Seal of the United States Federal Communications Commission. (Photo credit: Wikipedia)
With Congress in recess and Washington largely abandoned last week, the FCC issued three major orders, comprising some four hundred pages of dense text. The rulings addressed widely different topics: reporting the progress of broadband deployment by private networks, price regulation over middle mile Internet (what the agency calls “special access”), and the proposed sale to Verizon of wireless spectrum currently being warehoused by a consortium of cable companies.
The timing was no coincidence. In its last major overhaul of the agency in 1996, Congress left the FCC with almost no authority over the Internet, whether content, transmission or the devices and software that consumers use to enjoy it. All three of last week’s orders pushed well beyond the FCC’s legal authority. Issuing them in rapid succession was the act of a petulant teenager, loudly defying a parent he knows has already left the room.
Each decision in its own way reflected the fierce determination of FCC Chairman Julius Genachowski and his two Democratic colleagues to recast the agency whenever possible for a starring role in the Internet economy. They genuinely believe their “prophylactic” agenda will help consumers, despite a long history that demonstrates repeatedly the folly of slow-moving governments trying to micromanage the evolution of disruptive technologies.
Despite the range of subjects, the orders were in fact three variations on a single theme. All three--along with major FCC decisions since 2010 including the open Internet or “net neutrality” rules, a mandatory data roaming order for mobile carriers, the mutation of Universal Service from a telephone subsidy to a broadband fund, and the eventual approval of the Comcast-NBC Universal merger—tell the same story. The Internet needs us. Desperately.
But as each order unintentionally reveals, the agency couldn't be more wrong.
1. Imagining Defeat in Broadband’s Victory
As I wrote last week, the eighth annual Broadband Progress Report was poisoned by a pervasive double-speak that even the majority had a hard time taking seriously. The bottom line is clear: today, nearly 300 million Americans have access to broadband Internet speeds.
But as it has for the last three years (but not the five before that), a bare majority made up of the FCC’s three Democratic Commissioners concluded after two hundred pages of data to the contrary that the deployment of broadband in the U.S. is just not happening in “a reasonable or timely fashion.”
That determination defies logic and the law, but was a necessary fiction for the agency to continue operating under limited emergency powers that such a finding invokes. To keep their special powers, the majority had to conclude in the teeth of common sense that 95% penetration of broadband access in the U.S. in less than ten years, at a cost of nearly a trillion dollars--almost none of it taxpayer money--somehow signaled a severe market failure, one that could only be rescued through “immediate action” by the FCC.
These "actions" include passage of the 2010 net neutrality rules, whose absence was seen as somehow holding back future deployments of broadband infrastructure. It also includes raiding the bloated, multi-billion dollar Universal Service Fund (fed by a fully regressive tax paid by all phone customers) to subsidize broadband services for the poor and for rural consumers. (Both actions are the subject of pending legal challenges.)
Concluding that 95% access is somehow a national disgrace is absurd, even more so given that it’s not even the right number. Significantly, the majority left off entirely the fast-growing mobile broadband market, completely ignoring deployments of LTE and WiMax networks by most of the major mobile carriers. The data on mobile broadband wasn’t solid enough, the majority concluded, so instead they pretended that not one single person had an iPhone, Android or other broadband device.
Ridiculous, right? No matter. The majority assures us that even if they had counted mobile broadband, there’s still a tiny fraction of Americans--nearly all of them in rural areas--who can’t get broadband service today. Broadband deployment, the majority says in no uncertain terms, can no longer be deemed “reasonable and timely” until literally 100% of American consumers have at least one provider (already, most have two or more).
Never mind that, as fellow Forbes contributor Adam Thierer has written, almost no consumer technology has ever reached 100% penetration. That includes the telephone, which peaked below 95% after 100 years of effort. Indeed, counting mobile broadband, more Americans already have access to high-speed Internet services than have complete plumbing. But in the interest of extending their special Internet powers, the FCC will stop at nothing, it seems, including denying reality.
2. Returning “Special Access” to the Stone Age
Last week’s second order concerned price regulations for leased data communications services, the middle mile of the Internet known in agency jargon as “special access.” Special access includes services to link cell towers to high-speed backbones ("backhaul"), as well as private corporate data networks and dedicated Internet access for small businesses.
