Phoenix Center

[Commentary] The common currency in the internet age for both “edge” providers such as Google and the operators of “core” broadband networks such as Verizon and CenturyLink is information to provide consumers with enhanced online experiences. Given Americans’ voracious use of the internet, and what our browsing and buying habits say about us, common sense would dictate that the U.S. Government’s approach to the complex issue of consumer privacy should be comprehensive and not piecemeal: for industry-wide problems we need industry-wide solutions, not unique rules for one kind of company and different rules for another.

The FCC under former Chairman Tom Wheeler didn’t care less about cohesive policy approaches. Rather than attempting to harmonize its privacy policy with the approach taken by the Federal Trade Commission that already oversees online privacy issues, the FCC decided to re-invent the wheel and write its own set of draconian rules creating gaps and inconsistencies with the FTC’s approach. The FCC’s privacy rules were just bad rules. They were an excellent example of politically-driven asymmetrical regulation specifically designed to transfer economic profits from the core of the network to the edge. In plain English, the FCC’s rules were designed to help edge companies like Google protect their market share against competition from broadband service providers like AT&T. In so doing, the FCC perversely provided further incentive for broadband providers to reduce network investment. The Congressional Review Act does not change the state of the governing law. This is because the CRA is not designed to re-write an administrative agency’s governing statute, but to provide Congress with a direct oversight mechanism to review and disapprove how an administrative agency implements its governing statute. According to the CRA, if Congress disapproves of a specific rule, then an administrative agency may not reissue that rule “in substantially the same form….”

In this bulletin, we attempt to shed some light on the optimal design of Federal Communications Commission rules and practices for addressing interference disputes. Since spectrum licenses produce no benefits without large and mostly sunk investments in communications networks, our focus is on investment incentives. We argue that the Federal Communications Commission’s optimal interference policy would necessarily deal with different license holders differently when their sunk network investments vary.

We focus on sunk investments because if interference-causing repurposings are permitted and the significant sunk assets to provide services using spectrum are given short shrift, then the rational response of private parties is to curb investment. Put bluntly, regulatory policy towards interference concerns should favor those licensees with more “skin in the game,” with attention focused on actual capital investments in networks and not spectrum licenses alone. To provide context, we use the continuing saga of LightSquared Networks—a spectrum speculator now branded as Ligado—as a case study, though the analysis is in no way limited to the specifics of this ongoing proceeding.

In these frugal times, many Americans are forced to do more with less. Given the pernicious effect of the growth of the regulatory state, it is time for the government to do less with less. As such, our recommendation remains the same now as in 2011: As Congress and the Trump Administration struggle with the difficult policy decisions of how to shrink federal spending and get the economy moving again, perhaps an excellent place to start would be to investigate responsible cuts in the size of the federal regulatory bureaucracy.

Building and maintaining broadband networks is a tremendously expensive endeavor and even where networks are built they provide less benefit if vast swaths of the earth’s population does not see any value in using them. Research indicates that awareness, digital literacy, and affordability are the key barriers to adoption. A successful program, whether implemented by the public or private sectors, must expose nonusers to the benefits of being on-line and do so at low prices (or even free). While some governments have attempted to spur deployment and adoption, the public sector operates with limited resources.

Using subscriptions from the Lifeline program in the United States, we find that the use of the subsidy program rises with increases in unemployment and poverty. We suspect that private programs such as Facebook’s Free Basics may even be more effective than public programs, since the private programs are not influenced by political concerns and are available through participating operators to everyone for free without eligibility criteria.

The Federal Communications Commission recently outlined a “new path forward” for imposing price regulation on high-capacity telecommunications circuits sold to businesses and other telecommunications providers. The FCC outlines a two-step procedure for determining if it will apply rate regulation these Business Data Services: As a first step, the FCC proposes to determine “whether market power exist[s]” and where. If the FCC determines that market power exists, then the FCC proposes to apply a price-cap “style” regime to control prices.

The problem, however, is that nowhere does the FCC define a meaningful concept of “market power.” To fill this gap, in this paper I construct a policy-relevant definition of market power. I then consider whether the FCC’s analysis is capable of identifying the presence of or quantifying the magnitude of market power for Business Data Services. As I demonstrate, it is not. The FCC’s analysis is unsupported by basic economics and good statistics, and is thus incapable of providing any meaningful evidence regarding the presence or absence of market power.

As the Federal Communications Commission begins to formalize rules for the upcoming voluntary incentive auctions for broadcast spectrum, questions regarding participation limits on the largest domestic wireless carriers remain open.

Proponents of bidder restrictions on AT&T and Verizon appeal to a “revenue- enhancement hypothesis,” under which the participation by the more successful carriers will allegedly discourage bidding by smaller firms and thus reduce total auction revenues.

In this bulletin, we analyze data from a recent large-scale spectrum auction to shed light on the validity of the revenue-enhancement hypothesis, and our findings are significant. Among other things, we find no evidence that AT&T and Verizon reduced the number of bidders for licenses. Moreover, we find no evidence to support the claim that lower auction revenues resulted from large firm participation.

As participants, the two increased overall auction revenues, both by winning licenses and by helping to reveal the valuations of other bidders. AT&T’s efforts (win or not) added a 21% premium to final auction prices above and beyond the revenue effects of the typical bidder.

AT&T alone accounted for nearly half of all auction proceeds, even though its winning bids were only about 10% of the total. Verizon’s impact was consistent with that of the average bidder. Accordingly, our findings contradict almost every key aspect of the revenue- enhancement hypothesis -- not only did AT&T’s and Verizon’s participation not deter smaller firms from entering the auction, but their participation substantially raised total auction proceeds. Empirical evidence supporting bidder exclusions or restrictions in the forthcoming voluntary incentive spectrum auctions therefore remains weak.

[Commentary] Congress tasked the Federal Communications Commission with the difficult job of having to figure out both the big picture and small details of the auction process, including how many licenses to auction in any given market.

This number would, in part, determine the number of firms offering mobile wireless services (in addition to the two already in operation). On this question, former FCC Chairman Reed Hundt indicated he relied heavily on the advice of Professor Michael Porter at the Harvard Business School. The government, the Professor rightly reasoned, could not pick the equilibrium number of firms in advance.

To sum up, the advice from Professor Porter was to sell too many licenses and let consolidation move the industry to its equilibrium. In light of Chairman Hundt’s “overshoot the equilibrium plan,” I find the Obama Administration’s hard line and much of the current debate over the price-increasing effects of further consolidation misplaced.

In this strategy devised by Professor Porter and Chairman Hundt, even if we limit the argument solely to a price effect, permitting consolidation from a point known to be “too many” can still be good policy. Significantly, under the Hundt-Porter strategy, even if we know a merger will lead to higher prices, this knowledge is not a sufficient reason to block a merger. Higher prices was, in large part, the plan.