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Maureen Ohlhausen makes the case for FTC regulation of broadband

Maureen Ohlhausen may have reignited the Battle of the Alphabet soup earlier this afternoon as she made the case at a Free State Foundation conference for greater if not sole Federal Trade Commission jurisdiction over the internet.  Mrs. Ohlhausen argued that the Federal Communication’s ex-ante approach to regulating broadband, where the law creates silos or boxes within which future activity is analyzed to determine lawfulness, may have a negative impact on innovation.  Given the speed at which technology changes, trying to fit a service into a regulation implemented before the innovation was given birth risk modifications to the service just to make the service fit in a box that may no longer be applicable.

The Federal Trade Commission’s approach, argues Mrs. Ohlhausen, is ex post and consumer focused; based on the past performance of a service with analysis of the harm the service may have caused a consumer versus trying to guess what harm a service could cause a consumer in the future.  Determining the impact on consumer welfare, the change in the value consumers receive from market transactions, should be the approach to regulating the internet, Mrs. Ohlhausen opined.  An ex post approach would be central to an overarching regulatory paradigm which would allow broadband providers flexibility in developing and providing innovative services while analyzing potential violations on a case-by-case basis.

Where might that leave the FCC?  Would it be satisfied abandoning net neutrality regulation or its role in anti-trust determinations to focus on handing out spectrum licenses?

I don’t see this realignment of regulatory responsibility happening within the 113th Congress.  We would need to see a Republican victory in the Senate with Boehner and company maintaining control of the House to have nary a chance of moving toward the appropriate rewrite in 114th Congress.

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The New York Times is wrong on Sprint, T-Mobile

Posted January 1st, 2014 in antitrust, Sprint, T-Mobile USA and tagged , , , by Alton Drew

The editorial board of The New York Times has come out swinging against Sprint‘s (NYSE:S) speculated combination with T-Mobile (NYSE:TMUS).  SoftBank (OTC:SFTBY), a Japanese wireless provider, owns a controlling interest in Sprint.  Should an acquisition be approved by regulators, namely the Federal Communications Commission and the United States Department of Justice, the four largest national carriers would be reduced to the three largest national carriers and such a shrinkage, according to The Times would negatively impact consumers.  Here is the crux of The Times’ argument about the impact on consumers:

“As an independent company, for instance, T-Mobile has recently cut prices aggressively and simplified its cellphone plans. Its phone plans are often much cheaper than comparable packages offered by other cellphone companies. It no longer forces customers into two-year contracts; its subscribers can switch to another wireless firm whenever they like. And it slashed the high international roaming charges it levies on calls customers make when they are traveling abroad and eliminated roaming charges for text messages and Internet service.”

To me, that is not a valid argument to base a rejection of a combination.  T-Mobile’s decision to provide cheaper comparable packages resulted from its ability to identify a niche, an underserved market that could have been left out of the market for wireless broadband services.  It would be bad business judgment for SoftBank to ignore this market especially since T-Mobile’s corner on the underserved market is one of the linchpins of  the company’s success.  SoftBank would still have to compete with AT&T and Verizon and extinguishing an important part of T-Mobile’s business model would be like bringing a knife to a gunfight.

The Times is wrong on this one.

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Do I sense anti-trust promotion from smaller wireless carriers?

I just finished tuning into The Communicators on CSPAN-2. The guest was Steven Berry, president and chief executive officer of the Competitive Carriers Association. They represent a bunch of wireless carriers from T-Mobile and Sprint on down. Mr. Berry managed to give interim Federal Communications Commission chairman Mignon Clyburn some love this evening for her ability to move AT&T towards voluntarily allowing smaller carrier devices to inter-operate on the larger carrier’s network.

Mr. Berry addressed what he saw as the disadvantages of smaller carriers not being able to transmit a national footprint without the ability of their devices operating on a larger carrier’s network and touted Ms. Clyburn pro-consumer proclivities as helping bringing AT&T around in the 700 MHz band and hoped that the FCC would be able to help bring about the same results in 600 MHz band.

If you are a Run-DMC fan, think of the line from the “King of Rock” where the rap duo boasts that they and their music can knock down ceilings and walls. That’s why the 600 MHz and 700 MHz portions of the airwaves are preferably where cell phone companies would like to transmit their phone signals. Phone signals can travel long distances on these frequencies, which is ideal for rural wireless communications. Signals traveling on these airwaves can penetrate walls which is advantageous to urban communications where someone may be making a phone call from the basement.

