http://www.calendarlive.com/books/reviews/cl-et-book18aug18,0,7916032.story?coll=cl-books-reviews
BOOK REVIEW
The quest for a Republican nation
One Party Country The Republican Plan for Dominance in the 21st Century Tom Hamburger and Peter Wallsten Wiley: 262 pp., $25.95
By Lee Drutman
Special to The Times
August 18, 2006
IN 2004, Republicans won a clean sweep of the national elections — 232 House seats, 55 Senate seats, 28 governorships and, of course, the presidency, expanding on gains from 2000 and 2002. It's the kind of electoral dominance that could lead a pair of White House reporters to wonder: "[I]s the United States becoming a one-party country?"
Such is the provocative contention of Tom Hamburger and Peter Wallsten's behind-the-curtains exegesis of the Republican plan for perpetual political power — and why it just might be crazy enough to work. "Republicans," they write, "are the New York Yankees of American politics — the team that, at the start of every season, has the tools in place to win it all."
In "One Party Country," the two Los Angeles Times writers trace the GOP's winning strategy to George H.W. Bush's 1992 loss to Bill Clinton, which led Bush's sons George and Jeb to two realizations. One: You can't abandon your base. And two: It's time to start reaching out to minority voters that Democrats are taking for granted.
Soon the Bush brothers were making inroads with African American and Latino voters in Texas and Florida, touting new educational initiatives (market-based, of course!) and test-driving such phrases as "the soft bigotry of low expectations" that somehow make traditional Democratic approaches to social welfare seem even a little racist. By 2000, the outreach had paid off. Jeb Bush already had been elected governor of Florida and George W. Bush won 50% of that state's Latino vote (which is predominantly Cuban American and conservative) and the presidency. The Bush brothers, Hamburger and Wallsten argue, "had profoundly changed the Republican Party's base of support."
With the White House as a base of operations, Bush political advisor Karl Rove then set to work on "a breathtakingly ambitious plan to use the embryonic Bush presidency to build an enduring Republican majority." The first order of business was, well, business. The corporate love-fest began with a big wet sloppy kiss in the form of an immediate two-month freeze on regulation and just kept getting better. Hamburger and Wallsten write that many of the administration's "pro-industry moves attracted little public attention" because they occurred after the Sept. 11 terrorist attacks.
As planned, the business community expressed its thanks in the form of very generous financial support, and GOP operatives used that money to develop a highly sophisticated get-out-the-vote operation built around a top-of-the-line information-management system. Using the "Voter Vault" — which "matched voter files with marketing data obtained from magazine sales, grocery stores, and other retailers" — the Bush team found hidden pockets of supportive swing-state voters, such as an enclave of pro-Israel Orthodox Russian Jews in suburban Cleveland. Republicans also used the consumer data to target military history buffs, bourbon drinkers and Chevy owners, all of whom trend conservative.
Meanwhile, President Bush continued targeting minorities. During the 2004 campaign, many voters with Spanish surnames got a five-minute DVD — "barely noticed outside the Latino community" — in which Bush tried to establish a personal, emotional connection with Latino voters. (A Democratic pollster called it the "I love you" strategy.) Exit polls showed that 40% of Latinos voted for Bush in 2004, up from 35% in 2000.
Bush also devoted special attention to African American church communities that shared his religious and social conservatism (often abetted by government grants through the faith-based initiatives program). Hamburger and Wallsten suggest that a seven-point rise in black support in Ohio may have made the difference for Bush in the pivotal Buckeye State.
The obvious and immediate test of the premise of "One Party Country" will be the November midterm elections. Will Republican efforts to toughen immigration laws destroy the support Bush has gained among Latinos? Will the administration's fumbled response to Hurricane Katrina wash away the inroads the GOP has made among African Americans? And can Republicans keep playing the terrorism card, despite the daily reports of death and disaster in Iraq? (Hamburger and Wallsten have surprisingly little to say about the politics of national security as a potential explanation for recent Republican successes.)
Even if Democrats gain seats this fall, the authors see "few signs that [the] party will be prepared to turn those victories into a winning movement." That's because Republicans still have the solid support of business (and the money that comes with it), the Voter Vault and, perhaps most significant, the structural advantage that comes from years of careful redrawing of congressional district lines. Besides, in the winner-take-all American political system, Republicans need only continue to eke out slim majorities.
