senior Fellow, Silicon Flatirons, University of Colorado Regulating the evolving broadband ecosystem, AEI/University of Nebraska Forum Federal Communications Commission, September 10, 2014

I want to thank the AEI and the University of Nebraska for giving me the opportunity to speak on the important topic of regulating the evolving Internet broadband system, especially Jeff Eisenach, who I first met a dozen years ago at a big Cato Hill event, which was entitled, ironically, Too Much Deregulation or Not Enough. At that event, he may recall, I declared that

I am a devout capitalist, a member of a very specific sect of capitalist preachers— progressive, democratic capitalists. “I believe that US capitalism dominated the 20th century because we found the right balance between private incentives and public responsibilities… a way to impose social obligations without undermining the motive. I recognize that can go too far, creating too heavy a social obligation, which will slow the capitalist economic engine down. However, I also insist that we can go too far in deregulating, encouraging antisocial behavior, and allowing the capitalist engine to spin wildly out of control. Balance is the key.

As the title of my paper indicates I am still of that persuasion. In fact, I not only believe that the digital is the crowning achievement of capitalism, but that we must adhere to the principles of progressive capitalism if we are to secure its future success.

I present my qualitative analysis first, then provide supporting data in a series of slides.

In the great debate over regulation of the communications network on which the Internet rides the right and the left are each exactly half right (and, consequently, half wrong):

 The right is correct to trumpet the important role of , innovation and private investment in driving the digital revolution, but is dead wrong in denying the critically important role that active public policy played in creating the environment for success and the vital need for active policy to preserve and protect that environment.

 The left is correct to trumpet the important role of active policy; but is dead wrong to deny the critically important role that the private sector played in creating the digital revolution and must play in continuing to innovate and expand the digital space.

I promise to be an equal opportunity critic in my remarks, and judging from the most recent round of letters to policy makers, that will be easy. Both sides want light-touch regulation, but neither properly depicts the regulation that has worked so well. The touch was heavier than the right admits, and lighter than the left assumes. To design policies to promote the continuing progress of digital communications we must understand the ways in which the

1 combination of public policy and private actions created the digital revolution and recognize the threats that “undisciplined” private or public power pose to the engine of growth.

Progressive capitalism reduces imperfections and barriers to make markets work better, improving productivity and expanding output.

 The digital revolution reminds us that reducing market imperfections is not only about preventing the negative consequences of imperfect market structures – like the abuse of market power, perverse incentives, or the exploitation of asymmetric information.

 It is also about enhancing positive attributes of economic systems, like provision of public goods, building dynamic innovation systems, enhancing network effects, and mobilizing untapped resources by lowering transaction costs.

Slide 2: A pervasive and intense improvement in market functioning resulting from the combination of public and private action created the internet innovation system that is driven by a Virtuous Cycle of which has become the engine of the digital economy. Entrepreneurial experimentation at the edge of the network creates demand for new services that elicits investment in network capacity and functionality, which stimulates further edge experimentation, creating new demand and repeating the virtuous cycle. Today we labor in what I call the Quarterlife Crisis of the digital revolution to create a Socio-Institutional Framework to ensure its dynamic functioning, growth and expansion.

Public policy tilled the ground in which the seeds of the digital revolution could be planted and grow by providing key building blocks that would not have been provided by dominant incumbent communications sector . These include

 Large, sustained support for basic research, development and initial deployment of key technologies, particularly in the 1960s

 A commitment to develop decentralized communications networks for strategic defense, again in the 1960s

 A long standing New Deal tradition of pricing to promote use (that is, bill-and-keep for interconnecting communications companies and flat rate pricing for end users).

