Award Winning Blog

Friday, June 22, 2018

Life in the Antitrust Wonderland: Suspension of Disbelief and the TMobile-Sprint Merger



            Counsel for TMobile has filed a provocative and downright remarkable  Description of Transaction, Public Interest Statement, and Related Demonstrations with the FCC; available at: https://newtmobile.com/content/uploads/2018/06/T-Mobile-Sprint-Public-Interest-Statement.pdf.
The nearly 700 page document reads like an extended Wall Street Journal op-ed that distorts reality and encourages readers to embrace quite radical and questionable assumptions about the Internet ecosystem, the rule of antitrust law and what a New TMobile can and will do to make life better for wireless consumers and the nation.
            The authors of the document are banking on convincing a possibly all too easily persuaded federal government that it should ignore common sense, empirical evidence, the rule of law and basic economics.  TMobile and Sprint want to convince the world to ignore a basic smell test for a massive $26 billion horizontal merger of competitors that would further concentrate an already oligopolistic market.  Wising up from a failed attempt to merger in 2011, the companies’ strategists offer a false world view that things are different now, so much so that the future of U.S. competitiveness in next generation wireless technology is at stake and only a newly bolstered TMobile can save the day.
            The document insults the intelligence of both telecommunications professionals and everyday wireless subscribers.  Forget about AT&T and Verizon’s financial resources and industry leadership: New TMobile—and only New TMobile- can “leapfrog” technology and sustain U.S. global leadership.  The authors urge the FCC to “Keep America Great” by approving the merger even though the document fails to explain how TMobile will install and operate any new and innovative 6th generation of wireless that only it can deploy.
It will be interesting to see whether AT&T and Verizon respond to the insult, or keep their power dry and say nothing, knowing that an even more concentrated industry will relieve competitive pressure.
            Robert Bork wrote a law review article and book that help support the view that antirust courts and regulators should use a consumer welfare template for assessing mergers, rather than consider market share.  In the Antitrust Paradox, he warned that government could harm consumers by protecting inefficient ventures from competition based on what he considered a misreading of congressional intent.  Seizing on the view that the government should ignore the market concentrating consequences of the merger, the document authors emphasize how consumers stand to benefit even as one existing competitor exits the market and contributes its market share to another.  Apparently TMobile can refute clear evidence of the merger’s anticompetitive consequences simply by making a series of unenforceable promises about how it will enhance its value proposition for consumers.
            In this alternative reality, merging the third and fourth players in a vastly concentrated market creates a new venture able to do consumer welfare enhancing things the two companies could not do individually.  Does that make sense to you?  The merged company will promote competition, save consumers money, employ more people than the two standalone companies, sustain national technological leadership, bolster TMobile’s innovative “uncarrier” credentials, leapfrog technology and provide salvation to long underserved rural residents. What an impressive list of promised and unenforceable deliverables!
            Let us consider each in sequence with an eye toward assessing whether and how  consumers will receive these gifts.      

The Enhanced Competition Gambit
            The TMobile advocacy document makes the assertion that combining two weaklings in a market will create one muscular competitor able to mix it up with the two dominant carriers AT&T Mobility and Verizon.  This has some plausibility until one asks exactly what could TMobile and Sprint not do as separate companies that they can collectively.  TMobile answers by claiming that Sprint is on the brink of becoming a failed venture notwithstanding massive investment by Softbank of Japan and historically low interest rates.  For its part, TMobile conveniently fails to acknowledge that Deutsche Telkom—reluctantly perhaps--surely has the financial wherewithal to underwrite any necessary investment in infrastructure, including competing in auctions for spectrum.
            The conventional antitrust economic literature, based on empirical evidence, warns that increases in market concentrate creates additional incentive for so-called competitors to engage in “consciously parallel” conduct.  In plain English, this means that ventures would rather not spend sleepless afternoons competing when they can implicitly agree on nearly identical terms, conditions and prices.  Haven’t we seen that outcome before?
            TMobile became the uncarrier after it realized a merger strategy was not viable.  The company innovated and singularly introduced most of the consumer welfare enhancements we like such as carry over of minutes into the next month of use, fair roaming charges even in foreign countries, lower rates for subscribers bringing their own devices, multi-line discounts, etc.  If it got merger authority in 2012, do you think TMobile would have the same zeal to avoid incentives to “go along” with an industry “consensus” on rates?  Bear in mind that for years, all four major wireless carriers had nearly identical price points and competed, if at all, on the availability of handsets and the subsidies offered for them.

            Perhaps airline concentration offers some insights on real world consequences of mergers.  We see nearly identical fares, a reduced value proposition for economy customers, unbundling of services into new profit centers, and an emphasis on attracting higher margin business customers.  Even Southwestern, the uncarrier in commercial aviation, has largely adopted consciously parallel terms and conditions.  It still offers free baggage carriage, but no longer regularly offers the lowest price, particularly when it has the highest market share in a specific airport.
Increased Investment in Infrastructure, Particularly in Rural Areas
            Even after all the lawyer and financial advisor fees, New TMobile promises it will have more funds available for capital expenditures.  So pre-merger, the company might have scrimped, despite having to convince consumers that its network offered the same coverage and reliability as the Big Two carriers.  Post-merger, the company will have two foreign benefactors apparently willing to “double-down” on their already sizeable wireless investment in the United States. It comes across as ironic that in this time of heightened scrutiny about trade and foreign ventures exploiting access to the U.S. market, the federal government will consider a merger that surely will accrue financial benefits that Softbank and Deutsche Telekom will expatriate to their foreign countries. 
            Not all mergers trigger a new burst in capital expenditures.  The acquiring company typically has to see a bargain, “diamond in the rough” that holds promise for future success. Otherwise mergers trigger aggressive cost cutting, ostensibly to accrue synergies and efficiency gains.
            On the matter of rural investment, TMobile conveniently ignores the reality that 5G will have two substantially different characteristics in urban versus rural areas.  One will require substantially more investment, operate on far higher frequencies, require vastly more antennas and will use cutting edge technology.  The other type will require much less investment, may not even meet baseline business case requirements for deployment in lots of areas, will operate on lower frequencies to improve signal coverage and will use less sophisticated technology providing comparatively slower bit transmission speeds while operating in locations having no spectrum scarcity.  So much for the much hyped “leapfrogging” technology.  By the way, which carrier do you think has more patents and a vastly higher research and development budget? It’s not TMobile, or Sprint.
Trickle Down Employment Stimulus
            Can you think of a horizontal merger where the acquiring venture does not declare redundant any existing employees, but instead hires more?  No., I can’t either.  Who knew?
Answer: a small set of the usual sponsored researchers.  Their studies would not pass muster using the traditional peer review process, for a number of potential procedural and ethical factors, the latter including the frequent failure to disclose financial sponsorship in the first place.
            Ignoring such a blatant conflict of interest, these studies attempt to refute common sense.  Horizontal mergers often include a premium above the current market capitalization of the acquired company.  The acquiring company justifies the higher offer based on the combination of physical assets, intellectual property and a catch all factor typically called goodwill reflecting the value of the brand and other positive factors about the acquired company.  Another irony in the document: TMobile devotes significant space telling the world what a not so great company Sprint is.  They’re going to make Sprint great again, or for the first time as New TMobile.
            Apparently, TMobile will unearth undetected value in the Sprint employee population.  Alternatively, TMobile will find many new ways to compensate for the reduction in employee numbers at various strip malls and kiosks throughout America.  Lots of pump priming according to the sponsored researchers.  Bear in mind that they can predict anything and the company can promise anything with impunity.  The federal government surely will not unwind an approved merger, because the acquiring company kinda, sorta overstated promises and under- delivered with performance.  Of course, its heart and that of its sponsored researchers was always well intentioned.
The Appeal to Patriotism and National Pride: Maintaining America’s Greatness in Next Generation, 5G Wireless and the Internet of Things