For anyone who wants to understand why Republicans are winning elections and why they are likely to do so in the foreseeable future, "One Party Country" is a must read.
Lee Drutman is co-author of "The People's Business: Controlling Corporations and Restoring Democracy."
If you want other stories on this topic, search the Archives at latimes.com/archives.
Article licensing and reprint options
Copyright 2006 Los Angeles Times
Sunday, September 03, 2006
Executive bacchanalia -- Providence Journal/Scripps Howard News
http://www.scrippsnews.com/node/11552
Executive bacchanalia
Business & Economy | Business & Technology
By LEE DRUTMAN
Recently, the Securities and Exchange Commission finally got around to approving new executive-pay rules. The new rules (the first in 15 years) come as concern about the latest flabbergasting fiasco of executive chutzpah _ the backdating of stock-option grants _ continues to metastasize.
Under the new pay rules, corporate proxy statements will come with a "Compensation Discussion and Analysis" section, which will explain and justify executive-compensation levels to investors _ unless, of course, the company begs out of this requirement by proving that such disclosure would reveal competitive information (a potentially gaping loophole).
The disclosure is meant to prevent companies from burying descriptions of unrestrained executive perks in abstruse legalese in the far corners of financial reports. Investors complained that this practice was confusing and misleading; now, if all goes according to plan, the investors will be able to see not only that executives are earning "a lot," but also that they are earning "even more."
The rules will probably spur innovation. Companies will doubtless discover creative ways to justify giving executives annual compensation of the kind that it would take an average worker several lifetimes to earn. (Big-public-company CEO compensation now stands at about 400 times average-worker pay.)
As for stock-options backdating (the executive pay scandal du jour), companies will now have to document and justify all options grants. Nothing, however, says that justifications have to be convincing. For example, when The Wall Street Journal recently reported that almost 200 companies had taken advantage of post-9/11 stock-market lows to grant top executives millions of stock options, a Black & Decker's spokesman responded: "It did not bother the board that it was at an advantageous strike price, because that helped the retention aspect." Take that, shareholders!
At last count, at least 80 companies were under investigation for backdating: changing the grant date to a time when the company's stock price was lower than the original grant date. (Options sellers get the difference between the stock price on the day of the sale and the stock price on the day of the grant _ so changing the grant date to a lower-stock-price day is an easy way to make more money on option sales.)
As usual, the winners in this scandal are mostly top executives, and the losers are ordinary shareholders. The irony, of course, is that stock options were designed to align the incentives of executives and shareholders, by giving executives a stake in the company's share price. Instead, in an astonishing demonstration of the law of unintended consequences, stock options display the irrepressible ingenuity of avaricious executives and their friendly boards. (Options also played a pre-eminent role in the recent cascade of accounting scandals, giving executives a powerful incentive to artificially inflate earnings and cash out at a stock-market high.)
Indeed, despite all efforts to the contrary, American corporate executives keep coming up with ways to get even richer _ far outdoing their corporate compatriots throughout the developed world. (The United States is an outlier in executive- to worker-compensation ratios, by a factor of 10.)
This month, it's backdating of stock options. Next month: Who knows what fiscal bacchanalia will undermine any sense of fairness and shared enterprise in the corporate economy _ what daring act of clever cupidity will provoke further resentment from the ever-more-beleaguered ranks of working America? But hey, at least with this new requirement for disclosure of executive compensation, we'll know a little more about it.
(Lee Drutman, a California-based writer, is the co-author of "The People's Business: Controlling Corporations and Restoring Democracy," Berrett-Koehler Publishers. E-mail ldrutman(at)gmail.com.
Executive bacchanalia
Business & Economy | Business & Technology
By LEE DRUTMAN
Recently, the Securities and Exchange Commission finally got around to approving new executive-pay rules. The new rules (the first in 15 years) come as concern about the latest flabbergasting fiasco of executive chutzpah _ the backdating of stock-option grants _ continues to metastasize.
Under the new pay rules, corporate proxy statements will come with a "Compensation Discussion and Analysis" section, which will explain and justify executive-compensation levels to investors _ unless, of course, the company begs out of this requirement by proving that such disclosure would reveal competitive information (a potentially gaping loophole).
