For those in the DC area interested in telecom regulation, there is another great event opportunity coming up next week.
Join TechFreedom on Thursday, December 19, the 100th anniversary of the Kingsbury Commitment, AT&T’s negotiated settlement of antitrust charges brought by the Department of Justice that gave AT&T a legal monopoly in most of the U.S. in exchange for a commitment to provide universal service.
The Commitment is hailed by many not just as a milestone in the public interest but as the bedrock of U.S. communications policy. Others see the settlement as the cynical exploitation of lofty rhetoric to establish a tightly regulated monopoly — and the beginning of decades of cozy regulatory capture that stifled competition and strangled innovation.
So which was it? More importantly, what can we learn from the seventy year period before the 1984 break-up of AT&T, and the last three decades of efforts to unleash competition? With fewer than a third of Americans relying on traditional telephony and Internet-based competitors increasingly driving competition, what does universal service mean in the digital era? As Congress contemplates overhauling the Communications Act, how can policymakers promote universal service through competition, by promoting innovation and investment? What should a new Kingsbury Commitment look like?
Following a luncheon keynote address by FCC Commissioner Ajit Pai, a diverse panel of experts moderated by TechFreedom President Berin Szoka will explore these issues and more. The panel includes:
Harold Feld, Public Knowledge
Rob Atkinson, Information Technology & Innovation Foundation
Hance Haney, Discovery Institute
Jeff Eisenach, American Enterprise Institute
Fred Campbell, Former FCC Commissioner
Space is limited so RSVP now if you plan to attend in person. A live stream of the event will be available on this page. You can follow the conversation on Twitter on the #Kingsbury100 hashtag.
When:
Thursday, December 19, 2013
11:30 – 12:00 Registration & lunch
12:00 – 1:45 Event & live stream
The live stream will begin on this page at noon Eastern.
(Full disclosure: The Center for Internet, Communications, and Technology Policy includes TechPolicyDaily.com, to which I am a contributor.)
Perhaps to the surprise of many, I’m going to agree with Feld. But in so doing, I’m going to expand upon his point: The problem with anti-economics social activists (or, as we might generalize, the ‘Left’)[*] is that they have stopped listening to people who disagree with them. As a result, they keep saying the same thing over and over again.
I don’t mean this to be snarky. Rather, it is a very real problem throughout modern political discourse, and one that we participants in telecom and media debates frequently contribute to. One of the reasons that I love – and sometimes hate – researching and teaching in this area is that fundamental tensions between government and market regulation lie at its core. These tensions present challenging and engaging questions, making work in this field exciting, but are sometimes intractable and often evoke passion instead of analysis, making work in this field seem Sisyphean.
One of these tensions is how to secure for consumers those things which the market does not (appear to) do a good job of providing. For instance, those of us on both the left and right are almost universally agreed that universal service is a desirable goal. The question – for both sides – is how to provide it. Feld reminds us that “real world economics is painfully complicated.” I would respond to him that “real world regulation is painfully complicated.”
I would point at Feld, while jumping up and down shouting “J’accuse! NirvanaFallacy!” – but I’m certain that Feld is aware of this fallacy, just as I hope he’s aware that those of us who have spent much of our lives studying economics are bitterly aware that economics and markets are complicated things. Indeed, I think those of us who study economics are even more aware of this than is Feld – it is, after all, one of our mantras that “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” This mantra is particularly apt in telecommunications, where one of the most consistent and important lessons of the past century has been that the market tends to outperform regulation.
This isn’t because the market is perfect; it’s because regulation is less perfect. Geoff recently posted a salient excerpt from Tom Hazlett’s 1997 Reason interview of Ronald Coase, in which Coase recounted that “When I was editor of The Journal of Law and Economics, we published a whole series of studies of regulation and its effects. Almost all the studies – perhaps all the studies – suggested that the results of regulation had been bad, that the prices were higher, that the product was worse adapted to the needs of consumers, than it otherwise would have been.”
I don’t want to get into a tit-for-tat over individual points that Feld makes. But I will look at one as an example: his citation to The Market for Lemons. This is a classic paper, in which Akerlof shows that information asymmetries can cause rational markets to unravel. But does it, as Feld says, show “market failure in the presence of robust competition?” That is a hotly debated point in the economics literature. One view – the dominant view, I believe – is that it does not. See, e.g., the EconLib discussion (“Akerlof did not conclude that the lemon problem necessarily implies a role for government”). Rather, the market has responded through the formation of firms that service and certify used cars, document car maintenance, repairs and accidents, warranty cars, and suffer reputational harms for selling lemons. Of course, folks argue, and have long argued, both sides. As Feld says, economics is painfully complicated – it’s a shame he draws a simple and reductionist conclusion from one of the seminal articles is modern economics, and a further shame he uses that conclusion to buttress his policy position. J’accuse!
