April 13, 2016 11:10 AM

Has Verizon Pulled a "Costanza?"

One of my favorite episodes of the TV comedy series "Seinfeld" is called "The Opposite," in which George Costanza reflects on his life, and realizes it is the opposite of what he hoped it would be.  At the diner, George tells his friends "that every decision I've ever made, in my entire life, has been wrong."  His best friend, Jerry, suggests "[i]f every instinct you have is wrong, then the opposite would have to be right."  (quotes from IMDB, episode 5.21)  By the end of the episode, after consistently "doing the opposite" of what he would normally do, George's life has corrected itself: he is dating a beautiful woman, has his dream job with the New York Yankees, and is able to move out of his parents' house. 


                                       Verizon Training Video

The episode starts with the universal human emotion of regret, and then humorously illustrates common logical fallacies, which are presented as both problem ("every decision I've ever made has been wrong") and solution ("the opposite would have to be right").  And, even though both problem and solution are products of fallacious reasoning . . . hijinks ensue--and problems resolve.  But, certainly, no one would actually take this seriously--especially not one of the largest companies in the country--would they?  

If its Public Policy Blog is reflective of its corporate mindset, Verizon--based on a couple of recent posts--appears to be willing to give George's zany solution a try.  But, are they really "doing the opposite," or have they just changed--as competition forces all firms to do?

A Net-Neutrality Flip?

First, on March 21st, Verizon in the context of net neutrality decides to "make clear what Verizon stands for and what kind of policies we support, regardless of the outcome of [the pending Open Internet Order appeal]."  And, as it turns out, the rules/policies that Verizon thinks "are fair, even-handed, good for consumers and essential for us and others to thrive going forward" . . . are pretty much the same rules the Commission adopted in its first Open Internet Order in 2010.  In other words, Verizon now endorses the very rules that were vacated as the result of the D.C. Circuit's decision in . . . Verizon v. FCC.    

Clearly, Verizon was seized with regret over an appeal it now realizes it could have lived with, but traded for worse rules, and is now "doing the opposite," right?  At first glance, it would seem to be the case, but, the blog is quick to explain that this is not a simple case of human regret (or any other human emotion) finding its way into Verizon's corporate offices.  

Rather, according to Verizon, it is not the same company it was five years ago, when it appealed the FCC's 2010 Open Internet Order.  In the intervening time period, Verizon notes, it has "invested billions in businesses that depend on the ability to reach customers over the networks and platforms of others."  Indeed, since 2013, Verizon has built its Digital Media, content and ad delivery, business through the acquisitions of EdgeCast, upLynk, Intel's OnCue ad delivery platform, and AOL.  

Thus, Verizon's net neutrality position is not really an example of it doing "the opposite" (though, of course, it would have saved itself and everyone else a lot of hassle and expense had it just recognized this before it appealed the 2010 Open Internet Order).  But this isn't Verizon's only, or even best, example of "doing the opposite" in the last month alone.

Verizon's Special Access "Compromise"

Last week Verizon decided to "up" the "opposite," and suggested--along with Chip Pickering, head of INCOMPAS (the rival carrier association formerly known as CompTel)--that the FCC should probably go ahead and regulate "new networks" along with the old special access circuits still subject to FCC regulation.  Verizon has long fought against any regulation of its data transmission services and has already received FCC forbearance and been selling its packet, Ethernet, and SONET optical services without regulation for almost 10 years, so this is a clear Costanza-esque flip-flop, right?

Let's take a closer look at the letter that Verizon and INCOMPAS jointly sent the FCC.  The letter asks the FCC to: 1) immediately, make all dedicated services--regardless of technology--"subject to Title II of the Communications Act, including Sections 201 and 202;" 2) seek comment on a permanent regulatory framework, which would include ex ante price regulation in "relevant markets" where competition is "insufficient."

When looking at whether Verizon is really "doing the opposite," it helps to keep in mind the "not the same Verizon" caveat.  In addition to Verizon's recent digital media investments, the company has been divesting itself of its wireline (telephone + ISP + TV) properties for years, and at an accelerating pace in the wake of the FCC's reclassification of Internet access services.  Similarly, based on Verizon's pending XO Communications acquisition, and its reported interest in Yahoo!, Verizon may well see INCOMPAS as more of a future trade association, and less of a regulatory opponent, these days.  