The disclosure is meant to prevent companies from burying descriptions of unrestrained executive perks in abstruse legalese in the far corners of financial reports. Investors complained that this practice was confusing and misleading; now, if all goes according to plan, the investors will be able to see not only that executives are earning "a lot," but also that they are earning "even more."
The rules will probably spur innovation. Companies will doubtless discover creative ways to justify giving executives annual compensation of the kind that it would take an average worker several lifetimes to earn. (Big-public-company CEO compensation now stands at about 400 times average-worker pay.)
As for stock-options backdating (the executive pay scandal du jour), companies will now have to document and justify all options grants. Nothing, however, says that justifications have to be convincing. For example, when The Wall Street Journal recently reported that almost 200 companies had taken advantage of post-9/11 stock-market lows to grant top executives millions of stock options, a Black & Decker's spokesman responded: "It did not bother the board that it was at an advantageous strike price, because that helped the retention aspect." Take that, shareholders!
At last count, at least 80 companies were under investigation for backdating: changing the grant date to a time when the company's stock price was lower than the original grant date. (Options sellers get the difference between the stock price on the day of the sale and the stock price on the day of the grant _ so changing the grant date to a lower-stock-price day is an easy way to make more money on option sales.)
As usual, the winners in this scandal are mostly top executives, and the losers are ordinary shareholders. The irony, of course, is that stock options were designed to align the incentives of executives and shareholders, by giving executives a stake in the company's share price. Instead, in an astonishing demonstration of the law of unintended consequences, stock options display the irrepressible ingenuity of avaricious executives and their friendly boards. (Options also played a pre-eminent role in the recent cascade of accounting scandals, giving executives a powerful incentive to artificially inflate earnings and cash out at a stock-market high.)
Indeed, despite all efforts to the contrary, American corporate executives keep coming up with ways to get even richer _ far outdoing their corporate compatriots throughout the developed world. (The United States is an outlier in executive- to worker-compensation ratios, by a factor of 10.)
This month, it's backdating of stock options. Next month: Who knows what fiscal bacchanalia will undermine any sense of fairness and shared enterprise in the corporate economy _ what daring act of clever cupidity will provoke further resentment from the ever-more-beleaguered ranks of working America? But hey, at least with this new requirement for disclosure of executive compensation, we'll know a little more about it.
(Lee Drutman, a California-based writer, is the co-author of "The People's Business: Controlling Corporations and Restoring Democracy," Berrett-Koehler Publishers. E-mail ldrutman(at)gmail.com.
Executive Privileges - TomPaine.com
http://www.tompaine.com/articles/2006/08/11/executive_privileges.php
Executive Privileges
Lee Drutman
August 11, 2006
Lee Drutman is the co-author of The People’s Business: Controlling Corporations and Restoring Democracy.
This week, federal prosecutors charged three executives at Comverse Technology Inc. with reaping millions of dollars in illegal profits through fraudulent “backdating” of stock options. The little-known voicemail technology company is now the second to be charged in the rapidly expanding stock options backdating scandal that is starting to garner national attention. If you haven’t heard about it yet, you will soon.
As the scandal continues to unfold, the basic plot line is starting to look achingly familiar. Something to do with companies stacking the deck so that top executives somehow keep drawing all the aces. Something to do with CEOs whose personal greed knows no bounds. Something to do with auditors and lawyers who surely should have known better. Something to do with boards of directors whose inattention (willful or otherwise) knows no sense. Something to do with shareholders who knew nothing and were, once again, easily victimized. And unless something dramatic changes, it’s something that is going to keep happening.
The depressing part of this particular executive compensation card-trick is that actually turns out to be ingeniously simple.
Consider: Say you are the CEO of GloboMegaCorp, and you get 100,000 stock options granted on January 1, when the stock was worth $50. You cash them in six months later, when the stock is now worth $60, and you’ve just made $10 per share (the difference between the $60 on the sell date and the $50 on the grant date). With 100,000 options, that’s $1 million—not bad.
But say you “backdate”—that is, change the grant date—to the previous November, when the company stock hit a low of $40. Now, when you sell your options at $60 a share, you make $2,000,000 instead. Even better.
