Wednesday, August 5, 2009

Arbitrary telecom regulation

Perhaps the above title is a redundant description, given that everyone knows that telecom is highly regulated, that the regulatees spend huge sums to loosen that regulation and their competitors (including other telecom companies, Google etc.) spend money to increase the regulation.

Still, some of the observations today about the FCC were very interesting — even for someone like me that’s researched and written about US telecom policy for the past 13 years. I spent this morning at the State of the Net West conference, hosted by (and at) the Santa Clara University law school.

The second panel was “Antitrust in the Internet Era,” and the lead-off speaker was Rep. Zoe Lofgren (D-San Jose). With a US Chamber of Commerce rating of 37%, Rep. Lofgren is not a business-friendly legislator overall. However, like a lot of Peninsula Democrat politicians, she has a soft spot for local high-tech companies (which provide high-wage employment in her district and the largest share of her campaign contributions).

Still, I was pleasantly surprised when Lofgren spent some of her time focusing on the chilling effect of regulators’ threats. She noted that nowadays, the greatest impact of antitrust enforcement comes from the threat of an enforcement action rather than taking actual action. She also noted that (if I caught it correctly) the antritrust inquiries are often driven by the concerns of rivals, with its obvious potential for abuse.

But the most damning remarks came from Prof. Michael Katz, the Berkeley economist who (with book author Carl Shapiro) invented the concept of network effects with their oft-cited 1985 paper. Katz spoke from his unique perspective on telecom regulation, having served as deputy assistant attorney general for economic policy in the Department of Justice (2001-2003) and chief economist of the FCC (1994-1996).

Katz made two important points bearing on FCC arbitrariness. (Arbitrariness being my word, not his).

The first is about the unpredictability of the FCC review process. Katz said the timing of merger regulatory approval by the DoJ is proscribed by law under HSR, and thus (as a consultant) there is a very tight deadline to get analysis done by a specific time. On the other hand, for FCC regulated mergers, the review process much more leisurely, because the process is open-ended and the parties can’t do anything until the get FCC approval.

The second was even more damning. When reviewing mergers, Katz noted

  • “The FCC is a much less disciplined"
  • “It pursues its decisions [with] much less use of the facts.”
  • It makes “much greater use of threatening companies when it couldn’t prove it court”.
(The FCC has a habit of getting its regulatory decisions overridden in courts — most famously in indecency, but also in net neutrality and cable TV regulation.)

Katz concluded that the FCC “has a tremendous amount of power [that it can use] to essentially blackmail companies,” a position that he said that former FCC head Michael Powell also held. (In a quick search, I couldn’t find any public statement by Powell to that effect).

While Stanford economist Tim Bresnahan did not endorse Katz’s specific criticisms of the FCC, he said that government power must "be adequately constrained”. In particular, merger review should focus on the US standard of review — i.e. will the merger help/hurt consumer welfare? (When I openly asked Tim whether there were any cases in the past year where the competitor-focused EU antitrust standard would have helped consumers, he answered in one syllable: “No.”).

What was particularly striking was the divide on antitrust policy (and other policies) between the lawyers and economists. There were the two famous economists on the panel (and one obscure economics blogger in the audience), but we were clearly outnumbered by the lawyers — three panelists from the SCU law school and three J.D.-toting members of the House.

The economists argued from the standpoint of evidence, efficiencies, outcomes and results. (The token business and GOP representatives supported the same policies but did not make as strong an intellectual case).

The lawyers argued from anecdote, personal opinion, and beliefs. (In this matter, Rep. Lofgren was far disciplined than her colleagues). In other words, issues that he/she thinks are important are the ones that the law and policy should consider. This plays to the myth of the all-knowing, all-powerful benevolent regulator being the best way to remake society.

A great example of this came with grousing by audience and panel that repeated recent complaints about the closed nature of the iPhone (notably the Google Voice controversy). However, this is not a market failure or abuse of power. For every developer (or user) who gets fed up with the iPhone platform, there are choices like Android, Blackberry and Symbian — something that the competing platform owners know and use as a way to get adoption.

As Katz himself noted, “This is notion that iPhone is dominant handset … is just wildly overstated.” He predicted that a claim of a violation of an antitrust law “would never hold up in court” and thus the Justice Department won’t even investigate it. [Perhaps because the iPhone has less than 25% marketshare in the US — even if you count only smartphones — and less than 1% of the global mobile phone market..]

In other words, there’s no justification for government intervention if there’s no market failure. Meanwhile, there is no plan to intervene to fix the arbitrariness of FCC regulation.

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