Memorial Day 2011

On May 30, 1884, less than twenty years after the end of the Civil War, Oliver Wendell Holmes, Jr., Civil War veteran and future Supreme Court Justice, delivered a Memorial Day address in Keane, New Hampshire. The speech, titled "In Our Youth Our Hearts Were Touched With Fire," was given before John Sedgwick Post No. 4, Grand Army of the Republic, in a white painted town hall on the village common.

As we remember those who have served – and especially those who have paid the ultimate price, what Lincoln at Gettysburg called "the last full measure of devotion" – it is worth contemplating Holmes's address, and particularly the beautiful ending:

"Such hearts--ah me, how many!--were stilled twenty years ago; and to us who remain behind is left this day of memories. Every year--in the full tide of spring, at the height of the symphony of flowers and love and life--there comes a pause, and through the silence we hear the lonely pipe of death. Year after year lovers wandering under the apple trees and through the clover and deep grass are surprised with sudden tears as they see black veiled figures stealing through the morning to a soldier's grave. Year after year the comrades of the dead follow, with public honor, procession and commemorative flags and funeral march--honor and grief from us who stand almost alone, and have seen the best and noblest of our generation pass away.

But grief is not the end of all. I seem to hear the funeral march become a paean. I see beyond the forest the moving banners of a hidden column. Our dead brothers still live for us, and bid us think of life, not death--of life to which in their youth they lent the passion and joy of the spring. As I listen, the great chorus of life and joy begins again, and amid the awful orchestra of seen and unseen powers and destinies of good and evil our trumpets sound once more a note of daring, hope, and will."

With all our differences and diversity – including our differences of opinion on the great issues of the day – surely we Americans should be united on this day, and every day, in honoring and remembering those who have served, and still do, to defend our freedom.

While Lincoln at Gettysburg spoke at a particular time in a particular place, and on hallowed ground, his words transcend time and place. To me, recalling the ending of his Gettysburg Address has always seemed especially fitting on Memorial Day:

"We here highly resolve that these dead shall not have died in vain -- that this nation, under God, shall have a new birth of freedom -- and that government of the people, by the people, for the people, shall not perish from the earth."

Here at the Free State Foundation, we are committed to free market, limited government, and rule of law principles. Whatever your own beliefs, as we remember and commemorate, best wishes to you for a safe and contemplative Memorial Day!

PS – In the past week, several long-time readers of this space have asked me for past Memorial Day messages. Here they are:

Memorial Day 2007; Memorial Day 2008; Memorial Day 2009; Memorial Day 2010

Technorati Tags: Memorial Day,Randolph J. May,Randolph May,Oliver Wendell Holmes,Lincoln,Gettysburg Address

Section 706 and the FCC's Pro-Regulatory Proclivities

So, the Federal Communications Commission has now issued its Seventh Broadband Progress Report pursuant to Section 706 of the Communications Act. Section 706 requires the FCC periodically to determine whether broadband capability "is being deployed to all Americans in a reasonable and timely fashion." If the Commission's determination is negative, the Commission is directed to "take immediate action to accelerate deployment of such capability by removing barriers to infrastructure investment and by promoting competition in the telecommunications market."

Suffice it to say that by virtue of their indeterminateness "reasonableness" and "timeliness" are, to some extent, in the eye of the beholder – or, in this instance, in the eye of the regulator. Before Julius Genachowski became Chairman of the FCC, in each of the prior five Section 706 reports the agency had determined that broadband was, in fact, being deployed on a reasonable and timely basis. Under Chairman Genachowski's watch, the FCC has determined precisely the opposite in the last two reports.

This does not mean that in making such a negative determination Chairman Genachowski and his two Democratic colleagues are acting in bad faith. But it does drive home the point I made in a blog almost two years ago that "data" – no matter how sweet-sounding the oft-repeated "data-driven" mantra – not infrequently is viewed differently, and put to different uses, depending upon one's regulatory philosophy and perspective.

It is clear that the communications policy perspective of Chairman Genachowski and his two Democratic colleagues is presumptively pro-regulation. In my view, in light of the technological and market dynamism that characterizes the communications and information services marketplace, their perspective should be presumptively deregulatory. Be that as it may, viewed through its presumptively pro-regulation mindset, the FCC majority evaluated the data and determined broadband is not being deployed in a "reasonable" or "timely" manner.

As noted above, this negative determination may have important consequences because Section 706 directs the Commission to take immediate action to accelerate broadband deployment. And, we know that, based on recent history – for example, think net neutrality and data roaming mandates -- the actions taken by the Genachowski Commission are most likely to be adoption of more new regulations – despite the fact that the statute refers to "removing barriers to infrastructure investment."

While I have acknowledged above that it is possible to draw different conclusions from the available data depending upon one's regulatory perspective, Commissioner McDowell in his dissenting statement persuasively argues that, in this instance, the majority's ultimate determination is highly questionable. As Commissioner McDowell points out, for the first time, the Commission claims the statutory terms "deployment" and "availability" refer to something other than deployment of physical network infrastructure. The Commission's apparent motivation in abandoning the previous understanding is to re-interpret the terms to encompass the notion of "adoption" of broadband, not just access to broadband networks. In other words, the Commission now factors into its "reasonableness" and timeliness" determination, in an amorphous, unconstrained way, various professed concerns about the rate of adoption (already over 65% of Americans use broadband at home). Without digressing here into a discussion of the proper modes of statutory construction, it is enough to say that the Commission's novel re-interpretation of Section 706 – after a contrary interpretation in previous reports – is almost certainly incorrect.

The Commission's concession that, for purposes of its Section 706 determination, it will completely exclude the deployment of wireless broadband capabilities – even though 4G wireless networks are now being deployed – casts further doubt on the validity of its ultimate determination. Even as the number of wireless-only households now exceeds 25%, the Commission has stubbornly refused to consider wireless phones a competitive alternative to landline phones in forbearance proceedings. It now appears that, even as the number of smartphone subscribers increases rapidly, the Commission will pursue a similar tack of simply ignoring wireless broadband network deployment and availability for purposes of its Section 706 determination. This despite Chairman Genachowski's very recent statement that "3G wireless services can deliver speeds capable of handling a dramatically wide array of consumer applications." And despite the acknowledgment in the Section 706 report that "[c]urrently, a number of wireless providers are building out nationwide fourth-generation (4G) mobile broadband networks."

The Genachowski Commission's inclination to interpret evidence – not to mention re-interpreting statutory terms – in a way designed to provide support for its pro-regulatory proclivities is likely, over time, to have adverse consequences. In the news release accompanying release of the report, the Commission states: "Despite the difficult economy, the private sector continues to invest tens of billions of dollars in broadband infrastructure each year -- $65 billion in capital expenditures in 2010 alone -- expanding capacity, increasing speeds on fixed networks and rolling out next-generation mobile services like 4G." In a recent press release, Broadband for America, an industry trade organization, claims that since 2008 cable operators, telephone companies, and wireless firms have invested over $250 billion in private capital in broadband networks." To be sure, private investment of this magnitude, during the "difficult economy," is extraordinary, and a testament to American private enterprise.

