Forum: FCCs Powell: History Finds for the Market

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The following is an excerpt of remarks that commissioner
Michael K. Powell of the Federal Communications Commission delivered June 15 before the
Chicago Chapter of the Federal Communications Bar Association:

There are several lenses through which we can bring to bear
"judicious intelligence" on the question of [government] mandated cable access
[by Internet-service providers]. Two of the most important of these involve matters of
technology and competitive policy.

TECHNOLOGICAL

The danger is that we have an understanding of phone
systems and cable provision of video services, but we do not have much experience with the
two-way cable-data infrastructure. There are significant differences, and the risk is that
we could clumsily apply regulatory devices that have been developed on the technological
assumptions of phone service.

There are clear differences between telephone dial-up and
cable-modem Internet-access services. For example, dial-up connections offer a dedicated
circuit for reaching the Internet. The cable configuration requires clusters of consumers
to share access, much like a local-area network.

Consequently, the issues associated with shared access
among competitors might be more complicated. Rather than handing over a loop to a
competing service, cable interconnection would require unprecedented joint/multiprovider
coordination and cooperation that may prove too daunting.

Also, one needs to take into account the unique nature of
providing an Internet protocol-based service, rather than the traditional provision of
voice circuits.

In the IP world, the brilliance is in the fact that the
intelligence is not in the center of the network. Instead, the user can employ her
computing device and IP protocols to demand only the capacity she needs, and to specify
the route and destination of her communication without constraint. In this model, the
provider has less ability to control access to content that is available on the open Web.

Given the flexibility of IP protocols, those who suggest
that cable plant represents a technological barrier to content must be able to show why
the open IP protocol is insufficient to ensure access.

Is a firm's control of cable plant an actual barrier
to competition, or is such control just a more efficient way for that firm to provide
services to its customers? The former may be a competitive problem, deserving of
government attention. The latter may be an acceptable competitive advantage.

COMPETITIVE POLICY CONSIDERATIONS

The threshold question that we regulators must ask
ourselves is whether government intervention is appropriate. Sadly, we, too, opt to apply
ideological or partisan labels where clearly none is useful. Either you are
"pro-market" or "pro-consumer."

History has reached a verdict: It finds for the market.
It is now established that free markets work better than any other economic form to
allocate resources, inspire innovation, maximize public welfare and even to protect and
empower individuals.

Government in virtually every nation tried forms of
state-centered regulation, believing they could hatch national blueprints, models and
programs that beat the market.

Yet, today, one looks around the world and sees barely a
whiff of state-planned economic thinking. Governments in nearly every capital are
deregulating and putting private markets in place, privatizing commercial activity and
allowing private capital to flow more freely as the market sees fit.

It is not a coincidence that places with the highest
standards of living are places where markets reign. Wealth is power, and one of the
cornerstones of a free and democratic society is that too much power should not be allowed
to reside in the government. For that reason, much of our constitutional system is
designed to prevent the government from undermining individual rights.

In the case of free markets versus government intervention,
history has rendered a verdict, and that verdict is in favor of markets and against
intervention. Although we have seen that markets do not deploy resources in precisely the
ways regulators prefer, markets unquestionably deploy resources better and more
consistently than does the state.

Thus, restraint should be the watchword for governments in
any new economy driven by unrelenting currents of technological change and innovation,
such as communications and advanced services.

"To the winner goes the spoils." One
fundamental premise of the competitive market is that if one invests and takes risk to
develop superior goods and services, they should be allowed to enjoy exclusively the
fruits of their efforts. The government should not be quick to step in and redistribute
those benefits to other firms that could have taken the same steps themselves.

For example, firms seeking open access to cable systems
could have bought their own such systems. Others could have made the decision to spend
vast sums of money and take the risk to build and deploy these systems. If they did not,
or if they misread the market, arguably, that is their problem.

Is there a clear anti-competitive effect on consumers?
Although it is easy to identify what risks cable Internet access may pose to some firms,
it seems less clear that there are substantial anti-competitive effects on consumers.

The developments in cable over the past year have been a
great boon for consumers. The efforts undertaken by AT&T Corp., Cox Communications
Inc., Cablevision Systems Corp. and others have hastened the day in which average
Americans will have available to them high-speed, broadband capacity to access the
Internet and to make phone calls at affordable rates.

Further, upgrades to cable plant have intensified a
potential competitive threat that has led to heightened investment in alternative
broadband technologies by other firms.

We should be skeptical of the protestations from those who
now feel the heat of a viable competitive threat and who themselves did not take
successful steps to bring these benefits to the public.

Perhaps the only way developments like those that we see in
cable-broadband deployment could harm consumers of Internet-access services is if cable
firms also have market power in the provision of Internet access.

But I have seen no evidence to suggest that cable has
developed any such market power. There are scarcely 600,000 residential subscribers of
cable-modem services. That pales in comparison with the multimillions that are currently
accessing the Internet via narrowband technologies and phone services.

It is true that the slow deployment of these services
accounts for this disparity, but we have little on which to base a conclusion that
broadband service is a market segment distinct from narrowband Internet access.

How much bandwidth is enough? What are the killer
applications that require great bandwidth and that are so indispensable that consumers
should not be without them?

Many consumers will opt for less expensive narrowband
service for e-mail and basic applications, rather than paying more for capacity they will
not use. Will broadband replace narrowband, or will there be two classes of service?

