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Real vs. Contrived “Modern” FCC Policy Thinking – Part 20 Obsolete Communications Law Series

Just like the wisdom that one cannot make a silk purse from a sow’s ear; one cannot make “modern” FCC policy from obsolete communications law.

Apparently that is not stopping Former FCC Chairman Reed Hundt and Greg Rosston from trying in their new white paper: “Articulating a Modern Approach to FCC Competition Policy.”   

Their paper contrives:  three different competition policy approaches: the classicrole of regulating terms and conditions of sale, the modernrole of using various tools to create largely deregulated, multi-firm, competitive markets, and the laissez-faire approach of believing that unregulated markets, even if monopolized, will produce the best outcome.”

The purposes of the paper’s elaborate contrivances are clear, to advance Mr. Hundt’s FCC-first approach to communications policy by associating it with the popular “modern” brand and by linguistically-positioning it as the middle position between two extremes – all in hopes of influencing the core policy trajectory of prospective FCC Chairman Tom Wheeler.

The fatal flaw of the paper’s framework is it is clearly contrived, so it withers under scrutiny. 

Here are the problems with the paper in a nutshell. First, the paper’s rewrite of FCC history is demonstrably selective, revisionist and incomplete. Second, it effectively proposes to redefine the term “modern” to allow for retention of their favorite obsolescing policies. Third, the paper ignores the transformative effect and reality that competition policy and the Internet have on the FCC’s original regulatory authority – in order to imagine that the FCC remains all powerful over an ever-expanding regulatory domain. 

If an idea or policy is worthy of retention, one should argue it on the merits and facts, not on the contrived notion that something is “modern” when it clearly is not.

 

Revisionist History: First, the authors’ self-described “short history” of “classic,” “modern” and “laissez-faire” FCC competition policies is demonstrably selective, revisionist and incomplete. The authors undermine the credibility of their analysis and conclusions by ignoring most all of the most important FCC decisions of former Chairman Hundt’s tenure and the demonstrably destructive impacts these decisions had on investment, competition and the marketplace.

Why no mention of Mr. Hundt’s first big decision to slash cable rates another 17% on top of the 10% rate reduction ordered by then Acting FCC Chairman Quello in implementing the 1992 Cable Act? In hindsight, are there no competition-policy-lessons learned from how that decision ravaged cable investment for several years -- delaying cable-led broadband competition until the turn of the century? And didn’t the decision to drastically lower cable rates an additional 17% by regulatory fiat actually make it harder for nascent DBS competitors to succeed via competitively undercutting cable on price?  

Why no mention of the several-year delay in the formation of real facilities-based competition as a result of pursuing a “classic” common-carrier-regulation-vision via FCC TELRIC/UNE-P contrivances, which were ultimately found illegal in court?

In hindsight, are there no lessons learned about FCC competition policy from the marketplace result of these “classic” regulatory decisions? Are there no “competition” lessons learned from the Hundt-FCC’s policy of picking the CLECs as market winners -- via unsustainably massive subsidies and regulatory favoritism -- that ultimately led to the bankruptcy of the entire CLEC industry?

Or what did the FCC learn about competition from its one-sided reciprocal compensation policies that helped fuel a trillion dollar market bubble and created over twelve unsustainable Internet backbone companies that either went bankrupt or were consolidated to survive?

Why no discussion in the paper of how the so-called “modern” competition- approach actually delayed for several years the world-leading, facilities-based broadband competition that we now enjoy under “laissez-faire” policy? Why no discussion in the paper of the opposite competition results in the marketplace between the policies of the “modern” nineties and the “laissez-faire” aughts?  Concerning merger competition policy, why no mention in the paper of the lessons learned from the Hundt-FCC preempting a potential SBC-AT&T merger as “unthinkable” by spontaneously creating a new “competition” policy of “precluded” competition out of whole cloth, when the FCC several years later approved an SBC-AT&T merger with conditions and without anti-competitive consequences?

Concerning Hundt-FCC auction and spectrum cap polices, why no mention in the paper of lessons learned from the FCC making spectrum-conditioning mistakes that kept 20 MHz of prime Nextwave PCS spectrum from getting to market for well over a decade? Or the FCC’s spectrum-conditioning mistakes that have kept public safety from getting the spectrum it needs for over a decade as well?    

The point here is that if we are to discuss history in order to learn from it for the purpose of new policy making, it is essential to have an accurate and complete understanding of the results of various competition policy approaches. Selective and revisionist history is a poor foundation for creating workable, legal, and successful competition policy going forward.

 

Redefines “Modern:” To conclude that Chairman Hundt’s competition policy notions are “modern” requires some definitional gymnastics and eye-closing. The paper self-servingly defines the “modern” competition era as between 1970 and 2000, when “competition” was permitted by the FCC and centrally managed by the FCC – essentially the FCC-centric competition era.