Until the terms "relevant market" and "insufficient competition" are defined, it's difficult to say how much of Verizon's future revenues are likely to be affected.  Given the Chairman's immediate endorsement of the "compromise," it's doubtful that Verizon is worried about having too much of its future revenues tied up by the regulation it's endorsing.  On the other hand, if you are a cable company--or a telecom carrier with some unique routes--Verizon's "compromise" seems more like the good, old-fashioned, Washington-style compromise . . . of someone else's opportunities.   

*        *        *

In his more lucid, less politically-driven, first days on the job, Chairman Wheeler noted that every previous "network revolution" changed the world dramatically, and counseled that "we should not, therefore, be surprised when today's network revolution hurls new realities at us with an ever-increasing velocity."  When the velocity of new realities forces a rational economic actor to change positions as dramatically as a TV sitcom actor, it's safe to assume that the industry forcing those new realities is not subject to anything but competitive market forces.  So, why is it so hard for Chairman Wheeler to accept that the last thing a dynamically evolving "revolution" needs is more regulation?

March 17, 2016 4:48 PM

FCC Chairman Wheeler's Privacy Shell Game

In the past week, Chairman Wheeler has become the pied piper of the tech press.  He's been fawningly referred to as "the Dragonslayer," and, "the broadband industry's worst nightmare" (an encomium previously reserved for Comcast).  

Starting with a Huffington Post editorial entitled, "It's Your Data: Empowering Consumers to Protect Online Privacy," the Chairman has spawned copy that would draw an immediate FTC fine if it were attached to a product instead of a policy.  For example, NPR's headline, says the Chairman's proposed Internet privacy rules are going to "Let Consumers Set the Cost of Internet Privacy." New York Magazine's headline went further, saying  "The FCC Wants to Let Us Choose How Much the Internet Knows About Us."  

Unfortunately for Internet users, the reality is that--on the Internet--privacy is binary; you either have it, or you don't.  Moreover, as the Erin Andrews case demonstrates, on the Internet, when your information is lost to one person, it's available to everyone.  What is most concerning is not that the Chairman's proposed ISP privacy rules can't deliver on these fantastic promises, but that in the Chairman's Set Top Box NPRM, consumers are actually losing privacy that they used to have.   

Your Information Is Already on the Internet

It's no secret that, "your information is the commodity that drives the internet economy."  Nor is it any secret that this is the price the largest "free" websites/services charge for their services--such as those provided by Apple, Google, Facebook, and Microsoft.  

Likewise, Google is the leading online advertiser because it knows the most about you--and, according to the NY Times it is only getting better at gathering your information.  If you're interested, and have a Google account, here's an article with some links that allow you to see how much Google knows about you, based on your self-identified use of its apps.  But, these links don't tell you how much "pretty close to personal" data Google has collected on you, or what it has acquired through your use of its Android mobile operating system and mobile apps--which now account for 60% of mobile devices in the U.S.

The firms mentioned above are just the ones that you know have your information.  There is a whole industry comprised of firms, the names of which most people wouldn't recognize, called "data brokers."  These data brokers also track your Internet usage--and combine that information with other, personal information that they buy from your online merchants--to form a pretty accurate personal profile of all your online activity, which they make available to anyone willing to pay. 

ISP Privacy Rules Won't Give You "More" Privacy

Not surprisingly, according to experts, your ISP doesn't have any information about you that isn't already available from multiple other sources.  In fact, Professor Peter Swire of Georgia Tech says that, due to consumers' increased use of encryption, multiple connected devices, and proxy services, like VPNs, your ISP may actually know less about your Internet behavior than the websites you visit.

Of course, every expert doesn't agree completely with Prof. Swire's conclusions. In a thorough article presenting the opposing side, Computerworld reports that some experts disagree with Prof. Swire about how much of a consumer's Internet traffic ISPs can see--because encryption isn't always as effective as consumers might think, and even VPNs/DNS proxy services can be configured poorly.   Thus, Computerworld counsels readers to assume the worst, and that, "[m]uch like Google, your ISP knows everything about you."


                Now you all know everything about me . . .

Said differently, "the Internet" will not know one less fact about me if my ISP stops being the nth company to tell advertisers that I'm the leading YouTube viewer of "Lancelot Link: Secret Chimp" videos.  Rather, as Roslyn Layton explains, the effect of the proposed rules will be confined mostly to the ISPs, who must rely on consumers to pay an even larger share of the network costs, and the online advertising market--which needs more competition, not less. But, as for me, I get no "more" privacy than I have now.

