Outdated Merger Regulations Holding Back Competition

The National Cable Telecommunications Association (NCTA) and other digital utility groups are fighting for their right to purchase potentially failing competitive local telephone companies to expand their customer and infrastructure base. The failing locals, their employees and their customers are fighting for the right to get purchased before running into the ground.  The only thing standing in their way?  A redundant FCC rule forbidding these transactions which supposedly protects consumers, despite the wealth of existing antitrust regulation and the several entities already tasked with overseeing these sorts of buyouts.

To put this in perspective, we can think back to the mid-1990’s when the executive branch attacked the biggest tech firm in the country, Microsoft.  Short-sighted bureaucrats, pushing a command economy demonized Bill Gate’s firm for bundling Internet Explorer (their web browser) along with Windows (their operating system).  They laughed at Gates when he exclaimed that the browser is the operating system.  But today, anyone can see that they are inseparable.  Just imagine using a computer today with no Internet browser.

A similar fight is raging on with the evolution of digital utilities (cable, Internet and phone services).  The bundling of voice, cable, and Internet services has provided consumers with a simple billing system and other efficiencies that were previously missing from digital services.  As technology moves forward, bundling is becoming even more useful.  Caller ID and voicemail are accessible, in many cases, from your television or computer; the line of distinction between web content and normal television programming has been long since blurred; and what were once separate services, like the operating system and the web browser, are now inseparable.

As is true of any market, some players win and some lose. In competitive markets for voice telephony services, some companies’ best bet is often to sell the company while they still have a customer base and a working infrastructure.  Unfortunately, Section 652 of the Communications Act forbids it:

Section 652: Prohibition on Buyouts(b) Acquisitions by Cable Operators: No cable operator or affiliate of a cable operator that is owned by, operated by, controlled by, or under common ownership with such cable operator may purchase or otherwise acquire, directly or indirectly, more than a 10 percent financial interest, or any management interest, in any local exchange carrier providing telephone exchange service within such cable operator’s franchise area.  

In the land of local telephony services there are two primary categories of service providers: incumbent local exchange carriers (ILECs) and competitive local exchange carriers (CLECs).  Despite their cryptic acronyms, the two categories are fairly simple to understand–an ILEC the traditional (once-monopoly) provider of local voice telephony services, whereas a CLEC is one among several new competitors for local voice services.

Historically, by regulatory fiat, ILECs are the local telephone provider-of last-resort.  Because of this, federal statutes exist to prevent other, larger companies from buying them.  For deals involving these carriers, Section 652 is simply redundant.  Antitrust problems are covered by any number of current regulations, and the FTC and Department of Justice have long been the final word on any tech or telecom merger.  Denying ILECs the ability to merger with CLECs is not in question here.

It is the CLECs (the providers of competition for phone services) that are being denied their right to sell to cable companies, despite their having reached a mutually satisfying agreement.  Wrongheaded interpretation of Section 652 forces ailing CLECs to die a slow death and their customers to pay the biggest price.  For instance, the FCC’s decision to give local authorities power to determine the fate of a merger last year in Michigan allowed Detroit to block a merger for their geographic area where no consumer detriment existed.

 Without a foot in the door, large carriers and cable providers don’t invest in the small markets served by these CLECs and a burdensome regulation meant to protect consumers becomes the single biggest obstacle to improving consumer outcomes.

So what’s different between Microsoft then and digital services today?  The only difference I can see is that CLECs exist in a far more competitive market than did operating systems.  In short, customers would get the benefits of market competition — if only the FCC would let them.

The FCC has called for comments on an NCTA proposal to lift restrictions under Section 652 which prevent Cable-CLEC mergers.  FCC officials would be smart to clarify Section 652’s intentions, which would remove any burden on CLECs and let telephony innovation and competition reach every consumer.

 Zack Christenson is a Chicago-based digital strategist who writes on tech policy.

 

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