At last count, 80 companies were facing backdating investigations , though one academic study estimates that the practice may be far more widespread. By the count of Erik Lie at the University of Iowa, 29.2 percent of companies have engaged in some questionable timing of options grants and 13.6 percent of options granted to top executives between 1996 and 2005 were of questionable timing.
But while the stock options backdating fiasco is troubling indeed, most of the cases under investigation happened before Sarbanes-Oxley improved reporting requirements and other recent changes to accounting rules that require companies to count their stock options as expenses. So it’s not that likely to happen again.
Still, what’s important to note is the way these scandals provide yet another example of just how ingenious top executives have become in working the system—and just how helpless we seem to be to stop them.
Between 1993 and 2003, the percentage of company profits going to the top five executives more than doubled, growing from 4.8 percent to 10.3 percent. In 2004, the median Fortune 500 CEO received compensation worth $15 million. At last count, average CEO was earning more than 400 times average worker pay, and more than 800 times the minimum wage. It is worth noting that in almost all other industrialized nations, the average ratio of CEO-to-worker pay is rarely more than 25 to 1.
So, what’s to be done?
First, what’s been done already: Recently, the Securities and Exchange Commission issued new rules on executive compensation. Given that the new rules—the first in 14 years to address executive compensation—attracted 20,000 comments, you might expect that the SEC was proposing something radical. Hardly.
The new rules basically require companies to be more up front about how they are compensating their top executives. So instead of wrapping the details of outrageous retirement packages, use of the corporate jet and country club memberships in a cocoon of dense legalese and scattering throughout corporate financial statements, companies will now be required to provide a “Compensation Discussion and Analysis”—wherein they will explain and justify their executive compensation decisions, including its stock option granting practices. However—in a potentially gaping loophole—companies can beg out of this requirement if they can prove that such disclosure would reveal competitive information.
Problem is, we already know top executives are getting compensated at outrageous levels. We’ve known this for years. And somehow, despite widespread condemnation of this fact by just about everyone—it’s pretty hard to find an apologist these days—executive compensation still somehow continues to rise. Shame is clearly not an issue here! So, now that we have some new rules, maybe we’ll know a little more. But what exactly will that do to curb runaway CEO pay?
In theory, shareholders—armed with this new information—could punish companies that reward their executives too much by selling the stock. But given that numerous studies have conclusively shown absolutely no link between share price performance and CEO pay—plenty of CEOs do quite well during times of declining stock prices—it’s not clear whether even a massive sell-off would have much impact.
And, well, that’s about it. Shareholders could register their displeasure at annual shareholder meetings, but the problem is that the board of directors is almost always selected with the blessing of management. Not to mention that at 75 percent of U.S. companies, the CEO is also the chairman of the board of directors. So such displeasure by mere shareholders will inevitably be met with displeasure that somebody would express such displeasure in the first place.
Shareholders could threaten to vote sycophantic outrageous-pay-approving directors off the board, but the threat would ring hollow for a simple reason. Since management controls access to corporate proxy statements, almost all director elections are run Soviet-style: Managers appoint one slate of candidates, and shareholders can either approve or disapprove. The slate of candidates with the most votes wins.
For years shareholder groups have been arguing that the SEC should require companies to open up their proxy statements to minority shareholder groups, but pro-management groups like the Business Roundtable and the Chamber of Commerce have been able to convince the SEC that this is a bad idea. Unfortunately, until shareholders can somehow hold directors accountable—or vote directly on executive compensation—there will be very little they can do to restrain executive pay.
Barring direct shareholder involvement, the only other possibility is the moral argument against the outrageous excesses of CEO compensation made most recently by Berkshire Hathaway Vice Chairman Charles Munger. A month ago he delivered a blistering rebuke of excessive CEO pay at a keynote speech at the Stanford Law School Directors’ College.
Munger told an audience that included some CEOs that "Corporate compensation in America is offending a lot of people needlessly and it should be fixed. It is really dangerous to have a lot of envy taking sway in the world.”
He added that CEOs "have a duty to the larger civilization to dampen some of this envy and resentment by behaving way more noble than other people and more generous…The CEO has an absolute duty to be an exemplar for the civilization."
