Regulating Under the Influence: The FCC's Title II Initiative for Broadband

by

Dennis L. Weisman *

FCC Chairman Tom Wheeler is in a tough position. Notwithstanding the fact that the FCC is an independent federal agency, when the President weighs in on a policy matter - as is the case with net neutrality - it is difficult for the Chairman to say "thank you for your input Mr. President, but we are going to go in a different direction." It is widely recognized that "regulation is a political act" and no extant issue attests to this fact more than net neutrality. Mr. Wheeler's claim, therefore, that economics ("long-standing regulatory principles") carries the day on net neutrality regulation is more than a bit disingenuous. Indeed, as I argue below, the "economic fig leaf" that the FCC dons to rationalize its actions with respect to Title II regulation for broadband is particularly ill fitting - Mr. Wheeler's wardrobe malfunction du jour.

The FCC's Title II initiative reclassifies broadband as a telecommunications service rather than an information service and broadband providers would become common carriers with all of the myriad obligations this entails. Mr. Wheeler attempts in a recent Wired article to soften the blow by claiming that the FCC has no interest in imposing rate regulation on broadband providers or subjecting their last-mile facilities to unbundling obligations. This defense has a certain Clintonesque quality to it - "Yes, but I did not inhale." The problem here is three-fold. First, Mr. Wheeler has a commitment problem of sorts because he cannot speak for future FCC administrations. There is no such thing as a little regulation; it is invariably subject to regulatory creep, as the venerable Professor Alfred Kahn astutely recognized when he turned off the lights at the Civil Aeronautics Board.Second, if Mr. Wheeler is going to make the case that more heavy-handed regulation encourages deployment and investment in broadband infrastructure, it is the capital markets that he will have to convince and this is likely to be a tough sell. Third, a ban on paid prioritization is itself a form of rate regulation and this means that the FCC is going to be dragged into seemingly endless disputes over compliance with its rules.

There is a two-part standard to justify economic regulation. The first part is that governmental intervention is presumptively unnecessary absent market conditions that (1) credibly establish that the abuse of market power poses a substantial, non-transitory risk to economic welfare; and (2) should be expected to significantly undermine the integrity of the competitive process. The second part is that no governmental intervention can be justified unless the expected benefits of such intervention exceed the expected costs, appropriately defined. The fact that the FCC failed to ground its Title II initiative in any formal market power analysis resonated with Judge Silberman in his dissent in Verizon v. FCC.

Two additional observations are noteworthy. First, the FCC cannot point to any non-transitory abuse of market power. The net neutrality violations that it can cite are preciously few in number and the misconduct was remedied expeditiously. Hence, whatever regulatory oversight is called for is most assuredly of an ex post variety rather than the intrusive, ex ante sort that the FCC now contemplates. Second, the FCC cannot point to any systemic pattern of consumer harm stemming from these transitory violations of net neutrality principles to justify its approach because no such evidence exists.

In his Wired article, Mr. Wheeler makes the unexceptionable point that commercial interests are not always aligned with consumer interests. This is a fair point, but seemingly works at cross purposes with his proposal to ban paid prioritization. According to the Chairman, society is better off when the government forces everyone to fly coach and partake of parcel post. Really? Bill Baxter, the esteemed Stanford law professor and architect of the AT&T divestiture accord, recognized long ago that consumers cannot be harmed by the introduction of new services.

Finally, it should be noted that, if there is a tomorrow's product, it cannot be monopolized to the extent that we would be worse off than if we did not have that tomorrow's product. Tomorrow's product is, at any finite price, a net gain. Today's products remain available to compete with it.

Mr. Wheeler would appear to see it differently, but as a matter of economics he would be wrong. Of course, there is the oft-stated concern that paid prioritization will favor large (edge) providers over small innovators toiling away in their garages. This is a vacuous argument - the FCC should not be in the business of designing industrial policy to compensate for the failure on the part of small innovators to convince venture capitalists of the value of their creations. Lest we forget that Apple, Google, and Microsoft were all yesteryear's garage innovators that somehow managed to develop better mousetraps without industrial policy being hijacked to handicap the race.

Broadband is an example of a two-sided market in which edge (content) providers represent one side of the market and consumers represent the other side of the market. Just as newspapers impose positive prices on both advertisers and subscribers, it is quite generally efficient in two-sided markets for both sides of the market to contribute to the total price. A ban on paid prioritization over broadband networks essentially requires consumers to pay the full freight.To paraphrase the late Judge Robert Bork, one often hears of the baseball player who, although a weak hitter, was also a poor fielder. Mr. Wheeler's ban on paid prioritization is a little like that. Although it is socially equitable, at least it is economically inefficient.

The Free State Foundation is an independent, nonpartisan free market-oriented think tank located in Rockville, Maryland.

A PDF of this Perspectives, with footnotes, is here.