Antitrust Enforcement and Telecom Consolidation: What Does the Future Hold?

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The recent elimination of network neutrality rules by the FCC and re-emphasis on a lighter touch free market approach to the telecom sector came with a promise that antitrust enforcement by the DOJ and FCC would serve as a backstop to mitigate the risk of potentially harmful discriminatory conduct and to promote continued efficiency gains in the sector. Does a recent wave of telecom mergers and acquisitions raise questions about the nature and extent of antitrust enforcement needed to assure dynamism without undercutting innovation in the sector? Our panelists will discuss lessons learned from this recent enforcement activity and the future of competition enforcement, with particular commentary on Tribune/Sinclair, Disney/Fox, and AT&T/Time Warner.

Featuring: 

George Ford, Ph.D., Chief Economist, The Phoenix Center For Advanced Legal &. Economic Public Policy Studies

Alex Okuliar, Partner, Orrick Herrington & Sutcliffe LLP

Chip Pickering, CEO, INCOMPAS

Event Transcript

Operator:  Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society's Telecommunications & Electronic Media Practice Group, was recorded on Wednesday, January 30, 2019 during a live teleforum conference call held exclusively for Federalist Society members.  

 

Micah Wallen:  Welcome to The Federalist Society's teleforum conference call. This afternoon's topic is entitled, "Antitrust Enforcement and Telecom Consolidation: What Does the Future Hold?" My name is Micah Wallen, and I'm the Assistant Director of Practice Groups at The Federalist Society.

 

As always, please note that all expressions of opinion are those of the experts on today's call.

 

Today we are fortunate to have with us as moderator, Alex Okuliar, who is a Partner at Orrick. After our speakers give their remarks, we will then go to audience Q&A. Thank you for sharing with us today. Alex, the floor is yours.

 

Alex Okuliar:  Thanks very much. This is Alex Okuliar. I'm delighted to be participating in this call today. The recent elimination of network neutrality rules by the FCC and re-emphasis on a lighter touch approach to the telecom sector came with a certain promise: that there would be antitrust enforcement by the DOJ and the FCC, as well as consumer protection enforcement by the Federal Trade Commission, and that these would serve as a backstop to mitigate the risk of potentially harmful conduct and to promote continued efficiency gains in the sector.

 

Our topic today is going to focus on whether the recent wave of telecom M&A raises any questions about the nature and extent of antitrust enforcement needed to assure dynamism in this sector without undercutting innovation. Our panelists will discuss lessons learned from this recent enforcement activity and the future of competition enforcement. We'll also discuss recent state and federal efforts to rework net neutrality laws and the potential implications for telecommunications sector.

 

We're honored to have two distinguished speakers today. Former Congressman, Chip Pickering and Dr. George Ford. Let me take a minute to introduce each of our panelists.

 

Chip Pickering is the CEO of INCOMPAS, the Internet and Competition Networks Association, the leading trade group advocating for competition policy across all networks. Mr. Pickering was a six-term Congressman representing Mississippi’s Third District. During his time, he served on the House Energy & Commerce Committee, where he was vice chairman from 2002 to 2006 and a member of the Telecommunications Subcommittee. He also was co-chairman and founder of the Congressional Wireless Caucus and an assistant minority whip of the House. Previously, Chip worked for Sen. Trent Lott (R-Miss.) and served as a staff member on the Senate Commerce Committee, where he helped shape the Telecommunications Act of 1996. Because of his role in drafting the '96 Act, he became well known as a Congressional leader on telecommunications issues. 

 

Most recently, Chip was a partner with Capitol Resources LLC, a public affairs and government relations firm, where he represented an array of telecom clients, including wireless, cable and competitive broadband providers, as well as non-profits and companies specializing in education, energy, technology, and defense.

 

Our second panelist is George Ford. He's the Chief Economist for the Phoenix Center for Advanced Legal and Economic Public Policy Studies. Dr. Ford is also an adjunct professor at Samford University in Alabama and the President of Applied Economic Studies. George has a long and distinguished history of policy and economic work in the telecom sector. In the '90s, he was an economist at the FCC serving in the Office of General Counsel and the Cable Bureau's Competition Division. He later worked at leading telecommunications companies as an economist heading up policy and strategic planning.

 

George is a frequent author and speaker on competition and telecom policy issues. Having recently authored or co-authored articles on regulation and investment in the U.S., regulation in joint bargaining, as well as an analysis of the relationship between broadband speed and economic growth.

 

We will begin with a few minutes of introductory remarks from each of Chip and George, and then discuss some of the leading issues being debated today about the role of antitrust in the telecom sector. Chip, would you like to begin?

