According to the Communications Act, the Federal Communications Commission has concurrent authority with the antitrust enforcement agencies to review mergers of firms subject to their jurisdiction. While FCC merger review can play a useful role, over the last two decades the FCC’s merger review process has come under intense criticism for the agency’s enthusiastic use of merger commitments.
The root of this problem goes back to the 1990s when the agency started to require merging firms to demonstrate that their transaction will affirmatively “enhance competition” rather than, as is traditional, not harm competition. This new standard, which contravened established caselaw which tied the FCC's “public Interest” standard to antitrust’s “consumer welfare” standard, allowed the FCC to exhort concessions from merging parties, the terms of which appeared in detailed “public interest” statements filed with the merger application. These statements were often loaded with politically-beneficial goodies, but rarely had any nexus to the competitive issues raised by the transaction. In some cases, the FCC used merger adjudications to obtain regulatory concessions the agency was unable to achieve through industry-wide rulemaking. Nowadays, merger review at the FCC is a bilateral bargain between the regulated and the regulator that occurs outside the bounds of Communications law. And, because each deal is unique, mergers produce no precedent to which later mergers may adhere.
An excellent example of this phenomenon is the 2016 merger between Charter and Time Warner Cable. To get the merger approved, not only did the Commission require Charter, among other obligations, to build out its broadband network to reach an additional two million mass-market customer locations and enroll at least 525,000 low-income households in a discounted broadband plan within five years of the merger’s closing date, the Commission also imposed two conditions related to the then-raging “net neutrality” debate. First, the FCC prohibited Charter from imposing data caps and usage-based pricing mechanisms; and second, the agency required Charter to interconnect its IP network to any “qualifying” entity free of charge. Significantly, the two “net neutrality” conditions were to remain in force for seven years, but the Commission agreed to allow the merged entity to petition the Commission to sunset these conditions after five years.
The “bargain” between the regulated and the regulator over the net neutrality provisions is clear: The FCC demanded, and Charter agreed to, two seven year net neutrality commitments as insurance just in case the Obama administration’s 2015 Open Internet Order was reversed. It seems the Obama FCC was prescient to hedge its bets. The Trump administration’s 2018 Restoring Internet Freedom Order overturned the 2015 Open Internet Order, thus allowing the Obama FCC, through its negotiated merger conditions with Charter, to evade the deregulatory efforts of the Trump FCC.
The good news is that five years have passed, and under the terms of the regulatory bargain Charter has recently exercised its option to petition the FCC to sunset these two net neutrality merger conditions. There are compelling reasons for the Commission to grant Charter’s petition.
Let’s start with the prohibition on Charter establishing a data cap. Data caps are a common practice in the industry. To wit, Comcast currently caps most of its users at 1.2 terabytes (TB) of Internet data usage each month. AT&T’s cap is comparable at 1,024 GB for most of its plans. Other carriers also have data caps. But the average consumer need not worry about overages: to put these numbers into perspective, to reach 1 terabyte, a user would have to send and receive 11,000 emails, watch 142 hours of standard streaming video, 129 hours of hi-def video and 94 hours of super-hi-def 4k video, spend 345 hours in online gaming and upload 2,000 social media posts with photos, all in a single month.
Considering the huge amount of usage required to reach your average cap, we should ask the obvious question: why do ISPs impose data caps in the first instance? Easy: to stop people from running business servers in their houses under cheaper residential plans. Data caps are designed to affect only the most extreme usage cases. According to Michael Greeson of the Diffusion Group, a research and advisory group, “[e]ven heavy Netflix households are lucky to hit 250GB to 300GB a month.” There is nothing anticompetitive about data caps; in fact, data caps prevent one proverbial “bandwidth hog” from ruining other customers’ broadband experience. Consequently, there is no compelling reason to prolong Charter’s unilateral inability to follow standard industry practices.
Next, we have the interconnection condition. Given its legal infirmities, the case for sunsetting this condition is particularly compelling. To be blunt, not only is this interconnection condition price regulation by another name, but this interconnection condition is price regulation without procedural due process.
As noted above, at the time the merger was approved, the Obama administration’s 2015 Open Internet Order was very much in force and broadband Internet access was considered to be a common carrier “telecommunications” service under Title II of the Communications Act. However, by simply picking an interconnection rate of “zero” out of thin air without conducting any underlying cost study or using any specific cost methodology, the Commission—under long-standing Title II caselaw—improperly imposed upon Charter a confiscatory rate in violation of the Fifth Amendment. Indeed, these “qualifying entities” clearly impose costs on Charter’s network and Charter’s inability to recover its costs is a prima facie case of a regulatory taking. Sunsetting this interconnection requirement allows the current FCC to right this legal wrong.
Which brings us, finally, to the important issue of regulatory symmetry (or the lack thereof). Charter is the only major Internet Service Provider currently prohibited from imposing data caps and entering into voluntary interconnection agreements. In today’s vibrant Internet Ecosystem, these asymmetrical restrictions make no sense. Indeed, if data caps and rate regulation of the Internet are so important, then these issues are better handled in formal industry-wide inquiries or rulemakings where they can be effectively dealt with in a comprehensive manner.
And guess what? The FCC conducted that exact inquiry when it issued its 2018 Restoring Internet Freedom Order and concluded that the answer to the questions about whether the entire industry should be forced to abandon data caps or be prohibited from entering into interconnection agreements was a resounding “no.” Accordingly, having made the correct decision that the rest of the industry need not be burdened with inefficient “Open Internet” regulation, the Commission should sunset Charter’s asymmetrical merger conditions post haste.