Friday, April 1, 2005 - The Progress & Freedom Foundation Blog

Jeff Pulver Urges Regulation by Shakedown

Let me preface this entry by stating that Jeff Pulver is an indispensable force in communications. A tireless evangelist for Voice Over Internet Protocol (VoIP), and a pioneer in both the business and the regulatory worlds, he has my admiration for what he adds to the regulatory policy debates.

But, I fear he has gone terribly wrong here. In this post, he advocates using merger conditions against SBC and (probably) Verizon to: 1) enforce a "net neutrality" non-discrimination requirement; 2) require a separate affiliate for IP-based communications; and 3) require the merged entity to offer "naked" DSL.

Jeff offers that merger conditions are the only successful recent vehicles for the imposition of regulation and laments the baby step incrementalism of rulemaking.

But the "success" of merger conditions comes at a high price; namely, the conditions are extracted through a lawless shakedown rather than a regular legal process. What Jeff celebrates is the imposition of (unreviewable) regulations by fiat, rather than the more painstaking and appealable regulation by notice and comment rulemaking. This is not to be preferred in the long-run by any regulated entity. Regulation by voluntary concession may be efficient in the sense that big things can get done.

But when it is done extralegally, it inhibits efficient integration because parties cannot accurately predict what the FCC's "merger tax" will be. (By contrast, a Clayton Act antitrust analysis has a clear standard: will consumer welfare, properly understood, be detrimentally effected by the merger and what mitigating steps might be needed to avoid those effects?)

The conditions he urges would be imposed through the FCC's "public interest" license transfer authority. Harold Furchtgott-Roth ably demolishes past FCC merger review authority abuses here.
As Furchtgott-Roth points out, the "public interest" merger "authority" invites a capriciousness and idiosycractic industrial policy calls by the regulator. And, in contrast to rulemaking, which creates generally applicable law that all must abide by, the merger concession ransom applies only to the merged entity. Thus, the FCC ends up with the opposite of a "level playing field" but rather a field that treats a given company differently than all the rest, simply because of a stock transaction.

The regulatory leverage of the merger event is an inviting temptation for regulators. They can "get things done," and they can do it without review of those pesky and demanding courts. But it is lawless and rigorless, and that alone should cause us to reject it.

As for the conditions Jeff urges, I find them dubious on their merits as well. Though admitting that vertical integration is inevitable, he then urges conditions that deprive the integrating entities of the very efficiencies they may be seeking. Further, the interminable inquiries into what is permissible and impermissible "discrimination" -- and the associated error costs -- threatens the very price differentiation that is necessary to keep network-owners in business and investing.

The worst thing than can happen to VoIP is for it to become the new UNE-P. Asking regulators to commoditize the network for the benefit of applications running over it is tempting and probably inevitable in our public choice-riven regulatory climate. Might conditions arise where we need to consider the conditions Jeff urges? Yes. A monopolistic environment makes his suggested conditions worth considering. But imposing them prematurely and making predictive judgments about the proper vertical structure of the emerging communications market might well forestall emergence of a competitive market that makes these regulation unnecessary.

posted by Ray Gifford @ 12:25 PM | Antitrust & Competition Policy