The unprecedented release of a FCC draft staff analysis opposing the proposed AT&T / T-Mobile transaction could backfire legally, undermining its intent to backstop the DOJ’s pending lawsuit against the merger.

See my Forbes Tech Capitalist post on the “Top Ten Flaws in the FCC’s AT&T / T-Mobile Competition Analysis.”
 

According to the FCC’s own hard-to-find disclosure, the FCC does not operate its own broadband “public use wireless ‘Hotspot’ network” according to the FCC’s Open Internet regulations that it mandated for most everyone else.

  • Without this link to the policy, one would have to stumble upon the oblique reference to the 4-27-11 “VPAAC Hotspot Network” reference in the FCC newsroom, then click on “VPAAC Hotspot Network” and then click on the button “Expand,” then go to the very end of the document, to find the FCC’s terms-of-use policy for its public broadband network.

Ironically, the FCC’s public wireless network terms-of-use policy #3 says: the FCC’s broadband networkwill block all inbound Internet traffic to minimize any negative impact” on the network user.

 

  • This blocking of Internet traffic is in stark contrast to the FCC’s Open Internet Order, which essentially defined Internet “openness” throughout the order as not blocking lawful Internet traffic requested by a user.

The FCC’s own public network policy is also not transparent like it expects most every other broadband provider of Internet access service to be. 

  • What does it mean that the FCC “will block all inbound Internet traffic?
    • Most people think the Internet is by definition an interactive medium where packets go outbound from a user and inbound to a user.
    • If all inbound Internet traffic is blocked, how is it Internet access?
    • And if this policy does not actually block all inbound traffic as it says, (which appears to be nonsensical,) on what basis does the FCC discriminate what inbound traffic is blocked or allowed?
  • The FCC policy is also far from transparent in disclosing its network management practices in how it discriminates to “minimize any negative impact on the WHSN user.”
    • It suggests, but is not clear, that the FCC policy is to discriminate against video streaming or other high-bandwidth applications that could have a “negative impact” on the user.
  • The FCC is also not transparent in disclosing what the performance characteristics are of their broadband network.
    • Could it be that the FCC network does not meet the download and upload expectations the FCC has set for most all other broadband networks in the Nation? 

Lastly it is ironic that the FCC, which is very concerned about universal broadband availability to the public soonest, only offers “limited Hotspot coverage when visiting the Portals II FCC headquarters.”

  • With most of the FCC’s headquarters building unserved by the FCC’s broadband “Public Wireless Hotspot Network,” when will the FCC commit to a buildout timetable to ensure when the public can access the Internet via the FCC’s public wireless network in at least 98% of the FCC headquarters complex?

In sum, given the importance the FCC placed on rushing the Open Internet Order and net neutrality regulations into place in December 2010, and given the importance the FCC is supposedly placing on getting the transparency regs right before publishing the net neutrality order in the Federal Register, it would seem important for the FCC to lead by example and operate its own wireless network for the public in the same open, transparent, non-discriminatory manner and operating excellence that the FCC expects of most every other broadband operator in the U.S.

  • Given the fact that the FCC has had such difficulty operating their own broadband network according to the FCC’s own open and transparent regulations and standards, maybe the FCC should reconsider the wisdom and practicality of the FCC’s December Open Internet Order.

 

The Rural Cellular Association’s opposition to the AT&T/T-Mobile acquisition puts a spotlight on the un-sustainability of the analog rural cellular model that is on the wrong side of broadband change.

  • The clear but unspoken subtext of the RCA’s opposition is their recognition that their current subsidized model of rural cellular providers is fundamentally ill-equipped for the competitive broadband era.
  • Simply, the RCA is quixotically trying to drag the anchor of an inefficiently and unsustainably subsidized analog business model into the efficient and competitive broadband Internet future – a recipe for losing the future.

Importantly, most of the RCA’s problems exist completely separate from this transaction. 

