The FCC's Re-Regulation Agenda
For the first time ever, incumbent telephone companies have sustained back-to-back quarterly declines in the absolute number of wireline-based broadband subscribers. A new study from our organization, the American Consumer Institute, shows that regulations are a contributing factor to this drop — and also helped to cause the re-concentration of the wireline broadband market in recent years.
The study details the sordid history of broadband regulations and shows that, as industry regulations have increased or decreased, so has market concentration. It provides empirical evidence for something economists have been saying for a long time: Regulations can impede investment and reduce consumer benefits.
Over the last 30 years, federal telephone regulation has been schizophrenic. In a few periods, the FCC calmly nurtured new technologies and competition, but more often it was sadistic, suppressing investment and competition. Here is a bit of that history.
In the mid-1980s, the breakup of AT&T added seven large "incumbent local exchange carriers" (ILECs) to the telephone landscape. These "Baby Bells" offered local telephone service, but they were banned by a court ruling from competing with AT&T, Sprint, MCI, and others to provide long-distance and information services.
In the late 1980s, the communications marketplace evolved quickly when it came to computer data transmission, mobile wireless service, and cable-TV service. Before local phone companies were allowed to compete in the long-distance service market, it was evident that consumers needed high-speed connections to information services. Congress saw the consumer benefit of allowing more investment and competition, and provided a pathway toward lifting prohibitions on the Baby Bells in the Telecommunications Act of 1996.
But the FCC was not in a permissive mood. Several years prior to the 1996 law, in collaboration with Hollywood production studios, the ILECs had developed a competitive alternative to cable TV that used new Digital Subscriber Line (DSL) technology. At the time, regulations had blocked the ILECs from having any control over their own programming, which made the service uncompetitive. After the Supreme Court threw out those rules, the FCC changed them — but then demanded that the ILECs give away two-thirds of their channel capacity to new competitors. ILECs concluded that pursuing a video strategy would only create a financial debacle. Essentially, regulations thwarted competition.
Similar regulatory harassment continued as ILECs tried to enter the information-service market, primarily by offering Internet access. DSL was classified under Title II of the Communications Act of 1934, making it essentially a public utility in the FCC's eyes rather than an information service. Throughout the late 1990s and early 2000s, regulators littered their Title II workbench with tools for inflicting financial pain and maddening technical requirements on ILECs. Meanwhile, cable companies began providing a lightly regulated service using cable modems.
DSL technology had been available and trialed long before cable modem services were. As broadband services emerged, regulations put DSL providers two years behind their cable-modem rivals.
The FCC also hoped to grow new telephone-service competitors by forcing ILECs to endure those competitors as parasites. With imperial arrogance, regulators forced ILECs to allow competing companies to place their equipment on the ILECs' premises for networking purposes. They called it "collocation."
The FCC then required ILECs to equip competitors by "sharing" telephone lines and network services at bargain prices; for example, ILECs had to rent telephone lines to competitors for $2.92 per month when the cost to build such a line averaged $2,311. Essentially, the required prices guaranteed the ILEC a loss on each service the competitor chose. The FCC invented other punitive requirements, such as number portability, unbundling and rebundling of network elements, and dialing parity, none of which were imposed on cable-TV operators.
The FCC's openly hostile regulations ensured that ILECs were not eager to invest in new facilities, and that wreaked havoc on the market. Gradually, however, some coddled competitors built parts of their own network. The increased competition forced the FCC to allow ILECs pricing flexibility for some customers.
After a change in FCC leadership when George W. Bush took office, the agency came to believe that the societal benefits from broadband competition might be a good reason to loosen the regulatory restraints. DSL was reclassified as an information service, putting it on par with cable modem services. For almost a decade, broadband speeds accelerated, prices quickly reflected the effects of competition, broadband availability spread, market concentration became more balanced, and broadband subscribership blossomed.
Several years ago, however, the massive capacity consumed by the Internet's streaming-video providers began to make broadband service bog down at times. ILECs and cable began considering commercial solutions that would segregate that traffic so it would not impair service for others. That sensible engineering notion triggered a principle called "net neutrality."
Net neutrality holds that there should be no paid fast lanes in the Internet. Of course, there are and have always have been prioritized services. But reality did not fit the populist narrative. So, after two attempts to implement net neutrality were struck down in court, the FCC decided to reclassify broadband under Title II — making it subject to all the quirky, punitive, pettifogging regulatory nonsense from the prior century. The introduction of Title II regulations has led an avalanche of new regulations on telephone companies that are not placed on their competitors; e.g., telephone companies now find it harder to move from copper to fiber facilities.
So, here we are. Regulations are back in full force. If its goal of the Telecommunications Act was to provide consumer choice, increase consumer benefits, and encourage broadband deployment, the FCC's re-regulation agenda has accomplished the exact opposite.
Alan Daley and Steve Pociask write for the American Consumer Institute, a nonprofit educational and research organization. For more information about the Institute, visit www.theamericanconsumer.org or follow us on Twitter @ConsumerPal.