Thursday, July 23, 2015

The IP Transition: Focus on Consumers, Not Propping Up Competitors

In a blog posted on July 10, FCC Chairman Tom Wheeler announced he was circulating an item to be considered at the Commission’s August 6 meeting “that would update the FCC’s rules to help deliver the promise of dynamic new networks, provide clear rules of the road for network operators, and preserve our core values, including protecting consumers and promoting competition and public safety.”
He also said this:
The transition to efficient, modern communications networks is bringing new and innovative services to consumers and businesses. The Commission’s approach to these technology transitions is simple: the shift to next-generation fiber and IP-based networks from analog switch- and copper-based networks is good and should be encouraged.
The IP transition is extremely important for America’s consumers, so it is good that the Commission will be considering moving forward at its August meeting, because, frankly, the agency’s process in facilitating the IP transition has lagged more than it should.
My colleague Seth Cooper and I submitted comments to the Commission in the IP Transition inquiry (“Transition from Legacy Platforms to Services Based on Internet Protocol”) back in January 2013. And Free State Foundation scholars will continue to comment on the transition going forward. But, for now, I want to highlight, at a high-level, some concerns arising from the way Chairman Wheeler framed the issues in his blog and “Fact Sheet” posted at the same time.
In my view, it appears that Mr. Wheeler’s disposition – and perhaps that of his colleagues Commissioners Mignon Clyburn and Jessica Rosenworcel as well – to engage in micro-managing competition in the name of promoting it will ultimately harm American consumers. This is true even if this disposition results, in the short term, in propping up some “competitors.” I am referring to the statement to the effect that, “to preserve competition in the enterprise market,” Mr. Wheeler proposes to “require that replacement services be offered to competitive providers at rates, terms and conditions that are reasonably comparable to those of the legacy services.” This new “unbundling and sharing” requirement is put forth as an “interim” requirement, “pending completion of the FCC’s special access proceeding, which is examining these issues more broadly.”
There are several points I want to make about this way of framing the IP Transition issues (again, which will be addressed as well in later posts).
First, this is another case of Chairman Wheeler’s inclination to adopt intrusive regulatory mandates in a market that, by his own admission, presently is competitive, not subject to market failure. Note that his Fact Sheet refers to “preserving” competition in the enterprise market. In his blog, he refers to competitive providers presently serving hundreds of thousands of businesses and other non-residential enterprises.
Second, Mr. Wheeler says the new mandates are intended to be in place “pending completion” of the special access proceeding. Frankly, I just hope I live long enough to see the end of this interminable proceeding. In one form or another, it’s been going on for more than a decade. And the way the Commission has framed the issue – supposedly looking to determine whether competition exists on a building-by-building location all over the U.S. – and with competitors, not surprisingly, resisting giving up what they consider to be their sensitive customer information, the special access proceeding is unlikely to be completed in the next ten years.
Third, if the special access market is presently competitive, as Mr. Wheeler acknowledges, why has the Commission been wasting so much time, and causing the expenditure of so many resources, investigating that market over the last decade?
Fourth, the proposal to require sharing of “replacement services” at rates, terms, and conditions that are reasonably comparable to those under which the wholesale legacy services are acquired is a bad idea. It makes you wonder whether Chairman Wheeler is fully aware of the ruinous results of the Commission’s ill-fated Unbundled Network Element regime, which mandated unbundling and sharing of the legacy copper network piece parts. It is now widely acknowledged by economists and analysts that the implementation of the UNE sharing regime, with the Commission setting prices for the unbundled elements, discouraged new entrants from building out their own network facilities and incumbents from investing in new facilities. And it is widely acknowledged in the same quarters that the decision by the Commission – thus far – to refrain from requiring unbundling and sharing of fiber and IP facilities has played a substantial role in fueling the last decade’s investment boom in those advanced facilities.
Policies that encourage sustainable facilities-based investment enhance overall consumer welfare far more than policies purporting to support competitors by mandating facilities-sharing. In implementing the Telecom Act of 1996, the FCC paid lip service to recognizing the benefits to consumers when providers invested in their own facilities. For example, the Commission said: “[C]onsumers benefit when carriers invest in their own facilities because such carriers can exercise greater control over their networks, thereby promoting the availability of new products that differentiate their services in terms of price and quality.” This is true. But, unfortunately, the Commission’s policies, by making facilities-sharing so attractive, discouraged new entrants from investing in their own networks. The agency should not repeat that mistake now as part of the IP transition.
Fifth, if the Commission adopts a rule that requires sharing of facilities at “reasonably comparable” rates, then it necessarily will be embarking on a rate regulation regime that, inevitably, will be burdensome, time-consuming, and costly. This too is a lesson of the failed UNE regime. It is naïve to assume that competitors vying for customers are going to agree on what constitutes “reasonably comparable” rates – joining hands singing “Kumbaya.” Instead, it is much more likely the FCC will be setting rates for sharing elements of new fiber and IP facilities.
Sixth, all of the focus on protecting competitors seems to suppress what should be an important focal point regarding consumers – who, after all, should be the primary object of the Commission’s attention. There is a consumer-oriented imperative for the Commission not to delay the transition to IP networks. Indeed, Chairman Wheeler acknowledges the benefits new, more efficient next generation networks will bring consumers in terms of innovative services.

But the reality is that the transition will be slowed if the service providers are required to maintain two separate legacy and IP networks. As Seth Cooper and I said in our January 2013 comments, “service providers necessarily will have fewer funds available to invest in new broadband facilities as they continue to sink scarce capital into legacy facilities utilized by a dwindling number of customers.”
In sum, as the Commission moves forward, it should keep its primary focus on enhancing overall consumer welfare, not on protecting competitors by adopting measures that will discourage investment in new IP facilities by newer entrants and established providers alike.

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Don’t miss FSF’s lunch seminar, “Implementing Real Regulatory Reform at the FCC,” on Tuesday, July 28, from 11:45 a.m. – 2:00 p.m., at the National Press Club. FCC Commissioner Michael O’Rielly will deliver keynote remarks. His remarks will be followed by a panel discussion, moderated by FSF President Randolph May, with Richard Wiley, former Chairman, Commissioner, and General Counsel of the FCC, and Gus Hurwitz and Daniel Lyons, both telecom and administrative law scholars who are members of FSF’s Board of Academic Advisors.

A complimentary lunch will be served, but you must register to attend. You may register here.