 

Chip Pickering:  Yes. Well, one, it's good to be with you. I describe myself as a competition conservative. How do we have both antitrust standards in competition policy at the FCC and the FTC in a way that it promotes free-market competition? It actually reduces the role of government because the markets are functioning. If we look back at our history, the industry I represent, the competitive industry was really born out of the Ronald Reagan Department of Justice antitrust action against AT&T, in which we ended monopoly policy that started in 1934. And by 1984, the antitrust decision brought about competition in the long-distance industry. It became the model and the blueprint for then what happened in the cable industry in 1992 with satellite competition being introduced, and then in 1993 the adoption of competitive auctions and policy for the wireless industry, and then concluded with a sweeping Telecommunications Act of '96 that introduced competition in all telecom and technology markets.

 

It really led to the emergence of the internet business model, the internet industry, and competition across all platforms. It reduced the very heavy-handed, heavy-touch of price regulation cost models across all 50 states, and swept into the modern era, the information age, the computer age, and the digital age because of the combination of congressional competition policy, where the FCC, then, implemented and executed, and the antitrust action of the Reagan administration in the 1980s. It really did change the world, changed the markets, and have given us what we enjoy today in a way that I think is consistent with competitive and conservative principles of free-market competition.

 

So I welcome the conversation today and with George -- is a good friend to be able to debate as we go forward, "What is the future of competition, of antitrust standards, and what is the right balance between competition policy and antitrust standards?"

 

Alex Okuliar:  Thanks so much, Chip. George, do you have some introductory remarks?

 

George Ford:  Yeah, sure. Thanks for the invitation. It's a real honor to be here. This is an interesting time in terms of the dynamics of the telecommunications market, the dynamics of telecommunications regulation, and the dynamics of antitrust. The current environment is nothing like it was 20 years ago, or 25 years ago, when I got in the business, or even really 10 years ago.

 

When I first started at the FTC there was monopoly pretty much everywhere. And now it's pretty much nowhere. 98 percent of homes had a wireline phone and hardly anybody had a wireless phone. And now there are more mobile connections than people, and less than half the phones through a wireline connection. I've got two kids, and I've noticed that they never watch television, at least not traditional television, and that's got to have an impact on things going forward.

 

Today the broadband companies are trying to figure out how to transform themselves in this new environment. Consumers are more interested in devices, and apps, and games, and other content rather than the connectivity itself. Connectivity is a valuable -- in all sort of modalities and a modern phone can move between them in a way that hardly recognizable to the user. I suspect fixed-line broadband will likely go the way of wireline phone. Mobile broadband is the future, and I think the companies know that, which makes them reluctant—somewhat reluctant at least—to invest too heavily into fixed-line networks. That's a wise business decision. They're not just being cheap, as some people claim.

 

There's going to be a lot more vertical integration in this business. Competition in the distribution of networks has led to an increase in price for the content, and that encourages distributors to vertically integrate to get those costs down. The networks also need a steady stream of content to support their distribution network investments, and they will vertically integrate to create their own. And this is an economic incentive that's well understood, and we discussed extensively at the FCC when I was there.

 

Content is no longer restricted to the movie production companies and broadcast networks. I mean, there are many sources for really high-quality, video content: Amazon, Netflix, all those guys are making their own stuff, so that market has become increasingly competitive with a large number of substitute sources for content. And that content can reach consumers directly over the internet now, so you don't really need a distributor or packager, like a cable system, to deliver it. And that certainly impacts both the business plans of the content creators and the business plans of the distributors.

 

And, of course, with games that's going to dramatically impact the interest in content network investments. I don't envy the companies and the challenges they face in this environment. When we look at the competitiveness of the market and we look at the effect of mergers, we kind of have to abandon the way we've been thinking about these markets and update our thinking to a rapidly changing environment. And I know that's been said repeatedly over the years. I can remember writing my dissertation in the early '90s and the discussion about how dynamic the market was at the time, even though it was monopoly pretty much everywhere. But I think it's really true today that this market is undergoing a dramatic transformation in many ways.

 

The economics is still good, and it still drives the industry despite what people would rather drive the industry. It is the underlying economics that makes the difference. But the economics is pointing to new paths, and it's not clear exactly what those paths are. I mean, we've looked at Verizon and AT&T and we see very different strategies going forward.

