Last week, President Obama named Tom Wheeler of Core Capital Partners to be Chairman of the Federal Communications Commission (FCC). Interested parties of all types, from hedge fund managers to Silicon Valley entrepreneurs, are pondering how Mr. Wheeler will manage the agency and what he’ll focus on.
A look back at his musings on a personal blog (aptly named Mobile Musings) and on his more formal writings as chairman of an advisory committee to the FCC may provide some insights. Out of the gate, Mr. Wheeler will be confronted with several pressing issues, ranging from the FCC’s merger-review authority to the broadcast-spectrum auctions to net neutrality to the IP transition.
When it comes to drawing the limits of the FCC’s authority, I have argued that where the conduct under scrutiny fits squarely within the four corners of antitrust (such as mergers), the FCC should take a backseat to the antitrust agencies; for conduct that is not easily recognized as an antitrust violation (such as discrimination by a vertically integrated network owner), the FCC should take the lead. Does Mr. Wheeler agree?
Before the Department of Justice (DOJ) moved to block the AT&T/T-Mobile merger, in April 2011 Mr. Wheeler suggested in his blog that the FCC could regulate the wireless industry via merger-related conditions:
The Communications Act, however, does not prohibit the regulation of the ‘terms and conditions’ of wireless offerings, nor does it prohibit the FCC from imposing merger terms and spectrum auction rules that might seem to be regulation in another guise. It is this authority which offers the Federal government the opportunity to impose on AT&T merger conditions that could define the four corners of wireless regulation going forward; rules that would ultimately impact all wireless carriers.
Shortly after the DOJ filed its complaint in September 2011, Mr. Wheeler opined:
. . . absent a new vehicle the regulation of marketplace behavior that has characterized telecom regulation for almost a century is headed towards the same fate as the dial tone – another fatality of digital zeroes and ones. This trend could have been reversed by the conditions imposed by the government on an AT&T/T-Mobile merger. Skirting the regulatory authority issue in favor of a more flexible public interest standard, AT&T and the FCC/Justice Department would simply agree via a consent decree to pseudo-regulatory behavioral standards.
Keeping the FCC relevant in the evolving telecom landscape is certainly one consideration. But so long as the FCC can impose behavioral remedies on merging parties to promote the public interest, anything goes, including regulation that is wholly disconnected from the merger. Although mergers might generate effects that are not recognized as antitrust harms, there is little chance that a merger would escape antitrust scrutiny. This suggests a more limited role for the FCC when it comes to merger review.
As explained in my new book with Robert Litan, the FCC’s discretion to hold up telecom mergers in return for behavioral remedies invites “rent seeking” activity by competitors, who use the FCC’s merger review as a basis to lobby for welfare-reducing obligations on their rivals. Unless this discretion is removed by Congress, we must hope for a magnanimous regulator at the FCC to waive his discretion—an unlikely outcome given that discretion is a regulator’s currency in Washington. Mr. Litan gently reminded me during a C-SPAN interview that one regulator, Fred Kahn, ceded his discretion while heading the Civil Aeronautics Board. Based on his blog musings, it seems unlikely that Mr. Wheeler will do the same.
Broadcast Spectrum Auction
The first order of business on the auction front is deciding who can participate in the broadcast-spectrum auction and to what extent. In April of this year, the DOJ weighed into this debate by advocating “rules that ensure the smaller nationwide networks, which currently lack substantial low-frequency spectrum, have an opportunity to acquire such spectrum.” It’s not clear whether the DOJ would support barring AT&T and Verizon from the auction entirely, but for those contemplating that idea, consider these consequences: According to a study released last week by Georgetown’s McDonough School of Business, auction revenues would decline by as much as 40 percent as the demand for spectrum artificially contracts, and monthly wireless bills would increase by about 9 percent as capacity-constrained carriers are forced to deploy more expensive solutions.