Munger’s argument may fall on deaf ears, but ultimately, it may be that the only way for CEO pay to be brought under control is for CEOs themselves to finally say enough—to realize that they do have a moral responsibility as leaders, and to understand that when their pay is such an issue, it breeds resentment among an increasingly harried and squeezed working class, undermining a sense of shared gain and fairness in the economy—a sense that can’t be good for worker productivity. After all, it’s pretty disheartening to know that as an average worker, you would have to work for 400 years (about 10 working lifetimes) to make what the average CEO makes in one year.
As troubling as the stock options backdating scandal seems to be, it is merely one more chapter in an epic tale that shows no sign of ending. While regulators focus on new rules to prevent options backdating, executives are surely coming up with fresh new ways to outdo themselves. Disclosure may provide fodder for anecdotes, but it will change little.
As it stands, there seem to be two ways to bring CEO pay under control—either empower shareholders to hold directors and executives accountable, or somehow convince CEOs they have a moral responsibility to demonstration moderation. Unfortunately, neither seems particularly realistic at this point. It’s starting to seem like things are going to have to get worse before they get better. Problem is, it’s hard to imagine them getting much worse.
Executive Privileges
Lee Drutman
August 11, 2006
Lee Drutman is the co-author of The People’s Business: Controlling Corporations and Restoring Democracy.
This week, federal prosecutors charged three executives at Comverse Technology Inc. with reaping millions of dollars in illegal profits through fraudulent “backdating” of stock options. The little-known voicemail technology company is now the second to be charged in the rapidly expanding stock options backdating scandal that is starting to garner national attention. If you haven’t heard about it yet, you will soon.
As the scandal continues to unfold, the basic plot line is starting to look achingly familiar. Something to do with companies stacking the deck so that top executives somehow keep drawing all the aces. Something to do with CEOs whose personal greed knows no bounds. Something to do with auditors and lawyers who surely should have known better. Something to do with boards of directors whose inattention (willful or otherwise) knows no sense. Something to do with shareholders who knew nothing and were, once again, easily victimized. And unless something dramatic changes, it’s something that is going to keep happening.
The depressing part of this particular executive compensation card-trick is that actually turns out to be ingeniously simple.
Consider: Say you are the CEO of GloboMegaCorp, and you get 100,000 stock options granted on January 1, when the stock was worth $50. You cash them in six months later, when the stock is now worth $60, and you’ve just made $10 per share (the difference between the $60 on the sell date and the $50 on the grant date). With 100,000 options, that’s $1 million—not bad.
But say you “backdate”—that is, change the grant date—to the previous November, when the company stock hit a low of $40. Now, when you sell your options at $60 a share, you make $2,000,000 instead. Even better.
At last count, 80 companies were facing backdating investigations , though one academic study estimates that the practice may be far more widespread. By the count of Erik Lie at the University of Iowa, 29.2 percent of companies have engaged in some questionable timing of options grants and 13.6 percent of options granted to top executives between 1996 and 2005 were of questionable timing.
But while the stock options backdating fiasco is troubling indeed, most of the cases under investigation happened before Sarbanes-Oxley improved reporting requirements and other recent changes to accounting rules that require companies to count their stock options as expenses. So it’s not that likely to happen again.
Still, what’s important to note is the way these scandals provide yet another example of just how ingenious top executives have become in working the system—and just how helpless we seem to be to stop them.
Between 1993 and 2003, the percentage of company profits going to the top five executives more than doubled, growing from 4.8 percent to 10.3 percent. In 2004, the median Fortune 500 CEO received compensation worth $15 million. At last count, average CEO was earning more than 400 times average worker pay, and more than 800 times the minimum wage. It is worth noting that in almost all other industrialized nations, the average ratio of CEO-to-worker pay is rarely more than 25 to 1.
So, what’s to be done?
First, what’s been done already: Recently, the Securities and Exchange Commission issued new rules on executive compensation. Given that the new rules—the first in 14 years to address executive compensation—attracted 20,000 comments, you might expect that the SEC was proposing something radical. Hardly.