The FCC fertilized the ground by adding mandatory opening of access to bottle neck communications facilities again in the 1960s, which ensured

 Neutrality of the communications networks for data transmission and openness to network devices,

 No need to engage in costly bilateral negotiation over the cost and quality of access

 Freedom to experiment, and

 Interoperability of data flow

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The private sector responded to the opportunity with the energy that only capitalism can provide,

 Massive entry and entrepreneurial experimentation that created a new mode of production relying on

 Platforms with divided and diverse technical platform leadership

 Specialization of supply firms

 New relationships to markets, and

 User driven innovation to an unprecedented degree

Voluntary, multi-stakeholder, self-regulation created and preserved open protocols that facilitated collaborative production and ensured the digital space would continue to be friendly to entry, innovation and investment. While these voluntary efforts were vital to the success of the Internet innovation system, it is a mistake to believe that they would have succeeded without the strong action of the FCC to create and preserve the space of freedom for entrepreneurial experimentation.

It is also important to recognize that these efforts were led by new entrants and innovators, not dominant incumbent network owners and even more important to remember that at every step along the way, the dominant network owners expressed hostility to open decentralized communications networks, allowing the freedom to attach “foreign equipment” to the network, and the obligation to afford data nondiscriminatory access to the telecommunications network.

System level characteristics emerged as positive externalities to reinforce the “virtuous cycle” including an expanded division of labor, network effects, learning externalities and knowledge flows. Outside of the economy, there has been an immense increase in “weak ties” interaction and the participatory governance of everything.

With a half-century of success, it is easy to forget the essential role of the balance between public and private action. However, the ecology remains vulnerable to pollution that can sap its strength and undermine its ability to survive. The threat of pollution emanates from both the public and private sectors and is underestimated by both right and the left:

 On the right we find baseless claims that the dominant communications providers no longer have the incentive and ability to undermine the open flow of communication,

 On the left we find naïve beliefs that command and control regulation will not strangle innovation and that public sector entities can provide the necessary innovation.

The right ignores the clear evidence that network owner have an interest in setting the pace and controlling the direction of innovation and taxing successful applications to defend and increase their rents. If they are allowed to do so, they will ruin the economic engine, dampen the “virtuous cycle” by undermining the willingness and ability of the edge to experiment. They can

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 impose counterproductive uncertainty about access to the network and its devices,

 increase costs substantially by forcing edge entrepreneurs to engage in bilateral negotiation,

 undermine interoperability, and

 chill innovation through the threat of “hold up” of successful edge activities.

Incumbent network companies have a conservative, myopic bias, making them less innovative and dynamic with strong preferences for:

 preserving the old structure,

 pursuit of incremental, process innovation rather than radical, product innovation, and

 a proprietary culture that prefers restrictions on the flow of knowledge.

Competition is much weaker in the network segment than at the edge, which means incumbent network companies

 face less pressure to innovate,

 have the ability to influence industrial structure to favor their interests at the expense of the public interest,

 can use vertical leverage (where they are integrated) to gain competitive advantage over independent edge entrepreneurs, and

 can extract rents, where they possess market power or where switching costs are high.

The challenge for policy is to prevent them from doing so and develop and ensure funding of investment in infrastructure without undermining innovation. But, if the network owners keep acting worse than rent collecting utilities, they are going to get themselves regulated like rent collecting utilities. Here the naïve beliefs on the left come into play.

 Utility regulation is about homogeneity and stability, not only thriving in static environments, but inevitably reinforcing the stasis in the environment. Utilities do innovate, unfortunately at the pace of the rotary dial telephone.

 Utility regulation operates best by creating categories of producers and consumers, and definitions of acceptable behavior, with permissions required to act, everything is precluded until it is permitted. Service categories and behavioral limits are hashed out in administrative proceedings and court cases that can stretch out for years or even decades. The cost of delay can be ignored because the sector is presumed to be static.

 Digital communications networks thrive on diversity and prosper only where dynamic change is the key to success, the antithesis of the utility environment.

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 In a dynamic environment, the costs of delay and the of lost services – innovation that is never brought to market – can be severe, whether it is caused by private or public sector gatekeepers.