  • This transaction just creates a prime opportunity to engage in regulatory capitalism and artificially create the fiction of a competitive model by seeking regulation that makes competitors implicitly, and taxpayers explicitly, subsidize rural cellular providers, regardless of whether it is pro-competition or pro-universal service or not, but simply because that was the way the old dying voice subsidy system worked.
  • Providing masking-tape and rubber-band fixes to a rapidly dying industry model only undermines and delays the benefits of the new technology and the vastly superior economics, functionality, efficiencies, and productivity it can provide to most all but ~15% of the Nation’s rural consumers.

I. Wrong Side of Change

RCA providers find themselves on the wrong side of change from: technology, consumer demand, economics, competition, and government budgets. 

  • Technology: We are in an obvious and inexorable transition from RCA’s legacy analog-voice technology model of the past, to the diverse broadband Internet-Protocol technology model of the future, that enables much more than voice: broadband Internet, voice, video, and near-infinite applications.
  • Consumer Demand: Since technology now enables it, consumers are demanding more — increased functionality, value and innovation of broadband services – than cellular rural providers’ technology and model provides.
  • Competition: Increasingly rural cellular providers are seeing a market that has passed them by, one that is less driven by rural geography and cellular voice and more driven by reaching the world and using any broadband IP application.
  • Network: The legacy analog voice network based on copper line economics is dying, with over half of all local copper access lines lost to other facilities-based competitors and roughly ten percent more are going away every year.
    • In short, the underlying copper-infrastructure undergirding rural cellular’s copper-subsidized business model is unlikely to survive the end of this decade.
  • Economics: Since technology, consumer demand, competition and the network has radically changed the expected value proposition, the economics of rural cellular has also changed radically; now forward-looking competitive broadband economics are vastly superior to backward-looking subsidy and regulation-based voice economics.
  • Government Budgets: The Great Recession and the resultant unprecedented Federal, State and Local budget deficits mean resources are meager at best to continue to subsidize unsustainable technologies and business models.

It is unrealistic for rural cellular providers to ignore all the changes above and imagine they can politically drag their subsidized past into the more efficient broadband future via blocking or conditioning a legal AT&T/T-Mobile transaction. 

If authorities look at this transaction through the appropriate lens of how it provides large new benefits to millions of rural customers, rather than how the transaction exposes the relative inefficiencies of the wrong-side-of-change rural cellular competitors, the transaction is clearly pro-competition.

  • Put another way, denying rural consumers the competitive benefits and coverage-efficiencies of the AT&T/T-Mobile transaction because it offers more value to rural customers than rural cellular competitors would not be competition-centric analysis but competitor-centric analysis.
  • Central to competition is the freedom, within antitrust limits, to provide more efficient and economic combinations and offerings to consumers than a competitor. 

RCA has essentially framed its opposition to the transaction as a catch-all regulatory wish list for industry-wide price regulations, and inter-carrier/USF subsidies that are inappropriate to decide in a merger context.

II. Competition Can Now Outperform Regulation for Most of Rural America

One of the biggest revelations of this merger is that competitive models, without any government subsidies, can provide 4G LTE broadband service to the vast majority (~85%) of rural customers. 

  • (AT&T has pledged to provide 4G LTE broadband service to 97% of the United States; the U.S. Census Bureau claims ~20% of the U.S. population is rural, so AT&T would be providing coverage to ~17 of the ~20% — or ~85% of U.S. rural consumers without subsidies.) 

What this shows is that the wireless broadband economies of scale from a competitive AT&T/T-Mobile transaction transform rural broadband economics.

  • It suggests that Congress and the FCC should reexamine and update their assumptions in law and the National Broadband Plan about what percent of the population requires subsidies to get broadband, if 97% of the population can get 4G LTE broadband service competitively.
  • This proposed transaction suggests that the market economics of providing near universal broadband service via wireless is more economical and efficient than the economics of laying copper/fiber over long distances for few users. 