            One could admire the creativity in the document and its pretension in claiming that absent approval of the merger America is going to lose its technological superiority in wireless. Apparently Sprint will continue to be a failing concern and TMobile will have no way to help sustain American technological leadership unless it adds Sprint to its asset base. All those resellers of facilities-based carrier capacity can support the argument that a robustly competitive marketplace exists, but that will not sustain global best practices.
            I cannot help but ask what—if anything—prevented any of the four national carriers in the U.S. from sustaining global best practices?  Just how does the merger affect whether and how AT&T Mobility and Verizon can sustain global leadership?  Bear in mind that the Big Two already have test and demonstration projects for both 5G and the Internet of Things.  The merger would have no significant effect on their access to capital and their incentives to innovate.  Apparently even now (pre-merger) the Big Two see the need to continue acquiring more spectrum and to install new technology.  This would occur regardless whether TMobile and Sprint merge and it is foolhardy to think New TMobile can leapfrog the Big Two and threaten their technological leadership.
Competitive Necessity Either to Beat the 8-9 Major Players, or to Bolster the Uncarrier Strategy

            In addition to its promoting competition assertion, TMobile claims the merger will make it a more viable competitor in a crowded market.  The authors get to “8 or 9” competitors by counting so-called Mobile Virtual Network Operators (“MVNOs”) such as Tracfone and adding Dish Network that current faces a “use or lose” deadline for spectrum it acquired, but has not built any infrastructure to use.  Add Voodoo Math to the Voodoo Economics.
            MVNOs survive in the wireless marketplace if and only if facilities-based carriers allow them to do so.  MVNOs need an arbitrage margin between what they pay for capacity provided by a carrier with an operating network and what they can charge subscribers. TMobile and Sprint serve the vast majority of so-called pre-paid customers who subscribe to month-to-month service free of any longer term contractual commitment.  Will New TMobile retain the margin opportunity for resellers?
            Let me briefly raise the level of snark to this blog.  I try not to sink to the predominantly scummy level on many sites, but cannot help but pose this question: Will TMobile CEO John Legere maintain his “Bad Boy” posture, or get a haircut and develop a new affinity to Kansas City barbeque?  Economists pay close attention to incentives and even quasi-human corporations display predictable patterns.  The more concentrated a market, the greater the opportunity for so-called competitors to agree not to compete, or to do so in largely symbolic ways.  New TMobile promises a major consumer dividend by way of lower costs, higher data rates and better customer service.  I’ll be pleasantly surprised if they deliver on these promises and Mr. Legere keeps his long hair.
            In a prior blockbuster, vertical merger, Comcast did not even bother asserting that consumers would see lower subscription rates after the company acquires NBC-Universal.  Cable television rates kept right on rising well in excess of a general measure of consumer prices.  Recently, the Judge approving the AT&T acquisition of Time Warner assumed that consumers would gain $352 million in savings thanks to the removal of the markup flowing to Time Warner that it would no longer charge AT&T.  What are the odds that AT&T broadband rates will decline one dime thanks to the merger, and what are the odds that New TMobile will pass through any of its synergistic, efficiency gains by way of lower prices?  For that matter when was the last time any of us saw a wireless carrier offer a sale?
            What we will see is crafty use of tiering and pricing flexibility now that network neutrality rules do not apply.  As long as a wireless carrier kinda, sorta discloses a zero rating offer, then it can try to upsell subscribers with more service options, including “free” (unmetered) content.  Economists term that non-price competition and that is the best we can expect, even as it distorts the marketplace for content by forcing consumers to trade off higher preferences for less desirable, but subsidized content.  Of course New TMobile will have greater financial wherewithal to offer compelling alternative content to what the Big Two have available.
A Further Relaxation in Antitrust Enforcement in an Age of Technological and Marketplace Convergence

            TMobile and Sprint are banking on the FCC and Justice Department ignoring even more massive market concentration on the promise of great things only a merged company can offer consumers.  The Justice Department embraced the Herfindahl-Hirschman Index as a quantifiable measure of market concentration based on empirical evidence that concentrated industries typically operate less competitively.  Yes, of course, there are exceptions, but do you think the wireless industry will deviate from what we see in commercial aviation and other extremely concentrated industries?
            TMobile expects the FCC and Justice Department to cave out of exhaustion and repetitive “Mother May I” requests.  The company has increased its investment in sponsored researchers, lobbyists and other professionals able to make a plausible argument based on unenforceable promises and theoretical possibilities. 
            Why not stick with empirical data and a well-honed smell test?