The new rules basically require companies to be more up front about how they are compensating their top executives. So instead of wrapping the details of outrageous retirement packages, use of the corporate jet and country club memberships in a cocoon of dense legalese and scattering throughout corporate financial statements, companies will now be required to provide a “Compensation Discussion and Analysis”—wherein they will explain and justify their executive compensation decisions, including its stock option granting practices. However—in a potentially gaping loophole—companies can beg out of this requirement if they can prove that such disclosure would reveal competitive information.
Problem is, we already know top executives are getting compensated at outrageous levels. We’ve known this for years. And somehow, despite widespread condemnation of this fact by just about everyone—it’s pretty hard to find an apologist these days—executive compensation still somehow continues to rise. Shame is clearly not an issue here! So, now that we have some new rules, maybe we’ll know a little more. But what exactly will that do to curb runaway CEO pay?
In theory, shareholders—armed with this new information—could punish companies that reward their executives too much by selling the stock. But given that numerous studies have conclusively shown absolutely no link between share price performance and CEO pay—plenty of CEOs do quite well during times of declining stock prices—it’s not clear whether even a massive sell-off would have much impact.
And, well, that’s about it. Shareholders could register their displeasure at annual shareholder meetings, but the problem is that the board of directors is almost always selected with the blessing of management. Not to mention that at 75 percent of U.S. companies, the CEO is also the chairman of the board of directors. So such displeasure by mere shareholders will inevitably be met with displeasure that somebody would express such displeasure in the first place.
Shareholders could threaten to vote sycophantic outrageous-pay-approving directors off the board, but the threat would ring hollow for a simple reason. Since management controls access to corporate proxy statements, almost all director elections are run Soviet-style: Managers appoint one slate of candidates, and shareholders can either approve or disapprove. The slate of candidates with the most votes wins.
For years shareholder groups have been arguing that the SEC should require companies to open up their proxy statements to minority shareholder groups, but pro-management groups like the Business Roundtable and the Chamber of Commerce have been able to convince the SEC that this is a bad idea. Unfortunately, until shareholders can somehow hold directors accountable—or vote directly on executive compensation—there will be very little they can do to restrain executive pay.
Barring direct shareholder involvement, the only other possibility is the moral argument against the outrageous excesses of CEO compensation made most recently by Berkshire Hathaway Vice Chairman Charles Munger. A month ago he delivered a blistering rebuke of excessive CEO pay at a keynote speech at the Stanford Law School Directors’ College.
Munger told an audience that included some CEOs that "Corporate compensation in America is offending a lot of people needlessly and it should be fixed. It is really dangerous to have a lot of envy taking sway in the world.”
He added that CEOs "have a duty to the larger civilization to dampen some of this envy and resentment by behaving way more noble than other people and more generous…The CEO has an absolute duty to be an exemplar for the civilization."
Munger’s argument may fall on deaf ears, but ultimately, it may be that the only way for CEO pay to be brought under control is for CEOs themselves to finally say enough—to realize that they do have a moral responsibility as leaders, and to understand that when their pay is such an issue, it breeds resentment among an increasingly harried and squeezed working class, undermining a sense of shared gain and fairness in the economy—a sense that can’t be good for worker productivity. After all, it’s pretty disheartening to know that as an average worker, you would have to work for 400 years (about 10 working lifetimes) to make what the average CEO makes in one year.
As troubling as the stock options backdating scandal seems to be, it is merely one more chapter in an epic tale that shows no sign of ending. While regulators focus on new rules to prevent options backdating, executives are surely coming up with fresh new ways to outdo themselves. Disclosure may provide fodder for anecdotes, but it will change little.
As it stands, there seem to be two ways to bring CEO pay under control—either empower shareholders to hold directors and executives accountable, or somehow convince CEOs they have a moral responsibility to demonstration moderation. Unfortunately, neither seems particularly realistic at this point. It’s starting to seem like things are going to have to get worse before they get better. Problem is, it’s hard to imagine them getting much worse.
Reality behind the 'Net-neutrality' debate - Providence Journal
Lee Drutman: Reality behind the 'Net-neutrality' debate
01:00 AM EDT on Tuesday, August 29, 2006
BERKELEY, Calif.
IN RECENT MONTHS, there has been an increasing amount of excitement in Washington, D.C., about something called "Net neutrality." If one is to believe the frenetic rhetoric on both sides, the future viability of the Internet depends on either enacting it or not enacting it.
