Hidden in Plain Sight: FCC Chairman Pai’s Strategy to Further Concentrate the U.S. Wireless Marketplace

          While couched in noble terms of promoting competition, innovation and freedom, the FCC soon will combine two initiatives that will enhance the likelihood that Sprint and TMobile will stop operating as separate companies within 18 months.  In the same manner at the regulatory approval of airline mergers, the FCC will make all sorts of conclusions sorely lacking empirical evidence and common sense. 

            FCC Chairman Pai’s game plan starts with a report to Congress that the wireless marketplace is robustly competitive.  The Commission can then leverage its marketplace assessment to conclude that even a further concentration in an already massively concentrated industry will not matter. Virtually overnight, the remaining firms will have far less incentives to enhance the value proposition for subscribers as TMobile and Sprint have done much to the chagrin of their larger, innovation-free competitors AT&T and Verizon who control over 67% of the market and serve about 275 million of the nation’s 405 million subscribers.

            Like so many predecessors of both political parties, Chairman Pai will overplay his hand and distort markets by reducing competition and innovation much to the detriment of consumers.  He can get away with this strategy if reviewing courts fail to apply the rule of law and reject results-driven decision making that lacks unimpeachable evidence supporting the harm free consolidation of the wireless marketplace.  Adding to the likely of successful overreach, is the possibility of a muted response in the court of public opinion.

            So how will the Pai strategy play out?  First, the FCC soon will invite interested parties to provide evidence supporting or opposing a stated intent to deem the wireless marketplace sufficiently accessible and affordable throughout the nation.  The FCC has lots of evidence to support its conclusion, but plenty of countervailing and inconvenient facts warrant a conditional conclusion, particularly in light of future market consolidation.  Wireless carriers have invested billions in network infrastructure and spectrum.  Rates have significantly declined as the industry has acquired scale and near full market penetration.  Bear in mind that all of this success has occurred despite, or possibly because of a federal law requiring the FCC to treat wireless carriers as public utility telephone companies.  Congress opted to treat wireless telephone service as common carriage, not because of market dominance, but because it wanted to maintain regulatory parity with wireline telephone service as well as apply essential consumer safeguards. 

            How ironic—perhaps hypocritical—of Chairman Pai and others who surely know better  to characterize this responsibility as the product of overzealous FCC regulation that has severely disrupted and harmed ventures providing wireless services.  Just how has common carrier regulation created investment disincentives for wireless carriers when operating as telephone companies?  Put another way, how would removal of the consumer safeguards built into congressionally-mandated regulatory safeguards unleash more capital investment, innovation and competitive juices?

            U.S. wireless carriers regularly report robust earning and average revenue per user that rival any carrier worldwide.  Of course industry consolidation would further improve margins while relaxation of network neutrality and privacy protection safeguards would create new profit centers.  TMobile shareholders get a big payout, while the remaining carriers breath a sigh of relief that their exhaustively competitive days are over.

            Will the court of public opinion detect and reject the FCC’s bogus conclusion that common carrier regulation has thwarted wireless investment and innovation?  That requires a lot of vigilance and memories of the bad old days when no carrier opted to play the role of maverick innovator and marketplace disrupter.  With TMobile or Sprint merged or acquired, the remaining ventures have ever more incentives not to spend sleepless afternoons competing and devising new ways to stimulate customer interest in changing carriers.  TMobile and Sprint have offered just about every value enhancement in recent years such as carry forward minutes, reduced roaming charges, unlimited service, new bundles and use your own device at much lower monthly rates.  Would these options exist if only three carriers served 95% of the market?

            If you think the recent spate of airline mergers has enhanced competition and the air travel experience, then a wireless marketplace with 3 national carriers will work out just peachy.

FCC Chairman Pai’s Alternate Facts Part 3, Privacy "Protection" for Broadband Consumers

            FCC Chairman Ajit Pai has opposed broadband consumer privacy protection safeguards largely based on a false dichotomy: that Internet content providers, like evil Google and Facebook could collect, process and exploit consumer usage data, while ISPs could not. See
Dissenting Statement of Commissioner Ajit Pai, Re: Protecting the Privacy of Customers of Broadband and other Telecommunications Services, WC Docket No. 16-106.https://apps.fcc.gov/edocs_public/attachmatch/FCC-16-39A5.pdf.

            This is a false dichotomy, because consumers willingly opt to barter their usage data in exchange for “free” advertiser supported content access, while broadband subscribers will have to allow such surveillance and sales of usage data as a hidden or obscure cost of service.

            Even though Internet content consumers cannot negotiate with providers and have to accept “take it or leave it terms,” Chairman Pai might perceive a viable marketplace.  Consumers willingly give up privacy protection, because they don’t know what they have to give up, they consider it a fair trade, or they trust Federal Trade Commission safeguards to provide adequate protection. 