 

We also see now the near-complete politicization of telecommunications regulation. It used to be a boring topic hardly anybody was interested in. Companies, and other competitors, and incumbents worked very hard to get the public interested in it to try to get policy moved. And now, it's just completely politicized as best I tell. I like to think of it as U.S. regulation is going third world where the politics drives the decisions without much regard to the law or the economics. I think Chairman Pai has made it a bit better. There's still a lot of work to do in that regard, and he's not insulated from politics either, especially now with the change in Congress. He must also deal with an activist President, who's offered pretty strong opinions on two major transactions: the AT&T-Time Warner merger, which he called for a rejection of, probably because of the liberal news outlet, CNN, being involved; and then encouraging the Sinclair-Tribune merger because of their generally conservative viewpoints. So just more politicization of the process.

 

And we also see radical transformations or calls for radical transformations of antitrust itself. Antitrust is supposed to be about competition, but now there's a movement that wants to solve all sorts of social ills through antitrust. I'm no fan of the way antitrust is done in this country. It's kind of boilerplate and driven too heavily by precedent, which is the way lawyers work. Legal decisions, at least the big ones from the Supreme Court, are treated like gospel, even when they're bad decisions, at least on economics grounds. But that's just the way the process works. I mean, you have generalist judges making decisions and the lawyers hook onto those decisions and build a case based on them, which makes change very, very slow. But that's just the way the law works, and maybe that's a good thing. Maybe not.

 

I think, though, that the cost for abandoning the consumer welfare standard are ridiculous and ill-informed. Consumer welfare is basically the sum total of the wellbeing of humans, and I can't imagine a better standard for analyzing the acts of firms. The courts get it wrong, they often get it wrong. It's not the fault of the standard but of the legal process itself. And in many cases, the plaintiffs just present a bad case, and bad law comes out of bad presentations. But I have no doubt that antitrust law will change. It's constantly updating to reflect new economic thinking. And then legal decisions are based on that new thinking, and that becomes a part of the process. But normally this happens at a glacial pace, but I think that may change because the market is changing so rapidly that the courts are going to have to face some fairly new scenarios.

 

I had the honor of speaking at a conference in Hawaii last week, and I visited the Volcanoes National Park, and I was thinking about the eruption last year of KÄ«lauea. And normally we have the Earth's surface -- it's sort of a billion-year project of creation, but we saw a pretty big change in a few short months because of this eruption. And I think we're sort of in this "eruption state" possibly, in antitrust as it tries to adjust to the new economy. I think the Amex decision, whether you like it or not, is going to effectuate some change in the way cases are presented and force attorneys to look more closely at the nature of two-sided transactions.

 

But that's what change looks like, and change comes slowly. And nowadays, we can get on the internet and complain and everybody can hear it. And we can see problems and complain about them, and everybody gets to hear those complaints. But the process is changing all along. It just takes a while to change. And really, until we know what's what, until the economists really figure out how to tackle these problems and the lawyers figure out how to present them, then the change is going to be pretty slow. But I think it'd be a pretty bad idea to shoot from the hip because of some unspecified dissatisfaction with particular decisions. And I think that's just really what it is. People are unhappy with the way decisions are made and are trying to find some scapegoat and force some kind of change that they really don’t understand.

 

My biggest fear right now is that I think a change in the political climate could very well lead to an undesirable and politically-driven transformation of antitrust policy, and that could unwind a great deal of improvement in antitrust analysis over the past 40, 50 years.

 

Alex Okuliar:  George, thanks for those opening remarks and very interesting insights. Building on your points about the debate over the consumer welfare standard, I was wondering if you could comment -- that debate is a pretty far-reaching one, a widespread one here in D.C., in policy circles and enforcement circles. And there're a number of different aspects to the debate. One of those is how should we define the consumer welfare standard? A lot of people, traditionally, the last 30 or 40 years have viewed it as a focus on price, a focus on economic efficiency. Where do you sit in that debate? How do you think we should be thinking about the consumer welfare standard? Should it be a continued focus on price? Or should it be something broader than that? And if it's broader, how broadly should we go?

 

George Ford:  Well, sure. I think it could be broader than that. I mean, it's the sum of the wellbeing of all humans, right? It's a pretty broad standard, and it gets cut in a lot of different ways. I mean, you've got to stand before a judge and present a case, and you don't have all day to do it, and the lawyers have to understand what's being said, and the economists have to develop some method of measuring things. So it's just natural that we tend to find some tool that we have to analyze the problem and find some data set that allows us to get some sort of estimate of what we think will happen. And that just is very limiting.

 

But it's not the fault of the consumer welfare standard. It's the fault of the plaintiffs, really, not presenting an effective case for broader concerns. And there's debates about how you treat transfers within the consumer welfare framework and how you would treat input suppliers. There's a lot of complaints about how you treat monopsony power, and the Court has addressed monopsony power before. It's not common, but it has been done. So it's not unheard of that we would do that.

