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MICHAEL K. POWELL
Commissioner
Federal Communications Commission
Before the
Practising Law Institute

Washington, DC
December 10, 1998

"Letting Go of the Bike"

A Holiday Parable on Communications Mergers in a Season of Competition

(As Prepared For Delivery)

Good morning. It is my great pleasure to be here and to speak with you today. I know you will be hearing a lot of important details from some of the other speakers today, so I thought I would share with you a little of the "big picture." I want to start by speaking with you about the holidays.

To many of us, the holidays conjure up childhood memories of vacation, sumptuous meals joyfully devoured by family and friends, and, of course, presents. My nine-year-old Jeffrey has been lobbying for a new BMX bike. This bike is outfitted with all kinds of capabilities to jump, to speed through corners and to do a variety of stunts. Jeff insists he is going to become a stunt rider or BMX racer, neither of which give his mother and I much comfort. But we doubt he will really try any of these things and we are happy to get it for him, though we sometimes wish, in teaching him to ride a bike, we had thought to include advanced motocross training.

My memories of teaching my son to ride a bike have gotten me thinking again about our move away from a regulatory model to competitive markets in the communications industry. And it has me thinking about the pace of competitive forces, innovation, anxiety and risk.

Think of these elements as a sort of regulatory parable: the child is the Public Good and we Regulators are his parents. Mr. and Mrs. Regulator have raised Public Good, doting on him, feeding him, cleaning up his messes and just protecting him overall. One Christmas, his grandfather, Congress, decides to give Public Good the present for which he has been asking -- a slick, new bike called Competition. This bike has all kinds of bells and whistles that will let Public Good do all sorts of things he could not do on his old Regulatory Rider.

Mr. and Mrs. Regulator are very proud to see their son standing next to his shiny new treasure. They take pictures to commemorate the moment -- Public Good standing next to Competition, grinning from ear to ear, excited about the possibilities of hitting the street. As he jumps on and begins toiling around the flat circle just outside the Regulators' home they have little fear, but Public Good is not content. He did not ask for this serious machine just to ride in circles. He wants to take his bike to the track to test his potential on Free Market Hill.

Mr. and Mrs. Regulator do not know quite what to make of Public Good's restlessness. They admire their child's ambition, but believe the dangers of riding down Free Market Hill are great. They can just imagine him breaking a bone, or worse, his neck. They have visions of the emergency room. The Regulators resist letting Public Good ride Free Market Hill, but he demands a shot at the rewards that come to those who can conquer it.

So, Mr. and Mrs. Regulator agree to take Public Good over to Free Market Hill. As the Regulators look down the Hill, they see that it is very steep with a big jump up the other side, over which they cannot see. The Regulators know that, as Public Good goes down the Hill, his speed will be great. There may be ruts and gravel and who knows what is on the other side of that hill. Think of the hill, in our parable, as the ravaging economic and technological forces of the information revolution. Those forces are tumultuous, explosive, and quick changing. Public Good will have to ride more skillfully and nimbly than ever before. But the excitement of riding Free Market Hill promises to delight Public Good more than he ever would have experienced under the careful watch of Mr. and Mrs. Regulator.

But despite these opportunities for Public Good, Mr. and Mrs. Regulator cannot help themselves as their son starts down Free Market Hill. They run alongside, holding the handlebars and the seat. They constantly scream instructions and warnings. They insist he stay on the brakes. And when they get to that jump at the bottom, over which they cannot see, they are afraid to let their boy try it.

Mr. and Mrs. Regulator exhibit the understandable and sincere instincts of a parent. But it is also the classic parent trap. As every parent knows, if your child is going to learn to ride a bike, you must be willing to let go, despite the risks. If Public Good is going to reach his full potential, he must be set free. He needs the ability and opportunity to put his head down, lean into the wind and soar. He needs the ability to adapt quickly and change course as the road becomes bumpy, without the intruding hand of Mom and Dad. And Mom and Dad need to resist letting their speculative anxiety of the unknown get the best of them. It may be okay for them to insist Public Good ride with a helmet and avoid being too reckless, but to be truly responsible parents, the Regulators must let go and must not place too many conditions on Public Good's ride.

There are many areas I could now go into based on this parable. It implicates many questions about deregulation, forbearance and the balance between consumer protection and competitive opportunity. But what I wanted to focus on today are the lessons this parable holds for our actions under the breathtakingly broad public interest standard in the context of merger review.