Wednesday, June 13, 2018

Grievous Defects in the AT&T-Time Warner Court Decision



            A preliminary reading of the District Court decision (available at: http://www.dcd.uscourts.gov/sites/dcd/files/17-2511opinion.pdf leaves me with despair and several unanswered questions.  I am not an antitrust law expert, nor do I have a Ph.D. in antitrust economics.  On the other hand, I offer unsponsored, non-doctrinal common sense.
            The Judge places great emphasis on the pro-consumer benefits of a vertical merger.  On several occasions, he states that the merger will accrue $352 million in cost savings to the combined company (p. 67) now able to eliminate one of two content price markups: 1) Time Warner’s profit margin in licensing content to AT&T as content distributor and 2) AT&T’s profit margin in delivering content to subscribers.  Economists term this benefit the Elimination of Double Marginalization (“EDM”).
            This makes sense intuitively, but specifically as to the video entertainment market, how much—if any-- of this $352 million flows downstream to cable/DBS subscribers?  This is a question for which empirical data does exist.  The Judge excoriates the Justice Department and its expert witnesses for failing to provide conclusive and persuasive evidence of consumer harm, largely because it has to be predictive.  But insofar as the flow through of vertical integration’s efficiency gains and EDM, empirical evidence provides a clear answer.
            Year after year, the FCC’s reports that video content prices rise, well in excess of a broader measure of consumer prices. See Implementation of Section 3 of the Cable Television Consumer Protection and Competition Act of 1992, Statistical Report on Average Rates for Basic Service, Cable Programming Service, and Equipment, MM Docket No. 92-266, Report On Cable Industry Prices (rel. Feb. 8, 2018),; available at https://apps.fcc.gov/edocs_public/attachmatch/DA-18-128A1.docx.  Over the five years ending January 1, 2016, the price of expanded basic service rose, on average, by 4.4% percent annually with the average price per channel (price divided by the number of channels offered with expanded basic service) increasing 2.1% percent to 47 cents per channel, even with the proliferation of unwanted channels in an enhanced basic programming tier.  The FCC again reported the anomalous statistic that monthly rates in communities, deemed not to have effective competition, had service rates below those charged in locales meeting an effective competition test.  The Commission reported that cable operators have substantially increased charges to recoup broadcast signal retransmission costs with a 33.9% percent rise from 2014 to 2015.  So much for robust competition.
            Let’s consider a previous blockbuster vertical merger: Comcast’s acquisition of NBC-Universal.  Did Comcast reduce its rates to reflect EDM and operational synergies?  More broadly, why hasn’t Comcast reduced its rates in response to cord shaving, cord cutting and significantly greater churn?
            The Judge mistakenly assumes that the combined AT&T-Time Warner will pass through at some—if not all (see p. 69)-- of the EDM savings, but Comcast did not do so after it acquired access to a large inventory of cable networks.  Simply put, the Judge erred in thinking that the AT&T-Time Warner acquisition financially benefits consumers in a speedy and measurable way.  When pressed to identify consumer benefits of NBC-Universal acquisition, Comcast senior managers admitted that cost savings and rate reductions for subscribers were not likely.
            The Judge also did not accept any element of the Government’s assertion that a combined AT&T-Time Warner would have heightened negotiation leverage with competing content aggregators and distributors.  Again, common sense and empirical evidence challenge his confident—bordering on arrogant—conclusions.
            Just look historically at the content licensing process and identify who blinks first in the negotiation process, particularly when a blackout has occurred.  Time after time, content distributors cave, largely as “must see” television appears on the horizon.  No DBS or cable operator will hang tough once the NFL regular season starts.  Content providers have the upper hand in negotiations and who among us will pay $50 a month for a package of channels lacking CNN, TBS, TNT and other Time Warner networks?
            There are several instances where vertically integrated ventures evidence self-serving, anticompetitive behavior.  Consider this example: Comcast inserted its wholly owned Golf Channel in the enhanced basic programming tier, but relegated the unaffiliated Tennis Channel to a most expensive sport tier.   The FCC’s Administrative Law Judge determined that Comcast’s tiering decision was motivated in part by a strategy to harm a competitor.  On appeal to the FCC Commissioners, the decision was reversed.  One can readily smell a rat here, but even without politics and partisanship, the FCC staff would have been hard pressed to prove anticompetitive intent.  There always plausible deniability—that Comcast determined its subscribers like golf more than tennis, or any of a number of plausibly legitimate business motivations.
            Let us also consider a scenario where AT&T does not use its leverage, or does not have the upper hand.   Content carriage fees will increase, probably well in excess of a general measure of consumer prices.  Some non-AT&T video content subscribers will consider reducing or eliminating their cable/DBS monthly rates.  They will seek the alternatives including AT&T’s U-verse and DirecTV as well as the options the company offers via its broadband wireless, cellular radio service and “over the top” options available to broadband wired subscribers.  A significant percentage of churning video subscribers will migrate to an AT&T option, so in at least some scenarios AT&T enjoys a “win-win” proposition: 1) it can maintain or raise profit margins for still loyal subscribers and 2) it can capture new market share with churning subscribers of competitors who do not want to pay higher rates, even if they do not reflect greater AT&T leverage, post-merger.
            I’ll stop for the time being with a prediction: consumer video content costs will rise well in excess of general inflation measures and this decision will lead to an even more concentrated industry having less incentives to enhance consumer welfare and compete on price.
           

Monday, June 11, 2018

Legacy Antitrust Models Have Legs in the Internet Ecosystem: AT&T’s Acquisition of Time Warner


            A day after the FCC’s termination of network neutrality rules, District Court Judge Richard J. Leon will announce the verdict in the Justice Department’s suit against AT&T’s acquisition of Time Warner.  See https://www.nytimes.com/2018/06/10/technology/att-time-warner-ruling.html.  I’m betting the Judge will apply “old school” competition policy analysis finding no significant harm in this $85 billion deal that he will frame as vertical integration among non-competitors.  This ruling will lead to even more industry consolidation always framed as necessary to achieve scale, efficient operations and effective competition. We have not heard much about how these acquisitions offer consumer benefits, apparently because advocates do not have to bother telling us.
            Using the perspective of Chicago School economists, vertical mergers and acquisitions trigger limited concern about harm to competition and consumers while horizontal deals eliminate a competitor and further concentrate a market.  The prevailing wisdom assumes vertical integration can achieve benefits for the merging parties without offsetting harms to consumers largely because judges assume the two merger-aspiring ventures do not compete in the same market segments.
            In the Information, Communications and Entertainment (“ICE”) markets, deep-pocketed ventures operate throughout the marketplace with extensive vertical and horizontal integration.  It makes no sense to assume any ICE venture involving major incumbents, such as AT&T and Time Warner, operate in mutually exclusive market segments.  Decision makers do not seem willing, or able to understand that the Internet ecosystem seamlessly combines conduit and content and the ICE marketplace has fully integrated converging markets and technologies.
            Consider the conditionally approved acquisition of NBC-Universal by Comcast in 2011.  Even then, Comcast operated extensively in both content creation and content delivery.  It made no sense to consider the deal as solely occurring in a vertical “food chain” with Comcast a downstream distributor of content created mostly by unaffiliated ventures such as NBC.  In 2011, Comcast had 100% ownership interests in content networks including E!, Golf Channel Versus, G4, and dozens of regional sports networks, with minority interests in dozens of other networks.  See https://apps.fcc.gov/edocs_public/attachmatch/FCC-11-4A1.pdf at p. 177.
            It seems that competition policy models do not easily lose traction after having made the transition from academic theory, to preferred model by stakeholders, to conventional wisdom. For example, the Chicago School and now case precedent hold that no venture would ever deliberately underprice a good or service for any period of time beyond a blockbuster sale, e.g., the day after Thanksgiving (“Black Friday”).  The prevailing wisdom concludes that the underpricing company would have no good likelihood for recouping its losses, particularly in competitive markets that would foreclose gouging.  How then can judges and academics—including Chicago School economists—make sense of the ongoing business plan of Amazon and other Internet “unicorns” to forgo profits for years in the pursuit of market share and expanding “shelf-space” for products and services?
            Day by day consumer safeguards evaporate in the ICE marketplace.  I am not endorsing ex ante remedies that anticipate problems, but may well create their own through inflexibility.  But in this current environment, even ex post responses to legitimate complaints do not appear necessary. Who needs a largely impartial and qualified referee when economic doctrine assumes the market can solve or prevent all ills?




