From the Politch list, Dec 7, 2000
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The Progress and Freedom Foundation is releasing a book at its conference at the Renaissance Hotel in Washington, DC tomorrow. The intro chapter is below.  --Declan]
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Communications Deregulation And FCC Reform:

Finishing The Job

Jeffrey A. Eisenach and Randolph J. May

Communications markets have made much progress towards competition and deregulation in recent years, but much remains to be done.   Indeed, as 2000 draws to a close, it is increasingly clear that much more needs to be done, and that new approaches, both at the Federal Communications Commission and in Congress, will be required to complete the task.  In this volume, we present six papers that show how to finish the job of deregulating communications markets and reforming the FCC.

In early 1996, Congress made a decision with profound implications for the American economy in general, and the communications market in particular.  Recognizing that technological progress favors competition, and building on a twenty-year trend towards less regulation, Congress passed the Telecommunications Act of 1996.

The vision of the Act is made clear in its opening words: This is "An Act to promote competition and reduce regulation in order to secure lower prices and higher quality services for American telecommunications consumers and encourage the rapid deployment of new telecommunications technologies."  And hopes were high.  As President Clinton said in signing the Act, "with the stroke of a pen, our laws will catch up with the future.  We will help to create an open marketplace where competition and innovation can move as quick as light."

Has the 1996 Act delivered on that promise?  Certainly much progress has been made.  The market for telecommunications services is more competitive today than at any time since the early days of voice telephony.  Cable television prices have been deregulated. Spectrum continues to be made available through auctions, and the use of wireless telephones continues to skyrocket.  Broadband services are vastly more available and affordable.  Content regulation, at least in the form envisioned by the Communications Decency Act, has been held mostly at bay.  The Internet remains essentially free of government control.

We applaud both the Act and the FCC for these achievements.  It is all too easy to imagine things going in the other direction, with disastrous results.  But the inherently pro-market vision of the Act has proven to be robust; and, on many occasions since 1996, the Commission has chosen the path of the market over the path of regulation.

It is also clear, however, that the larger promise of the Telecommunications Act remains unfulfilled.  Five years after the Act was passed, the communications marketplace still teeters on the cusp between monopoly and competition, between regulation and freedom.  Further progress, it seems, will require new approaches.

The need for new thinking should not be surprising.  When the Telecommunications Act was written (for the most part, in 1995), the public Internet was only two years old.  "Video-on-demand" (based on a new technology known as "ADSL") was the new-new thing.  Personal computers had 486 chips, PDAs were unheard of, and color printers cost thousands of dollars.  Cell phones were not only not Web-enabled, they were still almost entirely analog and relatively rare.  Dial-up modems operated at 28.8 kbps (at most); if you had "broadband" (and no one called it that), you had a T1 line. There was no Winstar or Teligent or Covad or Northpoint or PSINet or Global Crossing or Level3 or Qwest.  Worldcom and MCI hadn't yet been introduced, let alone gotten married.  TCI was contemplating a big merger  with Bell Atlantic.  And (counting GTE), there were eight, count 'em, eight Regional Bell Operating Companies.

As Charles Eldering shows us in this volume, the world of the present and the immediate future is a very different place from the largely analog, largely stove-piped world of 1995.  The current world is digital and converged, with providers of integrated services utilizing multiple technologies to deliver bits and bytes of content through packet-switched networks.  Digital.  Converged.  Integrated.  Packet-switched.  We hardly knew these words in 1995.  Since then, the world has changed, but our policies remain grounded in old realities, our vision shaped by outdated assumptions.

Nowhere is the need for new approaches more apparent than in the FCC's policies under Title II of the Act.  As detailed in this volume by Robert Crandall,  the FCC has pursued an approach aimed at manufacturing the appearance of competition in local telephony by "jumpstarting" competitors  assuming, erroneously, that more competitors must mean more competition.  Its method has been to put in place what is arguably the most arcane and complex scheme of economic regulation ever devised, all for the purpose of requiring incumbent local telephone companies to resell their "essential facilities" to competitors so that the competitors, in turn, can resell local telephone service to customers.

The main problem with this approach is not its complexity; the problem is simplicity itself.  By making incumbent facilities available at incremental cost, the Commission greatly reduced the incentives of both incumbents and entrants to invest in new facilities.  As Justice Stephen Breyer said in Iowa Utilities, "a sharing requirement may diminish the original owner's incentive to keep up or to improve the property by depriving the owner of the fruits of value-creating investment, research, or labor. . . . Nor can one guarantee that firms will undertake the investment necessary to produce complex technological innovations knowing that any competitive advantage deriving from those innovations will be dissipated by the sharing requirement."