 

The process is just going to have to adapt, to expand the thinking as the markets change. I mean, it used to not be a big deal to talk about price in a one-sided sense because that's pretty much what everything was. You had a few cases where it wasn't newspapers and things like that. But for the most part, it was people selling stuff, and you could look at it in a very simplistic way. Now we have people giving things away in order to get data, and the market is data, not the product itself. And the economists and the lawyers have to turn to focus on those sorts of issues and how that impacts welfare. It's tricky. It's not going to be easy. But it's doable and certainly acceptable. The standard has been used in all sorts of ways; it's just not used commonly in all sorts of ways. So it's just a matter of advancing the technique and advancing the arguments that the plaintiffs make.

 

Alex Okuliar:  Chip, let me get you involved here. I'd like to get a sense from you of your views on what George is saying with respect to the consumer welfare standard, whether we should have, for example, a much broader conception of it and, actually, how we would effectuate that. How will we actually shift the analysis from the current consumer welfare standard into a new mode of analysis? Would that be by gradual process through the case law in advocacy, or would it be through legislation and the like?

 

Chip Pickering:  This is an area where George and I agree on the consumer welfare standard. It has evolved -- or emerged is a better way to describe antitrust law over the last 40 to 50 years. And it really has served the economy extremely well, and as the digital age came about and we began to have increased competition from all parts of the tech and the telecom sectors, the consumer welfare standard is, I believe, the right standard. It gives a sense of predictability and certainty for investments and innovation in the marketplace. It is a standard that I think Scalia, as he looked at how do you define originalism -- consumer welfare for antitrust is a comparable standard for conservative antitrust law and is one that I believe we should just antitrust reviews and mergers by. It really has served the country well.

 

We now have a language and an analysis, economically, legally, and on competition policy that we can judge whether something is improving the individual's life on a consumer basis, but also from the investors that start up these small businesses to the large companies that are operating in this space. But from the content side, and on the internet side, and on the network side we look at the consumer welfare standard as something that has endured the test of time, and it has been a successful standard and should continue to be what we use going forward in an innovative economy.

 

Now, to the degree that you combine consumer welfare standard with competition policy, if you look at the broader discussion that we're having today, there are four elements of competition policy: that is the structure of an industry, how many are competing in that market. If you look specifically at the wireless industry, there are four. If you look at broadband internet access service or the internet service providers, in many markets there are only just one to two. And you can see the difference in the two markets between consumer satisfaction, price, a greater availability of services, or innovation in the wireless industry; less so in the cable and the telco or the ISP market. And so you can see in structure the different outcomes that you have.

 

The other three elements of competition policy are, if you were to look at a table: so structure. Then one, access to networks – things like interconnection policy, wholesale access to networks, the ability for competitors to access a user network for their business or to serve the end user. Then access to content. If you look at the satellite industries when they first emerged as a competitor to cable, access to content was critical. And the streaming revolution that we're having right now in the internet business model, the access to content on an equal basis that has been part of the open internet and net neutrality discussions and debates for over the last 20 years, that access to content is the third bag of a competition table. And then, fourth, access to devices, whether it is your smart phone or the interoperability of your device to connect to your laptop or your iPad to the network. So the device interoperability and ability to connect and operate on the network is the fourth part of competition policy.

 

All of those working together can serve the consumer welfare standard. The more predictable than certain the three legs of competition policy are, the less likely you are to have to have a more disruptive intervention in the market. So I kind of come down more on the competition policy emphasis and priority of if you get competition policy, open internet, access to networks and devices right, then you don't have to have the disruptive intervention into the marketplace through antitrust. And so you have less of a major intervention and disruption from government action if you get the competition policy right on the front end.

 

And as we go forward, the great demand that is being created by internet companies and content companies that drives new investment and new networks -- the 5G networks of the future and the Internet of Things of the future are being driven by these new applications and new content. And what we're seeing in our member companies that instead of the large incumbents building new fiber networks which the wireless networks will ride on top of in 5G, it is the competitive industry and a very diverse group of companies that are often regional in nature, local in nature, and smaller and entrepreneurial that you'll have a thousand companies building in a thousand places versus one or two big companies building the infrastructure of the future. And that can be a good thing if you get the right competition policy to incent them to be able to build the networks that the content will ride over in the future.

 

Alex Okuliar:  Thank you, Chip. So George, any reactions to Chip's call, this sort of three-pronged analysis with respect to competition policy? And as a practical matter, how that would change competition policy in the U.S. and your thoughts on that?