            
            

Friday, June 8, 2018

The Sun Will Rise on Monday Even With the Sunset of Network Neutrality

By all accounts, the prior Network Neutrality regime will evaporate on Monday June 11, 2018.  The earth will spin on its axis and  it will not be curtins for the free world.  On the other hand, the absence of a referee does mean that at some future date, certain unscrupulous Internet Service Providers may test  the reach and scope of their freedom to discriminate and operate biased networks.

In the short run, ISPs are too smart to reduce the value proposition of their services, even though they probably could get away with it like the airlines.  In the longer term, I expect ISPs to create more service tiers, to offer "better than best efforts" routing opportunities and to come up with more zero rating/sponsored data upselling propositions.  This outcome will have a mixed impact on consumers.

On one hand, comsumers might want  prioritization of "mission critical," "must see" video.  On the other hand, the potential exists for ISPs to extort surcharges from small ventures, with content volumes nowhere near Netflix.  In kinder, gentler times, these ventures could expect ISPs to route their traffic without objection and demand for surcharge payments.  ISPs used to be content with the subscription payment of their downstream subscribers.  Now these ventures, operating in a two-sided market want payment from both upstream content providers and downstream broadband subscribers.

This reminds me of the adage that bulls make money in the stockmarket as do bears, but pigs get slaughtered.






Monday, April 30, 2018

How Consumers Suffer from the Sprint-TMobile Merger


            In the upcoming weeks, Americans will see and hear millions of dollars in happy talk about the proposed merger of Sprint and TMobile.  Spin masters, dollar operated academics and a legion of lobbyists will claim breathlessly how this merger will make the combined company a stronger competitor and innovator, that consumers will see lower prices and how the combined company will expedite the introduction of fifth generation services.

            Nonsense!

            This merger has one and only one true objective: to generate higher margins for the combined company.  Sprint and TMobile have wanted to merge for years, because three ventures controlling nearly 100% of an essential, must have service, cannot help but earn higher profits than a less concentrated industry.

            This merger reduces by 25% the number of ventures providing service.  Would you want one of the Big Four airlines to merge with another, particularly after several earlier acquisitions?

            Do not for a millisecond buy the notion that the wireless marketplace will have more than 3 major players.  Already the pro-merger advocates mention that Comcast has become a competitor.  To be clear, Comcast has become a reseller of network capacity leased from Verizon.   There are several so-called Mobile Virtual Network Operators who can generate a profit as resellers thanks to the ample margins U.S. wireless carriers have. True competition results if and only if additional facilities-based network operators enter the market.

            Bear in mind that U.S. wireless carriers already have some of the highest profit margins (Average Revenue per User) in the world.  They have offered an enhanced value proposition largely because two mavericks, Sprint and TMobile, have come up with virtually all of the promotions and innovations we like.  But for competition from Sprint and TMobile, do you think AT&T or Verizon would offer lower roaming costs, carry forward minutes, large monthly baskets of minutes, semi-unlimited data, zero rating, bring your own device and service bundled with content?

            The pro-merger advocates will claim that there is no downside in having 3 powerful competitors.  In reality, having just 3 companies promotes a greater likelihood for what antitrust economists and lawyers term “conscious parallelism.” That’s a clinical sounding name for price fixing: it will become ever more enticing not to spend sleepless afternoons competing and instead to implicitly agree on prices and other, non-negotiable terms of service.

            If this horizontal deal goes down, expect the Big Three to increase their ARPU with AT&T and Verizon setting a higher umbrella price with the new company pricing service just below.

Wednesday, April 25, 2018

The FCC’s 2018 Broadband Report: How Do You Politicize a Statistical Report?


            One of the blessings and curses of my calling includes the perceived duty to read as many key FCC documents as possible.  Of late, it challenges my credulity, serenity and faith in the democratic process.

            Consider the FCC’s 2018 Broadband Deployment Report, https://apps.fcc.gov/edocs_public/attachmatch/FCC-18-10A1.docx.  Until this year, the FCC dutifully provides statistics, perhaps framed in ways to support a policy objective.  But until now, not one statistical report included a partisan jab.  Despite lots of blabber about empiricism and humility, someone thought it fair and balanced to couple regularly reported statistics with an unsupported assertion that the 2015 Open Internet Order singularly caused a decline in the pace of increased subscribership and network performance during the last two bummer Obama years.

             In a statistical report, mandated by law, the FCC deliberately fails to consider other factors that may explain a slowing in broadband deployment and adoption, such as a maturing marketplace, the affordability of broadband service, particularly for rural and low income individuals, and carrier investment emphasis in content having recently concluded a major rollout of next generation 4G wireless broadband networking capacity.

            In a bizarre attempt at having its cake and eating it too, the FCC attempts to show how broadband deployment suffered under Chairman Wheeler, but of course Chairman Pai has quickly righted wrongs so that the FCC can conclude that broadband deployment now satisfies the so-called Section 706 congressional mandate to determine whether every American has adequate broadband access.


            In a remarkably failed triple bank shot, the 2018 Broadband Report notes how rural broadband deployment has gravely slowed down, even as elsewhere it reports that rural penetration has reached 98%.  Might serving the last few unserved rural areas in American trigger the highest cost per household passed?  Might reaching the last 2-3% become infeasible, or at least result in slower progress?  Apparently there’s no reason other than the network neutrality burdens.

Sunday, April 15, 2018

Freedom to Discriminate: Assessing the Lawfulness and Utility of Biased Broadband Networks

Hello All:

You might have an interest in a deep dive on broadand zero rating: http://www.jetlaw.org/wp-content/uploads/2018/03/2_Frieden-Article_Final.pdf.

Here's the abstract:

This Article assesses the potential for harm to broadband consumers and competitors when Internet service providers (ISPs) tier service by combining so-called “unlimited usage” with reduced video image resolution and also by not metering usage when subscribers access specific content sources. ISPs previously generated no regulatory concerns when they developed different tiers of service and price points based on content transmission speeds and monthly allotment of data consumption.

