FC: PFF book says technology reduces need for FCC regulation

[Declan McCullagh <declan () well com>]

[The Progress and Freedom Foundation is releasing a book at its conference 
at the Renaissance Hotel in Washington, DC tomorrow. (Fee is $95, 
http://www.pff.org/Dec.8%20TCom%20Conferencereg.htm) The intro chapter is 
below. --Declan]



Communications Deregulation And FCC Reform:

Finishing The Job





Jeffrey A. Eisenach and Randolph J. May







Communications markets have made much progress towards competition and 
deregulation in recent years, but much remains to be done.   Indeed, as 
2000 draws to a close, it is increasingly clear that much more needs to be 
done, and that new approaches, both at the Federal Communications 
Commission and in Congress, will be required to complete the task.  In this 
volume, we present six papers that show how to finish the job of 
deregulating communications markets and reforming the FCC.

        In early 1996, Congress made a decision with profound implications 
for the American economy in general, and the communications market in 
particular.  Recognizing that technological progress favors competition, 
and building on a twenty-year trend towards less regulation, Congress 
passed the Telecommunications Act of 1996.

The vision of the Act is made clear in its opening words: This is "An Act 
to promote competition and reduce regulation in order to secure lower 
prices and higher quality services for American telecommunications 
consumers and encourage the rapid deployment of new telecommunications 
technologies."  And hopes were high.  As President Clinton said in signing 
the Act, "with the stroke of a pen, our laws will catch up with the 
future.  We will help to create an open marketplace where competition and 
innovation can move as quick as light."

Has the 1996 Act delivered on that promise?  Certainly much progress has 
been made.  The market for telecommunications services is more competitive 
today than at any time since the early days of voice telephony.  Cable 
television prices have been deregulated. Spectrum continues to be made 
available through auctions, and the use of wireless telephones continues to 
skyrocket.  Broadband services are vastly more available and 
affordable.  Content regulation, at least in the form envisioned by the 
Communications Decency Act, has been held mostly at bay.  The Internet 
remains essentially free of government control.

        We applaud both the Act and the FCC for these achievements.  It is 
all too easy to imagine things going in the other direction, with 
disastrous results.  But the inherently pro-market vision of the Act has 
proven to be robust; and, on many occasions since 1996, the Commission has 
chosen the path of the market over the path of regulation.

        It is also clear, however, that the larger promise of the 
Telecommunications Act remains unfulfilled.  Five years after the Act was 
passed, the communications marketplace still teeters on the cusp between 
monopoly and competition, between regulation and freedom.  Further 
progress, it seems, will require new approaches.

        The need for new thinking should not be surprising.  When the 
Telecommunications Act was written (for the most part, in 1995), the public 
Internet was only two years old.  "Video-on-demand" (based on a new 
technology known as "ADSL") was the new-new thing.  Personal computers had 
486 chips, PDAs were unheard of, and color printers cost thousands of 
dollars.  Cell phones were not only not Web-enabled, they were still almost 
entirely analog and relatively rare.  Dial-up modems operated at 28.8 kbps 
(at most); if you had "broadband" (and no one called it that), you had a T1 
line. There was no Winstar or Teligent or Covad or Northpoint or PSINet or 
Global Crossing or Level3 or Qwest.  Worldcom and MCI hadn't yet been 
introduced, let alone gotten married.  TCI was contemplating a big 
merger  with Bell Atlantic.  And (counting GTE), there were eight, count 
'em, eight Regional Bell Operating Companies.

        As Charles Eldering shows us in this volume, the world of the 
present and the immediate future is a very different place from the largely 
analog, largely stove-piped world of 1995.  The current world is digital 
and converged, with providers of integrated services utilizing multiple 
technologies to deliver bits and bytes of content through packet-switched 
networks.  Digital.  Converged.  Integrated.  Packet-switched.  We hardly 
knew these words in 1995.  Since then, the world has changed, but our 
policies remain grounded in old realities, our vision shaped by outdated 
assumptions.