Analysis of the success of the Internet shows that the model for promoting entrepreneurial experimentation at the edge and preventing harmful behavior in the center of the digital communications ecology is already in hand, embodied in past FCC regulatory decisions. In the Carterphone, Computer Inquiries and unlicensed spectrum decisions, the FCC adopted bright lines that guaranteed access to communications bottlenecks.

 These clear and simple rules allowed extensive and intensive entrepreneurial experimentation, but did not require the involvement of the regulator in the day-to-day operation of the communications protocols or entrepreneurial activity.

 The utility regulation game of delay until death that is anathema to dynamic innovation was blocked by the FCC. The data flowed first and the burden on showing harm to the network fell on the operators, a burden that was rarely met.

We were recently told by some opponents of “heavy handed” regulation that “Broadband Internet deployment and adoption grew and flourished in a light-touch regulatory environment that encouraged heavy investment in the infrastructure needed to support the innovative new services that have become the trademark of the Internet economy, a light-touch approach – which has been an unqualified success and the basis for billions of dollars in investments.”

In fact, the innovation at the edge is the original driver. Virtually all of the success, the first 40 years, came in an environment in which the edge did not confront network operators taxing innovation by demanding to be paid for prioritization, or discriminating unduly against individual content providers or specific types of applications.

At the same time, we are assured by the left that common carrier regulation is “a simple bright line” and the FCC can refine modern rules to prevent “overburdening broadband providers.” But, undue discrimination, was never so simple because differentiation is legal and useful in utility regulation. Users are only allowed to buy service in the category into which they fit, or they can pay for a higher level of service, choosing from a number of speed lanes: DS1, DS2, DS3, T1, WATs, Switched Access, Special Access, or even Private Line. This differentiation is a fundamental form of consumer protection, since regulators do not want to force low volume residential ratepayers to pay for much higher levels of service and higher volume users should cover the costs that they impose on the network. The rhetoric on both sides manifests the policy dilemma, it does not solve it and it needs a good dose of truth in labeling.

Now to the data.

Slide 3: It took a century and a quarter to get wireline telephony to one-fifth of the global population. Wireless reached four times as many people in one-fifth the time. In a quarter of a century twice as many have gained Internet as ever had wireline telephone. More people have mobile phones today than are functionally literate. I do not mean to suggest these forms of communications replace one-another, on the contrary, they meet different needs and the

5 remarkable spread of communications is testimony to the unique value of communications to the human species, a value that is realized by the digital revolution.

Now to the data pictures.

Slide 3: This is the greatest communications revolution in human history. It took a century and a quarter to get wireline telephony to one-fifth of the global population. Wireless reached four times as many people in one-fifth the time. More people have mobile phones today than are functionally literate. I do not mean to suggest that one replaces the other, but the remarkable spread of mobile communications is testimony to the unique value of communications to the human species, a value that is realized by the digital revolution.

Slide 4: The revolution is not just about penetration of service, but also about an immense amount of one-way and two-way communications, all of which require a great deal of infrastructure.

Slide 5: Focusing on traffic flows gives a better appreciation of the huge increase in communications.

Slide 6: The revolution is about dramatic increases in efficiency – sharing of scarce physical and human resource, mobilization of untapped human resources by lowering transaction costs and a much better matching of .

Slide 7: The revolution is not just about the information and communications sectors, the digital revolution transforms the mode of production.

Slide 8: The digital revolution is an American revolution. My analysis of the Forbes global 2000, whose sales equal 44% of the global GDP, shows the following. While the U.S. accounts for 17% of total global GDP and 25 – 30% of the Forbes global 2000 in non-digital sectors, it accounts for 80-90% of the digital sectors, defined to include computer service, sales and hardware, semiconductors, communications equipment, software and Internet retail, measured by the number of companies, output, market value and assets.