I hope that this is in no way taken as an attack on Feld – and I wish his piece was less of an attack on Jeff. Fundamentally, he raises a very important point, that there is a real disconnect between the arguments used by the “left” and “right” and how those arguments are understood by the other. Indeed, some of my current work is exploring this very disconnect and how it affects telecom debates. I’m really quite thankful to Feld for highlighting his concern that at least one side is blind to the views of the other – I hope that he’ll be receptive to the idea that his side is subject to the same criticism.
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[*] I do want to respond specifically to what I think is an important confusion in Feld piece, which motivated my admittedly snarky labelling of the “left.” I think that he means “neoclassical economics,” not “neo-conservative economics” (which he goes on to dub “Neocon economics”). Neoconservativism is a political and intellectual movement, focused primarily on US foreign policy – it is rarely thought of as a particular branch of economics. To the extent that it does hold to a view of economics, it is actually somewhat skeptical of free markets, especially of lack of moral grounding and propensity to forgo traditional values in favor of short-run, hedonistic, gains.
“Real lawyers read the footnotes!”—thus did Harold Feld chastise Geoff and Berin in a recent blog post about our CNET piece on the Verizon/SpectrumCo transaction. We argued, as did Commissioner Pai in his concurrence, that the FCC provided no legal basis for its claims of authority to review the Commercial Agreements that accompanied Verizon’s purchase of spectrum licenses—and that these agreements for joint marketing, etc. were properly subject only to DOJ review (under antitrust).
Harold insists that the FCC provided “actual analysis of its authority” in footnote 349 of its Order. But real lawyers read the footnotes carefully. That footnote doesn’t provide any legal basis for the FTC to review agreements beyond a license transfer; indeed, the footnote doesn’t even assert such authority. In short, we didn’t cite the footnote because it is irrelevant, not because we forgot to read it.
First, a reminder of what we said:
The FCC’s review of the Commercial Agreements accompanying the spectrum deal exceeded the limits of Section 310(d) of the Communications Act. As Commissioner Pai noted in his concurring statement, “Congress limited the scope of our review to the proposed transfer of spectrum licenses, not to other business agreements that may involve the same parties.” We (and others) raised this concern in public comments filed with the Commission. Here’s the agency’s own legal analysis — in full: “The Commission has authority to review the Commercial Agreements and to impose conditions to protect the public interest.” There’s not even an accompanying footnote.
Even if Harold were correct that footnote 349 provides citations to possible sources of authority for the FCC to review the Commercial Agreements, it remains irrelevant to our claim: The FCC exceeded its authority under 310(d) and asserted its authority under 310(d) without any analysis or citation. Footnote 349 begins with the phrase, “[a]side from Section 310(d)….” It is no surprise, then, that the footnote contains no analysis of the agency’s authority under that section.
The FCC’s authority under 310(d) is precisely what is at issue here. The question was raised and argued in several submissions to the Commission (including ours), and the Commission is clearly aware of this. In paragraph 142 of the Order, the agency notes the parties’ objection to its review of the Agreements: “Verizon Wireless and the Cable Companies respond that the Commission should not review the Commercial Agreements because… the Commission does not have authority to review the agreements.” That objection, rooted in 310(d), is to the Commission extending its transaction review authority (unquestionably arising under only 310(d)) beyond that section’s limits. The Commission then answers the parties’ claim in the next paragraph with the language we quoted: “The Commission has authority to review the Commercial Agreements and to impose conditions to protect the public interest.” By doing so without reference to other statutory language, it seems clear that the FCC’s unequivocal, unsupported statement of authority is a statement of authority under 310(d).
This is as it should be. The FCC’s transaction review authority is limited to Section 310(d). Thus if the agency were going to review the Commercial Agreements as part of the transfer, the authority to do so must come from 310(d) alone. But 310(d) on its face provides no authority to review anything beyond the transfer of spectrum. If the Commission wanted to review the Commercial Agreements, it needed to provide analysis on how exactly 310(d), despite appearances, gives it the authority to do so. But the Commission does nothing of the sort.
But let’s be charitable, and consider whether footnote 349 provides relevant analysis of its authority to review the Commercial Agreements under any statute.
