Who's Who in Telecommunications Preemption

            In the not too distant future the FCC will preempt state laws that prevent municipalities from offering Wi-Fi services.  About 19 states have done so largely because private carriers and their trade associations have asserted that public ventures cannot operate efficiently, preempt private enterprise, unfairly have lower costs of capital and tap taxpayers to sustain deficit operations.  In my home state, Bell of Pennsylvania secured legislation that explicitly granted it veto power over any municipal operation outside Philadelphia.

            My initial instinct supports private options in lieu of state or municipal efforts.  However, at some point it becomes fruitless to wait for the marketplace to support private carrier market entry, especially in rural areas.  Incumbent carriers cannot have it both ways: 1) expressing righteous indignation at municipal initiatives, but also 2) refraining from making the investment themselves. Most municipalities install Wi-Fi, because private carriers will not do it and city officials assume wireless broadband access will enhance the welfare of citizens and establish a comparative advantage vis a vis other localities lacking such access. 

           Arguably Wi-Fi constitutes an essential service (maybe not a public utility) that consumers increasingly assume to be available everywhere.  As towns developed in the United States, municipal governments created water and sewage authorities rather than await private ventures that might consider such sunk investment as prudent.

            I do not seeing muni wi-fi as evidence of governmental mission creep where market failure exists.  Municipalities become the carrier of last—and only—resort.

            A different and more complex issue lies in the lawfulness of federal preemption.  Case precedent supports preemption when interstate service becomes so integrated with intrastate service that the two types of service are not separable.  In effect the interstate service “contaminates” and prevails so that the FCC can lawfully assert jurisdiction.  Additionally case law supports FCC preemption when a service evidences basic long-haul, interstate characteristics.   Internet access typically involves traffic routing that crosses state borders.  Lastly the FCC can prempt a service that constitutes a functional equivalent to, or interconnects with a federally regulated service.  A federal court affirmed the FCC’s preemption of state Voice over the Internet Protocol regulation (the Vonage case, Minn. PSC v. FCC, 394 F.3d 568 (8th Cir. 2004) based on the fact that most services interconnect with federally regulated long distance telephone service.  Additionally courts are receptive to arguments that different regulation by 50+ jurisdictions would “balkanize” and unnecessarily complicate the regulatory process.

            So why all the agitation by incumbent carriers?  I cannot see municipal networks becoming a major service alternative, particularly for larger cities where some attempts already have failed.  Likewise I don’t see incumbents hell-bent to offer “free” wi-fi service, although they may execute a strategy to use wi-fi for back-haul and video delivery to off-load traffic from 3G and 4G cellular networks.

            Perhaps incumbents simply shoot first and ask questions later on any initiative that does not include them and their approval. Maybe incumbents want to foreclose any unlicensed alternative to licensed operations, particularly ones that cost billions to acquire in spectrum auctions.

            Unlike the network neutrality debate, I believe incumbents will have a harder time convincing an appellate court to overturn the FCC.  This court would have to ignore ample case precedent, but who knows maybe the Supreme Court will ultimately hear the case and change course so that federalism and states’ rights trumps common sense.

What’s Certain About the Regulatory Uncertainty Debate

            Incumbent carriers, such as AT&T, Comcast and Verizon, have made countless “curtains for the Free World” assertions in the Network Neutrality debate.  They claim that if the FCC reclassifies as common carriage aspects of Internet access, it will create “regulatory uncertainty” and “disincentive investment.” 

            Not one of the countless sponsored researchers funded by incumbents has provided a shred of empirical evidence to support these assertions.  In fact, senior management officials at these carriers readily acknowledge that capital expenditures are based on marketplace conditions.

            These managers act like children in the back seat of a car driven by a parent.  Assuming the parent cannot hear them, kids say very candid things.  So do senior telecommunications managers when discussing capital expenditure with buy-side Wall Street analysts.  AT&T CEO Randall Stephenson has “warned that he could hold off on many of his company's capital investment plans -- including fast new fiber lines -- if uncertainty persists over how the US government will regulate the Internet.” See http://www.cnet.com/news/at-t-ceo-net-neutrality-uncertainty-puts-a-pause-in-investing/.

            Mr. Stephenson and other senior managers would not dare understate future capex in statements to the financial community, or to the Securities and Exchange Commission.

            In my mission to find and tell the truth, here are some inconvenient facts:

Congress Created Regulatory Uncertainty

            Regulatory uncertainty results when Congress fails to legislate despite changed circumstances, or when its laws lack clarity.  Congress last created telecommunications in 1996, before the Internet changed everything.  In that kinder and less partisan time, the legislature achieved consensus, albeit one rife with compromises that translated—over time—into statutory ambiguity.

            The FCC has acted in light of the vacuum generated by congressional inaction.  On two separate occasions, the FCC has failed to convince a reviewing court that its statutory interpretation is reasonable and that the judiciary should defer to its expertise in making sense out of an outdated and ambiguous statutory mandate.

Incumbents Use Regulatory Uncertainty as a Lobbying Tool

            Incumbents sustain regulatory uncertainty based on an assumption that the FCC will raise their cost of doing business and somehow limit their ability to maximize profit.  Yes these carriers will need plenty of staff and expensive lawyers to litigate and perpetuate uncertainty, but where are the constraints on profits?  Broadband access generates triple-digit returns.  Comcast can generate over $1 billion a year in cable modem and set top box rentals, largely because the FCC can’t seem to apply the longstanding Carterfone policy that obligates even private carriers to permit consumers to attach their own devices.

            Regulatory uncertainty is a red herring, because incumbents surely know that if the FCC oversteps, a reviewing court will overturn the rules.  The FCC may fail to convince a reviewing court that circumstances support reclassification of Internet access as common carriage, but the predicate for regulatory uncertainty lies with Congress that created it by not doing its job and by incumbents exploiting it for an uncertain monetary gain.

Competitive Necessity Drives Capex

            AT&T and other incumbent cannot carry out their threat to reduce or stop investing in infrastructure.  The decision to raise, lower or maintain capex results from a strategic assessment of competition.  Competitive necessity forces wireless carrier incumbents to acquire more spectrum, whether to use it, or to warehouse it to prevent market entry.  The lack of competitive necessity makes it possible for wire carriers, like Verizon, to cherry pick and red line the geographical areas where it chooses to offer fiber optic broadband service.

This Debate Increasingly Looks Like a “Tempest in a Teapot”

            The network neutrality debate has triggered the worse sort of exaggeration and hype. Incumbents have not and cannot prove any measurable short and long run harm to their bottom line, but their vigorous and effective claims trigger false positives, i.e., the assumption of harms such as capex disincentives.

            Recent market entrants deem common carriage rules, subject to forbearance of most regulations, as minimally necessary to safeguard competition and innovation.  Maybe, but the real possibility exists that they have identified false negatives, i.e., harms to competition and consumers. 

            Today, tomorrow and for the foreseeable future the remedy to network neutrality concerns likes in having a far more robustly competitive broadband ecosystem, something incumbents strive everyday to thwart.