Last week, the House Energy and Commerce Committee held its kick-off hearing on a potential update of our nation’s communications laws with no less than four former FCC Chairmen. As was appropriate, the hearing did not focus on specific items for change, but rather facilitated an excellent discussion of broad themes on how Congress should approach the complex task ahead. I commend the Committee for holding this discussion, because it is very important, in the words of Congressman John Dingell, for Congress to “legislate properly” in order to minimize the inevitable unintended consequences. Indeed, while Congress has had its share of legislative successes in the communications arena, it is important to recognize that Congress has also had its share of legislative failures—primarily because Congress did not think through the underlying economics of the problem carefully before enacting legislation. As I demonstrate with just two examples below (although I could easily provide many more), by failing to understand thoroughly such important items as reasonable expectations of market structure, the effect of the legislation on stakeholder incentives, and by failing to account for the potential for technological change, many of the legislative initiatives contained in the Telecommunications Act of 1996 ultimately fell flat.
Let’s start with the failure of the signature legislative initiative of the 1996 Act— unbundling—which was one of the most ambitious regulatory experiments in American history. Indeed, despite high expectations, less than a decade after codification, the experiment was effectively over when the FCC issued its Triennial Review Order in 2005 and effectively rendered most business plans based on unbundled network elements financially unviable. Without making any consumer welfare claims about the desirability of unbundling or its failure, in a paper entitled Lessons Learned from the U.S. Unbundling Experience, we demonstrated, with the benefit of a lot of hindsight, that the ultimate demise of the unbundling regime in the U.S. was driven by three underlying economic causes which Congress failed to comprehend when they passed the 1996 Act: (a) the expectations of policymakers for “green field” competitive facilities-based entry into the local wireline market at the time of the 1996 Act were unrealistic; (b) the unbundling regime was incentive incompatible in that the incumbent local phone companies were required to participate in their own demise without any (permanent) offsetting benefit; and (c) the rise of new alternative distribution technologies such as cable, wireless and over-the-top services that expanded the availability and quality of competing voice services. Local competition in the U.S., it turns out, was not the result of new entrants constructing new local distribution plant, but from the repurposing of the embedded cable television plant and the migration of many households to the exclusive use of mobile wireless services.
Similar lessons can be learned from Congress’s attempt to create a retail market for set-top boxes in Section 629. As we explained in our paper Wobbling Back to the Fire: Economic Efficiency and the Creation of a Retail Market for Set-Top Boxes, despite a massive amount of regulatory intervention by the FCC with its CableCard regime and its proposed AllVid paradigm to achieve Congress’s directions, the reason why we have yet to see (and are unlikely likely to see) a retail market for set-top boxes is simple: despite Congressional desires to the contrary, a retail market for set-top boxes is inefficient, and markets abhor inefficiency. Indeed, our analysis revealed that an MVPD has no anticompetitive preference for self-supply, so if set-top boxes can be produced more efficiently and sold at a lower price in a competitive retail market, then MVPDs would embrace such a retail market. As a result, barring some giant technological innovation that would change the economics of the problem, continued government efforts to create a retail market for set top boxes will always inevitably lead us back—in the words of our good friend former FCC Commissioner Rob McDowell—into “the Valley of Unattained Goals.”
So, as we contemplate a communications law re-write, the two examples of prior legislative efforts gone bad reveal three broad inter-related principles that Congress should always keep in mind:
First, before passing any legislation, it is important for Congress to understand the underlying economics of the problem. This analysis must include, inter alia, reasonable and realistic expectations of market structure.
Second, any successful legislative paradigm must make sure that the incentives of all the stakeholders are aligned. Otherwise, as we saw with the RBOCs in unbundling and MVPDs in CableCard, sabotage against the paradigm will run rampant.
Finally, as Carl Shapiro and Hal Varian brilliantly state in their book Information Rules: “Technology Changes. Economic laws do not.” Accordingly, legislating on the basis of a specific technology makes little sense; instead, legislating on the basis of broader service or platform categories is probably the better approach, with an eye always on the underlying economic incentives of the participants.
After all, as the wise parable goes, those who do not understand history are doomed to repeat it.