The FCC has long imposed complicated price controls for these services when they are offered over old-fashioned switched phone networks. Since 1999, however, the agency has exempted from some of its pricing controls special access services in markets where there are multiple providers.
In 2002, the FCC opened an inquiry to determine if its process for granting exemptions wasn’t both over and under-inclusive in different parts of the country.
That inquiry was never completed, but in last week's special access order, the three Democratic Commissioners voted to suspend the exemption process, concluding that the special access market had changed so much that it needed new rules. They didn’t actually issue any new rules, however, because the majority also decided they didn’t have enough data to do so. They also didn’t determine what data they needed or how they were going to collect it, but promised to start that process real soon now.
After decades of regulations, rulemakings, and hundreds of “pricing flexibility grants,” piecemeal tinkering with special access is a dangerous hobby. Consider just one part of the current calculation, the Price Cap Index, which limits how much incumbent phone companies (or “local exchange carriers”) can charge for special access. Here’s the simplified explanation from the FCC:
The PCI has three basic components: (1) a measure of inflation, i.e., the Gross Domestic Product (chain weighted) Price Index (GDP-PI); (2) a productivity factor or “X-Factor,” that represents the amount by which LECs can be expected to outperform economy-wide productivity gains; and (3) adjustments to account for “exogenous” cost changes that LEC’s [sic] control and not otherwise reflected in the PIC.
Got that?
Well the good news—or what should be the good news—is that none of this matters very much anymore. The Internet’s middle mile is shifting dramatically from slow copper to faster Ethernet, cable, and fiber solutions. Price regulations already dull the incentives for non-incumbent phone companies to invest in the kind of new infrastructure we actually need, especially for mobile backhaul. If we stopped subsidizing the cost of using slow copper, we’d get to an all-IP infrastructure that much sooner.
In Europe, for example, where regulators have an even heavier hand on the special access scales, efforts to micro-manage pricing have left incumbent providers unable to make a profit or develop any long-term strategy. Neelie Kroes, the E.U.’s chief regulator, has now acknowledged the serious harm that excessive regulation has unintentionally caused. She recently proposed changes that would make it possible for landline, cable, and mobile networks to compete more freely. That is, by deregulating.
The FCC should likewise be deregulating legacy copper as fast as possible, letting the natural migration to faster technologies happen unencumbered. And perhaps that is the future of special access regulation, once the FCC actually collects the data it needs to analyze the market.
But the majority admits it still lacks the information to determine how those mechanisms should be updated; it doesn’t even have a plan yet for how it’s going to collect the data, but promised to start the process within sixty days. As FCC Commissioner Ajit Pai points out in his dissent, however, that just means that under the fastest possible timetable, new rules can't be put in place until at least sometime in 2015. In the “interim,” the existing process, flawed as it might be, is now suspended.
The FCC is moving in precisely the wrong direction. As Fred Campbell, himself a former Bureau Chief at the FCC, wrote, “Making special access lines available at government subsidized rates will only encourage potential competitors to become reliant on the services of the incumbents. Why should competitors build innovative, ultra high-speed fiber networks that would provide real competition when the government is giving them a break on copper wire?”
Again, the majority’s logic just doesn't scan. Existing price regulation isn’t flexible enough to encourage the construction of high-speed, all-IP network infrastructure. But we don’t have the data to figure out how to do it better, even though we’ve been trying to collect it for ten years. We don’t even have a plan for getting that data. So let’s immediately suspend the existing exemptions and go back to regulating the hell out of the increasingly irrelevant copper network while we figure out what data we need to determine how we can get people off the copper network even faster.
Why the sudden urgency to deal with a problem that was first identified a decade ago, and for which there’s still no agreement on how to resolve it? Why immediately suspend the existing mechanisms for regulatory relief that have been in place since 1999 and which, if not perfect, at least provide some measure of incentive for an IP transition?
The answer is that the rapid migration to IP-based special access has the agency worried, not so much about price controls as about its own continued relevance in running the market. Copper, which the FCC can regulate, no longer provides fast enough speeds for today’s broadband demands. So the real motivation for the half-baked special access order is to ensure the FCC will be in charge of the next generation of special access, the one based entirely on Internet technologies.