        Nowhere is the need for new approaches more apparent than in the 
FCC's policies under Title II of the Act.  As detailed in this volume by 
Robert Crandall,  the FCC has pursued an approach aimed at manufacturing 
the appearance of competition in local telephony by "jumpstarting" 
competitors  assuming, erroneously, that more competitors must mean more 
competition.  Its method has been to put in place what is arguably the most 
arcane and complex scheme of economic regulation ever devised, all for the 
purpose of requiring incumbent local telephone companies to resell their 
"essential facilities" to competitors so that the competitors, in turn, can 
resell local telephone service to customers.

        The main problem with this approach is not its complexity; the 
problem is simplicity itself.  By making incumbent facilities available at 
incremental cost, the Commission greatly reduced the incentives of both 
incumbents and entrants to invest in new facilities.  As Justice Stephen 
Breyer said in Iowa Utilities, "a sharing requirement may diminish the 
original owner's incentive to keep up or to improve the property by 
depriving the owner of the fruits of value-creating investment, research, 
or labor. . . . Nor can one guarantee that firms will undertake the 
investment necessary to produce complex technological innovations knowing 
that any competitive advantage deriving from those innovations will be 
dissipated by the sharing requirement."

        Lacking the incentive to compete on the basis of better 
technology, some of the FCC's new "competitors" instead tried to win 
customers with clever marketing campaigns, or to profit by engaging in 
various forms of cream skimming and regulatory arbitrage.  Most of them 
never made money even at that, and by late 2000 it seems investors had run 
out of patience with such shortsighted business models.

In its defense, the FCC points to scores of new "facilities-based" 
entrants, which have invested billions of dollars in new equipment, and are 
providing millions of lines.  But these firms, too, must face competition 
from the resellers and arbitragers, and building new telephone networks is, 
in the end, an expensive proposition.  By late 2000, investors were 
questioning whether, in the face of such competition, the billions invested 
in fiber optic cables and new switches would ever yield a solid return.

Moreover, such competition as has developed has taken place largely in 
urban areas, and almost exclusively in the market for business 
customers.  For residential customers, and for those in rural areas, 
competition is mostly an unfulfilled promise.  Kenneth Gordon's paper in 
this volume helps us understand why: In the name of promoting "universal 
service," we (that is Congress, through the Act, the FCC, through its 
policies, and the states, through their public utility commissions) 
continue to hold the regulated price of local phone service below cost for 
residential and rural customers, while setting long distance, business and 
urban rates above cost.   Entrepreneurs are free, in principle, to compete 
for the privilege of serving residential and rural customers, but only if 
they are prepared to charge prices that fail to cover costs.  If they want 
to make money, they must compete not only for the customers, but also for 
the largesse of universal service subsidies needed to turn a profit.  Not 
surprisingly, few have chosen to do so.

        The end result is that competition has developed more slowly and 
less completely than anyone envisioned at the time the Act was passed.  In 
1996, most observers believed the "14-point checklist" Congress enumerated 
as criteria for RBOC entry into long-distance telephony would be satisfied 
virtually everywhere within three to five years.  Thus far, those criteria 
have been officially satisfied in only two states -- and the FCC, which 
says it is dedicated to promoting competition, instead continues to enforce 
the Act in a way that constitutes a near-absolute barrier to long-distance 
entry by the RBOCs.

        The great irony is that none of the above matters very much 
anymore.  Voice telephony as a discrete market is (almost literally) 
history.  The future  the immediate future  is about the market for 
integrated voice, video and data services carried on broadband digital 
infrastructures (wired or wireless) across distances that are never 
measured, because distance no longer matters much either.  The future of 
telecommunications, in other words, looks less and less like Ma Bell and 
more and more like the mother of all integrated networks, the Internet.

        The essential characteristic of the Internet is that it is 
digital, and the essential characteristic of digital information is that it 
is mode-independent  that is, it can be carried equally well, and 
interchangeably, on virtually any mode of communications.  Thus, the new 
approach to telecommunications deregulation has to begin by insisting on 
eliminating the barriers and regulatory distinctions that separate 
different communications technologies  telephony, cable, wireless, satellite.

        Soon after the Telecommunications Act was passed, PFF Senior 
Fellow Donald McClellan wrote a seminal paper arguing for a "containment 
policy" to protect the Internet from regulation.  The idea was simple: the 
Act, for better or worse, demanded a continuing period of regulation of 
voice telephony.  Donald suggested that the policy imperative must be to 
"contain" regulation within the old world of voice and not allow it to 
spill over into the new world of data.  For five years, containment has 
proven a successful strategy: data services  even when provided by the 
heavily regulated incumbent LECs  are subject to somewhat less regulation 
than voice.