 

George Ford:  Well, I think that Chip is sort of outlining the basic economic analysis of the way market structure is looked at. It's pretty standard. I mean, you can't complain about what he's laid out. I think that one area where we may disagree, or we may not, is that the number of firms in a market is determined by the economics of providing a service, and in wireline markets and wireline broadband, I think the equilibrium is probably two, three firms in most cases, and in some cases even one firm, and some cases no firms, which is why we have CAF and other subsidy schemes to try to get broadband deployed in areas where it's just not profitable to provide. That's just the way it works, and there's really nothing you can do about that. It's just very expensive to deploy network, and the demand, particularly for households, is very distributed. So it's just very hard to be in that business. Very few firms are willing to make those kinds of investments. Instead of criticizing them for doing it, we should thank them for doing it.

 

I think wireless is much different. You can have more providers in the wireless space than you can the wireline space because the cost structure and demand structure is different. You can also have a large number of providers in backbones because the traffic comes to you in a very dense package. And the cost of deploying that network relative to the size of the market is much lower than it is for distribution networks.

 

I think the biggest error that's made in analyzing telecommunications markets is the idea that the number of firms can be whatever somebody wants it to be. If I want 10 firms providing fiber optics to the house, the FCC just needs to declare that. And it's just not the case. It's just unprofitable to do that. It would require an enormous amount of subsidy dollars to cover the losses in such an equilibrium, or not an equilibrium rather.

 

We have to think of the market in terms of what it's capable of being. And any analysis of mergers should say, first, is how many firms are feasible in this market? How many firms can profitably provide service? And that should be the target, not some number that's unrealistic. You can't have five wireline broadband providers hardly anywhere. So it's just not sensible. I think now we're having the debate of whether or not four firms in wireless is feasible. I think Sprint's finances suggest that it may not be feasible to have four competitors in the wireless space. But maybe that's just poor management, I don't know. But the evidence suggests, to me at least, that more consolidation may be needed. And we can hate going from four to three, but if that's what the equilibrium is, then fighting it is really unproductive.

 

Alex Okuliar:  So, George, it sounds like your perspective on this is very much that this should be -- that regulation in this space should really be more on an ex-post basis with enforcement primarily through antitrust. Chip, from what you said, I'm gathering that for you it's a bit more of a continuum and that there can be more of a rules-based framework set up to help promote competition. And I want to ask you in that same vein, are there -- from your perspective, has antitrust -- are there examples where antitrust enforcement has really failed us in this space that would, from your perspective, create a need for a heavier rules-based approach? I'm thinking disputes like the recent Dish-AT&T-Time Warner, I believe, dispute where there was a blackout of HBO, I think, for Dish. Is that an area where antitrust enforcement is unable to solve the problem? Or is that something where we should continue to wait and see?

 

Chip Pickering:  The examples of where antitrust worked, going back to the AT&T divestitures, probably I would argue was the most successful domestic action that the Reagan administration did on a domestic, economic move. It really did change the world and ushered in the fiber, digital networks of MCI and Sprint, and then WorldCom, and tens of others that followed. And that gave us the internet backbone. And then it set a model that worked, later in cable, and in wireless, and in the '96 Act.

 

So competition policy I would argue has really helped us avoid major antitrust actions over the last -- because of one -- the Reagan DOJ action. But then all of the subsequent FCC and Congressional actions that did really give us a strong, rule-based competitive marketplace across every sector. And then it led to the emergence of the internet age and business models that are now beginning to disrupt and displace the traditional incumbent telephone and cable industries, and publishing in a number of other areas.

 

I would say that because competition policy has been so strong over the last two and a half decades to three decades that we've avoided having to have an antitrust enforcement action on a major scale that was similar to what Reagan had to do in 1984, the question is with the lack of certainty on open internet and net neutrality, does that make antitrust enforcement more likely in the future and a more disruptive intervention into the marketplace necessary into the future? And I would argue that if we could establish a permanent, predictable solution on net neutrality so that there's equal access to content, and apps, and the economy of the future that that is the best way to limit intervention by DOJ into the marketplace of the future.

 

George Ford:  I don't disagree with Chip that rules are important. Every market has rules they have to operate by. I think what's interesting about the AT&T-MCI situation is that antitrust was really needed because the FCC was fighting competition. And that's often the case that it's the failure of regulation that draws in the antitrust authorities. Regulation, generally, to the economist is viewed as a means to limit competition, not promote it. And it's only after some pretty serious beatings that the FCC, historically, has changed its ways, and that comes and goes with the politics and the preferences of whoever is running the agency.