Set Top Boxes Aren't Cheaper If You Pay with Your Privacy

Almost 30 years ago, during the politically polarized Senate confirmation hearings on President Reagan's Supreme Court nominee--Judge Robert Bork--some of the Judge's opponents were able to obtain his video rental history from his video store.  His opponents didn't find anything embarrassing, but they sparked a bi-partisan public outcry for laws to protect citizens from this type of repulsive invasion of privacy. Here's a contemporary article from the Chicago Tribune.   

Congress, though, was in front of the public this time, and Judge Bork's enemies could not have obtained his TV viewing records (if he was even a cable subscriber at the time), because in 1984 Congress had passed the Cable Communications Policy Act, protecting video subscribers' privacy. 47 U.S.C. 631   Since then, the FCC has had rules in place preventing the disclosure of personally-identifiable viewer information to third parties. 

In its Set Top Box NPRM, the Commission asserts that it will not totally ignore the requirements of the law, but the proposed rules would require the regulated entity (your cable or satellite MVPD) to send your personally-identifiable information to an unregulated third party providing a video navigation service.  The Commission suggests just asking Google and the data brokers to "self-certify" that they are complying with the legal obligations that apply to cable/satellite companies. See, NPRM at paras 73-74, 78.

Putting aside the dubious legality of the FCC's proposal, the Commission is exhibiting an almost-willful disregard for the purpose of the statute--or even worse, the importance of television as a shared medium.  The very nature of specific, viewer-tracked, ad delivery--of the kind Google proposes--is invasive.  Unless everyone gets the ad for [insert embarrassing product], then only the consumer gets embarrassed--when his friends watching March Madness ask, "why do I only see this ad at your house?"  

The Commission is expected to initiate an NPRM at its March 31st Open Meeting, for the purpose of ensuring that "consumers know what they are agreeing to when they sign up for Internet service."  There is nothing wrong with this goal.  In fact, it sounds a lot like the 32 year old law requiring TV providers to tell consumers the "nature of personally identifiable information collected or to be collected with respect to the subscriber and the nature of the use of such information."  Let's hope the data brokers are OK with that . . .

March 15, 2016 10:07 AM

What's Good for Google . . . Is Good for the FCC

More than a year before the Chairman's "unlock the box" initiative, the Chairman had a different idea:  if the FCC made it easier to become an over-the-top ("OTT") multi-channel video programming distributor ("MVPD"), then more companies would enter the market, and this competition would benefit all subscription video consumers.  You might think this would appeal to a new entrant with TV ambitions, like Google.

After all, the subscription TV market is devilishly hard to penetrate even if you can get the capital to build a distribution system.  A year ago, Google had 20,000 customers in Kansas City--after 5 years of trying.  But, Google wasn't in love with the Chairman's idea.  Why not?

The Market Is Internet Advertising . . . on TV Screens

Google is the dominant company in Internet advertising because it sells information about you--that it learns from your use of its applications, and devices--to advertisers.   If you're using the Internet, whether on a computer, mobile phone, or tablet, then there's a 70-85% likelihood that you're looking at Google ads (according this WSJ article re: the FTC Bureau of Competition 2012 staff recommendation on Google's abuse of its market power in online advertising). 

When you watch TV, however, the ads you see are not targeted at you personally, because they haven't been placed by Google.  This is something Google has been trying to fix since shortly after it first announced plans to build a fiber network.  Google, through its Google TV, and then Android TV, project makes "smart TVs" (with Google software built into the TV) and "buddy boxes" (set top boxes that work with a cable box/cable remote) available to consumers.  But none of these efforts have been particularly successful--leading industry observers to conclude that Google needed "another path to the TV screen."  

Then, a year ago, Google decided to try an "experiment" in Kansas City in which it combined its TV customers' content, and viewing history, with its advertising algorithms in order to sell targeted ads on the customers' TV screens.  Most likely, Google discovered that the content itself was the secret ingredient that would allow it to integrate the TV screen into its advertising universe.  

So why not become an OTT MVPD in the proceeding that Chairman Wheeler had initiated in December of 2014?  One obvious problem with this strategy is that MVPDs have long been subject to extremely strict FCC rules about disclosing customers' personally-identifiable information--rules that don't apply to edge providers like Google. The other problem with this approach is that the subscription TV market is devilishly hard to penetrate--just to get access to the customer's video content. Thus, shortly after Google announced its Kansas City TV experiment, it (along with several of its Google TV partners, trade associations, and pressure groups) formed the Consumer Video Choice Coalition ("CVCC") and began lobbying the Commission on a new set of issues.