When sustainable real market competition emerged after 2000, when consumers not regulators picked winners and losers, and when market forces, investment and innovation, not government subsidies, determined competitive outcomes, the paper amazingly excludes that recent broadband competition policy success from the “modern” competitive era.  The paper again self-servingly defines that successful broadband competition, not as modern, not even as competition, but as “laissez-faire.”     

The paper also conveniently ignores that broadband Internet competition, 4G wireless, and the smart-phone/tablet revolution occurred during the non-modern, laissez-faire era. Wouldn’t most people consider broadband, 4G, smart-phones and tablets “modern” competition in every sense of the word?

The paper goes on to further define “modern” as “multi-firm” competition.  Given that one of the definitions of “multi” is “more than one,” isn’t all competition by definition “multi-firm?” If “multi-firm” competition is redundant, why define one’s entire framework around it?

This suggests what really is going on is more of a Trojan horse framework, where competition policy disguises as re-regulation policy, where the FCC unilaterally could define “multi,” as not more than one firm, but as 4, 5, 6, or more firms in the “relevant” market. Then the FCC potentially could regulate any information services company for falling short of the FCC’s contrived multi-firm competition framework.  

Specifically the paper advises: The FCC needs to put in place a framework for all of its decisions so that companies will understand how such arrangements will be evaluated; without clear guidance, like that provided by the DOJ/FTC merger guidelines, firms will not know how the FCC will judge their actions.”

The very big problem with this approach is that such a “framework” would be a de facto law, and that is Congress’ role under the Constitution. Nowhere in the 1996 Telecom Act creating communications competition or any other law does Congress give the FCC such sweeping regulatory authority over information services firms.

The other big problem here is that the paper is effectively recommending transmogrifying after-the-fact antitrust law enforcement overseen by the DOJ/FTC , into preemptive FCC policy with no authority to do so from Congress.

We have seen this overreach before: e.g. the Hundt-FCC’s overturned UNE-P competition policy; the Martin-FCC’s overturned net neutrality enforcement action; and the Genachowski-FCC’s likely-to-be-overturned common carrier-like regulation of broadband.

The current FCC should be mindful that each of these attempts to unilaterally re-define competition “policy” were struck down because the FCC did not have direct authority to do set national competition policy in that way.     

 

FCC-Firsters: The third major contrivance of the Hundt-Rosston white paper is it imagines a near all-powerful FCC – a de facto “FCC-first” construct.

Consider the authors own words here. “Somewhere between a tenth and a sixth of the American economy is in [the FCC’s] purview.” (p. 7) “Other than the all-important consideration of judicial review, not too many checks on its [the FCC’s] authority exists.” (p. 4) “… the FCC is its own boss. Congress would find it quite difficult to impeach a commissioner, and Congress to pass a low overturning an agency decision. The agency as a Fourth Branch of government, is as to the markets in its purview the most important of all the branches.”  

The big problem here is that the paper’s assumption of largely unchecked FCC power largely ignores the transformative effect and reality that new laws, Congressional policies, FCC precedents, and technological innovations have had in hollowing out the FCC’s original and obsolescing 1934 sweeping regulatory authority.

That law’s policy and reality predicates are obsolescing or obsolete. Telephone service is not a “natural” monopoly; competition is not only possible, it’s vibrant and widespread.  Technology then was analog and not digital, and continuous not discontinuous in nature. We now enjoy universal voice service, and broadband is comparably universally available.

Moreover, the FCC’s underlying statutory authority did not envision many transformative technological innovations: TV, transistors, digital computers, cellular service, PCs, the Internet, the World Wide Web, wire line broadband, wireless broadband, web applications, smart-phones/tablets, etc. Is it “modern” to predate all that?   

The authors’ uber-expansive view of the FCC’s power going forward largely ignores that consumers don’t need the FCC anywhere like they needed the FCC eighty years ago. Competition and innovation naturally have obsolesced much of the FCC’s 1934 purpose and role.

This is not to say that there are transitional or vestigial roles and consumer protection functions for the Federal Government to play in the truly modern communications era, but it’s not the role envisioned eighty years ago, when the economic and technological predicates were almost the opposite of today.

The authors’ encouragement of an FCC-first approach to competition policy may advance a classic interventionist role for the FCC like Chairman Hundt pursued during his tenure, but it is badly outdated for the technological, economic, competitive, and legal predicate that prospective FCC Chairman Tom Wheeler inherits and must operate within.    

Conclusion:

The authors’ characterization of their approach to FCC competition policy as modern is contrived and not accurate.

First the paper tries to rewrite FCC history to exclude much of the most important competitive facts and results from the policies that they advance. Second the authors attempt to redefine the term “modern” to the point of being unrecognizable. Third the authors appear to goad the FCC to effectively ignore the law and the courts and implement whatever FCC competition policy that three commissioners support.     