 

But I think that we have to be a little careful with rules and antitrust at the same time because of the Trinko decision. And if the FCC has a certain source of rules, and those rules may lead to what the people view as anticompetitive conduct, that the antitrust authorities may say, "Well, that's not my problem. That's an FCC rule and I can't really fix it." So there is this trade off or substitution that we have to think about between heavy rules and antitrust action. I do think in this present environment we have to be real careful with rules, at least very strong ones. I think some rules are certainly okay, but we can't be too aggressive with them because we don't really know how this market's going to play out right now, and it is a very difficult time and companies at all levels of the network are really trying to figure out really what is [inaudible 32:39].

 

Alex Okuliar:  Yeah, there's been a lot of calls for net neutrality legislation at the federal level, and then, of course, there's been state activity in California. Assuming for a second that you can waive a magic wand and do whatever you'd like, what would you do in terms of setting up a net neutrality legislative framework, or would you not do that at all?

 

George Ford:  Well, the one reason I would think legislation would be preferable is that I think that the decisions about net neutrality have become purely political, and we're basically going to have Title I or Title II, depending on whether there's a Republican or Democrat in the White House. And I think that's terrible. I mean, that's just going to destroy the incentives of companies to invest. I think that for that reason legislation may be useful.

 

I also think that legislation may be useful because it's not clear to me what authority the FCC has to do the things that people want out of net neutrality. And even the carriers agree to certain sorts of conditions: no blocking and things like that. But a "no blocking" rule is a "zero price" rule, and a "zero price" rule, under Title II, is confiscatory and illegal. So I think that legislation may be required to sort of establish some sort of authority for the FCC to implement any sort of net neutrality regime, at least of the sort it talks about today. But really for me it's just to try to get the thing settled so we're not hopping back and forth every four to eight years based on who gets elected.

 

Chip Pickering:  As George kind of lays out the need or the agreement for legislation, there are several benefits. One, it would be permanent. It wouldn't be back and forth depending on who wins the White House. So it'd be predictable, and it would lead to greater investment because it's more certain and predictable. Two, right now what we're seeing are a lot of states taking action on their own. We've always believed that telecommunications policy, whether it's the wireless or the internet or the need to have a national framework will make investment and deployments of new networks, and technologies, and services, and applications more likely. And so instead of having 50 states acting on their own, a national framework is preferable.

 

And going to something that George said earlier, telecom and tech policy historically has been bipartisan. Net neutrality has introduced a lot of partisanship into this issue, and it keeps us from solving other problems. So the sooner that we can have a permanent, legislative solution so that we have a national framework that is predictable, and that we can restore as much bipartisanship into competition policy as possible I think would be good on all of those fronts.

 

Going into the structure conversation with George, on the wireline side we have, historically, felt that if you have at least three -- there's a major difference in markets where you've had one or two and then you have a third entrant. And that way the prices come down, speeds go up, everyone upgrades their networks, everyone gets better.

 

And if we're ever going to win the race as it relates to China on 5G, it will take a race to build fiber. The network and architecture of wireless in the future will be small cell. It will be dense. You'll go block by block, street by street, intersection by intersection deploying fiber networks with small cells and fixed wireless to supplement the fiber. But it will be a fiber-heavy, fiber-intensive infrastructure architecture and investment of the country.

 

And competition, if what we've learned in wireless over four generations of technologies, you first start with local and regional firms building out the wireless networks, and then they become national. I think on 5G we'll see that same type of heavy-intensive entry by non-traditional players into 5G into building fiber, small cell, and wireless. And it really will be from the competitive, not the incumbent, industry where the new networks will be built.

 

And so what the FCC is doing on the deployment agenda, what Congress is doing to streamline and speed deployment of new networks, and whatever can be done to sustain competitive entry of building new networks really does serve the national interest in the marketplace and a free market very well because you do get into a different competitive market when you have more than two providers on the wireline side, and then you really change the wireless market as well.

 

George Ford:  I agree with Chip. We need a national framework for net neutrality if we're going to have one. And we need a national framework for privacy if we're going to have one. [You] can't have these companies trying to match up their business plans to 50 different laws. I mean, it's just not really feasible, and it will certainly discourage them from deploying.

 

I also think that 5G could be a significant shift in the way the market looks if it's feasible to deploy in small ways. I think that more companies may choose to be in the fiber business, to serve towers and antennas. So I think that is a possibility that we could have what might be viewed as a more competitive landscape there. Although, I wonder whether or not the consumer will see it as much as that will be more of a wholesale role. But I'd probably be more handsome if I were three inches taller, but you just can't -- if the equilibrium is two, you can't have three, and I think that's always lurking behind the scene is that the economics is going to determine how many competitors there are, not the wishes of regulators and politicians.

