FCC a Special-Interest Playground When Reviewing Mergers

It’s been almost two months since the Antitrust Division of the Department of Justice cleared the AT&T/BellSouth merger with no conditions.

For reasons of history and politics, the Federal Communications Commission gets to conduct an essentially redundant review of this and other telecom mergers even though it possesses little if any antitrust expertise. FCC merger proceedings, observed former House Commerce Chairman Billy Tauzin, “can leave applicants slowly twisting in the wind to be picked apart by both regulatory enthusiasts and private party shakedown artists.” There have been numerous proposals to eliminate the FCC’s authority to review mergers, which generally do nothing to benefit taxpayers or consumers.

The Antitrust Division, led by Assistant Attorney General Thomas O. Barnett, subjected this merger to the traditional antitrust analysis and concluded it’s not likely to reduce competition substantially. This is not surprising.

On the residential side of the market in the BellSouth region, AT&T is virtually nonexistent, or, as the Antitrust Division put it, of “limited and declining competitive significance.” AT&T can provide services over its own facilities to only a small minority of the business customers, and the merger wouldn’t significantly increase concentration either in broadband markets or the Internet backbone.

Commissioner Robert M. McDowell thinks last year’s telecom mergers provide “a good template to follow.” He’s right.

Applying the “same criteria” that led to divestiture of certain network assets last year when SBC acquired AT&T, the Antitrust Division concluded not only that divestitures are “unnecessary to preserve competition” here, but that there aren’t any other conditions that would be justified, either.

The late Milton Friedman once thought that enforcing antitrust was one of the few desirable things government could do, but came to the conclusion that “instead of promoting competition, antitrust laws tended to do exactly the opposite.” Eventually, he advocated getting rid of antitrust completely, because “antitrust very quickly becomes regulation.” There’s a danger of that happening here.

Rumors indicate some members of the FCC want to re-regulate “special access” and impose baseball-type arbitration on market participants. Special access regulation was designed to allow competitors to enter the telecom market with little if any investment. It was partially repealed years ago, during the Clinton Administration. Competition is thriving in telecommunications, and there is less need than ever to create artificial carrots and sticks applicable to particular technologies and categories of competitors. This is the sort of industrial policy that led to the telecom bubble, which harmed millions of investors.

The suggestion to mandate baseball-type arbitration, although it may sound deregulatory on the surface, is actually a backdoor attempt to reward a particular group of industry participants whom special access and other regulation strongly favored until recently. Rather than reducing the involvement of the FCC in the marketplace, mandatory arbitration would simply add another layer of process. It would tend to enrich the Competitive Local Exchange Carriers, because arbitrators have a tendency to focus more on contriving win-win outcomes than on what the law requires. They generally split the baby. Arbitration is a poor substitute for objective and efficient adjudication.

Similarly, wireless competitors want AT&T to divest valuable spectrum and cable companies are seeking preferential interconnection arrangements as part of the merger. The Antitrust Division rejected all of these blatantly self-serving proposals. But apparently there are members of the FCC who are anxious to do the bidding of AT&T’s competitors.

Normally, the FCC has to conduct a rulemaking proceeding to enact regulation. There’s a reason for this. The normal proceeding is subject to various constitutional and statutory requirements which ensure that the process is deliberate and fair. Much of this procedure can be avoided altogether in a merger review, because there are no deadlines and investors are usually anxious for the deal to close. As a result, the applicants are forced to make “voluntary” concessions which they are ineligible to appeal to a court of law. These concessions may or may not be good for consumers.

Although AT&T and BellSouth aren’t competitors, they arguably fit an antitrust theory that has been struggling for acceptance for years. AT&T and BellSouth are “potential competitors” which should be “encouraged” to become actual competitors. The problem with the theory is the market has found more productive uses for the requisite capital, such as cellphones, cable, WiMAX, direct satellite and broadband power lines.

These intermodal offerings are imperfect substitutes, according to some, for wireline services for one reason or another. Likewise, it used to be argued that airlines and motor carriers were imperfect substitutes for railroads. And those arguments can all still be made, since there are many differences between planes, trains and trucks in terms of price, speed, capacity and reliability. Yet, somehow, there’s enough competition to keep nearly everyone happy. As Friedman’s colleague, the late George Stigler once noted, “competition is a tough weed, not a delicate flower.”

The merger is good for consumers because the combined company will be able to invest more in broadband in the Southeast. The companies claim that BellSouth is investing $2.2 billion over a five year period to upgrade its broadband network, but that BellSouth hasn’t invested in hubs for video services, or negotiated content agreements or constructed the necessary back office systems. AT&T has made all these investments, which won’t need to be duplicated. The combined company will have access to more customers, so it could qualify for more favorable content agreements, which are volume-based. The companies have also committed to things like free modems for residential customers who want to convert from dial-up service to DSL and broadband service at a low monthly rate of $10.

Yet, the AT&T/BellSouth merger proceeding has now been stuck at the FCC for 8 months. In that time, the Department of Justice, 18 state public utility commissions (with only 4 votes out of 73 dissenting) and 3 foreign countries have all approved it. Like Tauzin said, FCC merger reviews exist primarily for the gratification of regulatory busybodies and “private party shakedown artists.” It’s time to eliminate them completely.

Hance Haney is a Senior Fellow with the Discovery Institute.