However, recent “zero rating” and “unlimited” data offers have triggered questions as to whether ISPs engage in unlawful paid prioritization of certain traffic from specific sources or in traffic degradation by receiving high-definition video content but delivering it with lower line resolution. Additional questions examine whether ISPs engage in detrimental traffic throttling by slowing traffic delivery speeds when subscribers exceed a monthly downloading threshold or when high-volume subscribers seek service in a congested area. This Article further assesses the lawfulness of zero rating and video line-resolution degradation based on the two most recent sets of Federal Communications Commission (FCC) rules that treat ISPs as telecommunications service providers subject to common carrier regulation, as well as rules that now reclassify broadband access as an information service.

This Article concludes that even though ISPs have self-serving, profit-maximizing goals when enhancing or degrading content carriage and display, such practices can have positive spillover effects that enhance consumer welfare without significantly harming competition in the marketplace of ideas and Internet commerce. Acknowledging the potential for harmful arrangements, this Article also recommends that the FCC and other national regulatory authorities implement a speedy and fair complaint resolution process to remedy content carriage disputes.

Tuesday, March 20, 2018

I Won’t Get Over the Loss of Privacy Expectations



            Long ago, the CEO of computer manufacturer Sun Microsystems concluded that consumer privacy was a “red herring,” because one has “zero privacy anyway.” See https://www.wired.com/1999/01/sun-on-privacy-get-over-it/.  Scott McNealy suggested that we simply “[g]et over it.”

            No, I will not.

            Few subscribers of social media fully understand—or even partially understand—what extensive privacy intrusions one has to accept in exchange for the privilege of participating.  Trust me (no pun intended), we give up much, but not everything.  For example, one’s agreement to participate in a personality survey does not grant they surveying party the option of mining all the available data from all of survey taker’s friends.

            Shame on the survey taker, but greater shame on Facebook for doing nothing about this egregious expropriation of subscriber data.  Facebook likes to move quickly and break things. In its lust for revenue, its managers apparently think nothing of instances where major things get busted.

            The court of public opinion, the stock market, various government agencies and legislators throughout the world may convince social network senior executives that they better take seriously the consequences of the things they help break.  They can start with a risk assessment about whether significant subscribers will lose trust.

            Apparently, Facebook senior management thinks this latest episode will blow over in a few days.  Perhaps, but I trust the instincts of my wife who intends on deleting her account.

            Social networks exploit subscribers’ trust that the mined data has reasonable uses and reach.  Facebook has unclean hands when it facilitates the commercial exploitation of private information about which the subscriber has not consented to such use.

             

Friday, February 16, 2018

The Carriers’ Carrier Option for 5G Wireless


            You might have heard about a National Security Council initiative identifying the security and public safety benefits in having a government owned fifth generation wireless network leased by commercial ventures. See https://www.wsj.com/articles/u-s-memo-urges-big-push-on-5g-wireless-technology-1517200319; http://wreg.com/2018/01/29/axios-white-house-considering-nationalizing-5g-mobile-network/.

            While quickly rejected as unnecessarily intrusive of marketplace forces, the document does raise questions about whether and how shared infrastructure investment might make sense.  Even ardent libertarians might not reject the pooling of resources where a faster, more efficient and cheaper output occurs.  For example, AT&T won a competitive tender to build a nationwide, First Responder Network available for shared access by state and local public safety departments with AT&T able to exploit unused spectrum for commercial services.  See https://www.firstnet.gov/. Few would consider this socialism, a usurpation of the commercial marketplace and government mission creep.

            The First Responder network provides a case study in how pooled resources can expedite the availability of leading edge technology that can largely solve access, affordability and network compatibility issues.  The 911 disaster highlighted how various first responders could not communicate with each other, even at short distances, because of different frequencies and equipment types.  Arguably, similar benefits could accrue with government expediting the installation of a 5G network, particularly in rural areas not likely to see speedy deployment in light of the expense in building small towers with compressed signal contours.  Because of the fungible nature of transmission and switching capacity, commercial ventures still could differentiate their services and maintain a competitive marketplace.

            Nevertheless, I too have concerns about government ownership, particularly when the motivation appears more about foreclosing foreign snooping and facilitating domestic surveillance options.  Additionally, the First Responder Network does not provide an air tight case for 5G network sharing, because most public safety networks fit within the ambit of what governments provide while the commercial marketplace has largely functioned without much government involvement for mobile telecommunications and Internet access.

            The NSC initiative does suggest that infrastructure sharing can make sense in some cases.  Another way to think about sharing is to separate one element in a bundle of service functions leaving the remainder still within the ambit of the commercial marketplace.  Perhaps surprisingly, telecommunications ventures throughout the world have executed this model.  It’s often called “Carriers’ Carrier” and it has provided a platform for both cost savings and removal of the potential for anticompetitive behavior.  For example, the United Kingdom government ordered British Telecom to divide itself into a basic local exchange carrier and a venture able to pursue any and all other markets.  The local carrier operates as a Carriers’ Carrier offering first and last kilometer access to every venture, including British Telecom, on fair and nondiscriminatory terms and conditions.  I readily acknowledge that there are other examples where a carrier intermediary adds little value and raises the cost of capacity.


            The recent 5G proposal triggered an immediate and indignant response ensuring no consideration of even promising Carriers’ Carrier options.

Wednesday, January 17, 2018

Drunk on Deregulation


In this time of intellectual, political and philosophical rigidity, I embrace eclecticism and flexibility. I have suffered in the marketplace for funding and invitations to speak at conferences, because I don’t fit into one single camp. I combine salt and fresh water economics, as well as views on the marketplace from both political party templates.

I consider intellectual nimbleness a virtue, even as the current political and regulatory climate imposes litmus tests.  I am not alone: even some Chicago School economists have started to consider whether ventures can profit from predatory pricing as may be occurring when Internet platform intermediaries like Amazon postpone profit maximization to acquire more shelf space and market share.  For true believers, this is anathema, because they can’t conceive of a venture having the patience and ability to forego near term profits for greater future gains.

Throughout my intellectual mix, two guiding principles remains key: 1) find the truth and 2) identify how consumers benefit, or suffer from any government initiative.  What’s so wrong with these drivers?  Even ideologues like FCC Chairman Ajit Pai see some benefit in government and regulation. I expect him to make a taxpayer-financed grand tour of Hawaii’s Diamond Head, an extinct volcano now home to several military, emergency and governmental outposts.

On other days, the Chairman appears drunk on the prevailing Chicago School ideology that cannot identify any good in government.  See Jeff John Roberts, Network Neutrality: The FCC Chair is Drunk on Ideology, FORTUNE (Dec. 15, 2017); available at: http://fortune.com/2017/12/15/net-neutrality-pai/.  Such blind trust in the marketplace ignores several inconvenient truths.

