If reports are true that the FCC is planning on claiming in its upcoming wireless competition report that the FCC cannot conclude that the U.S. wireless market is effectively competitive, then the FCC is neither “data-driven” as it claims, nor in touch with market reality.

  • Don’t miss the latest CTIA assessment of U.S. wireless competition and innovation HERE.
  • The facts and evidence are overwhelmingly indicative of vibrant competition.

If the FCC is a wireless competition denier in the upcoming wireless competition report, despite the overwhelming factual evidence to the contrary, the FCC seriously risks its going-forward credibility with Congress, the Courts, industry and the public.

 

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.

 

The FCC’s Open Internet Order is even more likely to be overturned in court than before because the FCC’s extraordinary delay in publishing its December net neutrality regulations has oddly moved the FCC’s April Data Roaming Order to the front of the line of cases challenging the FCC’s overall legal authority to regulate broadband.

  • (The April 7 Data Roaming Order was published in the Federal Register 29 days after the decision; the December 21 Open Internet Order may not be published until late summer or fall, 7-9 months after the decision, per Politico’s Morning Tech.)

Consequently both cases are now more likely to be heard in the FCC-unfriendly D.C. Circuit Court of Appeals.

  • First, the FCC is modifying wireless licenses in the data roaming order and relying on its general Title III licensing authority to do so, while adjudicating licensing issues falls under the exclusivejurisdiction of the D.C. Circuit.
  • Second, the data roaming order raises the same fundamental legal question a D.C. Circuit panel unanimously decided in Comcast vs. FCC, which the FCC interestingly did not appeal.
  • Finally, sequence, i.e. the order of court precedents being established, matters profoundly in clearly resolving the grand question of whether the FCC has the statutory authority to regulate broadband.

If the FCC has been trying to game the process (as it appears to be on the surface) by on one hand claiming the Open Internet rules are practically operative and enforceable for these several months in 2011, while on the other hand delaying the legal trigger that affords those affected the due process to legally challenge the rules in both Court and in the U.S. Senate, the delaying maneuver appears to have backfired and undercut the FCC’s strategy and hope to keep the question of the FCC’s overall authority to regulate broadband out of the clearly FCC-unfriendly D.C. Court of Appeals.

  • In the end, the FCC’s apparent attempt to have it both ways — i.e. have both de facto and un-contestable net neutrality regulations for an extended period of time — could have real cost to the FCC’s ultimate legal broadband authority.

Most have missed the very important legal significance of Verizon’s challenge of the narrow Data Roaming Order to the FCC’s signature sector-wide Open Internet Order.

  • It is critically important and relevant because both orders at bottom raise the exact same legal authority question: does the FCC has direct statutory authority to price regulate an unregulated information service?

The legal connection/significance was easy for many to miss, because:

  • First the data roaming issue practically targeted only twocompanies, Verizon and AT&T, not the entire broadband industry;
  • Second, the AT&T-T-Mobile transaction has distracted and diverted most media and industry attention from the significance of the Data Roaming Order;
  • Third, the pretext for the data roaming regulations was a politically positive public narrative of promoting universal broadband coverage by helping politically sympathetic rural carriers, not the negative and highly controversial net neutrality demonization campaign by FreePress et al, of unproven network “discrimination;” and
  • Finally there was little to no public analogizing of the data roaming issue to net neutrality, so most people did not catch the arcane but hugely significant legal analogy at work here.

However, just because the politics and media coverage did not connect-the-dots between the Comcast vs. FCC decision, the FCC data Roaming Order, and the FCC Open Internet Order, that does not mean that the legal challenges of the twin broadband price regulation orders won’t easily connect-the-dots legally.

As the incisive dissents to the Data Roaming Order by Commissioners’ McDowell and Baker exposed, the FCC does not have the sweeping statutory authority to price regulate unregulated broadband information services.

  • As Commissioner McDowell dissented: “…my colleagues in the majority are, in essence, imposing a Title II common carrier regulatory regime in violation of Title III of the Communications Act and contrary to Commission precedent.
    • Simply the FCC is ignoring the plain language of the law and ignoring that the FCC decided unanimously just four years ago that wireless broadband is an unregulated information service and that “data roaming must be ‘free from common carrier regulation.’”
  • As Commissioner Baker dissented: “…in imposing data roaming obligations on mobile broadband services, we exceed our authority and impose rules of common carriage that are impermissible under our statute.”

Anyone who reads the law, the FCC’s legal analysis and the McDowell/Baker dissents, will see how tortured and inherently self-contradictory the FCC majority’s legal defense of the FCC’s authority is.

  • It is eerily similar to the presumptuous and inherently self-contradictory legal defenses of both the Comcast enforcement decision and the FCC’s Open Internet Order.

And if one reads Verizon’s Notice of Appeal, and the FCC’s data roaming order, which legally depends exclusively on the FCC’s Title III radio license authority, it is pretty clear that the FCC’s data roaming order, unlike the Open Internet Order, will fall under the D.C. Circuit Court of Appeals exclusive jurisdiction to adjudicate matters involving the modification of wireless radio licenses.

  • Thus, it is then more likely that the new D.C. Circuit panel that decides the data roaming order will be more likely to respect the precedent already established unanimously by the D.C. Court of Appeals panel in Comcast vs. FCC, i.e. that the FCC does not have unbounded legal authority to regulate broadband services and prices because that would give the FCC the power to de facto legislate, violating the Constitution’s separation of powers doctrine.

For those looking for additional parallels here, the Wiley Rien lawyer, Helgi Walker, that beat the FCC in Comcast vs. FCC, is the same lawyer that will argue for Verizon in both the Data Roaming Order and in the Open Internet Order.

In sum, the FCC’s apparent tactical machinations to delay the publication of the Open Internet rules in order to enjoy de facto industry regulation without affording those affected the due process opportunity to legally challenge the net neutrality regulations, ultimately have backfired on the FCC, because the delay now has most likely reordered the legal sequence of how these cases are decided in a manner that strongly disfavors the FCC.

The law of unintended consequences proves once again, it cuts in very unexpected ways.

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