The Commission did cite to several other sections of the Communications Act in the paragraph (145) that includes footnote 349. But that paragraph relates not to the review of the transaction itself (or even the ability of the parties to enter into the Commercial Agreements) but to the Commission’s authority to ensure that Verizon complies with the conditions imposed on the transaction, and to monitor the possible effects the Agreements have on the market after the fact. Three of the four statutes cited in the footnote (47 U.S.C. §§ 152, 316, & 548) don’t appear to give the Commission authority for anything related this transaction. Only 47 U.S.C. § 201 is relevant. But having authority to monitor a wireless provider’s post-transaction business practices is far different from having the authority to halt or condition the transaction itself before its completion because of concerns about ancillary agreements. The FCC cites no statutes to support this authority—because none exist.
This is not simply a semantic distinction. By claiming authority to review ancillary agreements in the course of reviewing license transfers, the Commission gains further leverage over companies seeking license transfer approvals, putting more of the companies’ economic interests at risk. This means companies will more likely make the “voluntary” concessions (with no opportunity for judicial scrutiny) that they would not otherwise have made—or they might not enter into deals in the first place. As we (Geoff and Berin) said in our CNET article, “the FCC has laid down its marker, letting all future comers know that its bargaining advantage extends well beyond the stack of chips Congress put in front of it.” In merger reviews, the house has a huge advantage, and it is magnified if the agency can expand the scope of activity under its review.
Thus Harold is particularly off-base when he writes that “[g]iven that there is no question that the FCC has authority to entertain complaints going forward, and certainly has authority to monitor how the markets under its jurisdiction are developing, it is hard to understand the jurisdictional argument even as the worship of empty formalism.” This misses the point entirely. The difference between the FCC reviewing the Commercial Agreements in deciding whether to permit the license transfer (or demand concessions) and regulating the Agreements after the fact is no mere “formalism.”
Regardless, if the FCC were actually trying to rely on these other sections of the Communications Act for authority to review the Commercial Agreements, it would have cited them in Paragraph 143, where it asserted that authority—not two paragraphs later in a footnote supporting the agency’s order assigning post-transaction monitoring tasks to the Wireline Competition Bureau. Moreover, none of these alleged assertions of authority amounts to an analysis of the FCC’s jurisdiction. Given the debate that took place in the record over the issue, a simple list of statutes purporting to confer jurisdiction would be utterly insufficient in response. Not as insufficient as an unadorned, conclusory statement of authority without even such a list of statutes (what the FCC actually did) — but awfully close.
We stand by our claim that the Commission failed to cite — let alone analyze — its authority to review the Commercial Agreements in this transaction. The FCC’s role in transaction reviews has been hotly contested, at least partially inspiring the FCC Process Reform Act that passed this spring in the House. Given the controversy around the issue, the Commission should have gone out of its way to justify its assertion of authority, citing precedent and making a coherent argument — in other words, engaging in legal analysis. At least, that’s what “real lawyers” would do.
But in real politik, perhaps it was naïve of us to expect more analysis from the agency that tried to justify net neutrality regulation by pointing to a deregulatory statute aimed at encouraging the deployment of broadband and claiming that somewhere in there, perhaps, hidden between the lines, was the authority the agency needed—but which Congress never actually gave it.
When the FCC plays fast and loose with the law in issuing regulations, someone will likely sue, thus forcing the FCC to justify itself to a court. On net neutrality, the D.C. Circuit seems all but certain to strike down the FCC’s Open Internet Order for lacking any firm legal basis. But when the FCC skirts legal limits on its authority in merger review, the parties to a merger have every incentive to settle and keep their legal qualms to themselves; even when the FCC blocks a merger, the parties usually calculate that t isn’t worth suing or trying to make a point about principle. Thus, through merger review, the FCC gets away with regulation by stealth—footnotes about legal authority be damned. Groups like the Electronic Frontier Foundation rightly worry about the FCC’s expansive claims of authority as a “Trojan Horse,” even when they applaud the FCC’s ends. We know Harold doesn’t like this transaction, but why doesn’t he worry about where the FCC is taking us?
The pending wireless spectrum deal between Verizon Wireless and a group of cable companies (the SpectrumCo deal, for short) continues to attract opprobrium from self-proclaimed consumer advocates and policy scolds. In the latest salvo, Public Knowledge’s Harold Feld (and other critics of the deal) aren’t happy that Verizon seems to be working to appease the regulators by selling off some of its spectrum in an effort to secure approval for its deal. Critics are surely correct that appeasement is what’s going on here—but why this merits their derision is unclear.
