Monday, March 07, 2011

FCC Should Conclude, Not Over-Condition Qwest-CenturyLink Merger

The FCC's approval process for the Qwest-CenturyLink merger drags on. It is now 283 days since the Commission's merger decision shot-clock started. That puts the Commission's merger review process more than 100 days past its self-devised 180-day decision deadline that commenced last May. All the while outside interest groups continue to call on the Commission to pile extra regulatory conditions onto the merger's approval. Qwest-CenturyLink has become yet another example of the need for a faster and more focused approval process.

CenturyLink proposes to acquire Qwest in a deal worth approximately $22.4 billion. The merger between Qwest-CenturyLink will create a voice, video, and broadband Internet service business benefitting from enhanced economies of scale. Once merged, the new business could potentially become a stronger competitor to other national carriers, video service providers, and broadband service providers. Qwest and CenturyLink operate in almost entirely separate geographic areas. So the merger will result in very little overlap of existing operations. An indication that the deal poses no market power or consumer harm complications is the Federal Trade Commission's fast-track approval of the Qwest-CenturyLink merger back in July.

Despite the Qwest-CenturyLink merger's potential for creating a more competitive market for consumers and despite the lack of any clear consumer harm posed by the deal, the FCC continues to sit on the deal. Public comment and reply periods have long since concluded. And now, 100 days past the Commission's deadline, interest groups press the FCC with continued calls for extra and unnecessary regulatory conditions on the Qwest-CenturyLink merger.

Qwest-CenturyLink is the latest in a string of recent FCC merger reviews that have gone way beyond the buzzer. The chart below lists major merger transactions at the FCC over the past five years, comparing how long the Commission's review process has taken.

(click image to enlarge)

As Free State Foundation scholars have pointed out in prior Perspectives papers and blog posts, lengthy delays in the merger review process leaves merging companies in regulatory limbo. While approval is pending companies are unable to take advantage of economic opportunities. In addition to opportunity costs, lobbying and other costs related to appeasing regulators continue to increase. And those delays also allow outside interest groups and marketplace competitors to inundate the Commission with demands that regulatory conditions be imposed on the merger. With the FCC's shot clock long since expired and time still passing, merging companies grow increasingly desperate to have the deal approved and pursuant to behind-the-scenes negotiations ultimately cave under pressure to regulatory conditions that impose costs of their own.

A case in point regarding the Qwest-CenturyLink merger is a recent
ex parte filing by Free Press urging the FCC to impose extra net neutrality and USF-related regulatory conditions on the deal. In particular, Free Press asserts that because the merged entity will be bigger and will be rolling out video content offerings that it will have increased content discrimination incentives. Free Press insists that the FCC should impose net neutrality regulatory conditions on the Qwest-CenturyLink merger because similar conditions were imposed in prior mergers, such as Comcast-NBCU and AT&T-BellSouth. And Free Press also insists that the FCC ought to impose net neutrality regulatory conditions on Qwest-CenturyLink because both parties "expressed skepticism and opposition" to the Commission's proposal to adopt net neutrality regulation.

These are not good reasons for imposing regulatory conditions. The FCC should reject calls to make net neutrality regulatory requirements a condition for approving the Qwest-CenturyLink merger. For starters, there is no reason to think that "big is bad" serves as a sound basis for imposing regulation, let alone for imposing conditions on mergers. Economies of scale that arise from larger enterprises often bring benefits to consumers through lower prices, wider product and service selection, as well as increased competition and choice in the market. This is certainly the case in capital- and infrastructure-intensive markets such as advanced telecommunications.

Since Qwest and CenturyLink have so little overlap in their existing operations, consumers are not going to find their choices for advanced telecommunications services reduced by the merger. If anything, expanded video service offerings by a merged Qwest-CenturyLink will most likely benefit consumers by giving them another alternative to cable and DBS video services.

It reaches the point of absurdity to insist, as Free Press does, that any broadband service provider should be subject to net neutrality regulation or regulatory conditions just because the ISP opposes it. But the bigger point is that major regulatory policies—such as net neutrality regulation—should not be haphazardly applied to particular companies as conditions for approval in merger review proceedings. It is improper for the FCC to impose untried, complicated, and wide-ranging regulatory policies as merger conditions. Those kinds of policies should be considered, rather, in industry-wide inquiries and rulemakings.

As known to all, the FCC adopted net neutrality regulation through rulemaking last December. The broadband Internet services regulatory framework ultimately adopted by the Commission is lengthy, complicated, subject to numerous exceptions and carve-outs, involves determinations based on the balancing of competing interests, and requires interpretation of general terms and "values" through future adjudications. What's more, the FCC's net neutrality rules are neither based on nor targeted to anticompetitive conduct or consumer harms. The FCC's wide-ranging framework for regulating broadband network management is not a limited set of specific requirements that can be targeted at particular anticompetitive concerns or consumer harm concerns posed by a particular merger. The expansive nature of the FCC's net neutrality regulation makes it a poor candidate for a merger review condition.

And, of course, Qwest-CenturyLink will already be subject to the Commission's net neutrality regulation—unless there is a successful legal challenge to such regulation. Given the FCC's adoption of industry-wide net neutrality regulation, the Commission should not force-fit such regulation into the Qwest-CenturyLink merger or into any other merger proceedings.

It is important to point out that these FCC process concerns regarding industry-wide rulemakings versus merger-specific conditions exist independently of the merits of the particular regulatory policies at issue. For these same reasons, calls for Qwest-CenturyLink to relinquish USF support as a condition for merger approval also appear dubious.

The FCC has finally begun its new efforts to modernize and streamline the USF and intercarrier compensation systems and to ultimately reduce the size and scope of the Fund. As a matter of public policy, FSF scholars have
consistently urged comprehensive reform of the universal service fund—including introduction of market-based approaches and significant reductions in the size of the Fund. USF is outdated, wasteful, and a growing tax burden on consumers. But rather than single out companies through its merger review process to make piecemeal USF reforms, the FCC should make use of its industry-wide USF reform proceeding to address USF issues.

Unfortunately, the FCC has insisted on net neutrality regulatory conditions in prior merger proceedings. The FCC has also made relinquishment of USF support a condition for prior mergers involving Verizon and Sprint, respectively. But that is hardly reason enough for the Commission to continue making the same mistake over and over again.

On other occasions the FCC has rightfully rejected calls for imposing certain regulatory conditions in merger reviews when such policies are a better fit for consideration in industry-wide inquiries and rulemakings. Such concerns were the basis for the FCC
rejecting handset exclusivity conditions in approving the AT&T-Centennial merger, for instance. Rather than engage in selective memory, the FCC should consistently remember those process concerns when considering interest group calls that it impose extraneous regulatory conditions on mergers.

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This blog post was written before I had an opportunity to read Commissioner Meredith Attwell Baker's March 2 speech to the IPI Summit on reforming the FCC's merger review policies. The Commissioner's speech contains a number of excellent proposals, as FSF President Randolph May pointed out in his recent post, "FCC Merger Review Reform: The Case for Regulatory Modesty."