That's the only explanation for this decision. The FCC is setting the stage for a naked power-grab over the entire middle mile—fiber, cable, and all. Precisely the approach the Europeans have admitted has ruined the global competitiveness of their networks—so much so that the major E.U. carriers have now resorted to begging the United Nations to intercede.
Maybe in 2015, when the “interim” suspension of pricing flexibility still hasn’t been resolved, that won’t seem so funny.
3. Creating a Spectrum Crisis, then Ensuring it Doesn’t get Resolved
The third of last week’s troika of decisions begrudgingly approved Verizon’s purchase of valuable AWS spectrum from a consortium of cable companies, who won auctions for the licenses in 2006. The consortium planned to build a mobile network to offer customers wireless voice and data services, but later decided not to proceed. The spectrum has been sitting fallow, until Verizon offered to buy it last year for close to $4 billion.
That price tag reflects a serious problem of supply and demand. Verizon and other national and regional mobile carriers are in desperate need of more spectrum. Mobile data use has exploded with the release of next-generation smartphones and other devices, and networks across the country are straining to meet consumer demand.
Verizon, AT&T, and other carriers are migrating as quickly as possible to more efficient standards, including LTE and WiMax. But with demand growing by thousands of percent, and with local zoning authorities slow to approve new tower construction or even modifications, more spectrum is essential.
Just ask the FCC, which sounded the alarm over a “spectrum crunch” in the 2010 National Broadband Plan. According to the plan, keeping the mobile broadband party going would require 300 Mhz. of new spectrum by 2015 and 500 Mhz. by 2020.
Unfortunately, the FCC, which manages all non-governmental frequency allocations, has almost no available inventory to auction--at any price. Prying licenses out of the hands of both commercial and governmental users who are no longer putting their spectrum to especially valuable uses, however, has proven nearly impossible. The FCC has no serious expectation of meeting its own timetable, threatening the health of one of the only growth sectors in the sluggish economy.
So the easiest way for existing carriers to get more capacity is to acquire licenses on the secondary market. Which is exactly what Verizon is trying to do, and what AT&T hoped to do in its bid to merge with T-Mobile USA last year.
The FCC, along with the U.S. Department of Justice, squashed the AT&T/T-Mobile deal. But after months of protracted negotiations, both agencies have now agreed to let the Verizon purchase go through. That’s the good news. The bad news is that the agency loaded down the deal with burdensome conditions and “voluntary” modifications that limit how Verizon will be able to use the spectrum it's acquiring.
Two of the conditions are particularly worrisome, reflecting once again the FCC’s determination to become the regulator of choice for the Internet economy.
First, Verizon had to agree to significant modifications to a marketing agreement that would have allowed Verizon and the cable companies to sell each other’s products. This would have made possible the creation of new bundled services, for example, that would have added mobile access to today’s “triple play” of voice, TV, and Internet access. But the FCC bowed to self-styled consumer advocates who argued that new choices would somehow harm consumers, or, more likely, competitors who didn’t have a quadruple play offering of their own.
The FCC admits that it’s too soon to predict how the co-marketing would affect competition. So the agency is content just to force Verizon to limit the scope of the arrangement and agree to “a number of monitoring and reporting conditions” for years to come. In other words, we’ll let you know what we object to once we’ve figured it out.
The second condition commits Verizon to mandatory data roaming agreements with other mobile providers who want to use the newly-acquired spectrum. The FCC already issued a nationwide data roaming order in 2011, so why the redundant condition here? The answer is that the 2011 order almost certainly exceeded the agency’s legal authority, and indeed is already the subject of a legal challenge—by Verizon!
Mandatory data roaming actually disincentivizes the kind of investment the FCC thinks is essential for healthy mobile competition. But regulating by placing specific conditions on individual license transfers is a bad idea no matter what.
The Comcast-NBC Universal deal, for example, included dozens of conditions, many of which had nothing to do with preserving competition or, to use the FCC’s longstanding but still undefined term, the “public interest.” These included a different and stricter version of the net neutrality rules than were ultimately passed and which are now also the subject of a court challenge.
Comcast has to adhere to a different version of net neutrality than everyone else, and will be bound by those rules even if the court throws out the "real" ones. Now Verizon has to follow a different form of data roaming. If the 2011 order is thrown out, likewise, Verizon will still be subject to it, at least for the spectrum involved in this deal.