Slide 9: This American revolution is unfinished. In contrast to the dominant communications technologies of the 20th century, which penetrated to well over 90%, basic broadband as defined by the FCC has reached only 60%. This level is unreasonable and untimely. This is the American standard to which policy should be held and it is a progressive standard, as defined in the 1996 Act, “Universal service is an evolving level of telecommunications service… taking into account advances in telecommunications and information technologies and services.”

Slide 10: Cross national comparisons can be misleading. Policy is only one of the reasons the U.S. lags behind in terms of broadband penetration and speed. The broadband deficit has not harmed digital leadership, to date. However, that does not negate the fact that we have failed to reach our self-declared goal for universal service and that, in the long run, insufficient provision of infrastructure can take a toll on leadership.

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Slide 11: The global revolution is also unfinished. Internet adoption and wireless broadband are well below 50%. We need to drive those numbers quickly to the 80% range and then confront the challenge of making mobile broadband adequate and completing the adoption of broadband. Moreover, one of the central principles of successful progressive capitalism is that leadership in the economy creates a strong obligation to exercise social leadership to ensure that the fruits of the revolution are widely enjoyed.

Slide 12: The unfinished revolution is not only about penetration and use. The digital communications network must shoulder all of the social responsibilities of the public switched telephone network everywhere.

Slide 13: Because the U.S. chose a progressive capitalist path to the digital revolution, with clear public policy and reliance on private action, a primary threat to its preservation and obstacle to its completion is insufficient . The failure of fixed line competition is the greatest disappointment of the 1996 Act, and the result is prices that have not fallen and consumers that are not satisfied. Measured by the concentration ratio or the

Slide 14: number of firms true broadband service is much too concentrated.

Slide 15: Cable dominates the fixed line broadband sector. These numbers are even more striking if one uses 10 mb or 25mb service. At this level of concentration, combined with the extreme importance of the control of bottlenecks, the market simply cannot function well without strong policy.

Slide 16: It is not just structural analysis that tells us this, it is real world behavior.

There are two sides to every story, but the negotiations that network operators demand is what chills innovation. When one side controls important bottlenecks, the outcome will in the private interest of the network owner to the detriment of the innovation system and worse still, when one side has proprietary interest in both core communications networks and edge activities, the virtuous cycle is in grave danger.

The refusal of network owners to interconnect with communications facilities deployed by edge companies is the most egregious violation of the spirit of the 1996 Act, whose goal is “to promote competition and reduce regulation in order to secure lower prices and higher quality services for American telecommunications consumers and encourage the rapid deployment of new telecommunications technologies.” The failure of competition in the network sector has led to a failure of prices to fall or consumers to be satisfied.

Slide 17: Incumbent network operators are jealous of the innovation rents being earned by the edge companies and they want to their profits.

Slide 18: They bemoan their comparatively meager market cap, ignoring the fact that the much higher value of digital companies reflects a combination of a lot of Schumpeterian rents and a bit of irrational exuberance.

Slide 19: What the network companies do not do is innovate and invest at anywhere near the rate that the Edge companies do.

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Slide 20: In fact, the dominant incumbent network companies take out as much capital as they put in.

Slide 21: The most dominant incumbent network is the worst offender.

Slide 22: Until now, they have increased their profits by increasing prices. We have all seen this graph many times.

Slide 23: However, when we put cable prices on the same graph with the prices for other services, we see the stark contrast between a sector that drives prices down with innovation and one that drives profits up with price increases. We also see why we don’t want to settle for the flat line of utility regulation.

Slide 24: The network operators have also done a miserable job of satisfying customers, with video and broadband services the lowest ranked among 48 sectors and the dominant cable operators the worst of the worsts.

Slide 25: Finishing on a more positive note, we study history to gain insight into where we are in the evolution of the revolution and where we have to go. The economic engine of progressive capitalism can sputter in one of two ways.

 1) Productivity can falter which means the growth of surplus is insufficient to support demand. This tends to happen when the technology is mature.