The Commission refuses to acknowledge, or fails to understand, that the costs imposed on broadband providers by increased regulations, such as the recently adopted net neutrality mandates, likely will have the effect of discouraging private investment. Discouraging private sector investment, especially on the huge scale indicated by the figures above, would be contrary to the goal, shared by all, for broadband to be made available to those remaining unserved areas (96% of American households already have broadband access), and for existing facilities to be continually upgraded with higher speed offerings.

In sum, the Commission, by filtering certain evidence through its embedded pro-regulatory lens, and departing from its previous interpretations of key statutory terms, has reached a determination in its Section 706 report that apparently it will use to adopt more new unnecessary regulations. I fear that, in the end, American consumers – and the American economy -- will be the real losers.

***

Finally, the Commission's handling of the evidence in this most recent Section 706 report has left me more convinced than ever that Congress should amend the Communications Act as l suggested in my recent essay, "A Modest Proposal for FCC Regulatory Reform." As I explain there, and in this more abbreviated "Rolling Back Regulation at the FCC" version published in the National Review Online, the Communications Act's forbearance and periodic regulatory review provisions should be amended to establish a presumption that, absence clear and convincing evidence to the contrary, the statutory consumer protection and public interest criteria for granting regulatory relief have been satisfied. I invite you to consider my proposal in conjunction with the way the FCC evaluated the evidence in its Section 706 report.

 

Technorati Tags: Section 706,FCC,Randolph May,Randolph J. May,Broadband Regulation,Competition Policy,Broadband Adoption,Julius Genachowski

FCC's Wireless Competition Report Should Take Wireless Substitution Seriously

A year ago this month the FCC issued its annual Wireless Competition Report. So a new report from the Commission should be just around the corner. One of the biggest questions surrounding its forthcoming report is whether the Commission will finally take stock of wireless substitution for wireline services.

In its next Wireless Competition Report, the FCC should take the opportunity to more closely examine the growing phenomenon of wireless customers "cutting the cord" and going without wireline voice service altogether. The Commission should also forthrightly examine in its report the impact of wireless on the wireline market. Particularly when it comes to voice service, a strong case can be made that competition from wireless service is rendering legacy wireline regulation unnecessary and costly.

From time to time, the FCC has acknowledged the increasing numbers of wireless subscribers. The Commission's recent Local Telephone Competition Report, for instance, states that as of the end of June 2010, the number of wireless voice subscribers nationwide had increased to almost 279 million – up almost 14 million from a year before and up more than 61 million from four years prior.

It's difficult to imagine how such a momentous spike in wireless subscribership could possibly leave wireline unaffected. And, in fact, the Commission has acknowledged the decreasing numbers of switched access lines. Its Local Telephone Competition Report indicates that the number of switched access lines for both ILECs and non-ILEC telecommunications providers total some 122 million. (ILECs and non-ILECs also serve a combined total of approximately 29 million VoIP subscribers). This number for switched access lines is down from approximately 133 million the year before and down from over 172 million from June 2006. In addition, the number of ILEC access lines and VoIP subscribership has declined relative to increases for non-ILECs. On June 30, 2010, ILEC total end-user switched access lines and VoIP subscriptions equaled just over 102 million, down over 10 million from a year prior and down nearly 40 million from four years earlier. Non-ILEC total end-user switched access lines and VoIP subscriptions equaled nearly 49 million as of June 30, 2010, up over 4 million from a year prior and up almost 20 million from four years before.

The FCC has also acknowledged the increasing numbers of consumers who have "cut the cord" and now rely exclusively on wireless. For instance, one 2010 survey cited by the Commissionshows that a fast-growing number of households — now approximately one-quarter of all households — have "cut the cord" and rely exclusively on wireless: "For the last 3 years, the proportion of households subscribing to both landline and mobile wireless service has fluctuated around 59%, while the proportion of households that subscribe only to mobile wireless increased from 13.6% to 24.5%." The latest iteration of that survey suggests those same trends are continuing. Age demographics alone should suggest these cord-cutting trends will continue, as the number of wireless-only subscribers increases among users in younger age brackets. The chart below conveys a general sense of the upward trajectory of wireless-only subscribership as a percentage of all wireless subscribers.

Furthermore, when it comes to assessing wireless in competition with wireline, one should also take into account the degree of wireless choices available to consumers. Consider the Commission's findings in its 2010 Wireless Competition Report that "[t]he percentage of the population served by at least two mobile broadband providers increased from 73 percent in May 2008 to nearly 90 percent in November 2009," "the percentage of the population served by three or more providers increased from 51 percent in May 2008 to 76 percent in November 2009," and "approximately 58 percent of the population is served by at least four mobile broadband providers." A forthcoming Wireless Competition Report should provide an updated set of numbers. But the continuing presence of wireless alternatives to wireline services in the voice market is a certainty.

Unfortunately, the FCC's Qwest Phoenix MSA Order from last year followed a string of prior orders in which the Commission has declined to incorporate these insights regarding wireline and wireless subscribership into its overall regulatory approach to wireline services. This despite the Commission's concession that "most subscribers to wireline and wireless engage in some usage substitution," and that "[t]he increasing percentage of residential customers that rely solely on mobile wireless voice service suggests that an increasing percentage of voice customers view wireless and wireline services as close substitutes, increasing the likelihood that wireless services may materially constrain the price of residential wireline service."

The Commission excluded wireless as a substitute for wireline in its market analysis in the Qwest Phoenix MSA Order by suggesting mere usage substitution is not the same as access substitution, and that conclusive proof of the latter would be required to show price-constraining effects. The Commission insisted that "[k]nowing the percentage of households that rely exclusively upon mobile wireless is insufficient to determine whether mobile wireless services have a price-constraining effect on wireline access services." But the Commission suggested that what it calls conclusive proof of price-constraining effects might not itself be enough to treat wireless as a substitution for wireline, claiming that cord-cutting "could be driven more by differences in consumers' age, household structure, and underlying preferences than by relative price differentials."

The Commission's refusal to consider wireless substitution in the Qwest Phoenix MSA Order runs contrary to a commonsense look at the data regarding increasing wireless subscribership, decreasing ILEC access switches, and increasing wireless-only subscribership that is bound to continue rising in light of associated age demographics. But it should also be remembered that the wireless substitution issue was subsumed by the FCC's rollout of a new and controversial market power analysis in the Section 10 regulatory forbearance context and its application to one particular metropolitan statistical area.

The next Wireless Competition Report now offers the FCC a better place to take a fresh look at the big picture of wireless competition and cord-cutting. The Commission should take that opportunity to face up to the substitutability of wireless for wireline. Once that long overdue step is taken, the Commission can then begin to recognize that aspect of market competition into its future rulemakings, regulatory reviews, and forbearance proceedings.

Video Competition Should Lead FCC to End Old Regulation

The FCC's preparations are underway for its forthcoming Video Competition Report. The Commission confesses its information and outlook toward the video marketplace is outdated. So for what will be its 14th report analyzing the state of video competition, the Commission has issued a notice seeking information about much of the abundant variety of content, aggregation, and delivery services that characterize today's innovative video market.

Although cable video services are primarily governed by the Cable Act of 1992, the video market landscape of 2011 is fundamentally different. That changing landscape has upended many assumptions behind the 1992 Act as well as other regulations dating back to the 1990s or earlier. Direct broadcast satellite (DBS) video services are subject to antiquated regulations as well. And the more the Commission's forthcoming report recognizes the abundance of choices in today's vibrant video market – which it already does either explicitly or implicitly – the less plausible the Commission renders any continuation of old regulation based on an increasingly arcane snapshot of yesteryear's market.