            On the matter of FTC protection, Chairman Pai deems an “eviction” the process by which the FCC proposed rules would replace general, FTC privacy safeguards.  He conveniently forgets that the FTC has no jurisdiction to impose rules on common carriers, the regulatory status still applicable to ISPs.  Even if the Pai FCC re-reclassifies Internet access as private carriage, I don’t think it’s a given that the FTC and its apparently acceptable rules to Chairman Pai would seamlessly and quickly come into play.

            More fundamentally Chairman Pai appears to treat conduit function and content as able to operate in nearly identical bartering marketplaces.  I respectfully disagree.  It’s one thing to refrain from using Facebook and even Google’s search function, because one cannot accept the privacy invasions, dossier construction, data mining, and revenue accrual from advertising auctions used by Internet content providers to finance their services.  It’s quite another matter to opt out of wireless telecommunications services, because carriers can do the same things and perhaps even more, based on the location determination, call and IP address recording and other surveillance/network management functions.

            Simply put, wireless voice and data subscribers should not have to abandon any and all privacy protections for the “privilege” of becoming a consumer.  If consumers learn that Chairman Pai is working sleepless afternoon to sanction unlimited trading of wireless consumer data, common carrier safeguards will look increasingly essential.

FCC Chairman Pai’s Alternative Personalities, Facts, Economics and Law—Part Two

Okay.  Turn off all electronic devices (except one with the screen on which you are reading this       blog!).  Please answer this one question pop quiz.

Who made the following public statement:

What would be best for consumers? My view is pretty simple. Our goal should not be to unlock the box; it should be to eliminate the box. If you are a cable customer and you don’t want to have a set-top box, you shouldn’t be required to have one. This goal is technically feasible, and it reflects most consumers’ preferences—including my own.

            A)        President Donald Trump;

            B)        FCC Chairman Ajit Pai

            C)        Former FCC Chairman Thomas Wheeler; or

            D)        Harold Feld, Senior Vice President, Public Knowledge (an advocacy group)

The answer: B. See https://apps.fcc.gov/edocs_public/attachmatch/FCC-16-18A5.pdf.

Perhaps this answer surprises you as the quote would appear to originate from someone with a strong commitment to consumer protection. You might have kicked out answer B) based on Chairman Pai’s removal of the cable set-top box Notice of Proposed Rulemaking without prior notice which he seems to consider necessary in most instances.

Perhaps Chairman Pai will replace the prior set-top box proceeding with one more likely to achieve his stated objectives.  Maybe not.  Chairman Pai appears to send mixed messages.

FCC Chairman Pai’s Alternative Personalities, Facts, Economics and Law—Part One

            FCC Chairman Pai has launched a charm offensive showcasing his commitment to transparency and regulatory restraint.  However, behind the scenes, he ignores due process, the rule of law, FCC tradition, bipartisanship and fair play to shut down previous FCC initiatives of which he disapproves. 

            For example, this bi-polar personality makes it possible for the Chairman to claim how much he cares about curbing extraordinarily gouging long distance telephone rates borne by the “captive” 2.2 million inmates in the U.S. even as he instructs his General Counsel to abandon any participation in an ongoing judicial review of prior FCC decision which resulted in rules.  See New Chairman Orders FCC To Abandon Court Defense Of Rule Limiting Prison Phone Rates; https://consumerist.com/2017/02/02/new-chairman-orders-fcc-to-abandon-court-defense-of-rule-limiting-prison-phone-rates/. By ordering his counsel’s no show,—akin to the Democratic Senators’ boycotts of Trump Cabinet nominee confirmation hearings—Chairman Pai facilitates maintenance of the status quo.

            Ironically, the Chairman has acknowledged the inmate calling marketplace fails to support his heartfelt belief that markets usually are infallible and efficient:

I believe that the government should usually stay its hand in economic matters and allow the price of goods and services to respond to consumer choice and competition. But sometimes the market fails, and government intervention carefully tailored to address that market failure is appropriate. Dissenting Statement of Commissioner Ajit Pai as Delivered at the August 9, 2013 Open Agenda Meeting, Re: Rates for Interstate Inmate Calling Services, WC Docket No. 12-375; available at: https://apps.fcc.gov/edocs_public/attachmatch/DOC-322749A4.pdf.

            On the other hand, Chairman Pai willingly works to prevent the consequences of market failure and the need for remedies, if the FCC errs in any way that he believes might establish a precedent for jurisdiction and overreach where market self-regulation suffices.  Better to eliminate in its entirety a ruling containing Pai-identified flaws than subject it to a court test, and refinements under his administration.

            The Pai-identified flaws are based on alternative facts, economics, accounting and law.

The Chairman has determined that the FCC’s prescribed per minute caps would prevent inmate calling companies from recouping costs.  He has interpreted Sec. 276 of the Communications Act as foreclosing any FCC jurisdiction over intrastate calling by inmates.  Additionally, the Chairman reads Sec. 276 as authorizing the FCC to remedy the unlikely instances of below cost rates, but prohibiting the Commission from remedying the far more likely scenario of rate gouging.