 2) The distribution of surplus can be too narrow to support demand (that is inequality is too great) to drive output and investment and productivity growth can falter, when capitalists shift from focusing on innovation to rent seeking. This is the classic sign of a gilded age which is a good description of the age in which we live.

Slide 26: The transition from a gilded age to a golden age is perilous and society is always polarized during these periods of change, but the necessary direction of institutional recomposition is clear. We need policies to create coherent growth that generates increasing externalities, production and .

Slide 27: Capitalism has successfully negotiated four previous transitions, but it takes time. The last two have taken a decade and a half.

Since the financial meltdown we have begun to take progressive first steps toward institutional recombination in anti-trust enforcement in the digital economy, financial services, consumer protection, healthcare, energy and the environment, for example.

I would say that the same is true of the FCC, but I was told to avoid saying things that would need to be ex parted. Although just about everything I have said today has been filed at the Commission, let me look back to stay out of trouble. The national broadband plan, the Section 706 finding of unreasonable and untimely deployment, universal service reform, the expansion of the definition of universal service, consumer protection, mobile data roaming, blocking the ATT-T-mobile merger, suggest a new direction. Key issues are on the table,

8 network neutrality, the IP transition, releasing of spectrum from obsolete application, interconnection, but this commission is treating them with the care they deserve.

Here again I would say that the right and the left are off the mark. No matter what the FCC does, it is too much for the right and too little for the left, which misses the fact that we are in the early stage of institutional recomposition.

Slide 28: In my other life as an energy analyst, I have developed a set of guiding principles for implementing performance standards, which are among the most effective tools for progressive capitalist policy.

Performance standards work best when they are: technology neutral, pro-competitive, allow flexibility, set long term targets requiring continuous progress toward a reasonably but aggressive goal, and emphasize least cost approaches and take risk into account. They are particularly effective when public policy provides a context for regulatory negotiations and multi-stakeholder, participatory governance. When policymakers set standards in this way and let capitalists do what they do best, achieve the goals in the most cost effective manner, the ultimate cost is usually less than half of the original, static cost estimate. These principles apply to the FCC.

I want to close with a quote from my Cato statement of a dozen years ago. “In the 1990s, irrational exuberance for deregulation destroyed the balance between the public and the private in a number of critical, infrastructure industries—electricity, telecommunications, finance—and we are suffering for it.”

We did not correct our direction in the first decade of the 21st century and we paid an even bigger price with the “Great Recession,” but we have begun to make the necessary course corrections. It is ironic, but appropriate given my analysis, that the FCC occupies one of the most important policy making positions to ensure that the core of the digital revolution continues to move toward a golden age.

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THE DIGITAL PAST AS PROLOGUE: How a Combination of Public Policy and Private Investment Produced the Crowning Achievement (to Date) of Progressive (American) Capitalism

Mark Cooper, Director of Research, Consumer Federation of America Senior Fellow, Silicon Flatirons, University of Colorado

Regulating the evolving broadband ecosystem, AEI/University of Nebraska Forum Federal Communications Commission, September 10, 2014

