Looking backwards and looking forwards in contemplating the next rewrite of the communications act.

• Jurisdiction: United States
• Author: Bauer, Johannes M.
• Date: 01 June 2006

1. INTRODUCTION II. THE CO-EVOLUTION OF LAW, TECHNOLOGY, SECTOR ORGANIZATION, AND PERFORMANCE III. THE INCOMPLETE CONCEPTUAL FOUNDATIONS FOR REGULATORY REFORM A. Unbundling B. Tradeoffs Between Economic and Noneconomic Goals in Media Policy IV. IMPLICATIONS FOR A REDESIGN OF COMMUNICATIONS LAW A. Rethinking the Role of Communications Policy, Law, and Regulation B. From Outcome to Process-Oriented Policy V. WAYS FORWARD I. INTRODUCTION

   The industries and infrastructure supporting an era of ubiquitous and relatively low cost communication came of age in the twentieth century. For nearly two-thirds of that century, the regulatory framework governing the communication industries was set by the Communications Act of 1934 ("1934 Act"). The framework for regulation created by the 1934 Act reflected both the early United States experience with the telephone and broadcast technologies of that era and the prevailing regulatory philosophy of the time, which viewed government as a corrective for the failures of communication markets prone to monopolization. (1) By the early 1980s, as the 1934 Act was approaching its half-century mark, there was increasing sentiment that the regulatory apparatus created by the 1934 Act had become more of a hindrance than a help to continued progress in the communications sector. Cable television had developed into a potent challenger to incumbent broadcast interests; MCI, Sprint, and other carriers were offering credible substitutes for AT&T's long-distance service, and it was widely anticipated that trends in communication technologies would make it possible to rely on competition, rather than regulatory oversight, to govern an increasing swath of the communications sector. By the early 1990s, the prevailing sentiment was that competition could more efficiently discipline the pricing and quality of communication services than could government using the regulatory apparatus erected under the 1934 Act and that competitive communication markets would develop naturally if market forces were given freer reign.

   The Telecommunications Act of 1996 ("1996 Act") was a reflection of this mindset and was widely heralded for ushering in a new era of competition in communications. Yet, only ten years after its passage, the 1996 Act is commonly seen as broken and in need of either wholesale revision or complete replacement. In contemplating new legislation, it is appropriate to ask what accounts for its notable lack of staying power compared to the 1934 Act. Because the 1996 Act is a complex piece of legislation, there are undoubtedly many details, which, had they been handled differently, could have contributed to a more satisfactory experience under the 1996 Act. In this regard, it is doubtful the 1996 Act is different from any other similarly complex piece of legislation. The numerous court challenges and policy revisions in the wake of the 1996 Act could be seen as an inevitable part of a period of reassessment and adjustment as legislation intended to transform a whole sector of an economy is implemented. However, the present disenchantment with the 1996 Act reflects frustration over a lack of progress in designing even the interim policies that were to smooth the transition to more competitive markets for traditional communication industries--and presumably a post-interim regulatory framework compatible with competitive markets. This disenchantment is also based in a growing sense that the continued evolution of communication technologies and the services built on those technologies have raised a host of policy issues that were not anticipated by the 1996 Act. However, we will argue in this Essay that these are but visible signs of three fundamental challenges of policymaking in industries subject to rapid technological and economic change. First, due to the large number of interacting factors and the associated incomplete information issues, it may not be possible to identify a policy model that links policy instruments with specific policy outcomes. As policies are implemented, they nearly always generate unanticipated consequences. Second, even if problems of incomplete information and uncertainty can be overcome, as the number of stakeholders increases, it becomes more and more difficult to find a solution that is politically feasible and will not be challenged by individual organizations or coalitions of organizations. Third, even if such a model and the associated instruments can be identified, it may not be robust to further changes in industry conditions.