The FCC Unbundles Video to Create "Device Market" Competition?

On February 18th, after 6 months of intensive lobbying by the CVCC, the FCC voted to require multichannel video programming distributors (hereinafter "MVPDs") to, effectively, "unbundle" the video stream going to and from the customer's television.  See, "Set Top Box NPRM".   The Commission explains that its proposed rules requiring video stream unbundling are necessary "because MVPDs offer products that directly compete with navigation devices and therefore have an incentive to withhold permission or constrain innovation, which would frustrate Section 629's goal of assuring a commercial market for navigation devices." Set Top Box NPRM at para 12. 

The FCC seems to believe that if it can imply that the MVPDs were responsible for the failure of the Commission's CableCARD rules, and that the MVPDs would likely frustrate any future rules to facilitate device interoperability, then it will be justified in implementing full-scale video stream unbundling.  So, on the thinnest of grounds--a couple of anecdotes, and a facially absurd theory--the FCC asserts that that MVPDs "offered poor support" for the CableCARD rules, and have the ability and incentive to frustrate the manufacture/sale of navigation devices by third parties. Set Top Box NPRM at paras 7, 12, and 28. The actual answer to the Commission's question was already available--but it wasn't the right answer.

The Commission's theory regarding MVPD's "incentive and ability" to foreclose third party sales of navigation devices has been litigated through trial in two separate consumer class action antitrust cases, and this theory has never been found to be supported by any evidence.  See, Jarrett v. Insight Communications Co., (W.D. Ky. July 14, 2014)  
 and Healy v. Cox Enterprises (W.D. Ok. Dec. 15, 2015).  If you bother to read either of these cases, you may also be surprised to learn that the device manufacturing market is very competitive--with at least 5 major vendors competing for each cable system.

So, as was the case with the Commission's reclassification of broadband Internet access, a very small number of privileged entities (Google, its partners and pressure groups) benefit from rules designed to address conduct that is not even hypothetically rational--much less, likely.   Still, you might think, who cares if the TV providers now have to compete with Google to sell ads to viewers?  But, Google won't be competing with your TV provider.

Don't Expect Much New Competition in the Device, or Online Advertising, Markets

One of the issues from the Commission's Net Neutrality Order (currently on appeal) is whether the FCC could, as part of reclassifying broadband Internet access as a "telecommunications service," classify all of an Internet user's formerly non-confidential information (the kind Google sells to advertisers) as "Customer Proprietary Network Information" ("CPNI") under Section 222 of the Act.  The statutory definition of CPNI is fairly broad, and includes information "made available to the carrier by the customer solely by virtue of the carrier-customer relationship." 47 USC 222(f)(1).  

If the DC Circuit agrees with the FCC that previously non-confidential customer data is now CPNI, as the result of the Commission's change in service definitions, then the FCC could limit the ability of ISPs to provide customer usage information to advertisers.  This was exactly the position that was being urged on the Commission by the Eric Schmidt/Google-funded pressure group New America, only a week before Chairman Wheeler put his "unlock the box" editorial on Recode.   

Last Wednesday, in a Senate Judiciary Committee Oversight Hearing, FTC chair, Edith Ramirez, was grilled on why the FTC overrode the recommendations of its Bureau of Competition and closed an investigation into Google's abuse of its market dominance in the online advertising market.  Not un-ironically, two days later, the FCC released a "fact sheet,"   describing its proposed rules to prevent ISPs from competing in that market by providing the same kind of ads that Google does--over your computer, mobile, and now, TV screens.  

December 23, 2015 5:25 PM

The Tortoise of Super-Fast Broadband

Two weeks ago, AT&T announced plans to bring its "GigaPower," very high-speed (300Mbps and up), broadband Internet service to 38 new markets in 2016--on top of the 18 markets that AT&T already has up-and-running on the service.  A day later, Google Fiber announced on the company's blog that it was exploring expanding its service (available in 3 cities/markets, but under construction in 6 more) to Chicago and Los Angeles.  Both announcements were widely reported by the news media, which has favored a "fiber race" narrative ever since both AT&T  and Google  announced--on the same day--their respective plans to deliver gigabit speed Internet service to Austin, TX.  

