The ugly truth behind the FCC's Verizon-spectrum approval

(Note: This is a guest column by Geoffrey Manne and Berin Szoka. See below for their bios.)

commentary Yesterday was seemingly a good day for users of smartphones, tablets and other mobile devices. The Federal Communications Commission approved, with conditions, Verizon's purchase of wireless spectrum from SpectrumCo, a consortium of cable companies. The more spectrum that's put to use, the more we'll ease the coming "spectrum crunch" as exploding data demands outstrip supply. This particular spectrum has sat unused for years, and the FCC's approval of the deal (following on the Department of Justice's approval last week) clears the way for some welcome relief.

The FCC's decision seems measured, citing both benefits and risks of the deal to consumers and rejecting most of the claims of the deal's staunchest critics. But this apparent reasonableness masks the true, arbitrary nature of FCC review: a costly, unsupervised game of "Mother, May I?", requiring applicants to rearrange their businesses in ways the agency could neither require by regulation nor extract as concessions without exceeding the proper scope of its transaction review. Most troublingly, the FCC need not even make its extra-legal demands explicit. Because all future applicants know that the actual approval of this deal is far less significant to them than the process behind it, even yesterday's good news comes with an asterisk.

It's no secret that some at the agency -- to say nothing of the self-proclaimed consumer advocates who aggrandize it --seek to manage the tech sector based largely on their unsubstantiated belief that "Big is Bad." Yesterday's order and the conditions imposed on the parties are animated by this assertion. But it's by no means clear that consumers are well served by this approach; rather, this maligned concentration of spectrum has been accompanied by lower prices -- along with enormous investment, expanded access and rapid innovation.

[From Gerald R. Faulhaber, et al., Assessing Competition in U.S. Wireless Markets: Review of the FCC's Competition Reports (July 11, 2011), available at http://ssrn.com/abstract=1880964.]

Of course, sometimes big really is bad. The central challenge for policymakers is ensuring they don't erroneously thwart beneficial deals and instead heed Nobel laureate Ronald Coase's caution: "if [a regulator] finds something -- a business practice of one sort or other -- that he does not understand, he looks for a monopoly explanation." That's why, in theory, we limit agencies' authority to review deals. But in practice, the FCC exceeds limits on its authority, applies a vague "public interest" standard with little analytical rigor, and avoids even that minimal rigor by pressuring companies into making "voluntary" concessions.

In this case, the FCC's review of the commercial agreements accompanying the spectrum deal exceeded the limits of Section 310(d) of the Communications Act. As Commissioner Pai noted in his concurring statement, "Congress limited the scope of our review to the proposed transfer of spectrum licenses, not to other business agreements that may involve the same parties." We (and others) raised this concern in public comments filed with the Commission. Here's the agency's own legal analysis -- in full: "The Commission has authority to review the Commercial Agreements and to impose conditions to protect the public interest." There's not even an accompanying footnote.

Thus the FCC extended its review authority to cover an economically valuable set of complex business transactions over which it has no legal authority. Approval or not, the FCC has laid down its marker, letting all future comers know that its bargaining advantage extends well beyond the stack of chips Congress put in front of it.

Accepting the limits Congress has imposed on the FCC doesn't require approving the Verizon/SpectrumCo deal -- or any other. The DOJ is perfectly willing to use antitrust to block such deals, such as rejecting the AT&T/T-Mobile merger last year. Just last week, DOJ demanded concessions of the parties to this deal (although its analysis, too, was flawed). The key difference is that DOJ can block or condition approval of a deal only if it shows the deal would substantially harm consumer welfare. And DOJ bears the burden of showing this harm, measured against extensive case law and economic analysis. But parties before the FCC bear the burden of demonstrating that their transactions enhance competition and serve the "public interest." That phrase "lacks any definite meaning," as Ronald Coase noted more than 50 years ago. Little has changed.

The FCC falls prey all too easily to the problem Coase identified: overestimating the dangers of concentration and underestimating how much spectrum sales and other transactions can benefit consumers. Even the Obama DOJ has cautioned the FCC against "striving for broadband markets that look like textbook markets of perfect competition...." As industry evolves and competitors vie for scarce resources (especially in wireless broadband), they meet new competitive challenges with novel business arrangements and increased investment. Economies of scale may become more important, and concentration may increase, benefiting, rather than harming, consumers. But the FCC cries "Monopoly!" -- without actually having to prove it.

Perhaps worse, having firms over a barrel, the FCC uses its leverage to regulate future conduct by extracting "voluntary" conditions in the name of the public interest --often conditions it couldn't impose by regulation. That's almost certainly what happened here with Verizon's concession on data roaming. Verizon (but not its competitors) will be subject, for five years, to obligations the D.C. Circuit may soon rule the FCC has no authority to impose -- much as Comcast "voluntarily" agreed to net neutrality conditions in its merger with NBC Universal even stricter than the regulations the D.C. Circuit seems likely to strike down for everyone else. This creates a patchwork of rules and obligations, coerced without sound economic justification, in a fashion largely unreviewable by courts, and in contravention of limits placed on the FCC's authority by Congress and the courts.

This effectively grants the FCC unchecked power to stop transactions it doesn't even have the authority to review, and to regulate companies in extra-legal ways it has no authority to.

Congress should rein in the FCC. The FCC Process Reform Act passed by the House in March (but now stalled in the Senate) is a good start, requiring that conditions be narrowly tailored to real harms the FCC actually has authority to regulate. But until Congress makes clear that the public interest standard is not a carte blanche and that the limits it explicitly imposed on the scope of the Commission's reviewing authority are binding -- or, even better, that the DOJ alone has the authority to analyze a transaction's competitive effects -- the FCC will continue playing games with our high-tech economy, even when it appears to be exercising restraint.