The Need for Guiding Principles in Public Interest Merger Review

The public interest standard is the basis on which we assert jurisdiction to review communications mergers. Though we do have some express antitrust authority under the Clayton Act, to my knowledge, the FCC has rarely (if ever) invoked such authority as the basis for reviewing a merger. The danger of the public interest standard is that it is extraordinarily vague and facile--too easy a basis to reach out and grab the brakes of competition. Consequently, I believe it is imperative that we try to enunciate principles that will discipline our historically broad discretion.

On other occasions, I have noted my belief that the first set of limiting principles must ensure that our public interest considerations are truly germane to our authority and expertise. I concluded that the decision whether to attribute significant (or any) weight to a particular factor in our public interest merger review should turn on:

  1. whether the Commission has statutory authority to consider that factor;

  2. whether the action the Commission would take with respect to that factor is part of our core function of setting telecommunications policy; and,

  3. whether the action relies on our unique expertise in setting such policy and is not more readily handled by other processes or other institutions vested with Congressional authority.

As I stated in reference to the MCI/WorldCom merger, the Commission cannot command respect as an "expert agency" -- one worthy of the broad public interest authority Congress has given us -- if our pronouncements turn on subjects in which we are not expert or which do not rely on our unique capabilities.

Moving Beyond Jurisdiction, Core Function and Unique Expertise

But even if we apply these general principles, I worry that the public interest standard is a "place perfect" for nurturing regulators' anxiety about protecting -- often overprotecting -- the public good. In terms of our bike parable, I believe that the public interest standard is insufficient in its basic form to guide Mom and Dad Regulator as to when to step in and when to let go of the Competition bike and allow Public Good to realize his full potential by braving the challenges of riding Free Market Hill.

Truthfully, the public interest standard can be largely self-fulfilling -- decide what you want to do and say it is in the public interest to do so. There need to be some limiting principles so that the industry, and the markets, know better when regulators should grab those handlebars and when we should not, remembering that every time we do grab, we slow competition and may cost the rider the race. Let me explore some limiting principles with you today to address these concerns.

1. Don't Squeeze Just Because You Can

From the standpoint of applicants, mergers often involve both high risks and high rewards, which often turn on relatively tight, unforgiving time frames. Once convinced of the net benefits of a proposed merger to their shareholders, the applicants may be willing to trade much to maximize their chances for timely regulatory approval. Thus, more than in most other situations, regulators have applicants by the throat.

There is an understandable impulse that when you have got a company by the neck you can go ahead and squeeze a little. That instinct must be resisted. A merger event cannot be an opportunity to import any and every concern one has with the merging parties, nor can regulators use the parties' desire to merge as a chance to grind every ax. One constraining principle here would be for regulators to ask themselves whether they would actually block the merger absent the condition they are exploring.

2. Merger Conditions Are Not a Substitute for Rulemaking

So what are some additional principles I think should discipline the public interest? Well, first of all, I believe that merger conditions really need to be merger-specific. Mergers may have pro-competitive aspects, anti-competitive aspects or both. As regulators, we must consider what the specific effects are as a consequence of the merger. Will the merged parties have too much market power when combined? Does the merger impermissibly eliminate an actual or, in limited circumstances, a potential competitor. Does the merger itself actually produce a problem or does the problem or issue of concern exist broadly in the industry, irrespective of the merger? If the answer to the latter is yes, I would submit that it is appropriate for the FCC to consider that issue, but only through the traditional mechanisms of administrative practice. In other words, through rulemakings or enforcement actions and not mergers.

Hesitancy in imposing merger conditions as a substitute for rules is well-advised because of its implications for competitive neutrality. It may seem defensible to require something of an industry, but it is anti-competitive to impose a condition on one or two members of an industry simply by virtue of the fact that they have chosen to merge. From the applicants' perspective, a condition is a cost. To raise the costs of one industry player but not the cost to others to whom the condition rationale also runs, seems patently unfair and will skew competitive development.

I must say a word here about so-called "voluntary" commitments. There has been a tendency throughout the history of the FCC to seek and rely on voluntary commitments. Sometimes we seek to distinguish voluntary commitments from conditions. We suggest that, out of the goodness of their hearts, the parties were willing to address a public interest concern of the Commission. We try to contrast this with a condition in which the government hinges its approval on the fulfillment of the condition.

I personally believe that there is absolutely nothing voluntary in a regulatory relationship. Merging parties are not altruists. They accede to commitments solely in order to get regulatory approval or to accelerate the review. The government cannot, to my mind, defend a merger condition (irrespective of what it is or its propriety) on the supposition that it was voluntarily agreed to by the parties. One should be troubled that such "voluntary" conditions allow an administrative agency to evade judicial review of a government imposed restriction.