Thus, analyst Jeff Kagan compares the strides of "the two heavy hitters in ultra-fast, ultra high speed, gigabit Internet services."  In the Washington Post, reporter Brian Fung observes that, "AT&T is benefiting tremendously from a chain reaction that Google initially began," though he concludes that, "Google's early lead in the fiber race [is] being eaten away by AT&T's traditional advantage in building networks."

But, while the "fiber race" narrative may add an element of human drama to the otherwise impersonal dynamic of broadband competition, Google's fiber-to-the-premise ("FTTP") network is not the first that AT&T would be compared with in the media.  It is, however, the first time the media has favorably compared AT&T to a FTTP-based service provider--and this is the more interesting aspect of the story.    

AT&T Starts the "Fiber Race"

As AT&T's service name--"U-VerseĀ® with GigaPowerSM"--suggests, AT&T started building its gigabit speed network long before Google Fiber.   In 2004, AT&T observed that, by using a fiber to the node ("FTTN") architecture (which deploys fiber to the last traffic aggregation point prior to distribution to the customer's premise (the "node")), it could quickly provide better-than-DSL speeds (i.e., 6Mbps vs. 3Mbps) to the maximum number of customers, and position AT&T to be able to progressively replace copper with fiber as bandwidth demand moved from the network core to the edge (residential consumers).  In 2005, AT&T decided it would call its IP network "U-Verse" and service was launched in 2006.  See this 2006 timeline/summary from AT&T. 

To illustrate how FTTN is designed to evolve, consider the tremendous surge in demand for wireless data over the last 10 years.  To expand capacity, AT&T has created more cell sites, and has steadily added fiber to replace the copper lines that "backhaul" traffic from the cell sites to its backbone network.  This means that, in some areas, AT&T can use new fiber in order to "groom" existing U-Verse neighborhoods onto new broadband distribution nodes closer to the customer--thus reducing the copper loop length, and enabling faster DSL transmission speeds.  

It's No FiOS

In 2005, Verizon began deploying its FTTP network, FiOS, and--although Verizon's FTTP would take longer to deploy (to reach a similar percentage of customers) the network itself was/is considered the gold standard.  Thus, among "experts," in the media, and, by self-described "wonks," its early years, AT&T's U-Verse network was always being compared--unfavorably--to FiOS.  U-Verse was the "Jan Brady" of broadband.

An industry newsletter, from 2007, reports that (at the FTTH (Fiber to the Home) Council meeting in late 2006), "AT&T, with its FTTN deployment, showed that it was thinking along the same lines as Verizon . . . [b]ut many in the audience were skeptical about whether AT&T could even deliver HDTV with its fiber-plus-VDSL plant." (emphasis added)  A year later, when AT&T increased its broadband Internet speed from 6Mbps to 10Mbps, one tech news site reported, "AT&T Bumps U-Verse Top Speed to 10Mbps, Verizon Chuckles."  Months later, at the end of 2008, AT&T almost doubled its top speed --to 18Mbps . . . and was still ridiculed.     

As recently as 4 years ago, Susan Crawford--who framed the President's views on telecommunications policy--had already counted AT&T out of the "broadband" market.  In an essay in the New York Times, Crawford argued for the regressive application of Title II regulations for broadband services (which the FCC adopted this year) on the basis that cable was a monopoly, unlikely to be challenged by U-Verse, which "cannot provide comparable speeds because, while it uses fiber optic cable to reach neighborhoods, the signal switches to slower copper lines to connect to houses."  

Perceptions Are Not Reality
 
Fortunately, for AT&T, its consumers (the people that pay for the network) disagreed with the critics.  In fact, almost a year before Prof. Crawford had discounted U-Verse as a competitor to cable, consumers were telling Consumer Reports that U-Verse was among the best choices (with, of course, FiOS) for bundled broadband, TV, and phone service.  Only a month after Crawford's essay, AT&T verified the Consumer Reports survey, reporting that consumer U-Verse revenues increased by an impressive 44% in 2011.  

By the end of 2013, despite the early skepticism about "whether AT&T could even deliver HDTV with its fiber-plus-VDSL plant," AT&T's U-Verse passed Verizon's FiOS in numbers of video customers served.  AT&T's network and top Internet speeds have consistently improved every year, with its top U-Verse speed increasing to 75Mbps a year ago.  Not surprisingly, consumer adoption of U-Verse broadband Internet service has also steadily improved--growing at 30% annually over the last 5 years.

