Data Roaming, Spectrum Auctions, and the Widening of the Broadband Credibility Gap…

Posted By Larry Spiwak On January 31, 2012 @ 4:58 PM In Broadband Credibility Gap,Data Roaming,Federal Communications Commission,Incentive Auctions,Incumbent Exclusion Rules,Net Neutrality,Regulation,Regulatory Reform,Spectrum,Spectrum Exhaust,Wireless | Comments Disabled

As I noted in my January 17th blog post [1], FCC Chairman Julius Genachowski is complaining loudly that the bill now pending before the House Energy & Commerce Committee would unduly constrict the agency’s ability to condition any voluntary incentive auction for much-needed beachfront broadcast spectrum.  Recently, former FCC Chairman Reed Hundt came to his protégé’s defense [2], noting that:

no one will benefit if Congress insists on telling the FCC—as the House bill does—who is eligible to bid or how the auction should be conducted. To have an efficient, fair, unpoliticized, neutral, pro-market auction the FCC should continue to be an auctioneer that is above political concerns.

However, as I demonstrated in my post, it is precisely because Mr. Genachowski has politicized the agency with anti-market policies that Congress has stepped in to restrain the Commission from repeating the mistakes of the past.

And if you think I’m kidding, let me give you yet one more recent example of exactly what I am talking about.  Last week, the Daily Caller ran a piece entitled Sprint Rural Data Roaming Decision Signals Confirmation to Conservatives Critical of FCC Data Roaming Rule [3].  According to the article, Sprint’s latest “cost-cutting” decision to roam on rural networks in Kansas and Oklahoma provided probative evidence that the FCC’s 2011 Data Roaming Order [4] does, in fact, drive down investment and slow wireless network deployment.  Certainly, the effect of the 2011 Data Roaming Order on the build-out of mobile wireless network is an important issue, and a complex one that merits closer study.

Yet for me, the coverage of this issue is lacking in a major respect.  In particular, this bit of news and the subsequent attention to it missed entirely a recent trend in FCC policy of which the Data Roaming Order is part and parcel.  That is, the expansion of price regulation in the communications sector for services exchanged between firms (not between firms and consumers).  FCC policy today is aimed largely at using the agency’s authority to shift rents among sophisticated companies.

If you ask most telecommunications policy wonks what is the purpose of the FCC’s Data Roaming Order, most would say it requires mobile carriers to sell capacity on their data networks to other wireless carriers.  However, such a requirement is largely unnecessary, since everything is for sale at the right price.  The real purpose of the FCC’s Data Roaming Order is to regulate the prices for data roaming.

In an effort to sugar-coat this price regulation, Chairman Genachowski describes the Data Roaming Order as a “lighter touch approach [5]” to roaming, in that it relies on “commercially reasonable” standard for roaming offers.  But “commercially reasonable” is neither a price nor cost standard—its meaning is entirely subjective.  According to the FCC’s Order, the agency intends to look at a minimum of SEVENTEEN subjective factors to determine whether an offer to a roaming agreement is “commercially reasonable.” (Data Roaming Order at ¶ 86.)    So, stated another way, regardless of what may come out of arms-length negotiations, the FCC has at least seventeen subjective ways to force a carrier to change its price.  Regardless of how you spin it, when the government can reject an offered price for one of its own choosing, that’s price regulation.

Price regulation, at its most basic level, occurs when the pricing decisions of a firm are subject to the control of a regulatory body rather than market forces alone.  In practice, regulators may set maximum prices (a price ceiling) or may set minimum permissible prices (price floors, as is common in agriculture pricing), either of which could be a zero price.  Price regulation entails nothing more than the seller of the product not having the liberty to choose its own price.  So, by holding a subjective “sword of Damocles” over every roaming negotiation, the FCC has effectively imposed de facto price regulation on the wireless industry.