Lacking the incentive to compete on the basis of better technology, some of the FCC's new "competitors" instead tried to win customers with clever marketing campaigns, or to profit by engaging in various forms of cream skimming and regulatory arbitrage.  Most of them never made money even at that, and by late 2000 it seems investors had run out of patience with such shortsighted business models.

In its defense, the FCC points to scores of new "facilities-based" entrants, which have invested billions of dollars in new equipment, and are providing millions of lines.  But these firms, too, must face competition from the resellers and arbitragers, and building new telephone networks is, in the end, an expensive proposition.  By late 2000, investors were questioning whether, in the face of such competition, the billions invested in fiber optic cables and new switches would ever yield a solid return.

Moreover, such competition as has developed has taken place largely in urban areas, and almost exclusively in the market for business customers.  For residential customers, and for those in rural areas, competition is mostly an unfulfilled promise.  Kenneth Gordon's paper in this volume helps us understand why: In the name of promoting "universal service," we (that is Congress, through the Act, the FCC, through its policies, and the states, through their public utility commissions) continue to hold the regulated price of local phone service below cost for residential and rural customers, while setting long distance, business and urban rates above cost.   Entrepreneurs are free, in principle, to compete for the privilege of serving residential and rural customers, but only if they are prepared to charge prices that fail to cover costs.  If they want to make money, they must compete not only for the customers, but also for the largesse of universal service subsidies needed to turn a profit.  Not surprisingly, few have chosen to do so.

The end result is that competition has developed more slowly and less completely than anyone envisioned at the time the Act was passed.  In 1996, most observers believed the "14-point checklist" Congress enumerated as criteria for RBOC entry into long-distance telephony would be satisfied virtually everywhere within three to five years.  Thus far, those criteria have been officially satisfied in only two states -- and the FCC, which says it is dedicated to promoting competition, instead continues to enforce the Act in a way that constitutes a near-absolute barrier to long-distance entry by the RBOCs.

The great irony is that none of the above matters very much anymore.  Voice telephony as a discrete market is (almost literally) history.  The future  the immediate future  is about the market for integrated voice, video and data services carried on broadband digital infrastructures (wired or wireless) across distances that are never measured, because distance no longer matters much either.  The future of telecommunications, in other words, looks less and less like Ma Bell and more and more like the mother of all integrated networks, the Internet.

The essential characteristic of the Internet is that it is digital, and the essential characteristic of digital information is that it is mode-independent  that is, it can be carried equally well, and interchangeably, on virtually any mode of communications.  Thus, the new approach to telecommunications deregulation has to begin by insisting on eliminating the barriers and regulatory distinctions that separate different communications technologies  telephony, cable, wireless, satellite.

Soon after the Telecommunications Act was passed, PFF Senior Fellow Donald McClellan wrote a seminal paper arguing for a "containment policy" to protect the Internet from regulation.  The idea was simple: the Act, for better or worse, demanded a continuing period of regulation of voice telephony.  Donald suggested that the policy imperative must be to "contain" regulation within the old world of voice and not allow it to spill over into the new world of data.  For five years, containment has proven a successful strategy: data services  even when provided by the heavily regulated incumbent LECs  are subject to somewhat less regulation than voice.

Five years later, the reality of convergence threatens to overtake the strategy of containment.  On the battlefield of integrated broadband services, cable, wireline telephony, wireless and satellite providers compete head to head.  Cable services presently operate under one set of rules, wireline telephony under another.  Wireless is treated like wireline, unless it moves, in which case, for regulatory purposes, it becomes like satellites.  And voice is telephony, unless it is converted by a personal computer into Internet Protocol (IP) bits and bytes before being ransported, in which case it becomes "voice over IP" (VOIP) and is treated as unregulated data.

The emergence of cable modem services virtually identical in capability and pricing to those offered by telephone companies through DSL echnology has brought this crisis of unequal treatment to a head, forcing the FCC to confront the issue directly in a proceeding now underway  Court decisions have disagreed on how cable modems should be classified for regulatory purposes, and the FCC must now decide: Are cable modems a telecommunications service?  An advanced service?  An information service?  Simply asking these questions is enough to illustrate the absurdity of such almost metaphysical regulatory distinctions in a converged world.