Fortunately, the pure-exclusion option appears to have little support among policymakers. In his departing speech last week, outgoing Chairman Genachowski advocated a balanced approach in which all four major wireless carriers would have a reasonable chance to expand their spectrum holdings, noting that “even the largest cellphone carriers need access to more airwaves to meet their customers’ booming demand for mobile data.” Regulators might look to the recent UK spectrum auction, in which the regulator (Ofcom) imposed modest caps on the amount of additional low-frequency bands that the two largest providers (Vodafone and O2) were allowed to buy—they already owned significant amounts of that spectrum before the auction—rather than bar those firms from bidding entirely.
Should the FCC follow this path, Mr. Wheeler will hopefully recognize the oncoming battle between wireless and wireline Internet providers, which militates toward a slightly more concentrated wireless industry in exchange for more intense inter-modal broadband competition.
On the net neutrality front, the FCC is awaiting a decision from a court of appeals on whether the agency overstepped its jurisdiction in its 2010 Open Internet Order. The first order of business is determining whether the FCC has the power to regulate Internet access providers. The second order of business is how best to regulate discrimination on the Internet when it rears its ugly head.
As Federal Trade Commissioner (FTC) commissioner Josh Wright correctly explained in a recent speech at George Mason, the FCC erred in the Open Internet Order by treating discrimination by vertically integrated network owners as a per se violation, in contrast to the “rule of reason” treatment afforded to similar “vertical restraints” under the antitrust laws. Mr. Wright advocates that the FTC (and not the FCC) police such conduct under the antitrust laws, arguing that the FTC is less susceptible to political influence than the FCC, and that the FTC has related experience with case-by-case enforcement of vertical restraints.
This is a debate deserving of more attention: Mr. Litan and I argue that the FCC is the better place to police discrimination on the Internet, noting that the agency currently adjudicates discrimination complaints in the video space, and that discrimination of this sort—for example, favoring an affiliated website or application over an independent one—is not an obvious antitrust violation and may generate a harm (reduced innovation) that is not easily proven under stringent antitrust standards.
While Mr. Wheeler likely would seek to maintain the FCC’s power to regulate Internet providers, it is not clear whether he embraces the per se prohibition of discrimination in the FCC’s Open Internet Order. A blog from November 2009, roughly one year before the Open Internet Order was adopted, suggests some moderation here, as least as to whether net neutrality applies to wireless networks:
Rules that recognize the unique characteristics of a spectrum-based service and allow for reasonable network management would seem to be more important than the philosophical debate over whether there should be rules at all.
A final hot topic in telecom circles is whether to release telcos from so-called “legacy regulations” that require them to maintain two separate networks: a copper network and an IP network. A related issue is whether to extend the FCC’s wholesale-access obligations to newly packetized IP networks.
The telcos argue that they could compete more effectively against cable operators if resources currently tied up in maintaining copper networks could be allocated to IP networks. On the other side, resellers argue that a wind-down of the telcos’ copper networks might strand these entrants’ investments in copper-based equipment, thereby raising the entrants’ costs to keep up with the IP transition. These raising-rival-cost arguments assume that resellers impose significant price-disciplining effects on the telcos’ broadband services, even in a world where cable operators compete with telcos for broadband services aimed at businesses.
On this policy debate, Mr. Wheeler’s findings as chairman of an advisory committee to the FCC provide a strong hint as to where he might land. In a June 2011 presentation of the Technical Advisory Committee, Mr. Wheeler explained that the old Public Switched Telephone Network (PSTN) would collapse under its own weight:
As the number of subscribers on the PSTN falls, the cost per remaining customer increases and the overall burden of maintaining the PSTN becomes untenable. A fast transition can generate significant economic activity and at the same time lower the total cost.
The Committee recommended that the legacy copper network should be sunset by 2018.
As the fine print in any investment prospectus repeatedly warns us, past performance is no guarantee of future returns. The same lesson is likely true for the Chairman of the FCC: Past writings cannot serve as a perfect predictor for future policies. But they certainly provide a clue.