As disturbing as the expansion of price regulation in communications markets, which are as competitive now as ever, is the clear bias contained in the Data Roaming Order and how such favoritism will prejudice negotiations.  In Paragraph 79 of the Data Roaming Order, the Commission outlines its review process as follows:

… if negotiations fail to produce a mutually acceptable set of terms and conditions, including rates, the Commission staff may require parties to submit on a confidential basis their final offers, including price, in the form of a proposed data roaming contract. These submissions would enable Commission [to order] the parties to enter into a data roaming agreement pursuant to the terms of the complainant’s [] final offer.

Given the explicit bias of the agency, those companies seeking roaming agreements will surely shave their best offers by a significant amount.

Unfortunately, Mr. Genachowski’s disingenuous stance on price regulation is not new to the Data Roaming Order.  We have seen this move before.  Take for example the FCC’s Open Internet Order [6], where by limiting free and independent price setting by Broadband Service Providers (BSPs), the Commission unquestionably imposes price regulation.

To demonstrate this fact, consider first the “No Blocking” principle.  The Commission defines “No Blocking” as follows: “Fixed broadband providers may not block lawful content, applications, services, or non-harmful devices; mobile broadband providers may not block lawful websites, or block applications that compete with their voice or video telephony services…” (Open Internet Order at ¶ 1.)  Requiring that BSPs permit access to lawful content does not, however, mandate on what terms such access is provided.  A clever BSP may evade the requirement by placing a very high price on such access.  At some rate level, a pricing solution is equally as effective as outright blocking.  (That is, assuming the pricing solution can be efficiently established and compliance monitored.)  Consequently, as in all cases of mandated “interconnection” or “access,” the next question must be “at what price” will such access will occur?  That price, as determined by the FCC’s Open Internet Order, is zero.  As stated in the Order,

To the extent that a content, application, or service provider could avoid being blocked only by paying a fee, charging such a fee would not be permissible under these rules. (Id. at ¶ 67.)

Plainly, the Open Internet Order includes price regulation: “paying a fee” is “not [] permissible under these rules.”

Price regulation is also embedded in the “No Unreasonable Discrimination” principle.  In the Open Internet Order, the agency expresses concern about BSPs offering “pay for prioritization” services, where, say, a content provider may wish to increase the quality of a video stream to its customer.  (For an analysis of the deleterious effects of prohibitions on pay for prioritization, see our earlier paper Network Neutrality and Foreclosing Market Exchange [7] that was later published in the International Journal of Management and Network Economics.)  Specifically, the agency states,

For a number of reasons [] a commercial arrangement between a broadband provider and a third party to directly or indirectly favor some traffic over other traffic in the broadband Internet access service connection to a subscriber of the broadband provider (i.e., “pay for priority”) would raise significant cause for concern.  (Id. at ¶ 76.)

Oddly, the Commission’s decision reaches the conclusion that paying for a higher quality service is a “significant cause for concern.”  In response to this “cause for concern,” the Commission imposes pricing constraints on BSPs:  “… as a general matter, it is unlikely that pay for priority would satisfy the ‘no unreasonable discrimination’ standard.” (Id.)  Again, the Commission has exerted authority over the pricing decisions of BSPs, blocking the providers from selling services of value to its users.

With its Data Roaming Order and its Open Internet Order, the Commission again widens the “Broadband Credibility Gap [8]” with consumers, Wall Street, Capitol Hill and telecom professionals alike.  Price regulation in the communications sector is on the rise.  Unlike traditional price regulation, which aims to lower the bills of households, the new regulation is aimed at shifting rents across major industry players.  In this regulatory game among giants, consumers are just pawns.    Accordingly, if this Administration is permitted a free hand to conduct a crucial voluntary incentive auction for scarce beachfront commercial spectrum, should we expect the agency to turn over a new leaf and focus on consumers rather than rent shifting among firms?  I think not.


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URLs in this post:

[1] January 17th blog post:

[2] former FCC Chairman Reed Hundt came to his protégé’s defense:

[3] Sprint Rural Data Roaming Decision Signals Confirmation to Conservatives Critical of FCC Data Roaming Rule:

[4] 2011 Data Roaming Order:

[5] lighter touch approach:

[6] Open Internet Order:

[7] Network Neutrality and Foreclosing Market Exchange:

[8] Broadband Credibility Gap:

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