            To reach these conclusions, Chairman Pai accepts an alternative reality.  For example, he appears to believe that interested parties report the actual costs of doing business to the last dollar.  The Chairman takes as a fact the calculation made by the National Sheriffs’ Association that annual administration costs for jail-based calling amounted to $244,253,292 around 2012-13, but the FCC’s price cap/safe harbor rate would yield only $136,704,062 in revenue. See Dissenting Statement of Commissioner Ajit Pai, Re: Rates for Interstate Inmate Calling Services, WC Docket No. 12-375; available at: https://apps.fcc.gov/edocs_public/attachmatch/DOC-340632A5.pdf.  He can conclude that the FCC would impose “confiscatory” rates on long suffering inmate calling companies should they have to reduce rates.

             Let’s take a look at the U.S. inmate calling industry and its financial viability.  Two privately owned companies, Global Tel*Link and Securus Technologies control 70% of the market.  These companies pay massive commissions—some would say kickbacks—to jails and prisons. That surely contributed significantly to the Sheriffs’ $244.2 million calculation.  Let’s call them franchise fees.  No stakeholder, no one at the FCC, no one period has provided credible evidence that these inmate carrier costs plus franchise fees are compensatory vis a vis the cost of providing telephone service. Inmate calling companies operate as telecommunications service providers, subject to Title II common carrier regulation.  Their rates have to be cost-compensatory, plus a reasonable profit.  Fees of any sort have to relate to the cost of providing service and not doughnuts, boondoggle trips to conferences and kickbacks.

             Chairman Pai has railed against voodoo economics and the absence of economics.  Yet when it comes to inmate calling, he accepts the accounting of a stakeholder having every incentive to pad the cost calculation.

             The Sheriffs’ calculation and Chairman Pai’s endorsement of it do not pass the smell test.  Outside the penal environment, long distance telephone calls cost retail subscribers about 2-5 cents for interstate calls and about 10-15 cents for intrastate calls.  For example, see http://www.phonedog.com/long-distance.  Outside jail, telecommunications costs are so cheap that it makes financial sense to use cheap overseas labor to provide operator assistance.  Operator assistance is also computerized.

            I don’t believe the Sheriffs have made a credible calculation, nor do I believe their threat to yank out phones if the FCC’s 13 cent rate cap were implemented.  If a jail’s phones accrue $2 million in phone commissions annually, which would management choose: $0, or $1.5 million?  Similarly, I have seen no evidence that jailors are spending millions policing, monitoring, and safeguarding the payphones.

            I readily accept that jails house a lot of “bad dudes,” foreign and domestic.  They have to pay a debt to society, but it does not have to include $15 for a 10 minute telephone call.        

            In this time of alternative realities, apparently the Chairman can be all things to all people.  It simply depends on your selective perception.

An Open Letter to FCC Chairman-Nominee Ajit Pai

Dear Commissioner Pai:

Congratulations on your likely nomination to become Chairman of the Federal Communications Commission.  For the good of everyone in the country, I hope you will lead the Commission with decorum, pragmatism and collegiality, no matter how real your prior grievances.  You owe everyone a renewed commitment toward humility, grace and an open mind, despite real or perceived justifications for snarkiness, sanctimony and hubris.

I am greatly disappointed that the FCC has become so partisan and fractious.  Far too many years ago, Commissioners of both Parties sought compromise rather than self-aggrandizement and accommodation of a few key stakeholders.  The public interest served as a goal worth identifying and serving.

As recently as 2005, all Commissioners could reach closure on basic principles of the role of the FCC in helping shape the Internet.  Every Commissioner agreed that the FCC could achieve a greater good with well-calibrated oversight and a limited regulatory regime, neither interventionist nor libertarian.  This agreement did not take a lot of pages, did not originate in the word processor of an outside law firm, or consultant and did not require endorsement by sponsored researchers, political parties and the most vocal and deep pocketed stakeholders.

Going further back in time, the Republican Party’s public interest mandate included rigorous antitrust enforcement and a commitment to a level competitive playing field.  You might not know that in true Teddy Roosevelt fashion, President Nixon’s Justice Department started the litigation that eventually resulted in the divestiture of AT&T and the unleashing of competitive energies.

I hope you will take every effort to achieve consensus which used to be the usual outcome of matters before the FCC.  Issues did not have a Republican position and an opposite Democratic one.  Most votes were unanimous, because fair minded Commissioners—led by a fair-minded Chairman—could achieve a just and proper outcome, even if it disappointed a major incumbent.

No one had to overreach, or grandstand.  No one had to write 50 page dissents.  No one dared resort to smugness, righteous indignation and arrogance.

I share your excitement about the promise of telecommunications and information technology to enhance national welfare and make life better for all.  Such potential makes it that much more important that you strive to lead by example and refrain from using your considerable power to settle all the grudges you bear.

Best wishes for a successful Chairmanship.

Sincerely,

Rob Frieden, Pioneers Chair and Professor of Telecommunications and Law
Pennsylvania State University