Articulating a modern approach to FCC competition policy.

• Author: Hundt, Reed E.

TABLE OF CONTENTS I. INTRODUCTION II. AN INDEPENDENT AGENCY NEEDS TO EXPLAIN ITS PURPOSE III. THREE ERAS OF FCC COMPETITION POLICY A. The Classic Approach B. The Modern Era C. Laissez-Faire and Beyond D. Changing Congressional Competition Policies IV. THE MODERN MULTI-FIRM APPROACH HAS PRODUCED WIRELESS SUCCESS V. UPCOMING COMPETITION POLICY CHOICES A. The Open Internet Order B. Maintaining the Success of Wireless VI. CONCLUSION: CONSISTENT CLEAR APPLICATION OF A COMPETITION POLICY WILL STRENGTHEN THE COMMUNICATIONS SECTOR I. INTRODUCTION

In creating the Federal Communications Commission ("FCC" or "Commission") in 1934, Congress gave the agency its fundamental mission: "regulating ... to make available, so far as possible, to all the people ... a rapid, efficient, Nation-wide, and world-wide ... communication service with adequate facilities at reasonable charges." (1) In the 1996 Telecommunications Act, Congress added this purpose: "promote competition and reduce regulation in order to secure lower prices and higher quality services ... and encourage the rapid deployment of new ... technologies." (2)

In these two basic documents, as well as many other supplementing statutes, Congress told the FCC to make sure the United States has the best possible information and communications technology ("ICT") platform. For the most part, private firms in many different markets build, operate, and constantly change that platform. To achieve its objective, the FCC acts, sometimes by "regulating," as empowered since 1934, and sometimes by trying "[t]o promote competition and reduce regulation," as mandated in 1996. (3) In deciding what to do with respect to competition, the FCC has taken three different approaches. It has variously chosen the following:

* the classic role of regulating terms and conditions of sale;

* the modern role of using various tools to create largely deregulated, multi-firm, competitive markets; and

* the laissez-faire approach of believing that unregulated markets, even if monopolized, will produce the best outcome.

In this essay, we offer a short history of each of these three quite different policies. We conclude by recommending that, as new Chairman Tom Wheeler composes a new Commission, the FCC adhere as much as possible to the modern approach. The FCC should use its power to promote competitive markets and therefore deregulate firms that then will drive innovation, new services, and benefit consumers. However, not all markets may be amenable to this approach. Therefore, we encourage the newly assembled FCC to explain its reasoning publicly, welcome open discussion, and then consistently follow the policy it chooses for each relevant market until the law and facts suggest a policy change would better benefit the economy and society.

Transparency and consistency give guidance to stakeholders, motivate the staff, enable effective coordination with other agencies, and provide thought leadership. Coherent, cohesive, and comprehensive application of a particular competition policy to a particular market also should aid the FCC in its many inevitable experiences in judicial review and congressional oversight. In any event, clear guidance from the FCC about its competition policy in a given market will give firms the green light to pursue strategies and tactics beneficial to the economy; at the very least, it will signal a yellow caution light to firms that want to take an action that goes against FCC competition policy, harming competition or consumers.

In 2006, we called for the articulation of a competition policy by the agency to ensure the promotion of competitive markets for communications services. (4) We hold similar views today despite, or perhaps because of, significant changes in technology, business practices, and market conditions. The FCC can and should take various actions--including rulemaking, enforcement, merger review, and spectrum sales--to open closed markets to competition and encourage firms to create new markets. These multi-firm competitive markets will, by their nature, provide benefits to consumers and the economy, and thus should be lightly regulated, without the FCC setting terms and conditions of sale.

We concede that the modern approach may not be applicable to some markets in transition from monopoly to competition, or to some markets that show characteristics of natural monopoly. We think that instances of natural monopoly in telecommunications markets are few and far between, but they exist. (5) In addition, the modern policy choice calls for ingenuity and restraint in crafting pro-competition rules. Nevertheless, we believe that as to most markets most of the time, this approach will unleash the combination of capitalism and technological solutions that best creates gains in productivity, national income, and general welfare.