Both the actual data roaming and net neutrality orders are being challenged, by the way, on the sensible and likely successful legal theory that the FCC was never given authority from Congress to sink its teeth so deeply into the Internet economy. If the agency can’t get by the courts and Congress, however, they can still impose themselves on individual transactions between some industry participants.
Merger conditions, in other words, assure the FCC of some role in regulating the Internet even where Congress and the courts have told it not to. Companies who volunteered to abide by different versions of rules later invalidated, in the interest of getting deals done, will still have to follow them.
The agency’s growing addiction to regulating by license transfer has created a patchwork of different rules for different companies and even different markets. It’s a mess—and a source of total confusion, not just for the industries and the regulators, but most of all for consumers. You know, the supposed beneficiaries of all this meddling.
We’re the FCC. We’re Here to Help
I believe FCC Chairman Julius Genachowski is sincere in his oft-stated belief that the Internet is essential to “education, health care and job-creation opportunities” for all Americans.
But would the former venture capitalist and Internet entrepreneur be so confident of the need for a strong FCC presence in the Internet ecosystem if he wasn’t the agency’s Chairman? Is it possible his view is skewed by the enthusiastic support of a staff that needs a role in the IP networks of the future to justify the continued relevance of the agency, so much so that he’s willing to step over the line of legal authority and invite repeated rebukes from Congress and the courts?
Last week’s three orders suggest, unfortunately, that the answer is a resounding yes.
Clearly, the FCC wants to cast off the legal shackles that bind it to the mundane world of last century’s communications technologies. The agency seems desperate, increasingly so in the run-up to this year’s Presidential election, to find its seat in the glistening halls of Internet Valhalla. And then regulate the hell out of it.
But anyone looking for evidence of what the Internet market would be like under even more aggressive FCC intervention need look no farther than the industries traditionally regulated by the agency: broadcast TV and wireline telephone service. Both these industries were initially put under severe federal and state regulation at a time when few alternatives existed – TV was long-dominated by the three major networks, and telephone service, until 1984, was a regulated monopoly of the former AT&T.
Cable, satellite and now fiber-optic TV have long-since outpaced the over-the-air broadcasters in innovation, giving nearly all Americans the option of hundreds of channels of diverse content, on-demand movies and other programming, time-shifting, interactive features and bundled services. And consumers are increasingly getting their content from the Internet, mixing and matching their choices and payment options.
Yet the FCC still regulates over-the-air broadcasters as if TV were a delicate flower, one requiring constant fussing by an overanxious gardener. The agency continues, for example, to fight to retain its ability to censor language that wouldn’t shock a ten year old.
After decades of the same kind of well-meaning “public interest” regulation that Chairman Genachowski has in mind for the Internet, over-the-air TV has now declined to almost a non-entity despite what is otherwise a content renaissance. The unregulated market has taken us to 95% broadband availability in less than ten years. But today, less than 10% of American homes rely on over-the-air broadcast. That figure is in large part the result of regulatory shackles, not a sign that more intervention is required.
Likewise, traditional local and long-distance telephone service over the copper network is being displaced by better technology from cable and fiber. At the same time, telephony is making the transition from inefficient switched networks to Internet-based solutions that run on the same protocols that carry every other kind of information.
The traditional business, as Wall Street knows, is in ruins. Here too, the FCC’s helpful intervention has unintentionally sped up the decline of the industry it purported to regulate to ensure better service for consumers. Oops, they did it again.
Chairman Genachowski and his colleagues are right to believe that the Internet is the future of global communications, and that the U.S.’s unparalleled success in inventing, deploying, and exploiting its still untapped capabilities is our greatest source of competitive advantage.
But the Chairman and his colleagues also believe that unless the FCC starts storming the beaches of the Internet, regulatory guns blazing, all will be lost.
Quite the contrary. We have arrived at the golden age of communication without the FCC’s help—indeed, because of the wisdom of Congress reflected in the 1996 Communications Acts--a bi-partisan decision to keep the agency from tampering with a new technological frontier.
The results speak for themselves.
Please, FCC, we’re begging you. Go help someone else for a change.
Follow me on Twitter @LarryDownes. At least until the FCC takes over.