In seeking an up-to-date look at video competition the Commission should use its report as the occasion to promptly begin eliminating out-of-date regulation that now hinders further innovation and competition. And, to the extent that congressional action is required to accomplish this, the Commission should recommend such deregulatory action to Congress.

The very fact that the Commission is calling for comment and information on how new forms of video content, aggregation, and delivery are impacting and providing substitutes for (multi-channel video programming distributor) MVPD services should be revealing. Implicit in the Commission's line of inquiry is the realization that the days of perceived cable monopoly are over. Although the FCC has frequently admitted that market share alone does not equate to monopoly, the chart below showing franchised cable companies' market share of MVPD subscribers conveys some sense of where the market was in the mid-1990s.

In the years immediately following, consumers in areas once served by only one incumbent cable provider began enjoying additional choices. As the next chart shows, by 2001, the competitive potential of two national direct broadcast satellite (DBS) service providers had begun to materialize.

More recently, telco providers have entered into the MVPD business with competing services. Although at this point AT&T and Verizon claim only a small percentage of MVPD subscribers compared to cable and DBS companies, such telco providers still claim approximately 6.5 million MVPD subscribers. Meanwhile, DBS has continued to make further incursions into cable companies' market share throughout the last decade.

In large part, such dramatic changes in the video marketplace prompted the U.S. Court of Appeals for the District of Columbia Circuit to declare in Comcast v. FCC (2009) that the cable bottleneck no longer exists. These changes are reflected in the final chart below based on numbers cited in the FCC's recent notice.

This last chart does not take into account other types of video services that were factored into the prior two charts, such as satellite master antenna (SMATV). More significantly, broadband-delivered video services are not factored in this market share snapshot, even though the presence of potential competition offered by broadband is now too serious to ignore.

Broadband services now provide an additional source of delivery for video programming. Consumers today obtain video content through online services such as iTunes, Netflix's subscription service, and Amazon. Hulu and a number of individual broadcast and cable TV programmer websites offer streaming content to consumers for free by using ad-supported models.

In addition, consumers have a growing variety of choices for devices to use for receiving video programming. An increasing number of "smart TVs" being brought to market, for instance, are capable of downloading video content directly from the Internet. Roku, Boxee, and Apple TV also offer content delivery services through their respective new devices. Broadband-connected video game consoles such as Sony PlayStation 3 and Xbox 360 are also increasingly popular devices for obtaining video programming. Just last week, in fact, Xbox began offering additional video content through a new Hulu Plus application. Not to be forgotten, new broadband-enabled tablet devices and smartphones are giving video consumers mobility options.

By taking into account a broader view of this rapidly changing, dynamic market, the Commission's forthcoming video competition report should be the occasion – now long overdue – for reducing regulation of cable and DBS services premised on an old, static picture of the market. A broadened perspective on video competition and substitutes should mean that outdated regulation of cable and DBS services – such as cable must-carry/retransmission consent regulation or its CableCARD regulation for cable set-top boxes – should be prime candidates for elimination. Both types of regulation are premised on an antiquated monopolistic mindset toward cable video.

It was expressly on a monopolistic premise, in fact, that must-carry regulation barely survived First Amendment challenge in a pair of 5-4 U.S. Supreme Court rulings from 1994 and 1997. In a market where conditions are competitive, however, must-carry forced-speech mandates are untenable under the First Amendment. And in Section 629 of the Telecom Act of 1996, Congress inserted a special sunset clause regarding set-top box regulation, requiring the Commission to remove regulation when there is "effective competition." The state of today's video market should prompt the Commission to invoke that sunset provision.

Now, with respect to the FCC's recent notice seeking information concerning the video marketplace, when a regulatory agency begins asking questions about successful new products and services it naturally raises worries over whether the agency might actually be seeking new rationales for expanding its regulatory authority rather than opportunities for reducing regulation in light of more competition. Might a broadened Commission inquiry into video mark the beginning of broader new regulation of the dynamic video market? Recent Commission activities – such as its adoption of regulatory conditions regarding online video in the Comcast-NBCU merger as well as its "AllVid" proposal to expand regulation of video navigation devices to all MVPDs – give real plausibility to such worries. (I discuss these in a prior FSF Perspectives paper.) Hopefully, those worries will go unrealized this time.

And, hopefully, in re-examining its old cable and DBS regulations in light of new marketplace conditions, the Commission will act consistent with the President's Executive Order for improving regulation and regulatory review. The President's Order calls on federal agencies to review their regulations to remove barriers that are needlessly hurting businesses and our economy, and to ensure that existing regulations "promot[e] economic growth, innovation, competitiveness, and job creation … [and] use the best, most innovative, and least burdensome tools for achieving regulatory ends." In February, Chairman Julius Genachowski stated he "expect[s] the FCC to perform its responsibilities consistent with the principles in the executive order."

The Commission's report should provide us with a fresh set of numbers about competitive conditions regarding several aspects of today's dynamic video market. And the report will give the Commission the perfect opportunity to finally face up to what common sense observation of today's video market reveals: rapid innovation and competition prevails, the old cable bottleneck doesn't exist, and outdated regulation of cable and DBS service based on a legacy monopolistic outlook is ill-suited for the current competitive environment. Consistent with the principles in the President's Executive Order, the Commission should use its report to remove old regulatory barriers rather than erect new ones that could stifle further innovation and competition in the video market.

Rolling Back Regulation at the FCC - Part II

The House Commerce Committee's Subcommittee on Communications and Technology has scheduled a hearing for Tuesday, May 3, on FCC process reform, and all five commissioners are to testify. FCC regulatory reform is certainly fertile ground, and I hope the committee is gearing up to do some serious plowing. [Just as I am about to post this, I see that the Subcommittee apparently has postponed Tuesday's hearing.]

In a piece entitled "Rolling Back Regulation at the FCC" published on April 18 in National Review Online, I suggested a modest change to the Communications Act, in the nature of a process reform, that could go a long way towards effectuating Congress's intent that the Telecommunications Act of 1996 be implemented in a deregulatory way. I explained that two entirely new provisions in the 1996 Act – the forbearance and periodic regulatory review provisions -- were intended by Congress to be primary tools for reducing regulation as competition developed, but that both have largely failed of their purpose. (For further detail, see my April 7 FSF Perspectives piece, "A Modest Proposal for FCC Regulatory Reform: Making Forbearance and Regulatory Reform Decisions More Deregulatory.")

In order for the forbearance and regulatory review provisions to achieve their intended purpose, I proposed that both be amended by incorporating an evidentiary standard that, in effect, would establish a deregulatory presumption. The Commission would be required to presume, absent clear and convincing evidence to the contrary, that the consumer protection and public interest criteria in the two provisions have been satisfied. The substantive criteria relating to consumer protection and the public interest would not be altered, and the revision would not dictate the outcome of any particular regulatory relief proceeding. But with the rebuttable presumption in place, the FCC would bear a considerably steeper burden in order to retain legacy regulations in the face of competition. Surely this is what Congress had in mind when it directed the agency in the regulatory review provision to determine whether a regulation is "no longer necessary in the public interest as a result of meaningful economic competition between providers of such service."