Finally, while the eye of the media has been on FTTP deployments like Google Fiber, it's what has been happening in copper that has almost-certainly put AT&T in position to provide super-fast Internet access more quickly--and in more places--than any other ISP.  Over the last 6 years, advances in DSL technology have allowed for faster transmission speeds--very close to those supported by fiber--over legacy facilities.

Overnight Success

Having been "counted out"--or never counted "in"--by the media has some advantages. One of these benefits is all the positive publicity AT&T is now getting from publications that may have never expected something they associate with an "innovative" "edge" company--like super-fast broadband--to be done better by a "monopoly" "ISP."   

But, it's difficult to overcome perceptions--particularly when these perceptions have been fed by the FCC.  The Washington Post article, cited above, looks for an explanation for how AT&T was able to overcome "Google's early lead in the fiber race."  Given the perception of Google's early lead, it would be hard for AT&T to convince anyone that it started the race before Google.  Instead, the article quotes AT&T's Jim Cicconi as saying, "[w]e're pretty good at this, and we've had a lot of years to get good at it."  That's as good an explanation as any.  

October 26, 2015 3:08 PM

Why Is the FCC Hiding the Ball on Special Access Price Regulation?

On October 16th, the FCC issued an Order Initiating Investigation and Designating Issues for Investigation ("Investigations Order") concerning the provision of point-to-point data transmission services ("special access") by the country's largest incumbent LECs (AT&T, CenturyLink, Frontier, and Verizon).  These services, when provided by ILECs, are still subject to FCC price regulation.  Although the FCC has "de-tariffed" many of these services, much like the recently re-classified "Broadband Internet Access" service, ILEC special access services remain subject to Section 201's requirement that they be "just and reasonable."  

The Commission's Non-Price "Concern"

Superficially, the FCC's investigation is about the ancillary effects of the volume and term commitments that some CLECs have agreed to in order to receive the ILECs' lowest prices on special access services.  However, the Commission's overview and explanation of its concerns suggest that its inquiry is much broader than the competitive concerns with discount contracts that have been identified in the case law, and associated economics literature, the Commission briefly discusses.  See, Investigations Order at n. 54.

The Commission's only potentially-legitimate non-price concern is succinctly stated only once in the entire first 12 pages of the Investigations Order.  The FCC quotes a CLEC ex parte letter arguing that the term and volume commitments in the ILEC tariffs "shrink[ ] the addressable market for competitive wholesale special access providers (thereby preventing them from achieving minimum viable scale), and cause[ ] special access prices to remain higher than would otherwise be the case."  Investigations Order, Paragraph 12 [internal citation omitted].  

Everything else the Commission identifies as a question, or unresolved contention between the ILECs and CLECs, is more properly classified as "something that the CLECs don't like having to do in order to get the lowest possible prices."  The CLECs' gripes are certainly reasonable (from their perspective), but they are not competition-affecting issues; they are bargaining issues.

When Good Discounts Go Bad

One issue (out of many the FCC identifies) is that conduct that is otherwise competitively benign "may be impermissibly exclusionary when practiced by a monopolist." See, U.S. v. Dentsply, 399 F.3d 181, 187 (3d Cir. 2005).  Sometimes monopolies (firms with market shares approaching, or greater than, 80%) will use "discount contracts" as a way to limit the ability of new entrants to enter the market for the product/service being offered through the discount contracts.  The FCC references some of these cases in n. 54.  Let's take a closer look at a representative case in order to better understand situations in which these agreements can injure competition.

In ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254 (3d Cir. 2012), the product market was heavy duty transmissions for big trucks, such as 18 wheelers, cement mixers, and garbage trucks.  The defendant, Eaton, was a monopolist in the U.S. heavy duty transmissions market from the 1950s until Meritor entered in 1989.  By 1999, Meritor had garnered a 17% share of the heavy duty transmissions market.  In mid-1999, Meritor and a leading European heavy-duty transmissions manufacturer, ZF AG, formed a joint venture to adapt a popular ZF AG model to the U.S. market.

In the U.S. market for heavy duty transmissions, there are 4 direct purchaser customers; these firms are the original equipment manufacturers ("OEMs").  Truck buyers, the ultimate consumers of heavy duty transmissions, purchase trucks from the OEMs by "assembling" components from the OEMs' catalogs.  It is, therefore, vitally important for a component part manufacturer to be listed in the OEM catalog--and on reasonable terms.  