Corporations, Subject to FCC Oversight, Pursue Greedy, Knucklehead Strategies

While marketplace purists consider the marketplace completely able to impose self-discipline, in reality company managers come up with truly foolish initiatives which seemed so clever at the start.  Use a search engine with key words like Verizon + FCC + fine and you will see a rather tawdry record where even high visibility ventures have engaged in shameful conduct apparently to squeeze out a few more million. 

Consider this strategy in the context of aggressive lawyering, research sponsorship and mandatory arbitration contract terms that foreclos consumers’ legal redress.  It took 3 years for Verizon to acknowledge that maybe it could have inserted a second screen on certain cellphones to confirm that a subscriber really wanted to launch an Internet session instead of an inadvertent pressing of a poorly placed button.  Today the Big 4 wireless carriers insist on a definition of “unlimited” that does not match the usual expectation.  

Let’s not forget that Comcast considered it strategically advantageous to lie to the FCC and to stonewall rather than fest up that the company was sending reset commands to frustrate peer-to-peer networking.  Let’s remember that Verizon found ways to disable tethering and all wireless carriers disabled Wi-Fi access until they realized they could offload traffic using that preinstalled feature in most cellphones.  Have we forgotten the numerous instances where major companies like AT&T and Verizon allowed, if not sanctioned the “cramming” of false, unauthorized additional fees and charges?

Regardless of Party Majority, the FCC Regularly Engages in Results-Driven Decision Making

We need an FCC that seeks the truth, not a preconceived outcome for which Commission staff “interpret” evidence to support that finding.  Does anyone think the Pai-led FCC objectively considered the facts and reached positions 100% opposite what the Wheeler-led FCC identified?
With great pride and solemnity, Chairman Pai has announced the creation of an economic analysis group well qualified to conduct the cost/benefit analyses he endorses.  

Does anyone think economists are any less likely to selectively interpret evidence and doctrine using a results-driven template?  So the marketplace can self-regulate, except when it doesn’t.

Safe travels and Aloha Chairman Pai.


Thursday, January 11, 2018

FCC Preemption of State Network Neutrality Initiatives

            In a less emphasized, but important initiative, the FCC set out its preemption of any state attempt to legislate network neutrality rules.  See Restoring Internet Freedom Order at ¶194 onward.  OK, I get this logic: Internet traffic has a fundamental and inseparable interstate characteristic.  Balkanized policies could generate costs and confusion.
            However, there are a number of inconvenient precedents that make the FCC’s preemption appear as results-driven at the behest of powerful stakeholders keen on having the Commission  foreclose progressive states from possibly demonstrating the upside benefits of an open Internet and the absence of all the dire predictions of reduced innovation, investment and “freedom.”
            First let’s marvel at the irony of a Republican majority waxing poetic about the benefits in federal preemption of the states.  So much for the talk about how state Public Utility Commissions operate closer to where the “rubber meets the road.”  So much for relying on states serving as laboratories to identify best practices.
            Next, let us look at some on the reasons the FCC has declined to preempt, or triggered judicial reversal when it attempted to preempt.  Municipal Wi-Fi comes to mind, because that service involves irrefutable, interstate service, e.g., from the global Internet cloud to places like Chattanooga, Tennessee and Wilson, North Carolina where incumbent carriers did not want municipalities to have the option for self-help when these carriers refrained from providing broadband.
            In Tennessee v. FCC, the 6th Circuit Court of Appeals (832 F.3d 597) reversed the FCC’s state preemption attempts based on multiple rationales that might have the same impact on  network neutrality preemption.  The court was able to differentiate the matter of municipal provision of broadband from the broader matter of whether and how the FCC could preempt state law.  Section 253 of the Telecommunications Act of 1996 contains some rock solid language favoring preemption when a state “prohibits” or has the effect of prohibiting “the ability of any entity to provide any interstate or intrastate telecommunications service.”  Notwithstanding that rather clear and explicit language, the 6th Circuit opted to read Section 253 as imposing no bar on the power of a state legislature—no doubt urged on by stakeholders keen on preserving any and all future options—to foreclose municipal governing entities from providing a service increasingly viewed as essential.
            The court also noted how the FCC previously refrained from preempting when it had an opportunity to do so where a state enacted a law prohibiting any sort of municipal provision of telecommunications service.  See Nixon v. Missouri Municipal League, 541 U.S. 125 (2004). Additionally, the court read Section 706 of the Telecommunications Act of 1996 as not including preemption as one of the tools available to promote affordable and ubiquitous broadband access from places like Wilson where broadband access would not be available unless the municipality acted, because no incumbent  had any interest. 
            Does this make sense and pass your smell test?  Would the court of public opinion defer to the wisdom of their elected officials to preclude the formation of any new municipal water authority even in instances where the incumbent goes bankrupt and no commercial venture wants to acquire the assets?

            Just now we have traditional views of federalism conveniently superseded by loftier notions of federal deregulatory consistency.  In the case of network neutrality, the FCC and its beneficiaries want to prevent states from enacting laws, rather than have such laws upheld and considered primary.  Why has state law become something readily swatted away by an all-powerful federal authority?

Sunday, December 17, 2017

A Deep Dive into the FCC’s Circulated Restoring Internet Freedom Document

             Press accounts and the FCC’s own summary, provide a general sense of how the Commission rationalizes its abandonment of network neutrality.  See https://www.fcc.gov/restoring-internet-freedom.  However, a deeper dive can provide further insights and perhaps identify areas of vulnerability in terms of judicial review and future conflict.

Set out below, I offer such an analysis.

Thinly Disguised Disgust Coupled with Supreme Confidence

            On balance, I am surprised at the lack of humility and decency in such an important document.  As perhaps never before, the Pai-led FCC makes it clear that it must correct grievous shortcomings in the legal interpretation, evidence interpretation, economic philosophy and overall perspective of the Wheeler-led, but Obama-controlled Commission and its Open Internet Order. 

            The new Commission comes ever so close to asserting that its predecessor distorted the truth.  The document states that the prior Commission engaged in “results-driven” decision making (¶50) and “manipulated” service definitions to “engineer[] a conclusion” (¶70).  That comes across as disingenuous in light of the paucity of unimpeachable empirical evidence in the Pai document and the heavy reliance on cherry picked conjectures of preferred commenters who repurpose sponsored research.

            Despite a commitment to empirical data collection, fair-minded cost/benefit analysis and transparency, the nearly 200 page document comes up remarkably short on facts and stands at parity with the Democrats on result-driven decision making.

