Economics at the FCC, 2015–2016: Competition, Merger Review, and Spectrum Management

Abstract

The Federal Communications Commission is responsible for regulation in the telecommunications and electronic media sectors, and for management of the nation’s non-federal radio frequency spectrum. During the past year, Commission economists contributed to the analysis of market power and the efficacy of various regulatory regimes in the business data services market, assessed potential harms that were associated with major mergers in the cable television industry and the efficacy of conditions designed to mitigate those harms, and helped to structure service and licensing rules to promote efficient usage of spectrum in the face of burgeoning demand for new wireless broadband services.

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Notes

  1. 1.

    At the time of writing this was an open proceeding. See (FCC 2016a). The analysis presented here was undertaken prior to the close of the comments on the proceeding, and represents the analysis of staff at that time, and not the views of the Commission. Staff analysis may change in light of additional factual information that may be entered into the record and/or additional analysis. The results in Tables 2 and 3 are representative of a class of regressions at the time of writing. Econometric analysis of the BDS market presents important challenges, including dealing with the possibility of omitted explanatory variables that correlate with competitive entry. The Commission’s analysis alleviates these concerns through employment of Census tract level fixed effects to the extent that there is no intra-tract heterogeneity that is correlated both with price and our competition variables.

  2. 2.

    These regulations largely apply to DS-1 and DS-3 circuits, which respectively have bandwidths of 1.5 Mbps and 45 Mbps and are provisioned with the use of traditional Time Division Multiplex (TDM) technology, rather than to packet-based technologies, such as Ethernet. Packet-based services are essentially subject to no regulation in Verizon’s case, and limited regulation in most other cases, and account for 42 % of total BDS revenues.

  3. 3.

    For the past decade, the ceiling on prices in price cap areas has been frozen and not adjusted for changes in input costs or productivity.

  4. 4.

    Hereafter “BDS Report”.

  5. 5.

    See Table 1 in the BDS Report.

  6. 6.

    Many locations are still only served over copper. At those locations, the maximum bandwidth that is available for lease is capped by the number of copper pairs that are deployed, the length of those loops, and the quality of the lines, and is substantially below the commercial capability of a fiber link. However, where enough copper pairs have been deployed, as is sometimes the case in certain locations, relatively high bandwidth services can be supplied.

  7. 7.

    The ILECs as common carriers lease a wide range of TDM and packet services (as distinct from physical facilities). The services are supplied over the ILECs’ own infrastructure: generally, copper or fiber fixed line connections. The record suggests that the ILECs rarely lease the underlying physical facilities on a stand-alone basis—e.g., just the bare copper loops or fiber, absent the transmission service—except where regulation requires such leasing (e.g., unbundled copper loops).

  8. 8.

    Details on the construction of the regression data can be found in attachment 1 of the BDS Report.

  9. 9.

    The capacity of a DS-1 is 1.544 Mbps and that of a DS-3 is 44.736 Mbps. Both of these connections use traditional TDM technology. The high bandwidth connections are largely packet-based, commonly Ethernet, connections, though about 15 % of these connections are circuit-based connections at capacities such as OC-3, OC-12, etc.

  10. 10.

    The BDS Report contains additional regression models, including with independent variables reflecting the presence of a facilities-based competitor that can serve the building, a facilities-based competitor that is in the census block but not the building, or a facilities-based competitor that is in the census tract but not the census block. .

  11. 11.

    Because the competitive variables of interest are indicator variables rather than logged values, the coefficients cannot be interpreted as elasticities. The BDS Report adopted the approximation of the percentage change in prices as Δ % = exp(β) − 1, where β is the estimated coefficient on the indicator variable of interest.

  12. 12.

    Table 20a in Attachment 1 and Table 20 in Attachment 2 of the FCC Staff Memorandum (FCC 2016e) estimate models using pooled data and interaction terms that allow the effect of competition to vary with respect to the FCC pricing regulations in effect. The results of these models indicate that there are statistically significant differences in competitive effects among areas subject to different pricing regulations.

  13. 13.

    Consistent with Office of Management and Budget information quality guidelines, the BDS Report was peer reviewed. The BDS Report examines whether the competitive effect varies with the pricing regulatory regime, using interaction terms to indicate differences in regime; BDS Report Table 20. One of the peer reviewers recommended additional attention to this matter. Table 3 herein, based on Tables 14a and 14b in Attachment 2 to the FCC Staff Memorandum (FCC 2016e) re Response to the Peer Review of the BDS Report (hereafter “FCC Staff Memorandum,” available at https://www.fcc.gov/peer-review-business-data-services-industry-white-paper) addresses the question by estimating separate regression equations for each product category. Table 3 also reports census tract clustered standard errors for the coefficients, which is a procedure that was recommended in the peer review and initially implemented at the census block level in Attachment 1 to the FCC Staff Memorandum.