Let me finally address the authors’ substantive recommendations. The authors’ recommend the FCC “have a consolidation policy.” That’s wholly unnecessary and redundant. America already has a consolidation policy; it’s called antitrust law.

What the authors are asking for is for the FCC competition policy to effectively flip the legal burden of proof from the government proving a merger/acquisition is anti-competitive to a company having to prove a merger is pro-competitive before the FCC – i.e. companies are guilty of anti-competitive intentions until proven innocent.     

The authors also recommend an FCC competition policy of “standing up for competition usually turns out to be the same as standing up for entrepreneurship, innovation, the little guy who wants to get big…

Defining competition as picking “entrepreneurship, innovation and the little guy” as the winners, may sound appealing to some, but its exposes the authors’ real concept of competition policy -- to tilt the rules to and subsidize some government-favored players, especially new entrants – with no concept of competition as: competing for customers; ensuring supply meets demand; providing the most value and benefits to customers; investing to have a superior offering; etc.

This recommendation of theirs epitomizes my strong opposition to the authors’ proposed FCC competition policy, which would ensconce the FCC as central manager of the communications marketplace with a pre-determined view of what companies should gain or lose share over time via government decisions, without regard to what consumers want or do, and without regard to economics, return on investment or solvency/profit.

When then FCC Chairman Hundt implemented this kind new entrant-favored FCC competition policy in the mid 1990s, it proved to be the single most financially destructive regulatory experiment in managed competition in U.S. history.

The Hundt FCC’s competition policy made it clear to the marketplace that the FCC  would be “standing up for entrepreneurship, innovation, the little guy.” That FCC ensured new entrants CLECs could expect virtually every price, term and condition advantage and subsidy that CLECs and new Fiber back bone companies could dream up.

This predictably led to economically unsustainable competition, where dozens of CLECs and over a dozen new fiber backbone companies were funded when market economics could sustain only a few. American investors and pensioners lost big -- over a trillion dollars when the tech bubble burst. The bankruptcy of the entire CLEC industry cost hundreds of billions of dollars in losses. And the burst of the tech bubble meant FCC-encouraged fiber backbone companies and equipment providers lost over a trillion dollars in market value in weeks. 

The cause of this huge and destructive carnage was FCC competition policy uneconomics and hubris where the FCC imagined that their visible hand of making most all of the relevant economic decisions for the sector could outperform the market’s invisible hand.

In stark contrast, the so-called laissez faire FCC approach, or light touch regulatory approach has attracted over a trillion dollarseconomic private capital investment, produced world-leading facilities-based broadband competition, and generated stellar competitive outcomes: falling real prices, increasing customer value, innovation, investment, differentiated choices, and more.      

In sum, a modern FCC will adapt to the real progress of America’s competitive markets and world-leading technological innovation. A modern FCC will not look backward nostalgically or try to relive the past by dragging obsolescing, FCC-empowering, economic regulations into the present day so the FCC can quixotically try and control America’s Internet tomorrows. 

To paraphrase our cinematic American philosopher Forrest Gump: modern is as modern does.

 

Obsolete Communications Law

Note: See here for power-point about problems with obsolete communications law.

Part 1: Obsolete communications law stifles innovation, harms consumers [5-2-12]

Part 2: The FCC's Public Interest Test Problem [5-21-12]

Part 3: FCC Special Access: Communications Obsolete-ism vs. Modernism [6-8-12]

Part 4: Obsolete Analysis Will Doom DOJ's Antitrust Probe of Cable [6-14-12]

Part 5: Why U.S. Communications Law is Obsolete [6-25-12]

Part 6: FCC's Slippery Slope to Regulating Content, Speech, and the Press [7-19-12]

Part 7: FCC's Over-Reliance on Obsolete Law [7-26-12]

Part 8: Google Fiber: Modern Technology, But Obsolete Policy Thinking [7-30-12]

Part 9: FCC Showcases Its Growing Obsolescence [8-23-12]

Part 10: The FCC's 1887 Railroad Regulation Mindset [8-29-12]

Part 11:  U.S. Government's Obsolete and Wasteful Spectrum Hoarding and Rationing [9-7-12]

Part 12: U.S. Falling Behind the World in Auctioning Broadband Spectrum [9-24-12]

Part 13: U.S. Government's Obsolete & Dysfunctional Spectrum Management [10-5-12]

Part 14: A Welcome Catalyst for Modernizing Obsolete Communications Law [11-9-12]

Part 15: Google Fiber's Avoidance of Phone Service Makes Case for Obsolete Law [12-7-12]

Part 16: Professor Crawford's Obsolete Public Utility Thinking for Broadband [1-11-13]

Part 17: ITU in Search of Relevance in the Internet Age [2-19-13]

Part 18: Why IP Interconnection Would Break the Internet [3-15-13]

Part 19: 1G Government in a 4G World [7-16-13]

 

Q&A One Pager Debunking Net Neutrality Myths