Thursday, September 20, 2007

Another Communications Policy Inflection Point

In a marketplace changing as rapidly as the communications market, with the changes driven in large part by technological dynamism, it is not surprising that on a fairly frequent basis the FCC confronts important milestone regulatory decisions. This is especially so as the transition from an analog to digital world, and from a monopolistic to a competitive one, appropriately has led to changes away from the dominant “common carrier” regulatory paradigm that prevailed during most of the twentieth century.

I have been thinking of regulatory paradigms —and deregulatory milestones— in connection with two of the FCC’s current hot topics: Whether to continue on the course of broadband deregulation and resist those urging re-regulation of so-called telephone company-provided “special access” services that already have been granted pricing flexibility based on Commission findings that competitive alternatives exist. The decisions confronting the Commission in these two areas—broadband forbearance and special access—represent yet another important inflection point for communications policy, one that will say much about whether the FCC continues to move forward on a market-oriented course commensurate with the increasingly competitive marketplace environment. Or whether, instead, the agency falls backwards into a regime best characterized as managed competition.

In 1999, then FCC Chairman William Kennard, a Democrat, issued a strategic plan for the agency which he called, “A New Direction for the 21st Century.” The first two sentences of the plan read as follows: “In five years, we expect U.S. communications markets to be characterized predominately by vigorous competition that will greatly reduce the need for direct regulation. The advent of Internet-based and other new technology-driven communications services will continue to erode the traditional regulatory distinctions between different sectors of the communications industry.”

By no means did I agree with everything Chairman Kennard did on his watch. But he certainly was correct in 1999 in recognizing how quickly competition and convergence were taking hold to “greatly reduce the need for direct regulation.” He deserves credit for stating the proposition so clearly. And he deserves credit for, at least in some respects, leading the Commission to take important market-oriented actions.

After all, it was during Bill Kennard’s tenure that the Commission adopted the regime that led to the grant of special access pricing flexibility based upon findings of marketplace competition. This was a significant deregulatory step taken by a Democratic-led FCC. In a paper released this past June entitled, “Special Access and Sound Regulatory Principles: The Market-Oriented Case Against Going Backwards,” I rehearsed the history of the special access, from its creation as a regulatory classification for high-capacity business services right after the 1984 AT&T Divestiture to the present. The paper not only recites in considerable detail the regulatory trajectory that got us to where we are today, but it examines the fundamental regulatory principles that should lead the Commission to conclude that it would be a mistake to re-regulate. (More about the reasons for not re-regulating later.)

Another example worth recalling during Kennard’s tenure was his mostly consistent position that cable operators should not be saddled with traditional common carrier regulation under the guise of an open access regulation. He recognized that in a world of converging services and technologies cable operators were transforming themselves into multi-service broadband service providers. Hence, he stated memorably that he wanted to avoid picking up the “whole morass of regulation” from the telephone world and “dump[ing] it wholesale on the cable pipe.” A pretty good beginning for a deregulatory broadband policy.

In 2001, control of the FCC shifted to the Republicans. And in a generally commendable if not always absolutely consistent way, the Commission under the leadership of Chairmen Michael Powell and Kevin Martin since has adhered to the policy adopted in 2002 that broadband services should be subject to a “minimally regulated environment.” As multi-platform competition among broadband providers, such as the former “telephone” companies, former “cable” operators, “satellite” companies, and “wireless” companies has continued to grow, the wisdom of this deregulatory broadband policy has been borne out. That is why it was puzzling, and, frankly, so potentially harmful, when the Commission deviated from this deregulatory course for wireless broadband services in its recent 700 MHz decision by including an open access/net neutrality condition for a wireless spectrum block.

The year 2004 marked the date that Bill Kennard predicted “U.S. communications markets to be characterized predominately by vigorous competition.” That prediction proved correct. No, not in the sense that vigorous competition exists to the very same degree in every nook and cranny of the U.S., but certainly in the sense that the direction towards effective competition is clear. And the three years since 2004 have only brought more of the same.

So now the Commission confronts broadband deregulation and special access.

I’ve written in detail about both of these topics, often highlighting information about the latest competitive developments, such as the most recent FiberTower or FiberTower marketing announcements to compete with incumbent “special access” services in new markets. Or Sprint’s announcements that it plans to rapidly deploy its own wireless broadband network that will not only obviate its need for special access facilities, but serve the consumer market as well. Sprint has entered into a cooperative arrangement with Clearwire to provision its WiMax services, and Google is on board as a business partner. And, even as I write this, I read in a September 20 report in Information Week that Sprint says it expects to have WiMax service available in “30ish” markets covering more than 100 million people by next year. For more, see the special access paper and my FCC comments on special access updating some recent competitive developments. I am not going to repeat all that here.