3. Merger Review is Not an Opportunity to Substitute the Regulator's Vision of the Marketplace for That of Market Participants

Third, I believe that merger review is not an opportunity to substitute the regulator's vision of the marketplace for that of market participants themselves. Markets are dynamic. They are churning, evolving, innovating stews that boil to suit consumer tastes. The market does not operate according to a recipe. One cannot really predict where markets will take you with any certainty. If one could, Wall Street would not exist as a sophisticated gambling trade, and a lot more young turks would be beating the S&P 500.

Regulators often are into the "vision thing." They enjoy speculating about how it all comes out and do so often at events and conferences like this one. Myself included. Of course, being a market pundit is easy when there are no direct harms to us if we are wrong. We do not place our hard-earned money on the table and take a chance. Only private firms suffer the harm of misplaced bets. As a consequence, our crystal ball is much cloudier than theirs. There simply is nothing like facing financial ruin to focus the mind. Moreover, in a market as fast-moving and innovation-driven as telecommunications, the ability to predict is probably impossible and certainly foolhardy.

In addition, regulators are fundamentally followers. We lag behind market trends. Our visions are usually 20 years out of date. We are mired in tradition, culture, and bureaucratic inertia. We are slow to understand, anticipate and adapt our actions to the leading trends in technology or services. And we often are vested in the ways of regulation or deregulation that make us important or relevant.

Finally, regulators have a persistent tendency to undersell the ability of market forces to address social, political and public policy objectives. The infant years of an emerging market always trend toward the highest value products and services and the higher value consumers. Firms make substantial up-front investments and they necessarily must pursue the most lucrative markets at the beginning to recover their costs and to demonstrate to investors that they are, in fact, a good bet. But I assure you private firms do eventually go after anyone that has money to spend.

Let me give a quick example. When the FCC earlier this year considered forbearing from certain regulations that apply to the highly competitive wireless industry, it declined to forbear in a number of areas. In part, this was out of a concern about limited deployment to certain less lucrative segments of the population. I understood this concern, but I questioned the suggestion that this represented a market failure and that regulation had to protect and facilitate service to those segments.

Since that decision, I have made some interesting observations that affirm for me that competitive markets do ultimately serve the mass market. I have seen the rise of national television ads for prepaid cellular plans. I saw a cellular phone service being offered at a Seven Eleven store. And recently I saw a cellular phone vending machine on a trip to Las Vegas. To put a cap on my point, the Yankee Group recently found that wireless phone use among users with an annual income level below $20,000 had doubled over the past year, from 8.9% in 1997 to 17.4% in 1998! The market is alive and well and inclined to reach the mass market.

Permissible Conditions

Having said all that, I do believe there are permissible merger conditions. For example, I believe conditions may be appropriate where necessary to cure demonstrable anti-competitive effects. The task of policing such effects is largely duplicative of the Department of Justice's efforts, but there are some conditions along these lines that the Commission can administer pursuant to our public interest authority that would be difficult, if not inappropriate, for Justice to impose.

I also believe conditions may be appropriate where necessary to enforce statutory requirements that are being violated. Such conditions merely invite regulators to enforce existing rules and laws. For example, the Commission might want to consider the fact that the applicants have refused to pay their required contributions to federal universal service support mechanisms. Likewise, the Commission might want to consider whether incumbent LEC applicants have refused to un-bundle their networks pursuant to section 251(c) of the Act.

Our skepticism about imposing such merger review conditions need not be overly stringent where it is demonstrated that the applicants have already violated the law. If the public interest means anything, it should mean that the Commission should not be seen as endorsing illegal behavior by approving proposed mergers without conditions designed to discontinue such behavior.

With respect to parties' warnings of future illegal behavior, however, I think we regulators should be more circumspect. Specifically, I think companies should enjoy a presumption of innocence, such that if regulators believe it likely that the merged entity will violate the law, we should be able to point to concrete and persuasive evidence in the record that supports this prediction. Moreover, I believe we should have to point to concrete and persuasive evidence in the record that supports a finding that the merged entity will be more likely to violate the law than the individual applicants.

Conclusion

In closing, if we are true to the goals of promoting simultaneously competition, deregulation and innovation in the context of merger review, I believe we must enunciate principles that stay the hand of a paranoid parent. I have shared with you some of my own views in this regard that surely will be tested in the coming year.

So you can see, though I believe in being careful, I am much more inclined than some to "let it ride." I know that young Public Good will reach his full potential if we do. I only hope that on Christmas day, I have the courage to take my own advice when my son Jeff asks for a shot at the hill.