 

Alex Okuliar:  Is there any empirical evidence out there, either in the U.S. or abroad, that suggests a strong correlation between competition policy related to net neutrality and investment in the telecom sector, whether it's infrastructure investment or other areas?

 

George Ford:  Yes. I mean, if you look at government data on the topic and use standard methods for assessing the impact, the 2015 decision, which was really a 2010 decision, was horrible for investment. It shrunk investment significantly. And I think that's the expectation that it would. I don't think that net neutrality itself -- I mean, the concept is necessarily detrimental to investment, and we didn't really see any investment effects from, say, the principles that Chairman Powell outline.

 

But Title II is a different beast, and it there was a lot going on that was associated with it. That was a very regulatory period. But I think that door was opened to all sorts of regulatory excess. And, of course, it depends on who's making the regulations whether or not that excess will occur. But I think the view -- at least data tells us the view was that companies believed that net neutrality -- that going to Title II for broadband was going to be very bad for business. Firms withdrew from investment.

 

Chip Pickering:  This may be an issue where George and I may have differing studies and different economic analysis and look at the universe of data from different perspectives. If we look at it from what is emerged over the last, let's say, 18 years, once the internet companies just began to form, if you -- Google, I believe, is 20 years old this year. Facebook and Twitter and some of the other major tech companies are even younger than that. So they're really just hitting their teenage years. But if you look at their investment and valuations, and if you look at all of the new investment in the streaming industry and the content industry, I really believe that that investment -- and if you look at apps and the development of apps over the last 10 years after the smart phone came out, we went from 10 apps to 10 million apps. And you went from web users over the last 20 years to now representing between 2 and 3 billion websites.

 

So open internet really created this abundant investment, not only in the U.S. but internationally and globally to create these huge markets for every small business, every start up, every type of imaginable business from local hardware to local realtors. It really did transform the entire economy, and if you look at all the investment that comes out of an open network and an open platform, and an open market, it really is something that I think is one of the great free-market success stories of world history. And it came out of those principles that first started by Michael Powell at the FCC and Kevin Martin as a Republican, led set of principles based on free trade and free-market policy.

 

So a strong net neutrality that has the equal access principles embodied in it, I think, creates larger markets, innovation, and investment across the board in every single sector of the economy. If you look at it just on the network side, the numbers are in dispute of whether it increased investment in networks. INCOMPAS recently filed an economic study that shows we now have competitive entry of fiber builders in states like Kansas, and Missouri, and Mississippi, and California, small states like Oregon, and Wyoming, and Montana, that because you no longer have to buy a whole bundle of cable video packages and you can just connect a server to a fiber network and give them access to the internet, that has created a whole new economic market and model for fiber builders that are entering the market around the country. And, again, that would not have occurred without a long history of open internet principles and protections.

 

So maintaining that, I think, is critical to get the investment and the infrastructure from the new entrants and the competitors that are entering and building out these new, dense fiber networks and small-cell networks that will then enable the Internet of Things, advance robotics, telemedicine, all of the autonomous vehicles in the automotive industry. So an open internet is really key to innovation investment across every sector of the economy.

 

George Ford:  And I don't think we really disagree the way that Chip has put it. I mean, the internet has driven enormous amounts of investment. My point was that regulating broadband internet service under Title II of the Communications Act, which really wasn't even under Title II of the Communications Act since it violated every section of Title II of the Communication Act, was detrimental. I think that the internet certainly drives enormous amounts of investment. I think that streaming video is certainly going to help the deployment of fiber because they don’t have to deal with video packages anymore. Although, I wonder sometimes whether or not we'll go back to that model eventually, given the cost of accumulating enough of that content.

 

The internet is an amazing thing when it comes to investment, but how the FCC approaches it, and the rules that it establishes, and the mechanisms, and the statutory support it uses to do that is going to affect how firms invest. And the way that it was done since 2010 has been, at least the evidence suggests and I'm aware of no credible evidence to the contrary, that investment failed significantly.

 

Alex Okuliar:  Thanks, George. Thanks, Chip. George, the FCC with the Restoring Internet Freedom Order shifted a lot of responsibility for consumer protection enforcement in the telecom space and the internet back to the FTC. Do you think the FTC's capable of handling the kinds of issues that will arise under the umbrella of, let's call it net neutrality, but consumer protection aspects of net neutrality? What authority does the FTC maintain to continue addressing neutrality concerns?