Doubling Down the Telecommunications/Information Service Dichotomy

            The Restoring Internet Freedom document relies heavily on the questionable conclusion that the FCC can and should create mutually exclusive regulatory classifications, despite technological and marketplace convergence.  Throughout the document, the FCC relies on a number of dichotomies whose air tightness supports divergent regulatory treatment, despite the reality that the telecommunications and Internet ecosystems do not support such neatness.

            The document supports extension of a view that the FCC must separate its treatment of telecommunications and telecommunications services, on one hand, and information services, on the other hand.  The Commission expressed such a need in 1998 in response to a Senate query (the Stephens Report) and implemented this air tight strategy in the Computer Inquiries.

            While such a dichotomy might work in a world where dial up common carriers provided a stand-alone link to information services, conduit and content now converge.  For example, smartphones offer voice telephone service, regulated as common carrier, Commercial Mobile Radio Service.  These carriers also offer data services, including access to the Internet cloud.  Consumers expect to have access to both types of services regardless of their different regulatory classifications.  A Republican majority FCC agreed when it mandated data roaming, at a time when such a service qualified for light-handed, information service oversight.

            Put another way, on functional equivalency grounds, consumers understand voice as different from data only insofar as how much the carrier charges, not how the carrier provides either service.  Similarly, consumers don’t quibble about whether a mobile broadband service is public or private, interconnected or not and whether the Public Switched Telephone Network and telephone numbers are used.

Misreading the Venerable Justice Scalia

            To legitimize its reclassification of broadband Internet access as an information service and wireless broadband as private, not commercial carriage, the FCC now must return to the rationale that bit and packet transmission cannot be distinguished and carved out from the information service it carries.  The Commission blithely ignores that Justice Scalia, dissenting in the Brand X case, rejected the view that the telecommunications element could not be carved out and recognized for what it is: publicly available conduit functionality.

            Justice Scalia recognized that deference to the FCC on its interpretation of conduit and content severability would promote deregulation in one instance, but could just as easily be used again by the FCC—having a different political party majority—to justify more government oversight:

Finally, I must note that, notwithstanding the Commission’s self-congratulatory paean to its deregulatory largesse . . . what the Commission hath given, the Commission may well take away—unless it doesn’t. This is a wonderful illustration of how an experienced agency can (with some assistance from credulous courts) turn statutory constraints into bureaucratic discretions {to regulate or deregulate based on the agency’s legal interpretation and politics]. . . . Such Möbius-strip reasoning mocks the principle that the statute constrains the agency in any meaningful way.

Self-Inflicted Wounds on the VoIP Regulatory Question

            Without a doubt, Chairman Pai must be basking in the limelight and congratulating himself for delivering an unimpeachable document that will survive judicial review.   Perhaps, but I would like to raise the VoIP question.

            Until now, the FCC has managed to avoid classifying VoIP so that it can mandate universal service contributions from VoIP services that access the PSTN.  The reemphasis on mutual exclusivity between basic telephony and enhanced, information services may force the Commission’s hand.  How can the FCC emphasize access to the PSTN, use of telephone numbers, the degree of accessibility by the public and the nature of interconnection to justify the unregulation of wireless broadband even as these factors pretty much line up in favor of treating VoIP as the functional equivalent of common carrier, regulated voice telephony?

 Employment, Innovation and Investment

            The document reiterates how network neutrality and the Title II classification decimated the telecommunications ecosystem with all sorts of disincentives.  However, the Commission never proves causality, nor does it have evidence that it, or the sponsored research it chose to embrace, can prove causality: that network neutrality and/or common carrier status constituted the direct cause for any and all reduction in employment, innovation and investment.

            Ironically, while the document obsessively invokes the gospel of disincentives, later the Commission emphasizes that ongoing investment in plant constitutes one of the major reasons the broadband marketplace is robustly competitive. 

            Compare these two conclusions:

The Commission has long recognized that regulatory burdens and uncertainty, such as those inherent in Title II, can deter investment by regulated entities . . .. The balance of the evidence in the record suggests that Title II classification has reduced ISP investment in the network as well as hampered innovation because of regulatory uncertainty. ¶88


With the advent of 5G technologies promising sharply increased mobile speeds in the near future, the pressure mobile exerts in the broadband market place is likely to grow even more significant.¶130

            Let me get this straight.  Without identifying evidence of causality and generating or identifying anything close to peer review worthy data, the FCC concludes that the Obama era Network Neutrality regime singularly caused a woeful decline in broadband plant.  Yet at the very same time, during the Obama-managed FCC, carriers like AT&T and Verizon expedited 5G plant investment, unimpeachable proof of how competitive the broadband marketplace has become, particularly in light of the functional equivalency of wired and wireless networks.


            Can the FCC have it both ways, or might a reviewing court question the science, economics and lawfulness of the FCC’s rationales for reclassification?  That’s the Trillion Dollar question.

Wednesday, December 6, 2017

“Restoring” Internet Freedom for Whom?

            Recently, a colleague in the Bellisario College of Communications, asked me who gets a freedom boost from the FCC’s upcoming dismantling of network neutrality safeguards.  He noted that Chairman Pai made sure that the title of the FCC’s Notice of Proposed Rulemaking is: Restoring Internet Freedom.  See https://www.fcc.gov/restoring-internet-freedom. My colleague wanted to know whose freedom the FCC previously subverted and how removing consumer safeguards promotes freedom.

            With an evaluative template emphasizing employment, innovation and investment, one can see that deregulation benefits enterprises that employ, innovate and invest in the Internet ecosystem.  However, the Pai emphasis lies in ventures operating the bit distribution plant reaching broadband subscribers.  The Chairman provides anecdotal evidence that some rural wireless Internet Service Providers have curtailed infrastructure investment because of regulatory uncertainty, or the incentive-reducing impact of network neutrality.  If the FCC removes the rules, then rural ISPs and more market impactful players like Verizon and Comcast will unleash a torrent of investment, innovation and job creation.

            O.K. let us consider that a real possibility.  Let’s ignore the fact that wireless carriers have expedited investment in next generation networks during the disincentive tenure of network neutrality requirements.

            To answer my colleague’s question, I believe one has to consider ISPs as platform intermediaries who have an impact both downstream on end users and upstream on other carriers, content distributors and content creators. My research agenda has pivoted to the law, economics and social impact of platforms; see https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2935292.

            Using the employment, innovation and investment criteria, the FCC also should have considered the current and prospective freedom quotient for upstream players.  Does nearly unfettered price and quality of service discrimination options for ISPs impact upstream ventures’ ability to employ, innovate and invest more?

            Assume for the sake of discussion that ISPs can block, throttle, drop and prioritize packets.  A plausible, worst case scenario has an innovative market entrant with a new content-based business plan less able to achieve the Commission’s freedom goals.  Regardless whether you call it artificial congestion, the potential exists for an ISP to prevent traffic of the content market entrant from seamless transit.  The ISP could create congestion with an eye toward demanding a surcharge payment, even though the market entrant’s traffic had no possibility of itself creating congestion.  The ISP also might throttle traffic of the innovative newcomer if its market entry might adversely impact the content market share and profitability of the ISP, its affiliates and its upstream content providers that previously agreed to pay a surcharge.

