Wednesday, July 28, 2010

Lies, Damn Lies and Statistics at the Federal Communications Commission

The Federal Communications Commission recently discovered that 14 to 24 million Americans, located in 1,024 out of the nation’s 3,230 counties, do not have access to any broadband service at any price. This finding greatly contrasts with the Commission’s numerous previous statements that an unregulated and robustly competitive marketplace has provided universally accessible broadband at affordable rates just about everywhere. In reality the FCC could conclude that “broadband is being reasonably and timely deployed to all Americans” only by using false data.

It should come as no surprise that the FCC could so miss the mark on actual broadband access. The agency is awash in partisanship, pseudo science, fuzzy math, creative interpretation of economic principles and legal concepts, selective interpretation of the facts, innovative collection of statistics, and flawed thinking. These defects support results-driven decision making where FCC managers first reach a decision and subsequently support that outcome by framing the policy issues, “finding” facts and compiling data in ways that rationalize the preordained conclusion.

The FCC lacks the resources or resolve to compile a record independent of what parties with a financial stake file when the Commission seeks public comments. This means that the FCC does not have an unbiased, empirical record that would meet a threshold standard of fairness and reliability assessed by independent third parties, a process known as peer review. Because the FCC relies on data compiled by stakeholders, the Commission typically lacks the ability to differentiate credible research from “cooked books.” By relying on data compiled by the companies it regulates, the Commission regularly agrees to treat the information as proprietary, making it impossible for third parties to corroborate or refute the evidence used by the FCC to support its decisions.

In the case of broadband the FCC’s commitment to confidentiality has gone so far as to deem as “trade secrets” data about whether a carrier does or does not operate in a specific locality. Trade secrets typically refer to essential business information such as food and beverage recipes, but the FCC has managed to equate information about broadband accessibility with a company’s most essential assets. Bear in mind that the Commission must act on a congressional mandate to identify and remedy broadband access scarcity.

Notwithstanding a statutory obligation to track broadband access closely the FCC purposely overstated the scope of market competition and how well carriers had made service available. The FCC defined broadband in 1999 as a bit transmission speed of at least 200 kilobits per second in one direction. The FCC retained that now woefully inadequate bit rate until this year when it acknowledged that many Internet services require higher speeds. The Commission also used zip codes as the most focused geographical measure for broadband market penetration until this year. The Commission could reach its conclusion of 99+ percent market penetration by claiming “mission accomplished” for the entire zip code if at least one subscription opportunity existed somewhere within the zip code.

What statistics the FCC complies and how the Commission interprets the data has a substantial impact on how the agency interprets its regulatory mission. If the FCC wants to deregulate and abandon existing public interest safeguards, the Commission can claim evidence proves a robustly competitive marketplace can self-regulate. Until this year the FCC considered the wireless marketplace so competitive that the Commission could deem precompetitive numerous horizontal mergers where one competitor buys out another and acquires additional market share. The Commission’s most recent analysis of the wireless marketplace makes only passing reference to the fact that Verizon and AT&T national carriers have over a 60% market share, four national carriers control over 90%, and the rate of market concentration has grown in light of FCC-approved acquisitions so much so that it now well exceeds the Justice Department’s threshold for a “highly concentrated” market. The Commission also reports that U.S. wireless carriers enjoy healthy returns led by Verizon with an enviable 46.3% margin for the second quarter of 2009.

If the FCC wants to expand its regulatory wingspan, the Commission can claim evidence supports the need to curb market power. A former FCC Chairman, normally adverse to regulatory expansion, nevertheless wanted to further regulate cable television operators based on his perception that the industry had become too dominant. Using data, not compiled by FCC staff and highly questionable in light of market conditions favoring more competition from satellite and telephone companies, this Chairman believed that cable market penetration had reached a congressionally-drawn threshold. Neither the Chairman nor his staff could generate empirical data to support this conclusion.

The FCC can rely on poor fact finding only if reviewing courts accept such practices as worthy of judicial deference to the agency’s expertise. Some courts appear not to second guess the Commission, but others readily find flaws. Examples of the latter include a court’s refusal to allow the FCC to count as equals any media outlet in a market, regardless of significance and market share.

As information, communications and entertainment become an increasingly significant component in the economy, we cannot afford to have the FCC ignore instances where market self-regulation does not serve the national interest. The FCC has undertaken some recent efforts to improve its statistical compilations, but longstanding institutional flaws remain

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