 

George Ford:  Well, that's probably a better question for an attorney. I think the FTC does have some authority to deal with egregious conduct by broadband providers. And I also think the FCC retains that authority to do that, if only through the bully pulpit or the way its addressed it in the past in dealing with a few of the issues that the agency itself created, such as [inaudible 46:44]. So I don't worry that much about the inability of government, either the Federal Trade Commission or the Federal Communications Commission to address a real problem. I think the authority is there to do that, whether formal or not. I mean, the FCC has a lot of power that doesn't show up in some sentence in a statute. So I think that that's not really going to be a huge problem.

 

I don't expect there will be things that are really anticompetitive, truly anticompetitive happen. And I think that should be the standard for net neutrality, really, is an anticompetitive act. A lot of the things we're talking about in net neutrality are not anticompetitive behaviors. Charging for a service is not an anticompetitive act. Charging different prices to people who buy different services is not an anticompetitive act. So I think that we have to get serious about what we really think an anticompetitive act is rather than what some people like or don’t like just because they don’t like it or like it. I mean, that's not really a standard by which we can establish policy and give companies the confidence to invest.

 

Alex Okuliar:  Thanks, George. Chip, any thoughts on that with respect to the FTC and its ability to receive the telecom space with respect to consumer protection issues?

 

Chip Pickering:  Yeah, my sense is that there is a natural division of labor or enforcement where FTC can be the primary agency of jurisdiction as it relates to consumer and privacy issues, and the network issues, interconnection, interoperability, all of the issues related to the network side of competition policy, and to a certain degree the devices that will then connect and ride, and the applications that will ride over the network – that should be the primary jurisdiction of the FCC. They both have competition authority in promoting competitive standards as it related to the consumer welfare and the public interest. So competition is shared. Networks should go to the -- jurisdiction should go to the FCC, and consumer and privacy can be well handled at the FTC.

 

Alex Okuliar:  And I should probably put a footnote in here that the DOJ Antitrust Division, of course, has oversight authority with respect to a lot of the antitrust issues for common carriers and has a long history of enforcement in that space, so they would share jurisdiction here. The FTC, of course, I worked at the FTC for a while, and they have, again, a long history of enforcement within the consumer protection and privacy side, or for activities of telecom and internet companies. So it seemed that there is agreement across the two of you, and I think at least within Washington, there's a sense that the agencies are definitely up to the task to fill any void, to the extent one exists, that the FCC may have created following the Restoring Internet Freedom Order.

 

I think we only have a couple of minutes left, so I'll thank both of our panelists. I think, George, Chip, this was a really great discussion. And I just want to see if either of you have any closing remarks or thoughts?

 

George Ford:  I couldn't help but think about when Chip was talking a while back, I was testifying before his committee back when he was in Congress, and this was after the 2003-04 decision to basically dismantle the unbundling regime, and he asked me, "Do we need to reestablish the unbundling regime?" And I said that it wouldn't matter because nobody would show up and invest if you did that because we had seen then sort of an industry, or industry participants, invest a lot of money and don't have the carpet pulled out from under them. And I think that's sort of the same fear that I have today that if this thing gets too politicized and we don't nail down some federal policy on some of these issues, that people are not going to come and invest because they don’t trust the government. It's a very serious problem, and I think that's something that needs to get resolved soon.

 

Chip Pickering:  George, this is a good one to end on. If the policies have developed around new wires, new rules that would incent incumbents to invest in new networks and to get regulatory relief in return, there's a forbearance petition that would reverse that policy and would actually wrongly incent incumbents to keep their old copper – not have competition and raise prices against the hope that we want new entrants, new investment. What our study showed that today because you can get a bare copper and then a competitor can invest their new electronics over it, enter the market, gain market share, and then build their own fiber network or that they can use transport that connects an urban market to a rural, all of the sudden there's a rural, small company that shows up and builds out a whole new fiber network in a small Kansas town. The same thing is happening in Montana, in Colorado, Wyoming, and they're using those elements of the '96 Act on a wholesale basis to then build their own networks and deploy new services. And, again, this is so key to building out the 5G networks of the future.

 

I would say where we don’t have enough competition, only one or two in the marketplace, those elements that allow new entrants to build new networks and then help win the race to 5G, those are the elements that should be preserved and protected.

 

Alex Okuliar:  Well, thanks, again to you both for a thought provoking discussion. I really appreciate it. Micah, I believe that that ends our teleforum.

 

Micah Wallen:  All right. And on behalf of The Federalist Society, I'd like to thank our experts for the benefit of their valuable time and expertise today. We welcome listener feedback by email at info@fedsoc.org. Thank you all for joining us. We are adjourned.             

 

Operator:  Thank you for listening. We hope you enjoyed this practice group podcast. For materials related to this podcast and other Federalist Society multimedia, please visit The Federalist Society's website at fedsoc.org/multimedia.