May 2011

The House Judiciary Committee's Subcommittee on Courts, Commercial and Administrative Law held a hearing on a bill that would define limits on taxes for virtual goods and services on the Internet.

Full Committee Chairman Lamar Smith (R-TX) sponsored the proposed legislation, known as the “Digital Goods and Services Tax Fairness Act of 2011.” The measure aims to “promote neutrality, simplicity, and fairness in the taxation of digital goods and digital services.” The legislation would restrict taxing authority to the jurisdiction of the customer’s tax address. Witnesses Robert Atkinson, President of the, D.C.-based Information Technology & Innovation Foundation (ITIF), and James Eads, Jr., Director of Public Affairs for Ryan, LLC, supported the proposed legislation.

Former-Federal Communications Commission Chief Economist Tom Hazlett has written paper arguing that television broadcasting needs to be de-regulated -- mostly so that it can fall of its own weight.

He writes that the broadcast TV system is "a needless expense, propped up not by customer demand, technical efficiency, or business necessity, but legacy regulation generations outdated." He said the opportunity cost of allocating 49 channels to broadcasting is an estimated $1 trillion in social welfare. "[P]rotecting broadcast TV in a world where "broadcast TV" is already an anachronism and video programs are themselves fleeing to new media is not a good way for the government to support the emerging markets of the 21st Century." The paper was sponsored by the American TV Alliance whose members include cable operators, satellite operators, and others seeking reforms to the retransmission system they say benefits broadcasters to the detriment of cable operators and their customers.

AT&T has already dropped some significant cash in its effort to gain approval for its merger with T-Mobile, and documents filed recently at the Federal Communications Commission indicate it plans to spend even more.

According to a confidentiality agreement filed at the FCC, AT&T has hired at least 71 legal experts and consultants to help with the merger process. That number includes in-house counsel as well and lawyers and consultants from a range of outside firms. Among the firms that AT&T has hired are Arnold & Porter, Crowell & Moring, Sidley Austin, WilmerHale, the Brattle Group, and Compass Lexecon. On the lobbying side, AT&T has also been on a hiring spree, tapping lobbyists at firms such as Peck, Madigan, Jones, & Stewart, Roberti Associates, and Capitol City Group, among others.

The authors explore the arguments supporting re-auction of the D Block for commercial use, and demonstrate that both the economics and prior history bear out significant problems with such a policy approach.

First, a re-auction of the D Block is unlikely to generate $3 billion in revenues. Statistical analysis of auction data indicates that a 10 MHz block of spectrum in the 700 MHz band must be unencumbered to produce $3 billion in revenues. However, it is important to recognize that the FCC's National Broadband Plan envisions a number of significant encumbrances on any re-auction of the D Block which have substantially reduced auction revenues in the past.

Second, regardless of the total amount received from a re-auction, the re-auction of the D Block does not fully fund the public safety network -- not even close. A nationwide public safety network is expected to cost about $10 to $13 billion. Even if a re-auction of the D Block did bring in $3 billion of revenues, it offsets only about one quarter of the public safety network's cost. The D Block re-auction offers no other mechanism by which to generate funds for the remaining network construction and operating costs. To date, the only credible proposal that could provide sufficient spectrum to alleviate the looming spectrum exhaust and provide significant auction revenue sufficient to cover the cost of building a public safely network and have money left over for deficit reduction is the notion of voluntary incentive auctions to repurpose unused broadcast spectrum.

Finally, the potential broader adverse market effects of a D Block re-auction. The evidence indicates that the public safety community needs a full 20 MHz of spectrum. If so, then the additional 10 MHz must be obtained from either future spectrum assignments or burdensome public safety encumbrances on commercial spectrum. A new block of spectrum will not be contiguous to the PSB Block, which has the effect of increasing the deployment cost of the public safety network by an estimated $4 billion relative to the D Block assignment. This assignment also has the potential of frustrating the creation of contiguous blocks of spectrum for future auctions, thereby substantially reducing subsequent auction revenues. Filling the public safety spectrum shortage with public safety obligations on all commercial providers could also substantially reduce future auction revenues. Thus, even under the rosiest of scenarios ($3 billion in revenues), the auction of the D Block flunks the cost-benefit test.