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April 21, 2011

FCC Expands Internet Takeover, Adds Bailouts and Price Controls

By John White
While the House of Representatives was debating HJ-37, a resolution to return internet policy decisions to Congress, the FCC was implementing the next phase of its regulatory imposition upon the internet.  That latest FCC move extends internet regulation to wireless while creating a crony capitalist system of regulatory bailouts and price controls. 

Buttressing the FCC, the Free Press lobby group held a gala event in Boston to promote internet operation by the FCC.  Speaking at the gala, former Speaker of the House Nancy Pelosi attacked the House resolution to exercise congressional oversight of the FCC.  "I don't think this bill is going anyplace," Pelosi said.  "No one should be guarding the gate on the internet."

Meanwhile, Joe Newby at the Spokane Examiner reports on an appearance by Rep. Ed Markey (D-MA) at another venue.  Newby reports that Markey said, "Republicans are trying to pass legislation destroying the World Wide Web," Markey whined, adding "and they're also trying to pass legislation to help destroy the whole wide world."

What brought us to this point?  First, the initial FCC internet regulatory takeover covered broadband -- such as fiber, cable, and DSL -- but not wireless.  Next, the courts became involved when Verizon and MetroPCS sued the FCC in January.  Those lawsuits have been dismissed on a technicality: "Legal action can only be filed in the 30 days following the publishing of the policies in the Federal Register."  Verizon has indicated its intention to re-file; MetroPCS has not announced its intentions.

The FCC remained on offense with its latest expansion of internet regulations into wireless under the guise of consumer protection.  From Bloomberg Businessweek:

Data-roaming agreements let wireless customers use their devices to connect with internet sites and e-mail outside their home areas...  Data services are growing in importance as customers increasingly turn to Web-enabled smartphones and tablet devices, such as Apple Inc.'s iPad.

Wireless companies routinely negotiate agreements with other wireless companies to provide fill-in coverage.  The Daily Caller reports:

Currently, mobile broadband carriers enter into contractual agreements to, in the case of small companies, "rent" network space; and in the case of large carriers, "lease" available network space. [...]


The new FCC rule disregards the current system, and not only mandates that large carriers offer network access to smaller companies, but that they do so at "reasonable" rates. Effectively, the FCC created a new price control for mobile companies.

The FCC has inserted itself, as a government agency, into the roaming contract negotiations between private-sector companies.  It does so by compelling an agreement and setting "reasonable rates."  That move was not well-received in some quarters, as reported by Yahoo News:

"A data-roaming mandate is unwarranted and will discourage investment," Robert Quinn, AT&T chief privacy officer and senior vice president of federal regulatory, told Bloomberg in an e-mail today. "Proponents of a roaming mandate were seeking government intervention, not to obtain agreements - which are plentiful - but rather to regulate rates downward."

Other companies, however, had asked for the regulatory bailout as CNET News reports:

Smaller wireless carriers, such as Sprint Nextel, Leap Wireless, and MetroPCS, have filed petitions with the FCC claiming these new rules are necessary to ensure that AT&T and Verizon Wireless, the nation's largest wireless operators, offer fair roaming terms to them.

For those companies asking for a regulatory bailout, the financial incentives are significant.  The Daily Caller reports on Sprint's balance sheet:

Sprint, for example, lobbied heavily for the data roaming rule. But Sprint's balance sheet has been in bad shape lately. From 2007 to 2010, the company's [infrastructure] investments went from $5.1 billion down to $1.5 billion. AT&T and Verizon, however, have both grown in recent years, and have [infrastructure] investments standing at about $8.4 billion each.

Over the last three years, Sprint's buildout of its network has not just stalled, but it has significantly declined.  Roaming agreements allow Sprint to maintain service to its customer base while its network costs fall.

Now we can connect the dots.  As Sprint's network deteriorates, it becomes more dependent upon roaming agreements to offset its network deficiencies.  For Sprint, the FCC intervention represents a regulatory handout worth billions.

Now imagine yourself as a fly on the wall at a meeting of MetroPCS management.  MetroPCS management is facing a dilemma in the form of a Sophie's choice.  Does the company re-file the earlier lawsuit in which it firmly believes the FCC has overstepped its authority?  Or, on the other hand, does it drop the lawsuit and accept the bailout the FCC is offering?

Same fly at Verizon.  Verizon faces a different set of two bad choices.  Do they proceed with the lawsuit?  The bureaucracy has the ability to punish with its new price setting authority.  Do they go along to get along in hopes of the least destructive regulation?

Is this some kind of insider information?  Not at all.  It's simply the obvious conclusion to draw from the regulatory environment we see being created today -- an environment in which the FCC voted to give itself the power to compel contracts and control prices.

This is the very definition of crony capitalism.  Some companies seek favors from the FCC.  The FCC rewards them with a "regulatory bailout."  The bailout allows the corporations to avoid taking the corrective action necessary to compete in a free market.  In turn, those companies become more dependent upon, and supportive of, increased regulations. 

Other entrepreneurs are intimidated to go along in hopes of incurring less punitive regulation.  The market environment deteriorates, becoming more corrosive and anti-competitive, with entrepreneurs competing against each other to gain a regulatory benefit or to hinder competitors.

The situation pressures all venders to become special interests.  Markets and customers are pushed out by regulations.  The company's master is no longer its customers, but instead the regulator that now controls it.  Yet should a company fail, stranding its customers, the regulators will blame capitalism and the free market.  The regulator will offer more regulations and more crony capitalism as a solution.

Seton Motley, a proponent of free markets, was terse when he said:

The FCC's contempt for the free market, this Congress and the Constitution continues unabated. Today's vote to unnecessarily and illegally insert itself into the otherwise very successful world of inter-provider data roaming agreements is incredibly destructive - and obnoxious.

The House has finished its work.  The focus now moves to the Senate, where senators will be asked to choose if Congress or bureaucrats decide policy.  Do they vote for the FCC to guard the gates of the internet?  Or do they vote for an open, free-market internet?
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