What got my ears up was Mr. Berry’s discussion on consolidation in the wireless market. Mr. Berry expressed his concern that Tier 2 carriers were riding off into the sunset, pointing out that at least five Tier-2 carriers had gone the way of the Dodo bird over the last twelve months. Mr. Berry asked how far consolidation should go. His question sounded like an invitation for more anti-trust action on the part of the federal government, especially given his belief that Ms. Clyburn and perceived new chairman Tom Wheeler have consumer interests at heart. That’s a red flag for government action that promotes competition. We heard those words before two years ago when the U.S. Department of Justice sued to stop the acquisition of T-Mobile by AT&T.

Is anti-trust law designed to promote competition while protecting consumers or is it designed to keep a couple competitors at bay while leveling the technology playing field for everyone else? Again, Mr. Berry appeared to be hinting so considering the question may be premature.

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The FCC needs a Joshua Wright type to step up

Today Federal Trade Commission member Joshua Wright offered a definition of unfair method of competition during remarks made before the New York State Bar Association’s antitrust section. Mr. Wright argued that unfair method of competition as discussed in section 5 of the Federal Trade Commission Act left a lot of room for re-interpretation especially as commissions change due to members joining and moving on. A policy statement that set the definition more into regulatory stone would provide businesses with more certainty as they contemplate the appropriate business models necessary for entry into a market.

Unless Mr. Wright can sell his colleagues on the ideas he presented today, I wouldn’t worry about an in-depth analysis of what he offered, although what he offered was pretty substantive. The reason his proposed policy statement caught my eye, quite frankly, was because the statement was posted in a tweet by Federal Communications Commission member Ajit Pai which signaled to me that the statement was worth a look see.

My take away as it concerns the FCC is that the nation’s regulator of interstate telecommunications seems to skirt the issue of competition in the wireless telecommunications market. The FCC currently has a docket opened to address the state of competition in the wireless market. The FCC also avoids any declaration of competition in the wireless market which is peculiar given the existence of four major national players; AT&T, Verizon, Sprint, and T-Mobile, and a myriad of smaller carriers such as Virgin Mobile, Leap Wireless, ClearWire, and Boost Mobile.

A major part of the FCC’s problem, and I would suspect the FTC’s as well, is that they are too focused on the actual number and size of the players in the market. The very word, “market”, should be enough to set the FCC’s focus properly. Market is a relational term, and when we discuss markets, we are talking about the primary demand and supply relationship between consumer and producer. Given that the preamble of the Communications Act asks the FCC to concern itself with universal access by consumers to a communications network, the FCC has been focusing on just about everything else; from how much revenues T-Mobile generates to whether we, as consumers, actually give a damn about what management techniques Verizon uses to bring us broadband services.

Instead, the FCC’s focus should be on whether the consumers’ demand for services is being met; is the market providing the output necessary for meeting the communications needs of consumers. Given the increasing demand for smartphones and tablets with no reported problems with carriers opening up accounts, and again given the existence of four major carriers and quite a few regional carriers, the FCC should have been able to create a definition for competition that reflects what is happening in the market. It hasn’t done so. It hasn’t even tried.

What we need is a little boldness; for the FCC to step out and say, here is our policy statement on the meaning of competition. Here is what we mean by a competitive market. Until then, all I see is a 17th, 18th, and 19th state of wireless competition report that fails to definitively state that we are moving in the right direction.

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The role of the FCC

Yesterday the Brookings Institution hosted a forum on broadband. What stood out to me was a discussion by the panelists on the role the Federal Communications Commission should play in the evolving broadband industry. One role mentioned was that of consumer protection.

I don’t have a problem with the FCC being a clearing house of information. Consumers tend to make mistakes when they are not armed with information about the carriers they are negotiating with for service. The FCC can be a resource for information on service quality and pricing. Any consumer services beyond that would be a waste of resources.

There are a number of state consumer agencies that can address consumer complaints about communications services. Also, state courts can address contractual disputes between communications companies and consumers. There is no need for the FCC to go granular on consumer protection.

The FCC should devote its resources to the role it plays in regulating commerce. As guardian of spectrum, the FCC’s primary mission should be to ensure that spectrum gets into the hands of firms that can put it to best use. This does not include trying to ensure every little company gets to sit at the table. It also does not mean redistributing rents (profits) to company A from company B because some grass roots groups believe that company B should divest itself of some of its holdings in order to expand into new markets.

The FCC typically pursues divestiture during its review of mergers, but has yet to show how forcing a company to give up market share has done anything to increase consumer welfare. I agree with the panelists to the extent that the FCC has never made a strong qualitative or quantitative argument showing the benefits to consumers of divestiture. Merger reviews should be left exclusively to the United States Department of Justice.

While I have abandoned the theory of market failure as a reason for government intervention into what should be free markets, I can’t see how the FCC can claim it’s protecting consumers without demonstrating how consumer value is being increased by its actions. The FCC should not be attempting to create competitive markets using a merger review process that has not demonstrated any value to either broadband firms, shareholders, consumers, or the process for distributing spectrum.