Sources: “Petition to Deny of the Consumer Federation, et al.,” In the Matter of Applications of Comcast , Time Warner Cable Inc. and Charter Communications Inc. For Consent to Transfer Control of Licensees and Authorization, MB Dkt No. 14-57, August 25, 2104; “Comments of the Consumer Federation of America,” In the Matter of The Open Internet Remand, Federal Communications Commission, GN Docket No. 14-28, July 15, 2014; “The Long History and Increasing Importance of Principles For 21st Century Public Digital Communications Networks,” Journal on Telecommunications and High Technology Law, 2014; “Reply Comments of the Consumer Federation of America,” In the Matter of Technological Transition of the Nation’s Communications Infrastructure, Federal Communications Commission, GN Docket No. 12-353, February 25, 2013; “Why Growing Up is Hard to Do: Institutional Challenges for Internet Governance in the ‘Quarter Life Crisis’ of the of the Digital Revolution,” Journal on Telecommunications and High Technology Law, 2013; “Structured Viral Communications: The Political Economy and Social Organization of Digital Disintermediation,” Journal on High Telecommunications and High Technology Law, 2011; “Reply Comments -- National Broadband Plan, Public Notice #30 on Broadband Adoption,” In the Matter of A National Broadband Plan for Our Future, Federal Communications Commission, GN Docket No. 09-47, 09-51, 09-137, January 27, 2010; “From Wifi to Wikis and Open Source: The Political Economy of Collaborative Production in the Digital Information Age,” Journal on Telecommunications and High Technology Law, 2006. “Too Much Deregulation or Not Enough,” Natural Gas and Electricity, June 2005; “U.S. Capitalism and the Public Interest: Restoring the Balance in Electricity and Telecommunications Markets,” Too Much Deregulation or Not Enough,” Cato Institute (2002) THE VIRTUOUS CYCLE AND INTERNET INNOVATION SYSTEM AT THE CORE OF THE DIGITAL ECONOMY Socio-Institutional Framework

Decentralized Pricing to Promote Communications Adoption and Use Digital Techno-economic Paradigm

Digital Technologies Strong Positive Externalities Internet Innovation System

Individual Level: Entrepreneurial Experimentation, Open System Level: Shared resources , lower Standards, Collaborative Production, Platforms with transaction costs, match supply & divided & diverse leadership,, Specialized Supply, New Demand, Expanded DOL, Network & financial Models, Unprecedented User Innovation Learning Effects Knowledge flows Virtuous Cycle

Demand Entrepreneurial Investment Experimentation in network edge infrastructure Increased Capacity & functionality The Digital Revolution in Communications, Global Penetration of Communications Technologies 80%

70% Wireline Phone 60% Mobile Phone

50% Internet

40% Mobile Broadband

30%

20%

10%

0% 1890 1915 1940 1965 1990 2015 Expanding Use Requires Infrastructure 1000

900

800 Web Hosts (millions) 700 Global PC Units Shipped 600 (Millions) Internt Exchange Points 500 Exabytes of Traffic 400 Web Sites (Million) 300

200

100

0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Increasing Internet Traffic (Perabytes per Month) 45000

40000

35000

30000

25000

20000

15000

10000

5000

0 1990 1995 2000 2005 2010 Three Examples of the Comparative Advantage of Collaborative Production THE INNOVATION CORE TRANSFORMS THE MODE OF PRODUCTION

20th Century Age of Mass Production 21st Century Age of Information and Telecommunications Techno-Economic Paradigm Mass Production/mass markets Segmentation of markets/proliferation of niches of scale (product and market volume) Economies of scope and specialization combined with scale Standardization of production Heterogeneity, diversity, adaptability Energy intensity Information intensity Synthetic materials Microelectronic-based ICT Socio-Institutional, Organizational Framework Horizontal integration Inward and outward cooperation and clusters Functional specialization Decentralized integration Hierarchical pyramids Network structures National powers, world agreements and /interaction between the global and the local confrontations Centralized/metropolitan centers- suburbanization Instantaneous global contact and action and communications

Carlota Perez, Technological Revolutions and Techno-economic Paradigms, Working Papers in Technology Governance and Economic Dynamics, January 2009:18 The Digital Revolution is an American Revolution (U.S. Share of Forbes Global 2000)* 100% 90% # 80% Profit 70% 60% Market Value 50% Assets 40% 30% 20% 10% 0%

*The output of the Forbes Global 2000 equals 44% of the global GDP. The American Revolution is Unfinished, BB Adoption is Unreasonable and Untimely