FCC Chairman Kennard has argued strongly against imposing the "morass of [telephone] regulation" (his words) on the cable industry, and promised, instead, to create a "new paradigm" in the FCC's current ulemaking on open access for cable platforms. As we have suggested lsewhere, the FCC can contain the spread of regulation simply by declaring cable and other comparable broadband services to be "advanced services," and then exercising its authority under Section 706 of the Telecommunications Act to forebear from regulation.  And then, without undue delay, a truly "new" paradigm must find a way to go beyond ontainment to deregulate voice as well as data, telephone companies as well as cable providers.

In the end, telecommunications deregulation must mean what the word suggests:  The elimination of entry barriers, including line of business restrictions, and doing away with price controls at every level.  This volume's papers by Eldering, Crandall and Gordon provide a detailed roadmap for achieving such deregulation.

Wireless services, in most cases, already benefit from substantial deregulation.  But they are subject to even more intimate forms of governance.  As users of the broadcast spectrum, they are de facto wards of he FCC, acting in its role as "steward" of what Congress continues to view as the exclusive and unalienable property of the United States government.

Charles Eldering's paper makes clear how crucial the role of wireless technology is in achieving the Act's vision of ubiquitous competition.  Mobile, satellite and fixed wireless technologies offer unique competitive advantages for particular uses and in particular markets.  Existing satellite and fixed wireless technologies already offer broadband services; third (3G) and fourth (4G) technologies will make mobile wireless broadband available within five years.

But progress in deploying such new technologies is slow.  Lawrence White's paper examines a major reason why this is so, and proposes a simple, if seemingly dramatic, solution:  "Propertyze" the spectrum and allow markets to manage its use, just as markets manage the use of other goods with complex attributes  like land.  White's argument is compelling.  Spectrum management by government invariably leads to inefficient and inflexible allocations of this increasingly valuable resource; and, it provides opportunities for interest groups, usually representing entrenched incumbents, to engage in what economists often call "regulatory predation." Markets, White argues, might also make mistakes, but such mistakes would be more easily and quickly corrected.  In the end, markets would do a better job than government in allocating resources to heir highest valued uses.  Moreover, White shows how a transition to a property-based system could actually be accomplished.

Whether Congress is prepared to adopt such a system remains to be seen, but the need for more efficient and flexible allocation of spectrum is clear.  For all its efforts to make spectrum available through auctions nd to allocate its use to the highest valued functions, the FCC continues to be an impediment to the timely deployment of technologies like 3G.  A new approach to spectrum management, one which allows the market to play the dominant role in allocating use, is an absolute imperative from an economic perspective.

A market-based approach to spectrum allocation would also make for good Constitutional law.  Scot Powe's paper in this volume examines the state of First Amendment law at the FCC and finds that the legal basis for differential treatment of electronic media (i.e. broadcasting) has been eroded by a number of recent Supreme Court decisions.  "Because of the [Supreme Court's] refusal to apply the broadcast analogy to newer media, while simultaneously suggesting that the sweep of government authority over broadcasting is more constricted than Red Lion and Pacifica suggest," Powe argues, "the Court appears to have left little constitutional room for future content regulation."  Moreover, he suggests, technological progress has made the historical rationale for treating broadcasting differently from other media (i.e. scarcity) less and less plausible.  "Broadcasting is unique," Powe explains, "not because it is unique, but rather because we have mistakenly assumed that it is unique."

A new approach to communications regulation must come to terms with the realities White and Powe describe.  Just as convergence has brought competition and diversity to telecommunications markets, it has done the same for what we still refer to, anachronistically, as "mass media."  It is time to recognize that the broadcast spectrum is not a public park, and to stop telling those who use it where to plant the daisies.

The ultimate anachronism at the FCC, however, may well lie at the very core of its organic statute, the Communications Act of 1934.  As the final paper in this volume explains, the Act gives the FCC broad authority to act "in the public interest."  It applies this standard in setting the terms of entry and the parameters of competition, in devising subsidy programs, in setting technological standards and in evaluating and prescribing program content.  Perhaps most notoriously, the agency invokes its practically standardless public interest authority to approve or deny the license transfers that invariably take place in communications industry mergers.  By doing so, it is able to hold such mergers hostage to the imposition of supposedly "voluntary" conditions that, in many cases, it could or would never impose through a generic rulemaking.  Whether it is in the public interest for the FCC to have such unbridled discretion is, at best, highly debatable.