        Five years later, the reality of convergence threatens to overtake 
the strategy of containment.  On the battlefield of integrated broadband 
services, cable, wireline telephony, wireless and satellite providers 
compete head to head.  Cable services presently operate under one set of 
rules, wireline telephony under another.  Wireless is treated like 
wireline, unless it moves, in which case, for regulatory purposes, it 
becomes like satellites.  And voice is telephony, unless it is converted by 
a personal computer into Internet Protocol (IP) bits and bytes before being 
transported, in which case it becomes "voice over IP" (VOIP) and is treated 
as unregulated data.

        The emergence of cable modem services virtually identical in 
capability and pricing to those offered by telephone companies through DSL 
technology has brought this crisis of unequal treatment to a head, forcing 
the FCC to confront the issue directly in a proceeding now underway  Court 
decisions have disagreed on how cable modems should be classified for 
regulatory purposes, and the FCC must now decide: Are cable modems a 
telecommunications service?  An advanced service?  An information 
service?  Simply asking these questions is enough to illustrate the 
absurdity of such almost metaphysical regulatory distinctions in a 
converged world.

        FCC Chairman Kennard has argued strongly against imposing the 
"morass of [telephone] regulation" (his words) on the cable industry, and 
promised, instead, to create a "new paradigm" in the FCC's current 
rulemaking on open access for cable platforms. As we have suggested 
elsewhere, the FCC can contain the spread of regulation simply by declaring 
cable and other comparable broadband services to be "advanced services," 
and then exercising its authority under Section 706 of the 
Telecommunications Act to forebear from regulation.  And then, without 
undue delay, a truly "new" paradigm must find a way to go beyond 
containment to deregulate voice as well as data, telephone companies as 
well as cable providers.

        In the end, telecommunications deregulation must mean what the 
word suggests:  The elimination of entry barriers, including line of 
business restrictions, and doing away with price controls at every 
level.  This volume's papers by Eldering, Crandall and Gordon provide a 
detailed roadmap for achieving such deregulation.

        Wireless services, in most cases, already benefit from substantial 
deregulation.  But they are subject to even more intimate forms of 
governance.  As users of the broadcast spectrum, they are de facto wards of 
the FCC, acting in its role as "steward" of what Congress continues to view 
as the exclusive and unalienable property of the United States government.

        Charles Eldering's paper makes clear how crucial the role of 
wireless technology is in achieving the Act's vision of ubiquitous 
competition.  Mobile, satellite and fixed wireless technologies offer 
unique competitive advantages for particular uses and in particular 
markets.  Existing satellite and fixed wireless technologies already offer 
broadband services; third (3G) and fourth (4G) technologies will make 
mobile wireless broadband available within five years.

        But progress in deploying such new technologies is slow.  Lawrence 
White's paper examines a major reason why this is so, and proposes a 
simple, if seemingly dramatic, solution:  "Propertyze" the spectrum and 
allow markets to manage its use, just as markets manage the use of other 
goods with complex attributes  like land.  White's argument is 
compelling.  Spectrum management by government invariably leads to 
inefficient and inflexible allocations of this increasingly valuable 
resource; and, it provides opportunities for interest groups, usually 
representing entrenched incumbents, to engage in what economists often call 
"regulatory predation." Markets, White argues, might also make mistakes, 
but such mistakes would be more easily and quickly corrected.  In the end, 
markets would do a better job than government in allocating resources to 
their highest valued uses.  Moreover, White shows how a transition to a 
property-based system could actually be accomplished.

        Whether Congress is prepared to adopt such a system remains to be 
seen, but the need for more efficient and flexible allocation of spectrum 
is clear.  For all its efforts to make spectrum available through auctions 
and to allocate its use to the highest valued functions, the FCC continues 
to be an impediment to the timely deployment of technologies like 3G.  A 
new approach to spectrum management, one which allows the market to play 
the dominant role in allocating use, is an absolute imperative from an 
economic perspective.

