When the FCC adopted the Open Internet Order last year, Chairman Wheeler made one thing crystal clear: "To preserve incentives for broadband operators to invest in their networks," and "to provide returns necessary to construct competitive networks," there would be "no rate regulation, no tariffs, no last-mile unbundling" for broadband services and facilities.
To Members of Congress, when they asked whether the imposition of Title II common carrier regulation on broadband would lead to central-planner-style pricing controls.
To investors, who were nervous about the effect that rate regulation could have on economic incentives to deploy faster broadband networks across the country?
By FCC lawyers who repeated this promise to the D.C. Circuit, when arguing that there was no harm to broadband providers necessitating a stay of the FCC’s Title II ruling.
The ISP industry welcomed those promises and of course assumed that they would be honored—not only for residential broadband services, but for business broadband services as well, where competition often is even more robust, where the need for regulation is essentially nonexistent given the competition that is present, and where the need for continuing investments is at least as compelling.
Unfortunately, it appears that these repeated commitments were actually quite hollow. Today, the FCC adopted a notice of proposed rulemaking calling for business broadband services to be subjected to—you guessed it—rate regulation. Despite prior statements recognizing the investment-destroying effects of rate regulation, a majority of the Commission has now embraced and even expanded on the regulatory approach the Chairman rejected only a few months ago.
Remarkably, making matters worse, the FCC’s proposal to impose rate caps and other regulatory mandates extends beyond the incumbent telco providers to new entrants in that marketplace, such as Comcast and other cable companies that are investing billions of dollars of capital and bringing real competition and innovation to the sector. In this upside-down new regime, a competitive cable provider that currently holds a 10% share in a market would be treated the same as a dominant incumbent provider serving 90% of that market. Indeed, in a market where an incumbent is currently the only business services provider, any potential new entrant would be assured of facing rate regulation immediately upon entry, before even winning its first customer.
Never before has the FCC sought to saddle new entrants with such heavy-handed pricing mandates—in any arena, let alone the broadband marketplace Chairman Wheeler promised to shield from such regulation. The inevitable result of such regulation would be a huge disincentive for nascent competitors to continue investing and competing in the business services marketplace. That disincentive would result in significantly less entry and competition over time, meaning that market forces would not drive down prices or boost service quality; the FCC would have to try to engineer those results through top-down mandates alone—an approach that almost never delivers the intended benefits.
This new regulatory regime turns on its head traditional justifications for regulation. Normally, the government regulates only where there is a market failure that requires regulation to create the synthetic benefits of competition; as Chairman Wheeler put it in a speech earlier this year, "competitive markets produce better outcomes than highly regulated markets." Yet here, regulation is being injected into a competitive sector, thereby discouraging future investment and innovation and depriving customers of the existing competitive benefits, which the government then seeks to restore with regulation.
The proposed rules come as part of the FCC’s proceeding on "special access" services—a term customarily applied to dedicated, point-to-point connections to business premises and other locations (such as wireless cell sites), traditionally provided using legacy technology and long dominated by incumbent telephone companies. For decades, the FCC’s special access regime has distinguished between "dominant" incumbent providers and "non-dominant" competitors (like Comcast), and has imposed rate regulation only on the dominant providers that have the ability to control prices. That approach is the product of many years of bipartisan policy consensus and foundational antitrust law. It’s also common sense. Non-dominant providers, by definition, don’t have the power to charge above-market rates. And as a practical matter, potential new entrants are far more likely to deploy and invest in competitive networks and services when they know they won’t be subject to prescriptive rate regulation.
This rulemaking, like a bolt out of the blue, would lay waste to that longstanding and eminently sensible regulatory framework and would brush aside basic tenets of antitrust law. In its place, the FCC would establish a regime for so-called "business data services" (BDS), which would include not only the incumbent carriers’ traditional special access services, but also packet-based services offered by competitive providers like Comcast. The FCC proposes to eliminate any distinction between dominant and non-dominant providers of these services, and to impose rate regulation and other mandates on all providers in any markets found to be "insufficiently competitive." As far as we can tell, the FCC will seek to apply that label extremely broadly to entire classes of service offerings.
The upshot: non-dominant broadband service providers would be subjected to rate regulation (among other obligations) for the very first time. Again, a competitive cable provider with a 10% market share would be treated no differently from a dominant incumbent provider with a 90% share. That’s just nuts. And the asserted objective behind this upending of bedrock economic principles? The FCC’s theory is that doing so would somehow lead to more choice and greater competition in the business services marketplace.
That’s obviously wrong and embarrassingly bad policymaking. If the goal is to promote new entry and investment in business broadband services, the last thing the FCC should do is institute price controls and apply them to new entrants. The Chairman himself recognized this obvious principle when he tied his prior "no rate regulation" pledge to the need to "preserve incentives" to invest and "to provide returns necessary to construct competitive networks." Yet here a divided FCC is, proposing a regulatory regime that penalizes non-dominant, competitive providers for entering with prescriptive rate regulation. New entrants in the business services marketplace already face significant challenges competing against the incumbents. Such competitors will have to think long and hard before choosing to challenge an incumbent when they will also be confronted with government-mandated price controls. The stakes are too high to gamble on such a radical approach.
It should be obvious by now that these new fiber connections won’t build themselves. Comcast has invested over $5 billion since 2010 to enter the business services market as a new competitor offering highly innovative products that appeal to business customers of all sizes. But if the FCC imposes a heavy-handed new regulatory regime that threatens to deprive service providers of a reasonable return on investment, then further investments in competitive services simply won’t happen. Businesses of all sizes—but especially small to medium-sized businesses who buy the services most affected by the FCC’s proposal—will end up with less choice and will benefit less from innovation, and may end up paying even more for service in the long term.
These harms will have a direct impact on consumers. New entrants offer additional choice, improved technologies, and lower prices. Perhaps most importantly, in the wireless arena, where explosive data growth and the advent of 5G will require a huge investment in fiber connections to carry the data from new cell sites to the Internet, the chilling effect of this regulatory proposal will be felt the most.
The bottom line: we are concerned that Chairman Wheeler’s favorite refrain—"competition, competition, competition"—seems to be moving on to "regulation, regulation, regulation." We hope our concerns are misplaced.