Tuesday, September 06, 2016

Thinking Things Through IV: Competition and Regulation

Five years ago I did a series of posts – actually only three – which I titled “Thinking Things Through.” I no longer recall why I abandoned the title after “Part III.” But I’ve decided to resurrect it now for a new series of posts with the idea that it’s an appropriate time to reflect on where matters stand as the Tom Wheeler-led Federal Communications Commission (presumably) draws to a close – and to look ahead.

In these “Thinking Things Through” posts, I intend to engage in such thinking at a fairly high level – a “macro” level if you will – rather than to address the nitty-gritty details that typify argumentation in particular proceedings. I understand, of course, that in many instances the nitty-gritty details are important, perhaps even determinative, and that they necessarily are a subject of dispute. But often, in the context of such back-and-forth dueling arguments, larger principles and ideas get lost – or deliberately ignored – in the minutiae.

So, at least for the purpose of these “TTT” posts, I propose to address some matters of importance in the context of the larger ideas and fundamental principles involved. And I propose to do so with a commitment to brevity consistent with my purpose.

So, I begin first with the topic of “Competition and Regulation.”

Early in his tenure as FCC Chairman, Tom Wheeler regularly touted what quickly became a mantra, “Competition, Competition, Competition.” And in his maiden speech at Ohio State University in December 2013, Mr. Wheeler articulated his so-called “see-saw” rule: “When competition is high, regulation can be low.” A couple of months later at the University of Colorado Law School, he repeated the see-saw rule in the exact same words: “When competition is high, regulation can be low.”

And to boot, Mr. Wheeler quoted Abraham Lincoln’s Second Inaugural Address to the effect: “As our case is new, so we must think anew, and act anew.”

I submit that when it comes to “competition and regulation,” the FCC’s actions under Mr. Wheeler’s leadership have been characterized by anything but “thinking anew.” Rather, they have been characterized by old thinking more fitting for the long-gone age of Ma Bell.

When I hear Mr. Wheeler’s “competition, competition, competition” mantra, or his “see-saw” rule, a different Lincoln quote comes to mind. In his April 1864 “Address at a Sanitary Fair,” Lincoln said: "We all declare for liberty; but in using the same word we do not all mean the same thing."

Like “liberty,” the word “competition” is accorded near universal approbation. But it should now be clear that in declaring for “competition” – even in triplicate! – Mr. Wheeler has a particularly narrow definition of the word in mind, a definition that does not comport with that of many respected regulatory economists and experts. And Mr. Wheeler has a particularly seductive purpose in mind as well: By adopting the narrowest, most restrictive view of the relevant market, he tilts his self-constructed see-saw towards more regulation.

We have seen this strategy play out over and over again during Mr. Wheeler’s tenure. A few examples:
  • In adopting the Open Internet order, the Commission concededly did not perform any meaningful analysis of the Internet access market in a traditional sense, for example, by determining the number of competitors, their market shares and market trends, the prospects for additional competition, and the like. The agency did not conclude a real market failure existed. Instead, it rested its findings regarding Internet service providers’ claimed market power on a flimsy “gatekeeper” theory premised on the asserted difficulty and costs subscribers confront in switching from one ISP to another. Note that this theory necessarily is premised on the fact that there is actually more than one competitor in the market.
  •  In proposing to regulate Business Data Services (formerly Special Access), the Commission suggests the relevant market for assessing competition may be as narrow as a single building, even though, as former FCC Chief Economist Tim Brennan explained in a recent Free State Foundation Perspectives, defining a geographic market as a building location does not make sense as a matter of market analysis. Moreover, the Commission appears intent on downplaying cable operators’ expanding BDS offerings in assessing marketplace competition, and downplaying the prospects for even further competition attributable to cable operator offerings.
  •  Aside from all its other problematic aspects, the Commission’s proposal to adopt a new “open standard” mandate regulating the design functions and capabilities of video navigation (set-top box) devices ignores the plethora of choices consumers now have for receiving video programming from new video distribution services, devices, and apps. And, while the Commission considers a new government-imposed technical mandate, additional choices for distributing and viewing video programming become available almost every week.

  •  As the Commission engages in what has become an ongoing charade of completing congressionally-mandated reports assessing competition in the mobile services and video services markets, and assessing the timeliness and reasonableness of broadband deployment, it consistently departs from past practice by simply refusing to determine the relevant markets are competitive. Among other devices, it does this, as pointed out in a recent Free State Foundation Perspectives by my colleagues Seth Cooper and Michael Horney, by refusing to acknowledge the substitutability of wireless and wireline services. And with regards to determining the reasonableness of broadband deployment, the Commission simply continually redefines “broadband” to narrow the extent of its reach in order to prevent the agency from making an affirmative reasonableness finding. This ploy, however divorced from the reality of actual consumer demand and expectations, allows the agency to claim a justification for further regulation.

Other examples could be provided. But the ones I have highlighted above show how the Commission all too frequently employs the stratagem of improperly constricting a relevant geographic or product market in an effort to portray a lack of competition – and thereby the need for maintaining or increasing regulation.

I have always acknowledged that there may be some specific geographic and product markets that, because of a lack of effective competition, should be subject to proper regulatory oversight by the Commission. But to go back to Mr. Wheeler’s metaphor, I do mean, emphatically, to say that the see-saw should not be artificially tilted towards regulation by misusing or misconstruing marketplace data in efforts to conclude competition does not exist where it surely does.

Finally, this note on a fix: With a relatively modest change to the Communications Act, Congress could prevent the invocation of mantras such as “competition, competition, competition” from substituting for rigorous economic analysis that fairly accounts for the dramatic changes that have taken place – and continue to do so – in most segments of the communications marketplace. As I first suggested in a Free State Foundation Perspectives five years ago, in recognition of the increased consumer choice that has occurred in the last two decades, Congress should require the FCC to presume, absent clear and convincing evidence to the contrary, that effective competition exists in those instances in which the agency assesses market competition.

This simple rebuttable evidentiary presumption would not itself determine the outcome of any particular proceeding. But it would make it more difficult to avoid evidence-based findings of effective competition by stratagems designed to tilt the see-saw in the regulatory direction.