All we are asking for is a free market untainted by lobbyists, fake grassroots groups, push polls, and all the other weapons of regulatory capitalism.

by Alex Goldman ISP-Planet Managing Editor [March 31, 2006]

In India, reports The Economist (behind its firewall), a thriving independent mail business could be eliminated overnight by a rule change. While the government carrier supplies service to every village, in the city, companies are delivering mail outside the system. The government wants to give its post office a monopoly on letter weight envelopes. The independents say this would eliminate over 60 percent of their business.

It sounds a lot like the services the Bells claim to pay for through the USF, although the program has no oversight. Whenever the USF is debated, the Bells fight hard because billions of dollars in profits are at stake.

All over the world, there is a debate about globalization as nations try to balance the power of multinational corporations with the perceived benefits of a world tied together by trade.

Most of the large corporations are still government entities. The Bells are unusual because they are allowed to operate like private companies, to lobby, and to charge whatever the market will bear, while still receiving certain protections from the government.

While conservative commentators like Thomas Hazlett see SBC's acquisition of AT&T as the dawn of a new era (see For whom the Ma Bell...) and the end of the phone company, others, such as Doc Searls (see Saving the Net: How to Keep the Carriers from Flushing the Net Down the Tubes) are worried. Searls writes:

With the purchase and re-animation of AT&T's remains, the collection of former Baby Bells called SBC will become the largest communications company in the US—the new Ma Bell.

Regular newspapers are concerned too. See, for example, The Coming Tug of War Over the Internet in the Washington Post and our current front page notable quote from USA TODAY:

Notable Quotes On Ma Bell vs. progress...

"While other industries have decided to race forward to keep pace with innovation, this one sees a bright future in turning back the clock. Maybe there is even a black, rotary-dial telephone in our future."

— USA TODAY

Debate impossible
The debate has also been ongoing within the FCC. We argued in 2003 that two directly opposing points of view were represented in the FCC (see Regulatory Future? More Uncertainty). Those arguing the Bells' side claim to support free enterprise, but, as we noted, "in public debate, those favoring unfettering the ILECs rarely talk about anticompetitive behavior, but they do occasionally acknowledge it."

Bells are not capitalists
The argument against the Bells and in favor of network neutrality rests on the fact the Bells are protected monopolists who fight against free enterprise.

When municipalities build Wi-Fi networks, the telcos often lie about them using the devices of dirty politics like push polls. The telcos are even circulating a purported list of muni failures that are in fact successes (see Telco lies and the truth about muni broadband). The telcos abuse the legal system to harass their opponents, for example, suing a pro-muni lobbying campaign for slander in 2003 (see Voices for Choices Wins Two vs. SBC).

All of that against businesses that aren't even started yet!

In order to fight established businesses, the Bells build fake grassroots groups to lobby for their laws.

The Bells are frequently caught engaging in all sorts of illegal behavior but fines, such as they are, are rarely a disincentive. In one of many such cases, when FCC fined SBC $6 million in 2002, H. Russell Frisby, then head of CompTel, was not impressed:

"The fine represents less than a month of the CEO's salary," Frisby said. "SBC's actions cost consumers well over $6 million and allowed the company to retain more than $6 million of business. The problem is that the FCC doesn't have sufficient authority to levy a fine that will be meaningful."

At the time, FCC Chairman Michael Powell was very self righteous, saying:

"Such unlawful, anti-competitive behavior is unacceptable," he said. "Instead of sharing, as the law requires, SBC withheld and litigated, forcing competitors to expend valuable time and resources."

It takes a lot for Bell behavior to be exceptionally bad, but such was the case in 2002. Even though it was being sued for fraudulent behavior, Verizon applied to the FCC for "credit" for its $150 million "investment" in NorthPoint to count towards an FCC agreement to invest a specific dollar amount in competition. The fact that Verizon had spent $150 million to shut down a competitor, that the money had been spent to erase competition rather than to promote it, makes this an exceptional case.

Bell behavior as usual accounts for two-thirds of all FCC fines between January 2000 and mid-2004. In spite of this, the FCC relies on the Bells for much of its data on the industry.

We continue to argue that Flawed FCC Data Guarantees Flawed Policy. Even Hazlett admits:

"Regulators are very passive. The private sector has to come to them. Regulators listen to the incumbents, listen to the competitors, and then weigh the politics."

As long as you ignore the behavior of the telcos, you can be against network neutrality. Telco guru Martin Geddes, for example, writes:

Would you want to make it illegal for at&t to offer a $5/month plan to poorer households that only allowed access to services by Yahoo!? The proposed neutrality rules would do just this, hurting the weakest in society most.

Independent ISPs recognize that net neutrality rules have to be written carefully to avoid, for example, outlawing the filtering of spam and viruses.

There is an answer
We were talking to an energy company guy recently who proceeded to explain to us how energy industry regulation works: generation, transmission, and provision of the end user are all separate, he said. This makes sense to us. We favor structural separation and always have.

The only capitalism that the Bells engage in is regulatory capitalism, as described by former FCC Chairman William Kennard:

You see, all too often companies work to change the regulations, instead of working to change the market.

I call this behavior "regulatory capitalism."

Regulatory capitalism is when companies invest in lawyers, lobbyists and politicians, instead of plant, people and customer service.

It's always easier to prowl the halls of Congress than compete in the rough and tumble of the marketplace.

Regulatory capitalists would rather litigate than innovate.

We have seen this in some foreign markets. Rather than compete against IP telephony, incumbents get their cohorts in government to simply outlaw it. Criminalize it.

Regulatory capitalism always works best for companies that have the resources and know-how to play the regulatory game. And, trust me, it's never the newcomers. Most new industries - yours included - don't have the time or resources to spend money on oak paneled law firms and limousine lunches.

The Bells do this because without it they would fail fast.

The independent ISP industry simply wants to introduce the Bells to the free market via the mechanisms of VoIP, IPTV, Wi-Fi, FTTH, and every other innovation that the Bells would rather fight than adopt.

— End