For starters, whatever the objections to the “divestiture,” the net effect is that Verizon will hold less spectrum than it would under the original terms of the deal and its competitors will hold more. That this is precisely what Public Knowledge and other critics claim to want couldn’t be more clear—and thus neither is the hypocrisy of their criticism.
Note that “divestiture” is Feld’s term, and I think it’s apt, although he uses it derisively. His derision seems to stem from his belief that it is a travesty that such a move could dare be undertaken by a party acting on its own instead of under direct diktat from the FCC (with Public Knowledge advising, of course). Such a view—that condemns the private transfer of spectrum into the very hands Public Knowledge would most like to see holding it for the sake of securing approval for a deal that simultaneously improves Verizon’s spectrum position because it is better for the public to suffer (by Public Knowledge’s own standard) than for Verizon to benefit—seems to betray the organization’s decidedly non-public-interested motives.
But Feld amasses some more specific criticisms. Each falls flat.
For starters, Feld claims that the spectrum licenses Verizon proposes to sell off (Lower (A and B block) 700 MHz band licenses) would just end up in AT&T’s hands—and that doesn’t further the scolds’ preferred vision of Utopia in which smaller providers end up with the spectrum (apparently “small” now includes T-Mobile and Sprint, presumably because they are fair-weather allies in this fight). And why will the spectrum inevitably end up in AT&T’s hands? Writes Feld:
AT&T just has too many advantages to reasonably expect someone else to get the licenses. For starters, AT&T has deeper pockets and can get more financing on better terms. But even more importantly, AT&T has a network plan based on the Lower 700 MHz A &B Block licenses it acquired in auction 2008 (and from Qualcomm more recently). It has towers, contracts for handsets, and everything else that would let it plug in Verizon’s licenses. Other providers would need to incur these expenses over and above the cost of winning the auction in the first place.
Allow me to summarize: AT&T will win the licenses because it can make the most efficient, effective and timely use of the spectrum. The horror!
Feld has in one paragraph seemingly undermined his whole case. If approval of the deal turns on its effect on the public interest, stifling the deal in an explicit (and Quixotic) effort to ensure that the spectrum ends up in the hands of providers less capable of deploying it would seem manifestly to harm, not help, consumers.
And don’t forget that, whatever his preferred vision of the world, the most immediate effect of stopping the SpectrumCo deal will be that all of the spectrum that would have been transferred to—and deployed by—Verizon in the deal will instead remain in the hands of the cable companies where it now sits idly, helping no one relieve the spectrum crunch.
But let’s unpack the claims further. First, a few factual matters. AT&T holds no 700 MHz block A spectrum. It bought block B spectrum in the 2008 auction and acquired spectrum in blocks D and E from Qualcomm.
Second, the claim that this spectrum is essentially worthless, especially to any carrier except AT&T, is betrayed by reality. First, despite the claimed interference problems from TV broadcasters for A block spectrum, carriers are in fact deploying on the A block and have obtained devices to facilitate doing so effectively.
Meanwhile, Verizon had already announced in November of last year that it planned to transfer 12 MHz of A block spectrum in Chicago to Leap (note for those keeping score at home: Leap is notAT&T) in exchange for other spectrum around the country, and Cox recently announced that it is selling its own A and B block 700 MHz licenses (yes, eight B block licenses would go to AT&T, but four A block licenses would go to US Cellular).
Pretty clearly these A and B block 700 MHz licenses have value, and not just to AT&T.
Feld does actually realize that his preferred course of action is harmful. According to Feld, even though the transfer would increase spectrum holdings by companies that aren’t AT&T or Verizon, the fact that it might also facilitate the SpectrumCo deal and thus increase Verizon’s spectrum holdings is reason enough to object. For Feld and other critics of the deal the concern is over concentrationin spectrum holdings, and thus Verizon’s proposed divestiture is insufficient because the net effect of the deal, even with the divestiture, would be to increase Verizon’s spectrum holdings. Feld writes:
Verizon takes a giant leap forward in its spectrum holding and overall spectrum efficiency, whereas the competitors improve only marginally in absolute terms. Yes, compared to their current level of spectrum constraint, it would improve the ability of competitors [to compete] . . . [b]ut in absolute terms . . . the difference is so marginal it is not helpful.