We prefer the FCC to adopt the classic approach only temporarily and as a last resort, if at all. The problems with this approach include (in the view of many others who have studied the economics and political economy of regulations) the likelihood that the regulated firms have much better information than the regulator and thus make regulation more difficult and less effective, the capability of the regulated firms to capture agency sympathy and reduce agency willpower, and the significant role that the money of incumbents plays in the elected branches of government. (6)

We believe the laissez-faire stance suits some markets on occasion. It may be ideal, for instance, in nascent or rapidly changing markets when technological roadmaps are unclear and bottlenecks are hard to create. However, the FCC ignores its ultimate mission if it allows laissez-faire to become laissez-dormir, with the Commission asleep at the wheel. Congress counts on the FCC to use its historical experience, technical skills, and good culture in constant pursuit of the ultimate objective: making sure America, and the world, has the best ICT platform imaginable. (7) As a result, in some cases where the FCC lets the market work, bottlenecks and exercises of market power may develop as technology changes. (8) In those cases, it may be beneficial for the FCC to step in with new, pro-competitive rules to ensure that consumers benefit to the extent possible. After all, competition provides both static and dynamic benefits for consumers through lower prices and increased innovation.

The purpose of this essay is to encourage all stakeholders in the FCC's mission to engage in the reasoned discussion that most benefits good decision-making at the agency. There is no shortage of important decisions in various telecommunications markets. Each decision calls for the FCC to articulate a specific competition philosophy.

As of this writing, such issues include at least the following: (1) addressing the Open Internet Order; (9) (2) ensuring a competitive broadband market that benefits consumers and includes new services and privacy provisions; (10) (3) finding a method to maximize the value of the spectrum resource (including the role of satellites); (11) (4) monitoring the transition to IP networks; (12) (5) determining the role of government in negotiations between content and multi-channel video distribution providers; (13) and (6) reviewing mergers in conjunction with the antitrust agencies. The FCC can expressly state its competition policy choice in a manner that resembles the DOJ/FTC Merger Guidelines. (14) Or it can reveal its policy choice on a case by-case basis. We believe a combination of both methods of expression will provide the most clarity to the FCC's many stakeholders. Reasoned explanation and consistent application amount to the forward-looking guidance much prized by investors and generally beneficial to the workings of markets. (15)

Each of the topics cited above involves competition. In the context of the Open Internet Order, the FCC is addressing market access, with opposing sides arguing alternatively that content providers seeking to reach consumers through an Internet access bottleneck, or that the potential for multi-firm competition in Internet access means no enduring bottleneck exists. Regardless of the point of view about competition, either the FCC (typically through its chair) states its competition policy and explains its application, or the policy is discerned by examining FCC decisions. Either way, the Commission adopts a competition framework--the question is whether this framework will be articulated persuasively, clearly, and in a manner that permits prediction.

2. AN INDEPENDENT AGENCY NEEDS TO EXPLAIN ITS PURPOSE

   The Commission is an independent regulatory agency--a creature not envisioned in the Constitution or created by any Amendment. (16) It is part of what is sometimes called the "Fourth Branch of Government." (17) As such, the FCC chair and commissioners can apply the competition policy of their choice and, for the reasons we elaborate on below, are not subject to exacting checks on their authority other than the all-important consideration of judicial review.

   By contrast, for example, the Environmental Protection Agency ("EPA") is not truly independent. (18) The head of the EPA reports to the President. (19) Its proposed rules do not go into effect without the permission of the White House. (20) If these were not meaningful constraints, it is likely that the EPA would exercise more authority over environmental impacts than it has done. (21) The FCC chair is one of a maximum of five commissioners, each of whom is appointed by the President for a term, subject to Senate confirmation. (22) Not more than three commissioners may come from the President's political party. (23) The agency, therefore, is intentionally designed to be composed in a bipartisan way, in the hope that it will achieve consensus on most matters. Indeed, according to an internal count done by us in 1997, more than 90% of the FCC's votes were unanimous. Such is...