Tuesday, July 31, 2007

The 700 MHz Decision: “Into the Morass of Regulation”

In the wake of the FCC’s 700 MHz decision mandating open access for the C block spectrum, I thought this comment from the analysts at Stifel Nicolaus was most telling: “We think it likely that much of the meaning of the open access rules will be determined by the 2009 election (which will determine the leadership of the FCC) and the courts.”

I assume the Stifel analysts mean the 2008 election. But in referring to 2009, they undoubtedly have in mind the time it takes for a new Administration to put in place its own FCC Chairman and its own team. For the same reason that much of the meaning of the FCC’s open access rules won’t be determined until 2009 or (more likely) thereafter, it follows that the revenues realized from the auction will be less than they would be in an unencumbered auction. This is because that veritable economic theorem that “people don’t want to buy a pig in a poke” holds true, even for the FCC.

Think about it: In how many auctions have you bid when the rules concerning what you can do with your winning bid won’t be known until several years later? As they say, it doesn’t take an Einstein to figure out that the looming uncertainty about the ultimate interpretation and enforcement of the new open access rules necessarily will drive down the bid price.

Regardless how it chooses to style its action, and regardless whether it calls it net neutrality, open access, or “no-lock, no-block,” the import is the same: The FCC is taking a step backwards to imposing common carrier regulation, a backwards step that imports public utility regulation into the broadband world. I still think former FCC Chairman William Kennard had it right in 1999 when he explained why he rejected arguments that the FCC should impose an “open access” requirement on cable:

But I also know that it is more than a notion to say that you are going to write regulations to open the cable pipe. It is easy to say that government should write a regulation, to say that as a broad statement of principle that a cable operator shall not discriminate against unaffiliated Internet service providers on the cable platform. It is quite another thing to write that rule, to make it real and then to enforce it. You have to define what discrimination means. You have to define the terms and conditions of access. You have issues of pricing that inevitably get drawn into these issues of nondiscrimination. You have to coalesce around a pricing model that makes sense so that you can ensure nondiscrimination. And then once you write all these rules, you have to have a means to enforce them in a meaningful way. I have been there. I have been there on the telephone side and it is more than a notion. So, if we have the hope of facilitating a market-based solution here, we should do it, because the alternative is to go to the telephone world, a world that we are trying to deregulate and just pick up this whole morass of regulation and dump it wholesale on the cable pipe. That is not good for America.

Curiously, the FCC, with the commendable exception of Commissioner Robert McDowell, seems to take pride in consigning broadband back to “the telephone world.” How else to explain the ritual incantation of Carterfone, a decision rendered in 1969 when the telephone world was indeed monopolistic? But this isn’t 1969, as Commissioner McDowell explained in his eloquent dissent. It is not even 1999, when Chairman Kennard rightly resisted picking up the “morass of regulation” and dumping it on the cable pipe.

No, this is 2007, when a Bush Administration FCC decided, despite the fact it recently concluded the wireless market is competitive, to reverse course and impose net neutrality/open access mandates on wireless broadband providers.

It is true that, as the Stifel Nicolaus analysts suggest, that the details of the “morass of regulation” won’t be entirely clear until 2009, if then. But what’s clear now, in 2007, is that the FCC has created a morass for no good reason.