        A market-based approach to spectrum allocation would also make for 
good Constitutional law.  Scot Powe's paper in this volume examines the 
state of First Amendment law at the FCC and finds that the legal basis for 
differential treatment of electronic media (i.e. broadcasting) has been 
eroded by a number of recent Supreme Court decisions.  "Because of the 
[Supreme Court's] refusal to apply the broadcast analogy to newer media, 
while simultaneously suggesting that the sweep of government authority over 
broadcasting is more constricted than Red Lion and Pacifica suggest," Powe 
argues, "the Court appears to have left little constitutional room for 
future content regulation."  Moreover, he suggests, technological progress 
has made the historical rationale for treating broadcasting differently 
from other media (i.e. scarcity) less and less plausible.  "Broadcasting is 
unique," Powe explains, "not because it is unique, but rather because we 
have mistakenly assumed that it is unique."

        A new approach to communications regulation must come to terms 
with the realities White and Powe describe.  Just as convergence has 
brought competition and diversity to telecommunications markets, it has 
done the same for what we still refer to, anachronistically, as "mass 
media."  It is time to recognize that the broadcast spectrum is not a 
public park, and to stop telling those who use it where to plant the daisies.

        The ultimate anachronism at the FCC, however, may well lie at the 
very core of its organic statute, the Communications Act of 1934.  As the 
final paper in this volume explains, the Act gives the FCC broad authority 
to act "in the public interest."  It applies this standard in setting the 
terms of entry and the parameters of competition, in devising subsidy 
programs, in setting technological standards and in evaluating and 
prescribing program content.  Perhaps most notoriously, the agency invokes 
its practically standardless public interest authority to approve or deny 
the license transfers that invariably take place in communications industry 
mergers.  By doing so, it is able to hold such mergers hostage to the 
imposition of supposedly "voluntary" conditions that, in many cases, it 
could or would never impose through a generic rulemaking.  Whether it is in 
the public interest for the FCC to have such unbridled discretion is, at 
best, highly debatable.

        So, it turns out, is the question of whether such discretion any 
longer would pass muster under modern Constitutional jurisprudence relating 
to the delegation of authority by Congress.  There is a strong case to be 
made that the non-delegation doctrine prohibits such indeterminate 
delegations of authority as a violation of separation of powers.  From a 
policy perspective, moreover, such a broad delegation simply is not 
consistent with the new, less regulatory, more market-oriented approach we 
believe is required: even if the Commission were to constrain its 
regulatory impulses for a time, the very existence of such an unbridled 
grant of power would ensure that the threat (and the temptation) of 
regulation would always remain.  Congress, therefore, should not wait for 
the courts to find an opportunity to constrain the FCC's public interest 
authority; it should do so itself.

        One final note on the substance of this volume and of our 
recommendations:  Despite the title -- Communications Deregulation and FCC 
Reform -- readers may note that there is no paper that specifically 
addresses some of the structural and management issues generally associated 
with FCC reform initiatives.  The omission is a conscious one.  While we 
clearly have views on how the Commission's structure might be improved, we 
believe that in this case it is crucial for form to follow function:  If 
the substantive changes recommended here are pursued, the structural 
implications will be obvious and should be easily implemented.  If 
substantive changes are not made, on the other hand, little will likely be 
achieved by purely structural reforms in the agency.

        This said, we strongly concur with the conclusion of the 
Commission's draft strategic plan, that within five years communications 
markets will evidence "vigorous competition that will greatly reduce the 
need for direct regulation."  Unlike the plan, however, we suggest that 
such a finding should lead to a discussion about how to reduce the size and 
regulatory authority of the Commission, rather than spawning a search for 
new and creative missions such as the "market facilitator" role envisioned 
by the plan.  Competitive markets do not need government agencies with 
2,000+ staffers to serve as market facilitators.

        As we present this volume for debate and discussion, we wish to 
thank the authors for their hard work and for the excellence of the 
resulting contributions.  Thanks are due also for the suggestions and 
constructive criticism received from The Progress & Freedom Foundation's 
Communications Policy Advisory Board, which includes many of the nation's 
leading authorities on government regulation generally and communications 
regulation in particular.  At The Progress & Freedom Foundation, we want to 
express special thanks to Program Associate Katie Flint and Research 
Associate Ian Dillner, without both of whom this volume would not have been 
possible.  Many others helped in many ways, and we are grateful to all of them.





                                                                Washington, DC

                                                                December 
2000














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