So, it turns out, is the question of whether such discretion any longer would pass muster under modern Constitutional jurisprudence relating to the delegation of authority by Congress.  There is a strong case to be made that the non-delegation doctrine prohibits such indeterminate delegations of authority as a violation of separation of powers.  From a policy perspective, moreover, such a broad delegation simply is not consistent with the new, less regulatory, more market-oriented approach we believe is required: even if the Commission were to constrain its regulatory impulses for a time, the very existence of such an unbridled grant of power would ensure that the threat (and the temptation) of regulation would always remain.  Congress, therefore, should not wait for the courts to find an opportunity to constrain the FCC's public interest authority; it should do so itself.

One final note on the substance of this volume and of our recommendations:  Despite the title -- Communications Deregulation and FCC Reform -- readers may note that there is no paper that specifically addresses some of the structural and management issues generally associated with FCC reform initiatives.  The omission is a conscious one.  While we clearly have views on how the Commission's structure might be improved, we believe that in this case it is crucial for form to follow function:  If the substantive changes recommended here are pursued, the structural implications will be obvious and should be easily implemented.  If substantive changes are not made, on the other hand, little will likely be achieved by purely structural reforms in the agency.

This said, we strongly concur with the conclusion of the Commission's draft strategic plan, that within five years communications markets will evidence "vigorous competition that will greatly reduce the need for direct regulation."  Unlike the plan, however, we suggest that such a finding should lead to a discussion about how to reduce the size and regulatory authority of the Commission, rather than spawning a search for new and creative missions such as the "market facilitator" role envisioned by the plan.  Competitive markets do not need government agencies with 2,000+ staffers to serve as market facilitators.

As we present this volume for debate and discussion, we wish to thank the authors for their hard work and for the excellence of the resulting contributions.  Thanks are due also for the suggestions and constructive criticism received from The Progress & Freedom Foundation's Communications Policy Advisory Board, which includes many of the nation's leading authorities on government regulation generally and communications regulation in particular.  At The Progress & Freedom Foundation, we want to express special thanks to Program Associate Katie Flint and Research Associate Ian Dillner, without both of whom this volume would not have been possible.  Many others helped in many ways, and we are grateful to all of them.
 
 
 
 

Washington, DC

December 2000

-------- Original Message --------
Subject: Re: FC: PFF book says technology reduces need for FCC regulation
Date: Mon, 18 Dec 2000 11:55:02 -0200
From: pedro rezende
To: declan@well.com

Declan,

Can you please post to Politech this commentary on a long message you posted recently, containg the introduction to a book being released? I hope it can make it to the politech list, for the last paragraph of thw book's introduction begins with "As we present this volume for debate and discussion...".

Declan McCullagh wrote:

[The Progress and Freedom Foundation is releasing a book The intro chapter is below. --Declan]

Communications Deregulation And FCC Reform:
Finishing The Job
Jeffrey A. Eisenach and Randolph J. May

Communications markets have made much progress towards competition and deregulation in recent years, but much remains to be done. Indeed, as 2000 draws to a close, it is increasingly clear that much more needs to be done, and that new approaches, both at the Federal Communications Commission and in Congress, will be required to complete the task.  In this volume, we present six papers that show how to finish the job of; deregulating communications markets and reforming the FCC.

In early 1996, Congress made a decision with profound implications for the American economy in general, and the communications market in particular.  Recognizing that technological progress favors competition, and building on a twenty-year trend towards less regulation, Congress passed the Telecommunications Act of 1996.

The vision of the Act is made clear in its opening words: This is "An Act to promote competition and reduce regulation in order to secure lower prices and higher quality services for American telecommunications consumers and encourage the rapid deployment of new telecommunications technologies."  And hopes were high.  As President Clinton said in signing the Act, "with the stroke of a pen, our laws will catch up with the future.  We will help to create an open marketplace where competition and innovation can move as quick as light."

Has the 1996 Act delivered on that promise? Certainly much progress has been made.  The market for telecommunications services is more competitive today than at any time since the early days of voice telephony.[...]

It is amusing to try to make sense of what this "Progress and Freedom Foundation" is up to. But it is also frightening. The first sense one can make of this book's introduction is that it is putting forward an ideological manifesto. Its following paragraphs carry a litany of complaints about the competitiveness in the telecommunications market not being enough. That nobody has the right to say how many competitors in such a market is too few. And about the electromagnetic spectrum, it says that "Congress continues to view [it] as the exclusive and unalienable property of the United States government". 

Then comes the book's jewel, when talking about regulation of wireless technologies:
 

But progress in deploying such new technologies is slow. Lawrence White's paper examines a major reason why this is so, and proposes a simple, if seemingly dramatic, solution:  "Propertyze" the spectrum and allow markets to manage its use, just as markets manage the use of other goods with complex attributes  like land.  White's argument is compelling. 