In my view, these questions may not need to be decided by
regulators. Rather, we should let that decision fall to consumers and the firms vying to
serve them in the marketplace.

There still is great innovation potential for alternative
access. And even if broadband service becomes a market segment distinct from narrowband,
it seems likely that alternative technologies will compete successfully with cable in the
near term.

Contrary to what some suggest, there are a number of viable
technologies and service providers in the broadband race, including digital subscriber
line, narrowband dial-up connections, integrated services digital network, wireless,
satellite and electric utilities.

One great fear is that if we ordain cable an essential
facility and begin to mandate a right of access on favorable terms, it may stifle
aggressive attempts to develop competing methods of bypassing the cable plant.

What got AT&T into cable in the first place was its
recognition that it was unworkable to be dependent on the local facilities of an
independent local-exchange carrier. It found a bypass.

The intense fear and anxiety over AT&T's cable
play has led to more energy and action on the DSL and wireless fronts than we have ever
seen. Competitors are responding. The market has identified the risks of cable monopoly,
and it is working on a solution. Investment is flowing.

Of course, if a cable company were to monopolize the access
market, there would be some loss of consumer choice, but this loss is probably overstated.
Consumers will retain full choice of content.

That, more than anything else, is critical. The real value
of the Internet is that it allows users to visit any corner of the world and to purchase
from nearly any seller in the world. If these choices are fully maintained, the most
critical risk associated with cable-plant monopolization is averted.

Undoubtedly, a vertically integrated cable Internet
provider may have the ability, and even some incentives, to attempt to corral consumers
into particular content choices or to bar them access to others, but I seriously question
whether that business model will be sustainable in the long run.

What is the public-policy interest served by protecting
competitors?

The flip side of focusing government intervention on
protecting consumers is that regulators should avoid intervening merely to protect
competitors. Our job is normally not to protect competitors.

And to the extent that appeals for regulatory intervention
are based on protecting particular competitors or classes of competitors, we must demand
to know why or how that is the appropriate focus of public policy.

Internet time is brutal. It is not surprising that in the
relentless race to innovate, firms will seek to use government to slow the pace, to gain
an extra step on or to hold back their competition.

But government should not allow itself to be used as
leverage in business transactions, or to be used to remedy bad business decisions or to
mitigate untold risks. Nor should we act to preserve business segments or models that may
have been transitional or that do not add significant value to the distribution chain
where new technologies have been introduced.

REGULATORY ACTION

So what lessons for those who advocate government
intervention can we learn from this application of "judicious intelligence?"

First, given the record of the Internet-market dynamics, I
start with a rule of decision. I am of the view that anyone advocating the extension or
intrusion of regulation bears a heavy burden of proving that the "public" will
be harmed, absent doing so.

Second, we should favor antitrust application to actual,
substantial harms to consumers over industrial policy. Government-orchestrated industrial
development may be unwise generally, but it is especially inappropriate in a market like
the Internet.

The Internet is driven aggressively by constant change.
Predictive speculation is dangerous enough when practiced by experts steeped in this
industry. It is completely foolhardy when practiced by government. Moreover, government is
simply not responsive enough to manage such rapid change. Every rule or ruling we issue is
likely to be obsolete the day it is written.

Proponents of cable-access regulation often sprinkle their
arguments with a parade of speculative harms that will befall consumers or the market. If
we truly are focused on addressing real harms, rather than speculative harms, one must
demand an answer as to why the existing antitrust laws are not sufficient to protect
consumers.

The advantage of such laws is that they do not impede
market development in the early, more speculative stages of development. Rather, antitrust
steps in when one can demonstrate that there are likely anti-competitive effects.

Third, we should carefully assess the costs of regulation,
including direct costs, indirect costs and opportunity costs. It is not that difficult to
identify a problem and to suggest the answer in terms of a general rule or provision of
law. In so doing, however, it is easy to ignore the enormous costs and complexities of
trying to actually craft and implement rules that are clear, effective and efficient.
Mandating open access to cable could unleash a never-ending regulatory exercise to catch
up with change.

Government intervention may also engender opportunity
costs. For example, if we intervene prematurely to mandate access to cable plant, the harm
may be greater to consumers than they would incur if regulators waited until evidence of
sustained market power develops. Such intervention could stifle the development of
alternative paths to the home that are currently under development and that are attracting
investment.

Ironically, pronouncing cable an essential asset and
declaring regulation of that asset may risk condemning customers to regulated monopoly
control of access.

On the other hand, if we decline to mandate such access
until we have something tangible to address, we would be in a position to surgically
tailor government intervention in a manner that is least disruptive to the market.

I generally reject the retort that it will be too late if
we wait until then, for I believe that an access requirement now would only be marginally
less complicated than one later.

I would note that whatever the answer to the question of
mandated cable access is, I am skeptical that this answer can be developed in hundreds of
different ways by state and local franchise authorities.

If in the wake of the recent decision in Portland, Ore., we
see a contagion of different approaches proliferate throughout the country, we will end up
with an incoherent, disjointed policy melange that seems sure to impede the development of
advanced services, in any form, for our citizens. Such concerns underlie the
constitutional commitment to interstate commerce and the federal supremacy clause.

But for now, I hope to focus the debate not on how or by
whom access to cable should be mandated, but rather on whether mandated access is a wise
policy at all.

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