It is instructive to compare what portion of the country RCA providers provide coverage (see green RCA map) versus what AT&T/T-Mobile offers in seventeen state maps

  • These maps  show the RCA model no longer best serves the mostrural providers.
  • These maps (RCA’s and AT&T’s state maps) show how in at least eleven big states, representing almost half of the country’s area, RCA providers offer little coverage, while a combined AT&T/T-Mobile would offer extensive 4G LTE coverage in: Kentucky, Pennsylvania, California, North Dakota, New York, Louisiana, Minnesota, South Carolina, Indiana, Texas, and Michigan.
  • The big takeaway here is that AT&T without subsidies is going to reach vastly more rural consumers than RCA providers can serve. 

In extremely tight financial times, why not have competition and market forces provide near universal broadband service to the Nation without the cost of the inefficient subsidy structure of the past? 

III. Conclusion

In sum, RCA opposition to the AT&T/T-Mobile acquisition is more about protecting and more deeply subsidizing RCA members dying business model that is completely on the wrong side of change, than it is about best serving American consumers, both rural and urban.

In essence, RCA’s message is don’t let their competitors and market forces create efficiencies, economies or new benefits that RCA providers cannot provide. 

  • RCA’s approach is about trying to delay the inevitable losing model, by forcing competitors and taxpayers to subsidize a losing model and also preventing a winning alternative that provides major benefits over what they have today.
  • RCA’s approach is a recipe for losing not winning the future, because winning the future involves permitting antitrust-legal combinations that provide large increases in functionality, value, and innovation.

 

As a regular reader of Steve Pearlstein’s Washington Post’s business column, I was dismayed at the consistent pro-regulation frame of Sunday’s piece on the AT&T-T-Mobile acquisition: “The Revenge of the Baby Bells.

The hallmark of longstanding bipartisan competition policy has been that if market players have the freedom to succeed or fail at differentiating, innovating and investing to meet consumers’ rapidly evolving needs, market forces can maximize consumer welfare much better than FCC regulators can. 

  • Current fierce communications sector competition on multiple levels, vibrant innovation and massive private sector investment have proven Congress’ wisdom in instituting competition policy to replace economic regulation as the best framework to maximize consumer welfare in communications.
  • Without the 1996 Telecom Act replacing economic regulation with competition policy, the Internet would be a fraction of the phenomenon it it today.

Thus it is dismaying that Mr. Pearlstein crafted a false choice in his column: “…stick with the competitive, lightly-regulated model and… block a merger… or it could acknowledge… the “telephone” market is a natural oligopoly… and… requires much stronger government regulation.” 

  • First, wireless is no longer “lightly regulated” as Mr. Pearlstein assumes.
    • In April, the FCC mandated price regulation of data roaming agreements, in its Data Roaming Order, which is among the strongest regulation available to the FCC short of an outright ban of behavior.
    • And in December, the FCC Open Internet Order included wireless in part of the FCC new net neutrality regulations, and also put wireless on a slippery slope towards more net neutrality regulation in claiming the wireless market is no longer effectively competitive, despite overwhelming evidence to the contrary.
  • Second, if the acquisition does not violate antitrust law, it does not require FCC economic regulation.
    • If the DOJ finds that there are selected local markets where the combination would raise antitrust concerns, there is a well worn path available to the DOJ of divesting local market spectrum and customers to other competitors to simply and cleanly rectify the concerns.
  • Simply the acquisition should not be a pretext for more economic regulation in opposition to the competition policy law of the land.

Mr. Pearlstein reemphasizes this false choice in his conclusion: “Which arrangement — a tightly regulated oligopoly or a lightly regulated market with numerous firms… — is most likely to produce the next innovation that improves services while lowering costs?” 

  • It is a false current choice Mr. Pearlstein presents because Congress already made that fundamental policy choice for the FCC in 1996 in almost unanimously supporting competition policy over a”tightly regulated” market.
    • And after 15 years of spectacular competition policy success, which has enabled the Internet, broadband and other innovations to flourish, there is scant evidence or justification to warrant reversing Congress’ bi-partisan wisdom and success. 

