Telecom regulation: High water mark

Federal Communications Commission chairman Kevin Martin has started the
Steve Rosenbush

Federal Communications Commission chairman Kevin Martin has started the "unrecusal" process with respect to commissioner Robert McDowell. McDowell, a Republican who once worked for companies that compete with AT&T, has "recused" himself from the AT&T-BellSouth merger review. He's actually expected to vote in favor of the deal, breaking a 2-2 party line tie.

Analysts still expect the deal to get done this month or next, although I wouldn't put the odds of this deal closing at 100%. Merrill Lynch analyst David Janazzo says that conditions on the agreement aren't likely to affect the value of AT&T. But the episode is significant because it demonstrates that the regulatory climate with respect to big mergers and acquisitions has changed since the Nov. 7 general election, at least with respect to telecom.

Janazzo notes:
"The next telltale sign relative to lifting the recusal of the fifth commissioner, in our opinion, could be Congressional Democrat response.  A strong negative response by key Congressional Democrats raises the political stakes along with the possibility of increased FCC oversight in 2007, in our opinion.  A more tepid response increases the viability of an ultimate 3-2 approval.  In either case, the delay of AT&T closing the BellSouth deal highlights a view that the regulatory/legislative environment with regard to telecom may have reached its high water mark."

The most important question, I think, is whether the regulatory climate for telecom reverts to the "pro-competition" outlook of the mid-90s. That led to the Telecom Act and the late '90s telecom boom, but also to subsequent bust. The bust ended with the major telecom players were allowed to consolidate. The growth in wireless and broadband has been indisputable in recent years, and I argue that the laissez fare attitude toward telecom consolidation has promoted innovation and broadband.

It's too late to undo the telecom deals of the last few years, but the FCC and Congress could change the climate by forcing the big telecom players to resolve commercial disputes by through binding arbitration with their rivals. The other crucial issue is whether the telecom companies will be allowed to charge big bandwidth users such as Google as premium for handing video. I see little merit in forcing companies to accept baseball style arbitration, although the arguments for and against net neutrality are complex, and both sides need to be considered. Telecom companies won't continue to invest in broadband if they believe that third parties such as Google will derive all the benefit. But slapping huge premiums on Internet access could choke off innovation on the Internet, which is the last thing anyone wants or needs. Going forward, it's hard to imagine an isssue that will have a great impact on the economy.