What I want to do now is offer some observations that seem to me to be key as the agency confronts these issues.

· Once regulatory authorities have recognized that competition is emerging and, therefore, that traditional common carrier-type regulatory restrictions applicable to the incumbent providers should be removed completely or relaxed, absent demonstrable evidence of more than transient market failure, regulators should not backslide from a deregulatory course. The notion of “managing competition” always has an allure for certain regulators (after all, they are regulators). But it is virtually impossible to manage competition without suppressing the development of the additional competition that all sides proclaim as the shared goal. This is because, even assuming purely for the sake of argument that the incumbent’s prices for special access are “too high” as claimed by Congressman Chip Pickering and others, reducing prices by regulatory fiat makes it more difficult for existing competitors to expand or for new ones to emerge. Do you think that FiberTower, FiberTech, Clearwire, and other facilities-based service providers that compete against the telephone companies “special access” services want to see the FCC force down the incumbents’ prices?

· The Commission tried to create “competitors” by controlling incumbent prices in the ill-fated Unbundled Network Element (UNE) regime. All this managed competition regime managed to do was create a financial bubble based on an unsustainable regulatory constructs that ultimately resulted in hundreds of bankruptcies and millions of dollars lost by those who invested in a regulatory regime rather than in new facilities. We want policies that lead to investment in new facilities, not in regulatory constructs. The Commission should have learned from this experience that the way to foster sustainable, facilities-based competition is not through regulation. It is especially disturbing that policymakers who profess to be free market-oriented learned so little from the UNE experience. In his September 13 letter to the FCC, Representative Pickering, a strong supporter of the UNE platform to the end, still misguidedly talks about the FCC “creating” competition by ratcheting down the “incumbents’ unreasonably high prices.” Not surprisingly, he provides no basis for suggesting the prices are too high.

· Congressman Pickering asserts there is there is “no effective competition [for special access] in the vast majority of markets” What does he make of the FCC’s findings of competitive entry by the FCC in the markets in which the agency has granted regulatory flexibility? Does he think the FCC’s tedious information-gathering process was a sham? The FCC has used collocation arrangements purchased by competitors as triggers for granting pricing flexibility. Does Representative Pickering know that the competitors almost always refuse to provide any meaningful information concerning their customers, the prices they charge their customers, the types of services their customers purchase, and the like, claiming the information is commercially-sensitive proprietary information? This secretive conduct, in and of itself, is what you would anticipate in a market characterized by competition.

· As for the forbearance petitions, the Commission, of course, has a responsibility to look at the actual and potential competitive alternatives available for these packet-based business broadband services that include Frame Relay, ATM, Ethernet, and other technologies employed to deliver of high-speed, high-capacity services to major business users. But, if competitive alternatives exist, or if the Commission determines it is practically feasible for such alternatives to develop, the agency should forbear from applying the existing regulatory requirements. To do anything less would be a deviation from its declared policy that broadband services should exist in a “minimally regulated environment.”

· Importantly, the Commission should have in mind that, to date, it has consistently viewed the broadband market as national, not local, in scope. In the landmark 2002 decision establishing the policy of minimal regulation for broadband services, the Commission at the same time declared that it was creating an “appropriate national framework.” Quite properly, this commitment to a national framework has remained the agency’s position since then. It comports with Congress’ intent at the time of the adoption of the 1996 Telecommunications Act, when it said it was providing, at least with respect to advanced telecommunications and information technologies such as those at issue in the broadband petitions, “a pro-competitive, de-regulatory, national policy framework.”

I don’t want to minimize the significance of many other decisions the Commission makes on a day-to-day basis. But it does seem to me that its forthcoming decisions in the broadband and special access matters are new inflection points, decisions that rightly will be viewed as important markers in determining whether or not the agency, as currently constituted, is free market-oriented.

At this stage, well-along in the transition from a communications marketplace characterized as generally monopolistic to one that is generally competitive, the FCC commissioners ought to come down firmly on the side of market-oriented rather than managed competition policies. I (hopefully) could be wrong, but I suspect the two Democratic commissioners are most likely to favor not granting meaningful broadband forbearance and re-regulating special access. They have a good-faith, but, in my view, mistaken belief, that the way to get more competition is through more regulation.

In the interest of not backtracking on established deregulatory policies that have been working for America’s consumers, it will be very important, this time around, for the three Republican commissioners, all of whom profess to adhere to free market principles, together to make that profession a marketplace reality.