With all due respect to Mr. Pearlstein, the choice the AT&T/T-Mobile transaction presents is not to regulate more or regulate even more — that more-regulation-myopic-frame ignores the real and wildly successful choice that Congress made in 1996 and still strongly supports, which is choosing competition policy over Government economic regulation.

  • The real danger of over-regulating competition is that the FCC imagines that it is somehow better at promoting innovation, competition, and economic growth than the market is.

The bottom line conceit — that the FCC can produce more innovation via regulation than the market can by having competing suppliers vie for consumers’ demands — is the presumption that regulators can centrally plan a better path for consumers than consumers can competitively choose for themselves.

 

In order to justify broadband price regulation in the Open Internet and Data Roaming orders, the FCC and FreePress must continue to undermine Congress’ competition policy by denying the increasingly obvious and incontrovertible facts that users competitively substitute broadband services between various broadband technologies like copper networks/DSL, cable modems, fiber, WiFi/WiMax, wireless broadband, and satellite.

  • Today the Pew Research Center released a new reportthat 24% of adult Internet users have placed calls online, the equivalent of 19% of all American adults.
    • “On Any given day 5% of Internet users are going online to place phone calls.”
  • This is on top of the well-respected CDC research seriesthat estimates that:
    • More than one of every four American homes (26.6%) had only wireless telephones…” and
    • “…nearly one of every six American homes (15.9%) received all or almost all calls on wireless telephones despite having a landline.
  • Even in the face of this overwhelmingly obvious evidence of users competitively substituting services across technologies, the FCC in its seminal FCC Qwest Phoenix Forbearance Order in mid-2010 refused to acknowledge that wireless phones compete with wireline phones!
    • FCC: “Although the leading mobile wireless providers have ubiquitous networks… we cannot conclude on the basis of the record that residential mobile services fall within the same relevant product market as wireline services.
  • With all the evidence and common sense experience of most every consumer, why does the FCC ignore everyday reality and the facts?
    • The sad answer is that the “expert” agency here has a powerful conflict of interest.
      • If the FCC admitted that convergence, the Internet and competition policy actually works (like everyone else knows), and acknowledged consumers in fact choose between competing technologies for their broadband services every day, then the FCC would have to face the unpleasant reality that the FCC is ripe for reform and downsizing over time– to better synch up limited government resources with the public’s rapidly diminishing need for FCC price regulation expertise.
        • It is clear the FCC is in competition denial, and as I described last week, the FCC is desperately in search of relevance in the broadband competition era.

The indefensibility of the FCC’s denial of competitive substitution is that in the December Open Internet Order, the FCC classified competing broadband technologies as providing the exact same Broadband Internet Access Service (BIAS).

  • How can the FCC logically claim that competitive Broadband Internet Access Services that for regulatory purposes all do the same thing — provide broadband Internet access services — are not also competitively substitutable?
  • How is what is good for the goose not good for the gander here?

This ignoring of obvious marketplace evidence that any consumer can see clearly for themselves — that different broadband technologies enable the same competitively substitutable Internet, voice and video applications — is a quintessential example of arbitrary and capricious behavior by a regulatory agency.

Unfortunately, the FCC has a powerful self-interest to be “competition deniers” — i.e. bureaucratic survival.

As long as Congress, the courts, industry, and the public allow the FCC to keep their technology-silo blinders on, and only see intra-industry competition within technology-silos, and remain blind to inter-industry, cross-technology broadband competition, that was the core purpose of the Telecom Act and Section 706, the FCC will continue to deny effective broadband competition exists.

In sum, what’s badly needed now is much more research, surveys, and data-driven evidence that show consumers and businesses competitively substitute different broadband technologies routinely in the marketplace, so that the FCC cannot continue to deny effective broadband competition exists in stark opposition to reality, the law, and the real public interest.

 

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