If only it were that simple. And if only somebody would talk about the real threat to the viability of the Internet.
The current debate dates back to last November, when AT&T's impolitic chairman, Ed Whitacre, complained that Internet content providers should be paying more. "They use my lines for free -- and that's bull," he told Business Week. "For a Google or a Yahoo or a Vonage or anybody to expect to use these pipes for free is nuts!" Needless to say, the content providers were taken aback.
The argument of Internet service providers (ISPs) like AT&T has since become a little more nuanced. They say that the time has come to invest in a faster Internet, but to do so they need to be sure that they can recoup the costs. And they want to do this by charging content providers more for guaranteed fast delivery, since, after all, they're the ones taking up the bulk of the bandwidth with their streaming video and whatnot.
Not surprisingly, the top content providers (Google, Yahoo, Amazon, etc.) don't like this one mega-bit. Neither does the blogosphere or online groups like MoveOn.org, that live and die by the Internet. They say it amounts to discrimination. What makes the Internet free and beloved, they argue, is that it's neutral: Anybody can put up a Web site. But once you let service providers charge for priority delivery, who knows what favoritism and gouging may ensue?
Hence "Net neutrality," a proposed legislative fix to prohibit service providers from establishing the multi-tiered Internet they seek, and to protect against potential content discrimination.
So far, the ISPs (who argue that any such regulation will stifle investment and is entirely unnecessary because they have no plans to discriminate) are winning in Washington. Net neutrality has been voted down on the House floor and failed to make it out of a Senate committee, partly because the telecoms have spent a lot more money lobbying the issue and have lots of support from Republicans, who happen to be in the majority (whereas content providers have won support only largely among Democrats). But Net neutrality does seem to be gaining momentum.
So who's right? First off, telecom companies are correct in noting that Internet service in the U.S. is in dire need of investment. We rank 16th in the world in both broadband penetration and in broadband growth. The U.S. is rapidly falling behind its competitors in Asia and Europe, and given the importance of technology in the 21st-Century economy, this should be an enormous economic-competitiveness issue. For example, American Internet users pay 10 to 25 times more per megabit than our Japanese counterparts.
As it turns out, we have no national policy to promote broadband growth. In fact, we are the only industrialized country without one. And why should that be? Well, perhaps it's because the telecom giants like AT&T like things just the way they are, with almost no competition, and they spend hundreds of millions of dollars a year lobbying to keep things this way. According a recent Governmment Accountability Office report, the median number of high-speed Internet providers available to a given household is two. No wonder Internet service is so expensive and bad.
But how did Japan, which actually was behind the U.S. in broadband service as recently as 2001, get so far ahead? Well, the Japanese government decided that high-speed Internet was a national priority and did something about it -- the country's telecommunications ministry made the sector very competitive through careful regulation (forcing regional telephone companies to open up their lines to competition, something big telecoms in the U.S. have fought tooth and nail). The ministry also used targeted subsidies to stimulate investment.
Were our government to develop and implement a real broadband policy and actually foster competition (as opposed to letting current oligopoly essentially write its own rules), Net neutrality would be less of an issue. Companies who huffed and puffed about how they ought to be able to externalize their costs would be blown away by competitors who instead just went ahead and innovated. And any service provider that threatened discrimination would quickly find its customers going elsewhere.
Both sides in the Net-neutrality debate claim that the viability of the Internet in America is at stake. In that, they are both correct. Too bad nobody is talking about the real reason why this is even an issue in the first place: the fact that instead of joining the rest of the industrialized world and developing a real broadband policy that includes actual competition, our government remains all too happy to let large telecoms enjoy all the benefits of oligopoly -- while forcing the rest of us to bear all the attendant costs.
Lee Drutman, a frequent contributor, is the co-author of The People's Business: Controlling Corporations and Restoring Democracy. He may be reached by e-mail at ldrutman@gmail.com.
Online at: http://www.projo.com/opinion/contributors/content/projo_20060829_ctlee.31ed540.html
01:00 AM EDT on Tuesday, August 29, 2006
BERKELEY, Calif.