100%

90%

80% Unreasonable and Untimely 70% Adoption and 60% Utilization

50%

40%

30%

20%

10%

0% Radio Television Telphone Mobile Phone Basic BB (10mb) Penetration of True Broadband, Subscribers/100 Pop. 35.0 Lower penetration is explained by: The residual shortfall in penetration & speed is due Colder Climate > Greater Value to public and private failures, underinvestment, Homogeneous Populations > Greater Value 30.0 overpricing and abuse of market power Higher Density > Lower Cost Greater Income Equality > More Affordable Price > More affordable At present, the difference is irrelevant 25.0 Policy > Available & Affordable to digital leadership # of Digital Companies in Global 2000 U.S. = 53 20.0 Japan = 5 Netherlands = 4 Hong Kong = 4 15.0 South Korea = 2 Canada =1 10.0 Singapore = 1

5.0

0.0

Italy

Chile

Israel

Spain

OECD

Japan

Korea

France

Turkey

Poland

Greece

Ireland

Austria

Iceland

Mexico

Estonia

Finland

Canada

Norway

Sweden

Belgium

Hungary

Slovenia

Portugal

Australia

Denmark Germany

Switzerland

Netherlands

Luxembourg

New Zealand New

United States United

Czech Republic Czech

Slovak Republic Slovak United Kingdom United The Global Revolution is Unfinished 80%

70% Wireline Phone 60% 4-5 billion people Mobile Phone to bring online 50% Internet 40% Mobile Broadband

30%

20%

10%

0% 1890 1915 1940 1965 1990 2015 The Challenge is About Much More than Adoption and Use True Broadband is a Highly Concentrated Market Dominated

HHI 6000

5000 Severe 4000 Competitive 3000 Shortfall

2000

1000

0 DOJ Unconcentrated Threshold DOJ Moderately Concentrated True Broadband Threshhold “If four is few and six is many,” even “If two is few and four is many,” True Broadband is much Too Concentrated

Number of Competitors 7

6

5 Severe 4 Competitive 3 Shortfall

2

1

0 DOJ Unconcentrated Threshold DOJ Moderately Concentrated True Broadband Threshhold Cable (Comcast-Time Warner) Dominated Fixed Line Service 70000

60000

50000 Total Subs Cable Subs Broadband Subs

40000

30000

20000

10000

0 The Abuse of Market Power is Real, Inevitable and Becoming More Frequent Blocking: . Madison River blocking VOIP ports (2005): . Cingular’s blocking of Paypal (2006): . AT&T blocking of Slingbox iPhone application (2010): . Skype blocking on mobile networks (2010): . FaceTime blocking over mobile devices unless using Mobile Share plan (2012): . Verizon blocking access to tethering apps (2012): Degradation: . Comcast degrading Bittorrent Traffic (2007): . Netflix degradation on Comcast (2013-2014) . Comcast refusal to connect Netflix CDN (2013) Discrimination: . Comcast exemption of Xfinity online video app on Xbox and TiVo from data caps (2012) . AT&T sponsored data plan on wireless network (2014) . T-mobile “Music Freedom” exemption of popular music streaming sites from data caps (2014): Raising rivals’ costs: . Comcast/Verizon/Time Warner interconnection agreements with Netflix (2014) . Continuing problems with wireless data roaming (2010-2014) . Increasing and continuous interconnection disputes (2009-2014) Innovation Rents in the Digital Sector (Return on Assets) 12%

How can we tell the Difference ? 10% Insufficient investment and price increases in addition to the other abuses of market power

8% Innovation Rents (Schumpeterian) 6% Market Power 4% (Rockefeller Rents)

2%

0% U.S. Digital Non-U.S. U.S. BB Non-U.S. BB U.S. Non- Non-U.S, Digital Networks Networks digital Non-digital Market-to-Book

2.00 (Tobin's Q)

1.80 How can we tell the Difference ? 1.60 Insufficient investment and price increases in addition to the other abuses of market power 1.40