Verizon has already said that they have no plans (assuming they get the AWS spectrum) to actually use the Lower MHz 700 A & B licenses, so selling those off does not reduce Verizon’s lead in the spectrum gap. So if we care about the spectrum gap, we need to take into account that this divestiture still does not alleviate the overall problem of spectrum concentration, even if it does improve spectrum efficiency.
But Feld is using a fantasy denominator to establish his concentration ratio. The divestiture only increases concentration when compared to a hypothetical world in which self-proclaimed protectors of the public interest get to distribute spectrum according to their idealized notions of a preferred market structure. But the relevant baseline for assessing the divestiture, even on Feld’s own concentration-centric terms, is the distribution of licenses under the deal without the divestiture—against which the divestiture manifestly reduces concentration, even if only “marginally.”
Moreover, critics commit the same inappropriate fantasizing when criticizing the SpectrumCo deal itself. Again, even if Feld’s imaginary world would be preferable to the post-deal world (more on which below), that imaginary world simply isn’t on the table. What is on the table if the deal falls through is the status quo—that is, the world in which Verizon is stuck with spectrum it is willing to sell and foreclosed from access to spectrum it wants to buy; US Cellular, AT&T and other carriers are left without access to Verizon’s lower-block 700 MHz spectrum; and the cable companies are saddled with spectrum they won’t use.
Perhaps, compared to this world, the deal does increase concentration. More importantly, compared to this world the deal increases spectrum deployment. Significantly. But never mind: The benefits of actual and immediate deployment of spectrum can never match up in the scolds’ minds to the speculative and theoretical harms from increased concentration, especially when judged against a hypothetical world that does not and will not ever exist.
But what is most appalling about critics’ efforts to withhold valuable spectrum from consumers for the sake of avoiding increased concentration is the reality that increased concentration doesn’t actually cause any harm.
In fact, it is simply inappropriate to assess the likely competitive effects of this or any other transaction in this industry by assessing concentration based on spectrum holdings. Of key importance here is the reality that spectrum alone—though essential to effective competitiveness—is not enough to amass customers, let alone confer market power. In this regard it is well worth noting that the very spectrum holdings at issue in the SpectrumCo deal, although significant in size, produce precisely zero market share for their current owners.
Even the FCC recognizes the weakness of reliance upon market structure as an indicator of market competitiveness in its most recent Wireless Competition Report, where the agency notes that highly concentrated markets may nevertheless be intensely competitive.
And the DOJ, in assessing “Economic Issues in Broadband Competition,” has likewise concluded both that these markets are likely to be concentrated and that such concentration does not raisecompetitive concerns. In large-scale networks “with differentiated products subject to large economies of scale (relative to the size of the market), the Department does not expect to see a large number of suppliers.” Rather, the DOJ cautions against “striving for broadband markets that look like textbook markets of perfect competition, with many price-taking firms. That market structure is unsuitable for the provision of broadband services.”
Although commonly trotted out as a conclusion in support of monopolization, the fact that a market may be concentrated is simply not a reliable indicator of anticompetitive effect, and naked reliance on such conclusions is inconsistent with modern understandings of markets and competition.
As it happens, there is detailed evidence in the Fifteenth Wireless Competition Report on actual competitive dynamics; market share analysis is unlikely to provide any additional insight. And the available evidence suggests that the tide toward concentration has resulted in considerable benefits and certainly doesn’t warrant a presumption of harm in the absence of compelling evidence to the contrary specific to this license transfer. Instead, there is considerable evidence of rapidly falling prices, quality expansion, capital investment, and a host of other characteristics inconsistent with a monopoly assumption that might otherwise be erroneously inferred from a structural analysis like that employed by Feld and other critics.
Today’s wireless market is an arguably concentrated but remarkably competitive market. Concentration of resources in the hands of the largest wireless providers has not slowed the growth of the market; rather the central problem is one of spectrum scarcity. According to the Fifteenth Report, “mobile broadband growth is likely to outpace the ability of technology and network improvements to keep up by an estimated factor of three, leading to a spectrum deficit that is likely to approach 300 megahertz within the next five years.”
Feld and his friends can fret about the phantom problem of concentration all they like—it doesn’t change the reality that the real problem is the lack of available spectrum to meet consumer demand. It’s bad enough that they are doing whatever they can to stop the SpectrumCo deal itself which would ensure that spectrum moves from the cable companies, where it sits unused, to Verizon, where it would be speedily deployed. But when they contort themselves to criticize even the re-allocation of spectrum under the so-called divestiture, which would directly address the very issue they hold so dear, it is clear that these “protectors of consumer rights” are not really protecting consumers at all.
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