IN RECENT MONTHS, there has been an increasing amount of excitement in Washington, D.C., about something called "Net neutrality." If one is to believe the frenetic rhetoric on both sides, the future viability of the Internet depends on either enacting it or not enacting it.
If only it were that simple. And if only somebody would talk about the real threat to the viability of the Internet.
The current debate dates back to last November, when AT&T's impolitic chairman, Ed Whitacre, complained that Internet content providers should be paying more. "They use my lines for free -- and that's bull," he told Business Week. "For a Google or a Yahoo or a Vonage or anybody to expect to use these pipes for free is nuts!" Needless to say, the content providers were taken aback.
The argument of Internet service providers (ISPs) like AT&T has since become a little more nuanced. They say that the time has come to invest in a faster Internet, but to do so they need to be sure that they can recoup the costs. And they want to do this by charging content providers more for guaranteed fast delivery, since, after all, they're the ones taking up the bulk of the bandwidth with their streaming video and whatnot.
Not surprisingly, the top content providers (Google, Yahoo, Amazon, etc.) don't like this one mega-bit. Neither does the blogosphere or online groups like MoveOn.org, that live and die by the Internet. They say it amounts to discrimination. What makes the Internet free and beloved, they argue, is that it's neutral: Anybody can put up a Web site. But once you let service providers charge for priority delivery, who knows what favoritism and gouging may ensue?
Hence "Net neutrality," a proposed legislative fix to prohibit service providers from establishing the multi-tiered Internet they seek, and to protect against potential content discrimination.
So far, the ISPs (who argue that any such regulation will stifle investment and is entirely unnecessary because they have no plans to discriminate) are winning in Washington. Net neutrality has been voted down on the House floor and failed to make it out of a Senate committee, partly because the telecoms have spent a lot more money lobbying the issue and have lots of support from Republicans, who happen to be in the majority (whereas content providers have won support only largely among Democrats). But Net neutrality does seem to be gaining momentum.
So who's right? First off, telecom companies are correct in noting that Internet service in the U.S. is in dire need of investment. We rank 16th in the world in both broadband penetration and in broadband growth. The U.S. is rapidly falling behind its competitors in Asia and Europe, and given the importance of technology in the 21st-Century economy, this should be an enormous economic-competitiveness issue. For example, American Internet users pay 10 to 25 times more per megabit than our Japanese counterparts.
As it turns out, we have no national policy to promote broadband growth. In fact, we are the only industrialized country without one. And why should that be? Well, perhaps it's because the telecom giants like AT&T like things just the way they are, with almost no competition, and they spend hundreds of millions of dollars a year lobbying to keep things this way. According a recent Governmment Accountability Office report, the median number of high-speed Internet providers available to a given household is two. No wonder Internet service is so expensive and bad.
But how did Japan, which actually was behind the U.S. in broadband service as recently as 2001, get so far ahead? Well, the Japanese government decided that high-speed Internet was a national priority and did something about it -- the country's telecommunications ministry made the sector very competitive through careful regulation (forcing regional telephone companies to open up their lines to competition, something big telecoms in the U.S. have fought tooth and nail). The ministry also used targeted subsidies to stimulate investment.
Were our government to develop and implement a real broadband policy and actually foster competition (as opposed to letting current oligopoly essentially write its own rules), Net neutrality would be less of an issue. Companies who huffed and puffed about how they ought to be able to externalize their costs would be blown away by competitors who instead just went ahead and innovated. And any service provider that threatened discrimination would quickly find its customers going elsewhere.
Both sides in the Net-neutrality debate claim that the viability of the Internet in America is at stake. In that, they are both correct. Too bad nobody is talking about the real reason why this is even an issue in the first place: the fact that instead of joining the rest of the industrialized world and developing a real broadband policy that includes actual competition, our government remains all too happy to let large telecoms enjoy all the benefits of oligopoly -- while forcing the rest of us to bear all the attendant costs.
Lee Drutman, a frequent contributor, is the co-author of The People's Business: Controlling Corporations and Restoring Democracy. He may be reached by e-mail at ldrutman@gmail.com.
Online at: http://www.projo.com/opinion/contributors/content/projo_20060829_ctlee.31ed540.html
Subscribe to:
Posts (Atom)