FCC No Free Market Ally

by on December 6, 2007 · 0 comments

Two commentators tried to argue that FCC Chairman Kevin J. Martin has held true to conservative principles nowithstanding recent attempts to re-regulate the cable industry. Cesar V. Conda and Lawrence J. Spiwak posited that a “pro-entry/pro-consumer-welfare mandate” is the very “hallmark of economic conservatism.” This is a bizarre statement.

“Pro-entry” is a euphemism for competitor welfare, the antithesis of consumer welfare. Competitor welfare used to be the guiding principle of antitrust law – a legacy of the populist movement. The idea was that more competitors equaled stronger competition. It’s intuitively appealing, but it confuses quantity with quality and is wrong if the competitors are inefficient. Protection of inefficient competitors is a form of subsidy.

For example, the Clinton FCC tried to jumpstart competition in telecom with a “pro-entry” policy which allowed startups to lease facilities and services below cost from incumbent providers like AT&T and Verizon. You might think that’s no big deal, AT&T and Verizon can probably afford it. But the truth is they don’t absorb such losses, they pass them on to their remaining customers.

Okay, you might say, maybe it’s a negative in the short term, but won’t all consumers be better off in the long run when pro-entry regulation leads to more competition – which should push prices down for everyone?

The answer depends on whether the competitors are viable – whether they can thrive in a free market without price controls or similar regulation.

The few remaining telecom startups who managed to avoid bankruptcy clearly cannot, but the FCC doesn’t seem to have read the memo.

The trade association representing the startups, COMPTEL, has written to the FCC that its members “do not have the scale and scope to compete with the Bells for the major purchasers of special access,” and reasons that regulation is in the public interest because this particular segment of competitors “have to offer extremely steep discounts off the Bells [sic] tariff price in order to win any modest portion of the customer’s business.”

Wall Street is of the same view. The viability of the startups, referred to as CLECs, is regarded as so bleak that Covad sold in late October for $1.02 a share, for example.

Since the fundamentals suck for the CLECs, they would be fools not to try to hire better lobbyists to convince the FCC to improve their regulatory advantage over the incumbents. This can become and endless game. And it has.

Yesterday the FCC refused to deregulate Verizon’s local phone services in six cities including New York, Boston and Philadelphia, even though Verizon pointed out that in New York, for example, cable operators offer competitive voice services to the vast majority of homes and intend to provide voice services throughout virtually all of their franchise areas in the near future; and each of the nation’s major wireless carriers offers service that is competitive with Verizon’s wireline service and is available throughout (or virtually throughout) the New York area.

This afternoon, Covad was trading at 82 cents a share. Obviously, investors aren’t optimistic that continued regulation of Verizon will revive Covad.

The FCC issued the following explanation:

The Commission found that the current evidence of competition does not satisfy the section 10 forbearance standard with respect to any of the forbearance Verizon requests. Accordingly, the Commission denied the requested relief in all six MSAs.

The forbearance standard, for all the criticism it has received lately, really gives the FCC wide latitude to do whatever it chooses. For example, it must make a finding that continued enforcement of a regulation is “not necessary for the protection of consumers.” It also must find that forbearance is “consistent with the public interest.” I just wish I were in the private practice of law right now so I could charge $500 an hour to argue what those terms mean.

The FCC ought to be asking itself why it is attempting to protect start-ups who, by their own admission, cannot cut it in a free market when cable operators and cellphone companies are offering competing voice services that consumers really want. But apparently irrational criticism from a few Congressional Democrats is becoming too much, and we are witnessing a classic case of Stockholm syndrome.

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