Now a point of clarification. In suggesting the forbearance and regulatory review provisions be amended to incorporate a deregulatory presumption by virtue of inclusion of the "clear and convincing" evidentiary standard, I did not mean to suggest that all entities regulated by the Commission should not be able to avail themselves of these provisions for regulatory relief. I was primarily focusing on the mechanism for achieving the deregulatory goal, not the scope of coverage. But to be clear: The two provisions should be revised so that all entities subject to Commission regulations are included, say, by adding "and a multichannel video programming distributor and any other regulated entity" after "telecommunications carrier," and "multichannel video programming service and any other service regulated by the Commission" after telecommunications service, each time "telecommunications carrier" or telecommunications service" appears.

As I noted in my National Review piece, my proposal does not lessen the need for comprehensive reform of our communications laws. But, in the meantime, if adopted, the proposal could go a long way towards forcing the FCC to eliminate what President Obama called, in his recent executive order, "outmoded, ineffective, insufficient, or excessively burdensome" regulations.

I received many favorable responses to my proposal. Perhaps in the course of the hearing on FCC reform, Committee members can ask the FCC commissioners for their reaction to this idea, along with many others.

Technorati Tags: Randolph J. May,Randolph May,FCC Reform,Forbearance,Regulatory Reform

The AT&T and T-Mobile Merger: Thinking Things Through - Part II

On April 21, AT&T and T-Mobile filed the applications seeking the FCC's consent to their proposal for T-Mobile to be acquired by AT&T.

For those readers who may not be familiar with the FCC's merger review processes, and its historical timeline for ruling on merger applications, don't expect any decision from the FCC this calendar year. I'm not suggesting the government (the Department of Justice included – after all, it is one government we have!) shouldn't be able to reach a decision before next year, I am just predicting it won't.

As I said in a statement issued on March 20, the day the merger proposal was announced, "[l]ike all mergers of this size, the proposed AT&T – T-Mobile combination will get close scrutiny, and it should." I stand by that statement.

I went on to say that:

"My preliminary sense is that the benefits from the proposed merger, with the promise of enhanced 4G network capabilities implemented more quickly than otherwise would be the case, outweigh the costs. Even after the merger, the wireless market should remain effectively competitive with the companies that remain. Over the last several years consumers have benefited from a continuing downward-sloping price curve indicating a substantially competitive market. And it is important to remember that, with respect to many services, the wireless market increasingly is just part of a larger overall broadband market."

Nine days later, in a piece entitled, "The AT&T and T-Mobile Merger – Thinking Things Through," I offered some thoughts on ways to think about the merger as the review process commences. In re-reading the piece, they still seem apropos, so, if you're inclined, I commend them to you.

In the same vein of "thinking things through," I want to call your attention to a claim made by Sprint that strikes me as somewhat odd. Sprint, the third largest wireless provider after Verizon and AT&T, suggests that if the merger is consummated, consumers will pay higher prices for their wireless services. Sprint spokesman John Taylor said the merger would harm consumers and "raise prices."

This is an odd claim coming from Sprint because you would think that Sprint would benefit, as a competitor, if the result of the merger is that the combined AT&T and T-Mobile will charge higher prices than either would charge uncombined. After all, the higher the price charged by one marketplace competitor, the easier it is for other competitors to take away – compete away – the customers of the higher-priced provider.

So, I would take Sprint's crocodile tears alleging the likelihood of higher post-merger prices with a grain or two of salt. This is especially so in the face of the long-running steep declining price curve that, without interruption, has characterized wireless prices in the U.S. over the past 15 years. According to the FCC's 2010 Wireless Competition Report, only Hong Kong has lower rates. Consumers in Great Britain, Germany, and France, Japan and most other countries pay more. In reality, Sprint might well think, and be justified in thinking, the merger will lead to even lower prices and better service for AT&T's and T-Mobile's consumers as a result of the integration efficiencies achieved from combining spectrum resources and otherwise.

But if Sprint really thinks the proposed merger will lead to higher prices for AT&T's and T-Mobile's customers, it should welcome the opportunity to use this higher "price umbrella" to lure away those customers with its own lower prices. Indeed, as Scott Cleland pointed out in a post this week, Sprint features its low prices and "unlimited" calling plans in its advertising. (Scott's piece, "AT&T – T-Mobile in Competitive Perspective," contains a lot of pertinent data relevant to an antitrust-like market analysis.)

It may be that Sprint already is so focused on its role as "leading merger opponent" that its attention will be diverted away from what ought to be its primary job -- fighting for the customers presently served by AT&T and T-Mobile, and, for that matter, by Verizon, and by MetroPCS, Leap, Cox, and the myriad of other regional providers. Indeed, statements from Sprint's officials sound as if the company, in its "leading merger opponent" role, already has adopted a static mindset that will go a long way towards consigning it to back-seat status. Here is spokesman John Taylor: "America could say goodbye to competition in the wireless industry if two companies are allowed to control nearly 80% of wireless industry revenues." The notion that the wireless providers "control" their customers in a sense that renders these subscribers non-contestable is simply wrong. The providers battle fiercely not only to sign-up new customers but to get existing ones to switch. Witness their non-stop ad campaigns – and their marketing expenditures.

So, in thinking things through at this early stage of a long review process, one thought I have is that, as the months go by, I hope Sprint doesn't become so focused on opposing AT&T and T-Mobile in the regulatory and antitrust arenas that the company fails to avail itself of the opportunities to compete in the marketplace. I suspect that while AT&T and T-Mobile executives are heavily preoccupied with the merger themselves, opportunities for Sprint to devise marketplace responses will be plentiful.

Technorati Tags: Randolph May,Randolph J. May,FCC,AT&T,T-Mobile,Merger Reform,Competition Policy

"Bill Shock" Regulation Raises First Amendment Concerns

Over the last several months the FCC has been wading into what it calls wireless "bill shock." However, there is a real question whether bill shock constitutes a real problem – let alone a problem substantial enough to warrant a new slate of regulatory mandates. This question is particularly important considering that the proposed bill shock regulation presents constitutional problems under the First Amendment.

For starters, most consumers don't incur overage charges. The Nielsen Company analyzed 78,633 post-paid wireless bill accounts spanning from the third quarter of 2009 to the second quarter of 2010 (see here and here). According to Roger Entner's analysis of the Nielsen Study, "86.5% of accounts never have a voice overage and 82% never have a data overage." Of those that do incur such charges, they're usually much smaller than the extreme anecdotes that have been highlighted before the Commission, such as a report by an AT&T customer that he was charged over $9,000 when his teenage son watched YouTube for 45 minutes on his smartphone from Guatemala. The Nielsen Study numbers suggest the median charge for consumers going into voice overage once per year is $17.89 and twice per year is $29.90. And the median charges for going into data overage once per year is $2.00 and twice per year is $3.85.

Small overage charges imposed on consumers who exceed their usage plans are hardly shocking. Requiring consumers whose usage exceeds their plan allotment to pay for such extra use makes sense. What makes little sense is to automatically equate mere overage charges to bill shock. The FCC's bill shock survey – which contends that one in six wireless consumers or 30 million experience bill shock each year – appears to equate the two.

Consider also that in some instances, paying an extra charge for extra use of a service — beyond what is provided in a consumer's chosen service plan — is more efficient for a consumer than purchasing the next most expensive service plan. And in many instances, carriers will allow consumers who incur overage charges to retroactively upgrade to a higher-tiered service plan.