   This Essay addresses all three of these issues and possible ways to overcome them more effectively in the future. The next Part briefly discusses the co-evolution of law, technology, and sector organization, comparing changes in communication technologies and industries since 1996 to the changes that occurred during the sixty-two years when the 1934 Act held sway. It illustrates that the most recent pace of technical, economic, and policy change has been self-reinforcing and of a character that could not have been predicted when the 1996 Act was passed. In the following Part, we argue that the difficulties and failures observed to date in designing policies compatible with increased competition in traditional communication industries reflect in substantial part a misplaced belief at the time of the 1996 Act that our understanding of the economics and politics of communications policy justified confident claims as to how competition would develop and work in communication markets and how tradeoffs between economic and noneconomic goals for communications policy might be addressed as competitive forces were given greater sway. To illustrate the incompleteness of the understanding of the economics of communication markets, we briefly recount the highlights of the history of FCC attempts to design rules for network unbundling. A review of the FCC's failed attempt to create a diversity index that would provide an empirical foundation for attempts to balance traditional diversity goals for media policy against societal interests in economic efficiency in media markets illustrates how poorly the conceptual foundations for developing policy in this area are formed. The final Part draws on the observations of the previous two Parts to offer suggestions for how the process of crafting future communications legislation might be improved.

2. THE CO-EVOLUTION OF LAW, TECHNOLOGY, SECTOR ORGANIZATION, AND PERFORMANCE

   The design of law and policy is typically conceptualized as an optimization problem subject to certain technological, economic, and institutional constraints. At the heart of the traditional policy analysis approach is the assumption that societal preferences can be expressed in an objective function: W=W(x). Following the notation of Thrainn Eggertsson, (2) policy model x=f(a, z) specifies empirical relations between a vector of policy instruments a, which are elements of a larger set of policy variables A (a [member of] A) and vectors of outcomes x and external variables z. Analytical or computational methods are needed to determine policy instruments that maximize the objective function W([x.sup.*]). If X. is the set of possible outcomes given the external factors z, the goal of public policy is to find the values for the policy variables [a.sup.*]=g([x.sup.*], z), generating outcomes x* that maximize the objective function (i.e., [W.sup.*]=W([x.sup.*])). The traditional view also assumes a clear division of labor between policymakers, who determine W(x) and experts, who reveal the relevant theoretical and empirical relations f(a, z) and assist in the choice of the optimal policy instrument(s).

   Although its execution faces many challenges, this view is justifiable in the short run. Determination of the policy objectives and their weights (the welfare function) is not a trivial problem and is often done implicitly rather than in an open dialogue. Under conditions of incomplete information and uncertainty, it may not be possible to establish a robust policy model. Moreover, it may not be possible to fine tune policy instruments to achieve particular outcomes, especially if time lags exist between the adoption of measures and their effects. Furthermore, political and economic constraints will typically limit the set of feasible policy choices. According to Barbara Cherry, policies are sustainable if the measures are politically adoptable and perform reasonably well with respect to the stated goals. (3) Thus, policies are sustainable if the technological, economic, and political forces of change are weaker than the forces favoring preservation of the existing arrangements. It is possible that no such policies exist, for example, because no sufficient policy instrument is known or no politically feasible solution exists. In these cases the set of sustainable policies is empty, and one would expect continuing policy change.

   In the medium and long run the predominant policy approach ignores that policies, in addition to the incentives of decision makers, also have feedback effects on the constraints--and thus modify the initial policy problem. In the long run it is therefore more appropriate to view law and policy, technology, sector organization, and sector performance as

   coevolving, each shaping but not fully determining the other. (4) For example, unbundling rules will affect the investment decisions of the firms bound by these rules and those benefiting from them. Good policy decisions ideally would be based on dynamic models that capture direct short-term and indirect long-term effects of policy instruments. Extending the definition of sustainability, policies can be considered "dynamically sustainable" as long as the existing policy process can adapt existing measures to changing circumstances.

   Like other areas of public policy, telecommunications policy is embedded in multiple layers of social arrangements, such as...