We posit that White's arguments are fundamentally flawed. Progress in deploying wireless technology in the US has been slow only if compared to Europe, and if we compare both progresses unbiasedly, we can immediately see the real reason for this difference in speed and results. The future of telecommunications efficiency is not market freedom, but people's freedom: open standards.

The internet is a basic academic lesson on this fact, for those who can thnk freely, unchained from libertarian dogmas. For those that can then understand this lesson, it will eventually and inevitably become part of History 101. Open standards are really what people's freedom in the digital world is all about. On the other hand unlimited greed, camouflaged as market freedom, has prevented the US wireless industry to come to terms with this. To deadjectivize freedom is just a FUD ( Fear, Uncertainty and Doubt) tactic to get the harts and minds of clueless chained inocents.

Let's look at hte facts. Each player in the US wireless arena has fought and is fighting all they can to impose its proprietary standard for maximum possible gain, while Europe's players moved quickly to negotiate among them an open standard process that would focus and settle the competition on its track, for they all compromised some of their greed in achieving a negotiated open standard that will, and is, promoting greater indirect benefit from a clear direction on goals and investments. 

To compare the electromagnetic spectrum with land is fallacious. White's argument is pure propaganda for licenciousness, presented as market freedom, the needed oxigen for unlimited greed. The US government is not to be construed as "the exclusive and unalienable" proprietary of the electromagnetic spectrum, but as the constitutional guardian of common good. As earth's atmosphere or clean water, the electromagnetic spectrum is a common good of humanity. Period. Common good is quite different from property. But greed is blind to the concept of common good, and this is what we get from mithologyzing property and greed. We see clearly this manifesto's blindness to common good in the following passage, offered without further justification.
 

"Broadcasting is unique," Powe explains, "not because it is unique,  but rather because we have mistakenly assumed that it is unique."

While this manifesto suggests the recepy for "more" competition, it forgets that what we may need, looking at the example of Europe, is "better" competition. This possibility is despised by the reigning credo on the absolute wisdom of Adam Sith's invisible hand of the market, which is actually what is being pushed here. No concern on the lack of jurisprudence for arbitrating anti-monopoly disputes, in checking and balancing the power of this invisible hand taking over the common good, are addressed. Despite this credo's sorcerers having no idea on how to make the largest world economy land softly, it doesn't matter. Such nuisance is not seen by them or their followers as a sign that what they take as science is really based on credos. 

What the manifesto ends up asking for is that society buys this credo and give out a blank check to Greed Unlimited. Declan himself, in a subsequent posting, claims that bureaucrats and regulatory enthusiasts are blind to the unintended consequences of regulation. But regulation is a checks and balances mechanism, and to ignore this fact is to be blind to the unintended consequences of *lack of* regulations. To do away with regulation as a remedy for bad regulation can be the sorcerer's apprentice's nightmare.
 

Markets, White argues, might also make mistakes, but such mistakes would be more easily and quickly corrected.  In the end, markets would do a better job than government in allocating resources to; their highest valued uses.  Moreover, White shows how a transition to a property-based system could actually be accomplished.

The manifesto in this book's introduction is filled with attacks on "anachronisms" of the FCC and the statutes on which its structure and power are based, while presenting us with a recipe taken straight out of one of the most hilarious pages of history, from the fifteen century: The Tordesilla's treaty.

Having dominated the technology necessary for navigating oceans, the economic powers of Spain and Portugal asked the guardian of common good of that time -- the Pope -- to grant them property rights to all land reachable through the oceans, to be "fairly" divided among both. They promised the Pope they would work to save the souls to be found on those lands, if the oceans were "propertized". England cried foul to no avail, and the treaty was signed. That was greed run amok.

The electromagnetic spectrum is the unexplored ocean of the digital revolution. The assault on it being orchestrated by this manifesto, with the hopeful blessing of constitutional guarantees for market freedoms, is tantamount to a reedition of the Tordesillas treaty. The citizens of today are the England of then. We are being asked by the market popes (or sorcerers, depending on point of view), to content ourselves with the fact that radio astronomy will become blind by greed's noise, but for a good and noble cause. Humanity losing touch with the rest of the universe will, they imply, simply be an unavoidable consequence of this necessity for "more competition" in the telecommunications market.

If the Unabomber was an astronomer, he probably would have picked his victims differently, and if the hooligans protesting in Seattle, Washington DC, Praga, Davos and Genova knew better, they would've probably chosen their targets more carefully.