Last fall the FCC issued a proposed rulemaking to lay the groundwork for new "bill shock" regulation. The Commission proposes to require wireless carriers to clearly disclose any tools they offer consumers to set usage limits or review usage balances. Although many carriers already do this, the Commission would cement the practice into disclosure rules. Furthermore, the Commission proposes to require wireless carriers to provide some kind of warnings to consumers – perhaps voice alerts or text alerts – when consumers exceed their respective plan's monthly mobile use limits and begin to incur overage charges for voice, data, and text. (Carriers already provide consumers with a variety of alert options, too.)

The Commission also proposes to mandate warnings when customers "are approaching an allotted limit" on their monthly mobile use limits. Prepaid wireless services are swept up in the Commission's proposal, too, even though prepaid users don't pay recurring monthly bills and therefore are not even in the category of consumers who would face potential overage charges, let alone charges constituting bill shock. And the Commission proposes requiring warnings from wireless carriers when consumers are about to incur domestic roaming charges or international roaming charges that are not covered by their monthly plans.

Commenters in the bill shock rulemaking proceeding go further. Some even urge the FCC to require wireless carriers to provide multiple, individualized usage and overage alerts with specific information customized to particular consumers. Commenters insist that the Commission require carriers to offer a variety of choices regarding overage and usage alert delivery. Additional mandatory alerts are urged by commenters for informing consumers that they are no longer voice or data roaming and not subject to roaming fees. Commenters also argue the Commission should mandate wireless device screen notice and alert icons as part of the required slate of warnings.

Previously, I've raised concerns about the effect of imposing a slew of new regulatory controls on a thriving, competitive wireless market that is only in the beginning stages of delivering broadband services and upgrading network capabilities to 3G and 4G specs. (See the FSF Perspectives piece "Don't Let 'Bill Shock' Regulation End Light-Touch Treatment of Wireless.") But now I want to highlight a different concern. Because the regulation being considered isn't meant to address actual fraud or deception and because the scope of proposed regulatory controls appears so broad, many aspects of proposed bill shock regulation may infringe on First Amendment free speech rights.

The U.S. Supreme Court has repeatedly recognized that freedom of speech means not only a right to speak but also a right not to speak — or a right against being compelled by the government to speak. Although the Supreme Court's First Amendment jurisprudence typically accords a lesser degree of protection to what it categorizes as "commercial speech" and is generally more favorable to compelled disclosures of speech than to outright restrictions on speech, even government regulation requiring disclosures of factual information is subject to constitutional scrutiny. Commercial advertising that is inherently or implicitly misleading is not deserving of First Amendment protection. But where no fraud or deception is involved, commercial speech regulation is subject to set out by the Supreme Court in Central Hudson Gas & Electric Company v. Public Utilities Commission of California (1985).

Under Central Hudson, government regulation of non-misleading commercial speech is permissible where: (1) the regulation advances a substantial government interest; (2) the speech directly advances that interest; and (3) the regulation is not more extensive than necessary to achieve that interest. The government bears the burden in justifying its regulation as alleviating a real problem in a material way, as opposed to regulation having a vicarious connection to a merely conjectured problem. This also means the government must establish that less burdensome alternatives will not suffice to directly advance the substantial interest at stake.

When it comes to bill shock regulation, remember again that misleading information is not at issue. Instead, the Commission is proposing regulation for the purpose of "assist[ing] consumers in avoiding unexpected charges on their bills." Let's assume a court would find that the government proves there is an actual bill shock "problem" and that the Commission's stated purpose is "substantial" enough to warrant regulation. The government would still have to establish that the myriad regulations proposed by the Commission – and commenters, to the extent the Commission were to adopt their proposals – would materially address that problem beyond the extent is already addressed by available usage monitoring tools and alerts.

A question about diminishing returns immediately occurs when considering mandated usage monitoring tools and alerts when those tools and alerts are already widely available. But even if a court found that some or all of the requirements the Commission might ultimately adopt directly and materially advanced the government's purposes, questions would still remain about whether those same purposes could be achieved by more narrowly tailored approaches.

The Commission's proposal to require wireless carriers to clearly disclose their respective usage-monitoring tools to consumers certainly constitutes as a less burdensome alternative to achieving that purpose. If the problem, as stated by the Commission, is that consumers are often unaware of or unable to use them or gain access to the relevant information, then compelling disclosure could more likely satisfy First Amendment scrutiny. As the Supreme Court recently declared in Milavetz v. U.S. (2010): "Unjustified or unduly burdensome disclosure requirements offend the First Amendment by chilling protected speech, but 'an advertiser's rights are adequately protected as long as disclosure requirements are reasonably related to the State's interest in preventing deception of consumers.'" And a court would likely conclude that promoting consumer awareness through educational efforts provides an even less burdensome alternative that is even more directly focused on the perceived problem. The Commission has already undertaken such educational initiatives, including a bill shock "tip sheet" that it released to the public last year.

But recognition of the proposed disclosure requirement and educational efforts as less burdensome alternatives throws the broader array of Commission and commenter proposals for bill shock regulation into much greater uncertainty under the Supreme Court's First Amendment jurisprudence. The more bill shock requirements the Commission ultimately adopts and the broader their scope, the more likely it is that such requirements would be considered by a court to be unnecessary to achieving the Commission's purpose – and consequently contrary to the First Amendment.

At this point, the ultimate scope and particulars of any bill shock regulation that the Commission might adopt remains uncertain. Wireless has thrived in recent years thanks in part to light-touch regulatory treatment. But the broader regulatory approach to bill shock that the Commission and pro-regulatory voices have recently endorsed embodies a more heavy-handed approach – and one even at odds with the First Amendment in some respects.

Given questions about whether bill shock is a real, substantial problem, and a problem that multiple regulatory mandates are needed to fix, I hope the Commission will think again before imposing regulation so broad as to also raise First Amendment questions.

Expect Google's Privacy Problems to Threaten Bubble 2.0

 

As I have said several times before, there is no one, in my book, that writes more incisively about Google than Scott Cleland. Here’s another good piece by Scott.

While I don’t necessarily always agree with Scott’s conclusions, I always give them the thought they deserve.

So, here’s the latest food-for-thought:

Expect Google's Privacy Problems to Threaten Bubble 2.0 | The Precursor Blog by Scott Cleland

Technorati Tags: Google,Privacy,Scott Cleland

The AT&T and T-Mobile Merger: Thinking Things Through

Remember the 2008 merger of the satellite radio companies, XM and Sirius? The National Association of Broadcasters, advocating on behalf of its terrestrial broadcaster members, adopted a facile battle cry slogan. The NAB said the proposed combination was a "merger to monopoly."

The NAB's claim was specious because "satellite radio" was part of a much broader marketplace comprised of audio information and entertainment service providers using multiple platforms, including free 'over the air' AM and FM radio, iPods, mobile-phone streaming, HD radio, Internet radio and next-generation wireless technologies. The ferocity with which the NAB tried to defeat the merger refuted the notion that its terrestrial broadcaster members did not compete in the same market.

[Tip: When considering competitive and market impacts for purposes of merger reviews, observe the extent to which various competitors, often many competitors, mount vigorous campaigns designed to convince the antitrust authorities and the regulators that if the merger is approved there will be an absence of competition. Note the incongruity.]

