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FCC Martin chills broadband investment embracing Hundtonomics

FCC Chairman Martin's surprising proposed open access/net neutrality regulations for the 700 MHz auction, threaten to broadly chill the broadband investment necessary to deliver broadband deployment to all Americans.

  • Chairman Martin apparently has chosen to abandon over a decade of bipartisan free-market Internet policy and adopt a new more regulatory "managed competition" broadband policy advocated by new House Chairman Ed Markey, who has strongly praised Chairman Martin for his support for net neutrality regulation/open access.
  • The real world effect of this unwarranted core policy flip flop is to introduce new and very substantial policy, legal and investment uncertainty into what had been a very stable economic growth environment. 
    • Chairman Martin is making the heroic assumption that he can massively interfere with market forces and heavily subsidize untested and likely uneconomic business models with no unintended consequences on investment or economic growth in the critical broadband sector.    

Chairman Martin has now emphatically embraced the core economic principle of former FCC Chairman Reed Hundt's Frontline Proposal (and Frontline's Google gaggle of investors), which is that market forces will not and cannot promote sufficient "competition" so the government must regulate and "manage competition" (i.e. mandate prices, terms and conditions -- either directly or indirectly) to ensure consumer welfare.


  • "Hundtonomics" is simply the political-economic ideology that regulators know better than markets or consumers.


    • Hundtonomics, which Mr. Hundt effectively explained in his book "You say you want a revolution"), was responsible for:


      • massive policy, legal and investment uncertainty for seven years following the passage of the 1996 Telecom Act;


      • a multi-year delay in tens of billions of dollars in investment in broadband networks because Mr. Hundt's regulations ensured little opportunity for return on investment;
      • a multi-year delay in upgrading the Internet too handle video; and  
      • bankruptcy of dozens of FCC-policy-subsidized CLECs and fiber optic companies, like WorldCom and Global Crossing, which lost investors and pensioners over a trillion dollars in the market bubble.

So how does Chairman Martin's proposed net neutrality regulation chill broadband investment?


I. New Policy Uncertainty


Wireless is by far the most competitive segment in the broadband sector, and the US has more facilities-based competition than any nation in the world by far with four national wireless broadband networks today and two more being built.


  • If Chairman Martin believes that net neutrality regulation is necessary for this most competitive part of broadband access to the Internet, what does this signal about how his real views will turn out to be on net neutrality regulation of DSL, cable modem, and BPL?


    • Is the market to believe Chairman Martin now in these proposed rules that market forces are failing?


    • Or is the market to believe what the FCC consistently decided over the last several years, that cable modems, DSL, BPL, and wireless broadband are all unregulated information services without net neutrality/open access restrictions?


  • Investing is largely about forward-looking confidence and perception.


    • Chairman Martin is proactively choosing to introduce massive broadband policy uncertainty where little existed before! 


      • Regardless of his true policy or political intent, which remains a mystery, the real world effect of Chairman Martin's leadership actions are to introduce new and massive forward-looking policy/investment uncertainty into the national broadband investment equation. 


Chairman Martin apparently has decided to lead the FCC in a very different policy direction than the current policy baseline of:


  • The Bush Administration policy that no net neutrality legislation was needed, which it communicated officially to the House last year;


  • The NTIA's current public position that the Bush Administration's broadband policy of relying on market forces has been highly successful in making broadband access availiable to all Americans by President Bush's goal of 2007;
  • The Federal Trade Commission's view that:   "To date we are unaware of any significant market failure or demonstrated consumer harm from conduct by broadband providers.";
  • The 1996 Telecom Act's purpose: "To promote competition and reduce regulation in order to secure lower prices, higher quality services,...and encourage the rapid deployment of new telecommunications technologies." ; and


  • The rejection of net neutrality legislation by the House and Senate last year.  

Policy uncertainty does not get more fundamental than that.

II. New Legal Uncertainty


Current Chairman Martin is pushing the boundaries of his legal authority by pursuing auction conditions that run directly counter to the 1993 purpose of the FCC auction law, which was to create an economic (not regulatory) mechanism to allocate scarce public spectrum resources to the maximum benefit of the American taxpayer and to reduce the Federal budget deficit.

  • Broadband providers are likely to sue on multiple grounds. One of the most likely is that the new rules are arbitrary and capricious in that the new auction conditions run counter to all the FCC's relevant previous orders which declared broadband (cable modem, DSL, wireless and BPL) to be competitive unregulated information services not monopoly telecom services requiring common carrier regulation. 
    • Moreover, the Chairman's own public comments have presented a completely opposite policy view than he is now espousing. 

At their core, Martin's proposed open access regulation conditions, are common carrier regulations that attempt to regulate and predetermine price, terms and conditions of interconnection.  

  • We have seen this movie before with Hundtonomics following passage of the 1996 Telecom Act where another FCC Chairman thought he was smarter than the market and consumers and could politically factor in all the nuances and tradeoffs that the market and consumers make every day.
  • That seven year legal fight was the equivalent of Telecom World War I. Chairman Martin appears to want to ignite Telecom World War II in the courts.
    • Maybe as a result of losing the extremely high profile UNE-P legal battle in the Supreme Court, Chairman Martin hopes to gain ultimate vindication of his legal and policy prowess by refighting and winnng the same basic legal fight in the competitive wireless world.

III. Investment Uncertainty:

Markets hate uncertainty. There are too many other investment opportunities that don't have massive regulatory and legal risk and uncertainty associated with it.

  • The well known adage is: "Capital goes where it is welcome."

Chairman Martin's proposed rules make it clear that market forces and competitive bidding in a open and unfettered public auction won't be tolerated for a third of the most valuable spectrum available in the 700MHz auction. 

  • Chairman Martin already knows which company he wants that spectrum to be earmarked for: Google, because Google is the only company that does not have to charge for wireless services but can offer a advertising model if they can get the spectrum cheap enough.
    • In other words, Chairman Martin is ensuring that Google and its coalition could win the spectrum at a multi-billion discount, so they can try and make an uneconomic open access business model more economic.
    • At the core, open access needs free or near free conduit or spectrum.

Any company or investor currently contemplating future broadband investment has to be substantially more uncertain today than they were before FCC Chairman Martin proposed a 180 turn in broadband and Internet policy for a key part of the Internet.

  • Investors appreciate that regulation is like a cancer that when it appears it can rapidly metastisize and spread out of control wreaking havoc on the whole system.
  • Chairman Martin is effectively trying to say don't worry: I am only introducing a few cancer cells into your broadband investment equation, it won't hurt you...