            Of course network neutrality opponents would object to this scenario based on the summary conclusion that an ISP would never degrade network performance, or reduce the value proposition of its service.  The airlines do this and so would an ISP if it thought it could extract more revenues given the lack of competition and the inability of consumers on both sides of its platform to shift carriers.

            ISPs do not operate as charities.  The FCC soon will enhance their freedom which translates into higher revenues and possibly more customized service options for consumers willing to pay more. 

            Before the FCC closes shop and hands off any future dispute resolution to the generalist FTC consider this scenario.  Subscribers of Netflix, or the small content market entrant discussed above, suddenly see their video stream turn into slide shows.  The FTC lacking savvy as to the manifold ways ISPs can mask artificial congestion and network management chicanery orders an investigation with a “tight” six month deadline for reported findings. 

            Just how long after the onset of degraded service will video consumers get angry and cast about for a villain?  Might the list of candidates include Congress, the FTC and FCC?


Friday, December 1, 2017

The Misguided Wisdom in Substituting the Generalist FTC for Sector-Specific FCC Expertise

            A number of important, fundamental questions about the scope and nature of government oversight lie within the broad and breathless debate over network neutrality.  Does the public benefit from government oversight by an agency with particular expertise in the industries overseen, or can a generalist agency do a better job?  A related question asks whether ex ante regulations, which anticipate problems, can better serve the public than ex ante remedies occurring after investigation.

            I firmly believe in the essentialness of sector specific expertise, but see ex ante network neutrality regulations as possibly constraining customized services that meet specific subscriber requirements.  For example, I believe the FCC would have the necessary expertise to differentiate between an ISP tactic that hurts consumers and competition and one that does not, e.g., many types of zero rating.

            To the best of my knowledge, no critic of the FCC—even ones keen on shutting it down—have gone on record stating that a generalist agency can and should assume responsibility for spectrum management.  Shifting that essential task to the Commerce Department, for example, probably would heighten the bias favoring retained government “ownership” of choice spectrum with less likelihood for consideration whether government agencies can do more with less.

            The Office of Chairman Pai has endorsed the generalist FTC in lieu of FCC investigation and sanctioning of anticompetitive, or consumer harming practices:

MYTH:  The Federal Trade Commission is not well equipped and has far fewer powers to protect consumers from misconduct by Internet service providers.

  • FACT:  The Federal Trade Commission has broad authority to police unfair, deceptive, and anticompetitive practices online and has brought over 500 enforcement actions to protect consumers online, including actions against Internet service providers and some of the biggest companies in the online ecosystem.  And unlike the FCC, the Federal Trade Commission can order consumer redress (such as refunds) for violations of federal law.


            If I read this correctly, Chairman Pai would pass off an important safeguarding function to a “sister agency” with no concern about impact on budget, staff numbers and jurisdictional wingspan.  Such magnanimity from someone whose position typically requires vigilance against reduction in function, relevance and budget.

            Perhaps Chairman Pai honestly believes the FTC has a better handle on the situation.  Alternatively, he does not think this, but considers it politically wise to abdicate responsibility so the problem will go away.
            The problem will not go away, but the cop on the beat will lack sector-specific expertise.  A particularly glaring deficiency will lie in content carriage issues at the lower layers of the stack of Internet Service Provider functions.  The FTC has greater experience with obvious snookery by content con artists.  Now it will reinvent the wheel on the many ways an ISP might use its platform intermediary function  and content/app carriage activity in anticompetitive and other harmful ways. 

            One last point: Chairman Pai appears to imply that the FTC can generate remedies to harmful behavior with financial and other sanctions that the FCC cannot.  The FCC surely can fine ventures under its jurisdiction.  Perhaps the Chairman has rushed to the conclusion that a reclassification of ISPs as information service providers removes any opportunity to sanction and penalize ISPs making the FTC the government agency of first, last and only resort.


            How humble.

Tuesday, November 21, 2017

Regulation as a Manageable Cost Center: The Example of Network Neutrality and the AT&T Acquistion of Time Warner

            Moving in for the kill, incumbent carriers have stretched their home team advantage.  With millions in lobbying, campaign contributions and sponsored research, along with a like-minded FCC majority, the unpleasantness of the prior 8 year Obama stretch largely will evaporate very quickly.

            Money well spent.

            Rather than frame regulatory debates in terms of midlevel issues of economic theory and political philosophy, think lower tier: cold hard cash money. Follow the money.

            Regulation impedes businesses like AT&T and Verizon from achieving even greater profitability, unless of course a captive regulator can be persuaded to tilt the competitive playing field by disadvantaging one or more competitors.  Incumbents have convinced decision makers that when regulation prevents profit maximizing behavior, there better be a damn good reason.  Notions of equity and level competitive playing fields will not suffice even though the advocates for deregulation do not have to meet a similar burden when claiming existing rules “stifle innovation” and “kill jobs.”

            The incumbent camp waxes poetic how regulation has preempted billions in investment, hurt employment and reduced innovation. But how can they prove this?  Answer: they don’t have to.

            No decision maker—certainly not the FCC—has called upon AT&T, Comcast, Verizon and others to show how network neutrality singularly has prevented incumbents from making investments, or that there are fewer patent applications and workers because network neutrality has poisoned the ecosystem.

            Where are the economics, empiricism and analysis that FCC Chairman Ajit Pai claims his management will deliver?  It’s nowhere to be seen, unless you accept conjecture as sufficient.  From the FCC across to incurious, deadline worrying reporters, the prevailing network neutrality frame is that somehow eliminating it will “free” stakeholders to do more good than what they now can do.  Exactly how does a non-discrimination requirement stifle profitability?  How is this requirement resurrection of old school public utility regulation of a non-existent monopoly? 
           
            No one has to answer such questions.

            As to the other big issue of the news cycle today, no one asks whether AT&T’s acquisition of Time Warner’s content has impacts outside the vertical food chain of content creation and distribution. So this $85 billion deal is nothing more than your garden variety vertical merger which “everyone knows” is both benign and always permissible.

            Ask creators and distributors of content who compete with AT&T what the merger will do.  If they can overcome their fear of retaliation, you might see the AT&T mothership able to extract concessions from upstream content sources seeking access to AT&T satellite, cellular and wireline customers.  And you might see how raising costs of doing business for competitors makes it highly likely that churning customers might beat a path to one of the 3 content distribution flavors AT&T has to offer.

            But you have to ask.