I recall the NAB's silly "merger to monopoly" mantra now because, in the face of AT&T's proposed acquisition of T-Mobile, some of the usual "I've never seen a merger I would approve" suspects have been quick to claim that a merger from "four to three" in the wireless marketplace, or at least this particular "four to three" merger, necessarily would be anticompetitive.

But, please, not so quick!

While the "four to three" formulation, like the NAB's "merger to monopoly" mantra, may make a nice sound bite, it is in no way a substitute for the rigorous market analysis and weighing of the public benefits that will determine whether the proposed combination should be approved.

At the time AT&T's acquisition of T-Mobile was announced, I had no hesitancy in stating: "Like all mergers of this size, the proposed AT&T - T-Mobile combination will get close scrutiny, and it should." So I do not propose here to offer a final judgment on the merger – before the merging parties have even filed their supporting papers with the FCC, or provided documentation to the antitrust authorities.

But I do suggest that formulaic sloganeering, coupled with the predictable, tiresome references concerning "giant" corporations, ought to be ignored throughout the review process. This sloganeering does nothing but detract from the type of informed analysis which ought to be performed.

With that in mind, I don't want here to go into any in-depth market analysis, except to note, assuming the AT&T/T-Mobile merger is consummated, that there will still be three major nationwide providers – AT&T, Verizon, and Sprint – along with many smaller providers, such as MetroPCS, Leap Wireless, and U.S. Cellular, which serve many geographic areas. There are reportedly five or more competitors in the top 20 markets. There are other providers as well, such as TracFone, which serve niche product markets by differentiating their offerings on the basis of price or terms of service.

While Sprint asserts that, post-merger AT&T and Verizon, would "control" 72% of the subscribers, the 28% of the market that remains is not marginal. It seems sufficiently large that the remaining competitors would continue to exert competitive discipline on Verizon and AT&T. Of course, and more fundamentally, it is wrong to view the market shares as static, as if the competitors simply accede to characterization of "control" of subscribers and cease competing. If this were true, the Sunday newspapers would be an awful lot smaller than they already are.

As the inquiry into the merger begins, here are some thoughts to keep in mind. The government's role is not to judge the merits of the AT&T/T-Mobile combination against some other hypothesized – or wished for – combination that was never proposed and never might have been. Its job is to assess the merits of the proposal before it.

And it will be most important to keep in mind as well the rapidity with which the parameters of communications and information services market change, driven by the interplay and feedback loops of incessant technological change and evolving consumer demands. In light of such rapid changes and feedbacks, it is difficult for even the most sagacious and experienced business and technology gurus to predict the future course of communications markets, or of shifting market power within those shifting markets.

I mean no disrespect to government workers in suggesting they are even less likely than the business people or technologists to have the knowledge or expertise to succeed at making accurate predictions concerning the future of these dynamic markets. Indeed, given their dismal past track record, for example, conditioning mergers such as the AOL/Time Warner based on misplaced predictions concerning future market dominance and technological evolution, there is every reason to believe the antitrust authorities and the FCC commissioners and staff should approach the AT&T/T-Mobile merger with a healthy dose of humility concerning their own perspicacity.

Finally, the merger presents the FCC with yet another opportunity to demonstrate some much-needed regulatory modesty in the way the agency handles merger reviews. I first outlined the problems with the FCC's approach to merger review in a piece for Legal Times in March 2000 entitled "Any Volunteers?" As the title of the piece suggests, a significant recurring problem is the Commission's unseemly practice of extracting from the merger applicants, late in the review process, so-called "voluntary" commitments in exchange for the agency acting on the merger. Trouble is, these extracted conditions often have little or nothing to do with any specific competitive issues raised by the proposed merger. If the voluntary conditions are suitable at all for adoption as FCC-enforced mandates – and many are not – they should be considered in generic rulemaking proceedings.

For much more on this, see my recent blog, "FCC Merger Review Reform: The Case for Regulatory Modesty," and also FCC Commissioner Meredith Baker's excellent recent address on the subject. While the gist of my advocacy over the years, as well as the thrust of Commissioner Baker's speech, is that the Commission should adopt new generic policies and processes for handling merger reviews outside the context of any particular merger, there is no reason why the agency, in a display of self-restraint, cannot begin the long-overdue reform process right now.

Stranger things have happened.

Technorati Tags: Randolph May,Randolph J. May,AT&T,T-Mobile,FCC Merger Review,Merger Reform

Data Plans: Pricing Flexibility to Pay for What You Use

By Deborah Taylor Tate

Aside from its proposed acquisition of T-Mobile – a rather large aside -- AT&T recently has been in the news for plans to charge its heavy-using broadband subscribers a bit extra when they download large amounts of data that exceed certain monthly thresholds. Quick to pounce on those plans were critics that typically oppose any usage-based pricing plans that allow broadband subscribers to pay only for the amount of their own use.

But building and operating broadband networks involves real costs. Usage-based pricing arrangements allow broadband companies to recover those costs while allowing subscribers to economize by paying only for the service they actually use. Adopting government price controls on broadband to prohibit that kind of flexible pricing could actually stifle innovation by leading to network congestion by heavy users and by reducing the amount of revenues available for future investment in network upgrades.

According to news reports, AT&T will cap broadband data use at 150GB per month for its DSL subscribers and 250GB per month for its U-Verse subscribers. Apparently, the average AT&T DSL subscriber uses approximately 18GB per month. The company expects less than two percent of its subscribers will be affected by its data cap policy, which will involve $10 charges on subscribers for every 50GB that they consume past their allotted monthly limit. And TR Daily reported on March 14 that "AT&T also plans to notify customers when they hit usage thresholds equal to 65%, 90%, and 100% of their caps and to offer customers historical usage reports and multiple usage tools to enable subscribers to track and manage their usage."

In response, Free Press claimed that AT&T's data use and charging plans bear no relation to network costs and will stifle innovation. Criticisms of this kind, however, treat broadband as if it were a cheap or almost "free" kind of service.

Last year, in my FSF Perspectives paper "A Tangled Web: Moving from 'Open and Free' to 'Safe and Secure,'" I observed that proponents of proposed network neutrality regulation using the term "open and free" to define the debate were in fact obscuring the reality of how broadband infrastructure and services are financed and delivered in our economy:

"'Open and free' sounds really good. However, no American really believes anything in life is 'free' anymore — certainly not in the context of an incredibly sophisticated global Internet and high-end devices being unveiled almost daily. Consumers pay for computers, cell phones, wireless devices, Xboxes, BlackBerrys, laptops and now the new iPad. In addition, most pay a monthly subscription to connect these devices to a broadband or Internet provider. A family with the most basic plan might spend over $1,000 annually; families with fiber and the maximum number of movie channels spend thousands. In legal terms, 'free' is a red herring; it doesn’t exist for most consumers."

I went on to write:

"[M]assive movie downloads and video gamers (not to mention pornographers) may cause an online traffic jam, yet up until now, they have not had to pay for causing it. In fact, most light Internet subscribers would probably like the option of paying only for what they use while heavy users pay for traffic jams or damage to the Internet superhighway. We all want to ensure that a doctor in the midst of delicate tele-surgery would have confidence that the highest quality of dedicated bandwidth would allow the safest possible outcome for a patient.