From late 1999-2000, the U.S. trucking industry experienced a 40-50% decline in demand for new vehicles.  Shortly thereafter, Eaton entered into new long term agreements ("LTAs") with the 4 OEMs.  Long term agreements were not uncommon in this industry, but Eaton's new agreements were "unprecedented" in their length (the shortest were for a minimum of 5 years).

The new LTAs provided the OEMs with substantial up-front cash "rebates" of $1-2.5 million.  In exchange, the OEMs agreed to use Eaton transmissions in a very high percentage (usually, >90%) of their vehicles sold.  If an OEM missed its sales targets in any year, it was required to return in full all "advance" rebates it had received from Eaton.  Finally, the agreements required OEMs to artificially increase the price of ZF Meritor transmissions by $150-200, and to impose additional "penalties" on customers that still chose ZF Meritor transmissions.

By 2003, ZF Meritor determined that it was limited to no more than 8% of the market due to the Eaton's agreements with the OEMs.  ZF Meritor needed to get at least 10% of the market in order to remain viable, so it adopted a strategy of trying to sell directly to the end-user customers.  Nonetheless, at the end of 2005, its market share had dropped to 4%, and, in January of 2007, ZF Meritor exited the market.  Shortly thereafter, ZF Meritor sued Eaton on antitrust grounds. A jury returned a verdict in favor of ZF Meritor, which was upheld on appeal by the 3d Circuit Court of Appeals.

The Commission's Investigation of Dissimilar Discounts

Every antitrust case involving discount contracts, as well as the economic literature cited by the Commission, has several facts in common with the ZF Meritor case. First, the product or service has to be an input to the product or service the customer sells to its customers.  Second, it must be the case that only 1 firm can supply the majority of any customer's demand for the input, and, that firm almost always has a market share of 80% or greater.  Third, the primary "victim" of the contracts is not the purchaser, but rather the direct competitor, of the seller.

Finally, and this last condition is implicit, but the most important for our purposes.  In every instance where discount contracts have been found to harm competition, these contracts affect the entire relevant market for the product or service (or a very high majority of that market)If a new entrant can enter the market (for the same service the dominant firm is supplying through its "discount contracts") without selling to the same customers, then the discount contracts can have only a speculative and de minimus effect on competition--regardless of  how "unfair" they may seem to an outside observer.

Do CLECs Represent the Majority of Demand for Wholesale Data Transmission Services?

This, of course, is the first question the FCC should have addressed if it was genuinely concerned about competitive conditions in the wholesale transmission market.  To understand the importance of CLEC demand to the capital deployment decisions of competitive wholesale network service providers, let's look at a competitor that successfully entered the market after the FCC started its special access inquiry.  Zayo, according to the company history on its website,

was founded in 2007 in order to take advantage of the favorable Internet, data, and wireless growth trends driving the demand for bandwidth infrastructure, colocation and connectivity services.

So, if the ILECs have tied up the demand of some CLECs--which could otherwise go to competitors like Zayo, then who is buying from Zayo instead of the ILEC?  Fortunately, Zayo solves this mystery in a presentation to investors in May of this year.  
zayo_sales channels from pdf.jpg

What?  Zayo is selling to some of these same CLECs and those wascally ILECs?   In fact, as we can see, while wireline providers--including those same special access sellers that are under investigation--do constitute the largest group of potential customers for a new entrant, they are still only a minority of total market demand.  Moreover, it is hard to say how much the incremental CLEC demand would be--if not "locked down"--but it's doubtful that it would make the pie a whole lot wider. 

Why Does the FCC Insist on Its Ruse of an Investigation?

We've previously pointed out that "ILEC special access" is not a relevant product market.    Because "ILEC special access" is not a relevant market, it's not at all surprising that the FCC cannot point to a single, specific, direct competitor victim.  Instead, the Commission seems quite willing--perhaps too willing--to simply accept the purchasers' assurances that a victim exists; just a more "theoretical" victim than the antitrust laws protect.   

So, if the Commission's ostensible question for "investigation" is nothing more than the thinnest veneer to disguise price regulation, why is the FCC even bothering with the pretense of an investigation?  While it doesn't make much sense to price-regulate a fraction of a "market," if that's what the FCC wants to do, then it should at least regulate prices in a transparent manner.  Good government isn't always smart, but it should always be transparent to its citizens.