1.20 Innovation Rents 1.00 (Schumpeterian)

0.80 Market Power 0.60 (Rockefeller Rents)

0.40

0.20

0.00 U.S. Digital Non-U.S. U.S. BB Non-U.S. BB U.S. Non- Non-U.S, Digital Networks Networks digital Non-digital Capital Expenditures as a % of Free Cash Flow, 2013 100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0% Comcast Verizon Time ATT Apple Microsoft Google Facebook Netflix Amazon Warner Dominant U.S. BB Networks Leading U.S. Digital Edge Firms that Rely on the Network Network Owners are Disinvesting: Incremental Capital as a % of Net Income, 2013 (CapEx - Depreciation)/Net Income)

100%

80%

60%

40%

20%

0%

-20%

Dominant U.S. BB Networks Leading U.S. Digital Edge Firms that Rely on the Network Comcast: the Dominant U.S. BB Network, is the Worst Offender 60%

50%

40%

30%

20%

10%

0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 -10%

-20%

-30%

-40% CapEx/(Operating Income + Dep. + Amort.) Additional Capital=( (CapEx-(Dep. + amort))/Operating Income Real MVPD Rates, 1996=1 1.8

1.6

1.4

1.2 y = -0.0021x2 + 8.3826x - 8413.1 1 R² = 0.9779

0.8

0.6

0.4

0.2

0 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1996-2010 2011-2014 Real Prices 1998-2014 , 1998=1 1.8

FCC Expanded Basic 1.6

1.4

CPI TV Services 1.2 CPI Electricity 1 CPI Telephone

0.8

0.6 CPI Wireless

0.4 CPI computers

0.2 CPI Information Services 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 American Consumer Satisfaction Index, Average for 2013-2014 80

70

60

50

40

30

20

10

0 All All Other Comcast Time All Other TV Comcast TV Time Companies Internet Internet Warner Subscription Subscription Warner TV Service Service Internet Service Service Subscription Providers Service Service PIKETTY & PEREZ Studying history to gain insight into where we are in the process and where we have to go. Recurring Phases of Great Industrial Surges and the Measures of Good Performance

SCHERER: Good performance is multidimentional: (a) Decisions as to what, how much and how to produce should be efficient in two respects: Scarce resources should not be wasted, and production decisions should be responsive qualitatively and quantitatively to consumer demands; (b) the operation of producers should be progressive, taking advantage of opportunities opened up by sciences and technology to increase output per unit of input and to provide consumers with superior products, in both ways contributing to the long-run growth of real income per capita. (c) Operation of producers should facilitate stable full employment of resources, especially human resources...not make YOU ARE maintenance of full employment through the use of macroeconomic policy HERE instruments excessively difficult. (d) The distribution of income should be equitable… [It] implies that producers do not secure rewards in excess of what is needed to call for the amount of services supplied… reasonable price stability Source: Carlota Perez, Technological Revolutions and Finance Capital (Edward Edgar, 2002), Figures 5.1 The 5 Great Surges of the give insight into how to progress from the Gilded Age to the Golden Age

Carlota Perez, Financial bubbles, crises and the role of government in unleashing golden ages, FINNOV, January 2012:4, Technological Revolutions and Techno-economic Paradigms, Working Papers in Technology Governance and Economic Dynamics, January 2009:18 Technological Revolutions and Finance Capital (Edward Edgar, 2002) Performance Standards: A Valuable Tool for Progressive Capitalism, Design Principles for Effective & Efficient Standards Encourage Capitalist Experimentation . Technology neutrality . Pro-competitive . Allow flexibility Emphasize least total social cost and risk aware approaches which encourage . consideration of all externalities and recognition of subsidies . consideration of lead time, scale, capital at risk and use of portfolio approaches Take a long-term view, which allows policy makers to . Set goals that require aggressive, responsible, steadily progress, . consider cost trends (including the pattern of pay offs to social investment), . ignore sunk costs, and . explore fundamental transformation of infrastructure (physical and institutional)