On the other hand, a grandmother who e-mails periodically, shops online once a month and looks at baby pictures should probably not be paying the same as a 24/7 so-called bandwidth hog. Even The New York Times recognized that huge file- sharing platforms are used for 'pirated copies of movies' — i.e. illegal content downloads. But whether you are a grandmother, a small business or a multinational corporation, you should want the government working to ensure the safety and security of personal data and the protection of our children, and that we continue to have a robust, efficient and ever-expanding broadband architecture for the future."

In December, the FCC proceeded to impose its controversial net neutrality regulation. I maintained the FCC's efforts were (and remain) a troublesome distraction from more important priorities — such as ensuring the Internet is safe and secure and protecting businesses, individuals, and even our government from cybercriminals and malicious attacks.

That being said, the net neutrality framework that the FCC ultimately adopted was premised on the agency's rejection of calls to "prohibit broadband providers from offering their subscribers different tiers of service or from charging their subscribers based on bandwidth consumed." Instead, the Commission concluded: "The framework we adopt today does not prevent broadband providers from asking subscribers who use the network less to pay less, and subscribers who use the network more to pay more." (See page 41, paragraph 72 of the FCC's Order.)

Whatever one thinks about the FCC's latest attempt to regulate how broadband companies can manage their own networks, even the agency's regulatory framework acknowledges the benefits of usage-based pricing to consumers. Pricing plans like AT&T's are entirely permissible, even under the FCC's pro-regulatory policy.

Congress and the FCC should preserve the kind of broadband pricing freedom that allows companies the flexibility to recover the costs of doing business while allowing consumers to pay for the amount of service they actually use.

Me, Michael Copps, and Sunshine That Hurts

I don't often agree with FCC Commissioner Michael Copps -- so when I do, I like to take the opportunity to take note.

For many years now, to his credit, Commissioner Copps has been the most steadfast proponent of congressional action to revise the Sunshine Act. As most readers of this space know, the Sunshine Act prohibits more than two of the five commissioners from meeting together privately outside of a formal FCC open meeting preceded by a public notice.

Perhaps in theory, this post-Watergate "reform" sounds nice, but in practice – in the real-world of agency decisionmaking in a multi-member commission -- the Sunshine Act works against the type of collaboration and collegial discussion that might well improve agency decisions.

Way back in 1995, I chaired a special committee of the Administrative Conference of the United States that recommended revisions to the Sunshine Act. Our committee report proposed revisions that would, at least on a trial basis, allow agency members to meet in private, without advance notice, provided a summary of the meeting was put in the agency's public record after the meeting. The report explained in detail the problems with the Sunshine Act and the reasons why revising the law would improve agency decisions.

Now Representatives Anna Eshoo, John Shimkus, and Mike Doyle have introduced the "Federal Communications Commission Collaborative Act." Their press release says that the bipartisan legislation "would modify current FCC rules to allow three or more Commissioners to hold nonpublic collaborative discussions, as long as no agency action is taken." A member of each political party would have to be included in any such discussions.

Commissioner Copps, in a news release commending the bill's introduction, stated that "[i]f there is only one action that the Commission could take this year to reform the FCC, this should be it."

I can think of several measures that ought to be taken to reform the FCC, but Commissioner Copps is right that revising the Sunshine Act is certainly an important one. Here is the way that Commissioner Copps explained why this is so:

“The inability of Commissioners to get together and talk as a group makes zero sense.  The statutory bar on more than two Commissioners talking together outside a public meeting has had pernicious and unintended consequences—stifling collaborative discussions among colleagues, delaying timely decision-making, discouraging collegiality and short-changing consumers and the public interest.  For almost a decade I have seen first-hand and up close the heavy costs of this prohibition."

Again, Commissioner Copps deserves credit for his leadership on this issue. Much of the press tends to take a pretty superficial, knee-jerk reaction against any proposed changes to the Sunshine Act, so it takes a certain amount of courage to argue for reforming the law.

Commissioner Copps and I are in agreement that, in the current state of affairs, too much Sunshine hurts.

PS – A final reminder. In a January blog, I put in a plug for Time Warner Cable's Research Program on Digital Communications, which awards stipends designed to foster research dedicated to increasing understanding of the benefits and challenges facing the future of digital technologies in the home, office, classroom and community. As I said in that piece, TWC executives, led by Fernando Laguarda, deserve much credit for developing and implementing the program. It presents a good opportunity for scholars to contribute to our understanding of digital communications.

The 2011 Program Announcement setting forth the program guidelines is here. The deadline for submitting applications is April 1. Take heed.

Technorati Tags: Randolph J. May,Randolph May,Sunshine Act,FCC,Federal Communications Commission Collaborative Act

Taxes Worthy of a Tea Party – Part II

In a February 10 piece, "A Tax Worthy of a Tea Party," I said: "When consumers are forced to pay a 15.5% tax on a service the government continually describes as vital in order to support a subsidy regime the government admits is 'wasteful and inefficient,' you would think there would be calls for a Tea Party – whether of the 1773 Boston variety or the 2010 nationwide variety."

There I was speaking of the 15.5% surcharge imposed on all long distance calls to support the various Universal Service Fund ("USF") subsidies.

A recent special report by Scott Mackey published in State Tax Notes documents that, including the federally-imposed USF tax, wireless users now pay a combined federal, state, and local tax rate of 16.3%, up from 15.2% in 2007. (Throughout, as shorthand, I use "tax" to include charges that have the same economic effect as taxes, whether the governments denominate them "fees" or "surcharges" or the like.) The average U.S. wireless subscriber pays approximately $7.84 in taxes on his or her monthly bill.

Considered in isolation, the nationwide average 16.3% tax rate imposed on wireless services is startling – and disturbing – enough.

But considered in relation to the nationwide average tax rate of 7.4% imposed on other general goods and services, the 16.3% tax rate imposed on wireless services –- more than double that on other general goods and services -- is even more startling and disturbing.

In light of the interest in supporting more widespread use of wireless smartphones as part of a national strategy to make broadband services more accessible, especially to lower-income persons, the discriminatory tax treatment of wireless services makes no sense from a public policy perspective. The discriminatory treatment certainly discourages use of wireless services vis-à-vis other goods and services.

You might think that, along with the Tea Party I suggested to protest the federal USF tax, the excessive tax treatment of wireless services by state and local governments would be worthy of a Tea Party too.

But at least some relief from further state and local government tax escalation may be in sight. Representatives Zoe Lofgren and Trent Franks, and Senators Ron Wyden and Olympia Snowe, have introduced the "Wireless Tax Fairness Act of 2011." The bill would impose a five-year moratorium on any new discriminatory tax on wireless services. A discriminatory tax is defined as one that is not generally imposed on other goods or services, or one generally imposed at a lower rate.

While there should a sizeable reduction in the current federal USF charge, and a reduction in existing state and local government wireless taxes, the moratorium proposed by the "Wireless Tax Fairness Act" is certainly a worthy and important start to achieving such needed tax relief. The fact that the bill is a bipartisan effort with 140 co-sponsors is a positive sign.

With the economy still fragile, and with a governmental interest in encouraging more widespread broadband use –- or at least not affirmatively discouraging such use by discriminatory tax treatment -– speedy passage of the Wireless Tax Fairness Act makes sense as both sound tax policy and sound communications policy.

