My AEI colleague Mark Jamison recently posited that the Federal Communications Commission (FCC) could be transformed (0) into a more effective regulatory body by replacing its current network-centric wireline and wireless silos with a function-based structure, with bureaux of economics, engineering, competition, and consumer protection. The first two would concentrate on analysis and the second two on monitoring and enforcement.
The proposed structure takes account of the profound changes that have taken place as technological convergence has brought all of telecommunications, broadcasting, and data transport onto a common digital platform, and customers’ experiences have come to be mediated primarily through the applications they use rather than the underlying network technologies that support them. It also offers an opportunity to rethink what the FCC is regulating, why it is doing so, and the tools chosen to promote desired policy objectives. It may be time to move away from an engineered, structural approach to regulation to a more organic, ecosystem-based approach. In the former, systems are designed with large levers to be pulled that can fundamentally alter the structural arrangements of regulated industries, while the latter can be characterised as multiple ‘regulators’ scattered throughout a complex system. These regulators primarily monitor performance and make fine-tuned local adjustments aimed at keeping their part of the system functioning in support of, and in response to, the performance of other parts of the system.
A trip through history
The FCC’s current structure is an artefact of historic policies prescribing specific remedies to achieve particular outcomes. At the outset, the FCC and other state regulators regulated specific firms whose market power derived from a combination of natural monopoly cost structures and protections from competition granted in exchange for undertaking specific obligations, such as common carriage. Building upon regulations developed for railways and postal services, each firm was presumed to have its own bespoke network.
Hence the initial object of regulatory interest was the firm. Rate-of-return regulation was employed to prevent a specific firm from making profits in excess of a fair return on capital employed. And to start with, there was only one network — wireline. In accordance with Structure-Conduct-Performance views of Industrial Organization, exertion of market power by the regulated firms — for both monetary and non-monetary gain — was dealt with by imposing structural remedies. Thus, long-distance came to be structurally separated from local calling, and in the 1996 Telecommunications Act, wholesale and retail activities separated to allow competitive local exchange carriers ( CLECs) to access elements of the regulated incumbent firms’ (ILECs) networks.
In a similar vein, radio spectrum has been regulated on the basis of its necessity for the development of specific networks by individual firms. Hence, the division between wireline and wireless was born. The network-based structural approach proved advantageous when wireline operators moved into wireless service provision — the network typology rather than the firm was a sufficient structural distinction for regulatory purposes. The purpose of regulation was specifically to constrain the market power of the firm that owned the relevant network. Wireline and wireless regulatory silos could undertake their activities separately, even though both might be regulating the same firm.
Engineering a machine
Metaphorically, the two-division arrangement can be viewed as separate attempts to engineer predetermined structural arrangements that govern the networks and the markets in which they operate. As the functionality of wireline and wireless operators started to merge, the legacy network-based regulatory silos remained, even though the services offered by both networks were substitutes, at least for some customer segments. The (structural) networks and firms, and not the (functional) markets in which they operate have been the primary object of regulatory interest.
Therefore, it is unsurprising that recent calls for recent regulatory intervention — such as network neutrality — have focused upon structural artefacts (i.e. the charging and network operation activities of ISPs) rather than the processes of competitive interaction of all participants in the relevant markets. The modus operandi of historic regulation has been the construction of a large, centrally-planned, and precisely-engineered machine controlled externally using structural levers inserted for specific purposes. The wheels and gears inside the machine have been constructed to respond to movement of the lever, but the fundamental design has remained intact throughout.
An organic, ecosystemic alternative
By contrast, the firms that have emerged over the past three to four decades to provide the complementary applications that now form the primary interface between end users and the telecommunications services they use have evolved under a profoundly different governance arrangement. Competition Law makes no presumptions about industry structure — rather, it emerges endogenously and evolves dynamically. Interventions are confined to cases where real harm is perceived to have been inflicted. All firms are subject to its provisions, not just dominant ones. Penalties and remedies focus on altering behaviours, not industry structures. This approach has facilitated the use of ecosystem metaphors to describe the complex interrelationships that emerge as convergence and increased competition have led to extremely complex webs of interaction. There is no ‘grand design,’ and interventions fine-tune the performance of specific ‘local’ transactions rather than dictating the terms of systemic operation.
If the FCC is being called upon to oversee the operation of complex systems, then Jamison’s four bureaux arrangement facilitates a regulatory approach where the performance at specific points of the ecosystem is monitored, and behaviours are adjusted retrospectively based on need. As there is no preconceived view of how the ecosystem should be structured, innovation that could potentially alter the fundamental structure of the ecosystem is fostered. Importantly, this approach recognises that performance at one point of the system (e.g. a wireline network) are fundamentally affected by activities at other parts (e.g. wireless or application providers). Interventions fine-tune behaviours conditional on these interrelated dependencies, regardless of the technologies or identities of the firms concerned.
The time is right to consider such fundamental changes to the FCC to make it fit-for-purpose for governing in an uncertain the future, rather than seeking to reproduce arrangements for governing an historic industry structure that is no longer relevant.