Technorati Tags: FCC,Randolph May,Randolph J. May,Universal Service Fund,Wireless Taxes,USF Fees

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.

* * * * * * *

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."

FCC Merger Review Reform: The Case for Regulatory Modesty

You probably have seen the trade press reports on FCC Commissioner Meredith Baker's Wednesday speech concerning reform of the FCC's merger review process. Even if you have, it is well worth taking the time to read the entire speech here.

Entitled "Toward a More Targeted and Predictable Merger Review Process," Commissioner Baker sets forth a number of specific ideas for addressing what she aptly calls the "long-term structural issues" bedeviling the agency's merger review process.

The speech is concise, and I am not going to repeat what Commissioner Baker says. The merger review process, as carried out by the FCC, has been subject to criticism for well more than a decade. Suffice it to say that her reform suggestions fall into the following three categories: (1) eliminate or at least reduce the duplication of effort – and the attendant expenditure of resources – that result from dual review of the proposed transaction by the antitrust authorities and the FCC; (2) reduce substantially the time the FCC takes to complete its review; and (3) constrain the FCC's practice of imposing wide-ranging merger conditions that do not pose clearly merger-specific harms.

As noted in Commission Baker's speech, I first wrote about the problems attendant to the FCC's merger review process in Legal Times in March 2000 in a piece entitled "Any Volunteers?" ("Volunteers" was used purely in the ironic sense.) Another article entitled "Reform the Process" appeared in the National Law Journal in May 2005. I have written on the subject many times since.

Rather than rearguing here what should be done – and Commissioner Baker has certainly done a good job of laying out her own proposals – I want to emphasize a different point: The timing may be – ought to be -- right now for the FCC to adopt many of the reforms that Commissioner Baker and others have suggested.

Of course, as a practical matter, the Commission will only act to adopt merger reforms if FCC Chairman Julius Genachowski gets behind the effort – and provides the crucial third vote.

He should want to do so.

Commissioner Baker generously credits Chairman Genachowski with devoting agency resources to institutional agency reform. I am not aware of all he may have done in this regard. But I am sure that nothing Chairman Genachowski has done thus far would be as significant or meaningful with respect to institutional reform as changing the FCC's merger review policies along the lines suggested by Commissioner Baker.

There is widespread agreement that the way the Commission conducts the process now -- with the inevitable year-long reviews, the incontrovertible duplication of effort of the Department of Justice and the FTC on the one hand and the FCC on the other, and the unseemly extraction of so-called "voluntary" conditions – has contributed mightily to the FCC's reputation as an agency that does not function very well much of the time.

With the nation's economy and job creation prospects still fragile, and with intense focus on our massive budget deficit, the timing ought to be right for Chairman Genachowski to lead a serious effort to achieve merger review reform. After all, President Obama has made a point in the past few weeks of saying government agencies should ensure their rules and processes are not unnecessarily delaying or making more costly new investments and job creation by businesses. See, for example, the President's widely-publicized Wall Street Journal op-ed, "Toward a 21^st Century Regulatory System." And earlier this week the Government Accountability Office released its widely-commended report, "Opportunities to Reduce Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue," highlighting areas where the government can achieve cost savings by eliminating duplicative functions and increasing the efficiency of operations.

Nothing more is needed for the FCC to succeed in a merger review reform effort than a healthy dose of self-restraint and regulatory modesty. I understand that, consistent with the relevant Communications Act provisions, the agency must find that license or authorization transfers are in the "public interest." There is no doubt that within the context of that vague standard, the Commission has the discretion, for example, to adopt each of the process reform proposals Commissioner Baker proposes.

In 2008, I published an article in the Administrative Law Review entitled, "A Modest Plea for FCC Modesty Regarding the Public Interest Standard," in which I suggested that in carrying out its public interest responsibilities, "the FCC itself should act more modestly." With respect to the merger review process and other agency policies, I said that, short of congressional action, "regulatory constraint under the public interest standard must come from the agency itself."

While unusual, it is not unprecedented for an administrative agency, on its own, to implement institutional reforms. Over the past few decades, despite the remarkable marketplace and technological changes that have occurred, the FCC, unfortunately, has been especially resistant to institutional change.

Chairman Genachowski should seize the opportunity presented by Commissioner Baker's thoughtful merger review proposals to demonstrate that the FCC is still capable, in an exercise of regulatory modesty, of reforming itself – at least in this important respect.

Technorati Tags: Randolph J. May,Randolph May,FCC,FCC Merger Reform,Commisisoner Meredith Baker

Speaker Boehner Hits High Notes in Music City

For Deborah Taylor Tate

John Boehner made his first speech as Speaker outside Washington, DC, Sunday night here in Nashville. He addressed the annual meeting of National Religious Broadcasters.

Speaker Boehner was straightforward, straight-talking and straight-faced in his analysis of our present “debt empire,” as he put it. The first half of his speech focused clearly on the Republicans' review of unnecessary government regulations. The FCC bore the brunt of his consternation.

He began his attack with this description of the FCC’s actions: “Right now, freedom and free expression are under attack by a power structure in Washington populated with regulators who have never set foot inside a radio station or a television studio.” Evidenced by numerous outbreaks of applause, the room full of broadcasters heartily agreed. With Representative Marsha Blackburn -- another passionate and ardent opponent of “government takeover of the Internet” -- in the audience, this was the perfect venue to call out the FCC for continuing to push in the wrong direction regarding Internet regulation.

The Speaker mentioned numerous colleagues determined to stop the FCC's new net neutrality regulations and ended this portion of the speech with this statement (again, met with resounding applause): “Congressman Greg Walden of Oregon, a former broadcaster himself, has introduced a congressional resolution of disapproval to reverse the FCC’s actions. I’m pleased to report the House will act on this measure as early as next month."

Whether net neutrality, or the return of the “fairness doctrine,” or the audacity of an agency utilizing tax dollars for inappropriate purposes -- most every example of regulatory over-reach ended with a ballroom full of “Amens.” (I bet he doesn’t hear that very often during speeches in Washington). Which is precisely what the problem is. Not that Washington insiders aren’t religious; many are deeply so. But that Washington’s penchant for taxing, regulating and spending -- under the present Administration’s leadership -- is not merely unsustainable. “It is also immoral.”

The fact is that ordinary Americans are facing extraordinary and immediate problems of joblessness, bankruptcy, and even higher gas prices…while Washington is on a “spending binge.” One of Mr. Boehner’s examples is that each baby born starts life with a debt of $45,000 -- their portion of our present national debt. That is more than most college educations, many annual incomes, and about half the price of an average home in many parts of the country. That is appalling. In Mr. Boehner’s words: “Every dollar the government takes is another dollar families cannot devote to strengthening their communities or saving for their children’s future.” And, quoting Proverbs: “No society is worthy that treats its children so shabbily.”

Mr. Boehner is not a showman or an actor. He is not a great orator, and he even has a little trouble getting used to the teleprompter. But he is “everyman” (and everywoman), and he is keenly in touch with both the very fiber of our founding fathers as well as “we, the people.”

Probably the most telling phrase of the night was: “In Washington, the abnormal becomes normal.” Let's hope this faithful band of fiscal conservatives can actually do what the Speaker proposed and “chart a new path to prosperity and make the tough choices necessary to restore a moral fiscal policy” at the FCC as well as in Congress.

Godspeed, Mr. Speaker.