  14. 14.

    See FCC Staff Memorandum (FCC 2016e, Attachment 3), which examines this issue in greater detail and concludes that there is scant evidence that potential competition from HFC cable infrastructure was having a competitive effect on the BDS market in 2013. .

  15. 15.

    A synthetic bundle is a combination of video, voice, and Internet services that is offered by two different companies. For example, at the time of the proposed transaction, AT&T and DIRECTV had partnered to offer consumers a bundle with DIRECTV video and AT&T Internet broadband services.

  16. 16.

    See AT&T and DIRECTV (2014a), FCC (2015a, par. 61).

  17. 17.

    Such as delaying or minimizing entry of OVDs into the market.

  18. 18.

    An initial simulation was submitted by Michael Katz, and a follow-up simulation was submitted by Berry and Haile. After examining both simulations, FCC staff determined that the two simulations were closely related, but focused their analysis on the BH simulation, which the staff considered to be more economically rigorous. The order describes the BH simulation, data, and FCC staff revisions in greater detail. See FCC (2015a, esp. Appendix C). Berry and Haile are professors of economics at Yale University.

  19. 19.

    A Designated Market Area (“DMA”) is a Nielsen-defined television market that consists of a unique group of counties. The United States is divided into 210 non-overlapping DMAs. Nielsen identifies television markets by placing each U.S. county (except for certain counties in Alaska) in a market based on measured viewing patterns and by MVPD distribution.

  20. 20.

    A component is a product that is offered by an individual firm (e.g., a video component, broadband component, or voice component).

  21. 21.

    The variables that affect demand in the model are: (1) the DMA price index of the product components; (2) broadband download speeds and the number of offered channels for video; (3) quality characteristics of DBS service, such as latitude measurements of the DMA; (4) indicators for a particular provider’s presence in a market; (5) demographic characteristics of the geographic market, such as median household income; and (6) indicators for a particular product’s availability in the geographic market.

  22. 22.

    The reduction that represented the lower bound only incorporated the expected dollar savings from the channel-by-channel comparison. The reduction that represented the upper bound incorporated the dollar savings that were claimed by the Applicants.

  23. 23.

    The Commission has previously stated the importance of competitive alternatives to the bundled options (FCC 2011). Therefore, the Commission imposed a commitment that the merged entity offer affordable, low-price standalone wireline broadband service.

  24. 24.

    See FCC (2016b, par. 188–205). Also see FCC (2016b, Appendix C) for the full economic analysis.

  25. 25.

    The analyses that were undertaken assumed a permanent foreclosure strategy by New Charter; that is, New Charter was assumed to foreclose a rival from its vertically integrated networks in perpetuity (see Rogerson 2014).

  26. 26.

    The Nash model was similar to that utilized by the FCC during its analysis of the potential for foreclosure of NBCU programming as a result of its merger with Comcast.

  27. 27.

    Zone 1 is the subscription zone that is closest geographically to the sports teams, where foreclosure of the RSN programming from a rival MVPD would be most profitable because the rival’s expected subscriber loss would be greatest.

  28. 28.

    While both theoretical and empirical approaches generated comparable estimates of expected departure, the FCC placed greater reliance on the empirical estimates in determining the likelihood of foreclosure.

  29. 29.

    Discovery shareholders would therefore suffer a loss from foreclosure without any compensating benefit, as only the Stakeholders (Malone and Advance/Newhouse) have an equity interest in both Discovery and New Charter.

  30. 30.

    See FCC (2016b, Appendix C, pp. 246–270).

  31. 31.

    The analysis reported herein is based on Comcast data. The Commission requested information and data on the Applicants’ and Comcast’s sales of VOD/PPV services. Given that Comcast and Time Warner Cable behaved in a similar manner with respect to Netflix during the peak of the congestion period, our intention was to conduct an analysis of the VOD/PPV revenues for both Time Warner Cable and Comcast. However, the frequency of the data that were provided by Time Warner Cable made this analysis unfeasible, and thus we relied solely on the Comcast data. Because Comcast is likely different from Time Warner Cable and other cable companies, the magnitudes of the economic effects that we analyzed might vary. However, the direction of these effects is likely the same for Comcast, Time Warner Cable, and New Charter (FCC 2016b, Appendix C, p. 266).

  32. 32.

    See FCC (2016b, Appendix C, pp. 265–270).

  33. 33.

    The regression also included the average bandwidth of the Netflix stream in the DMA as a measure of quality and geographic and temporal fixed effects that control for geographic and temporal differences in the demand for Netflix content.

  34. 34.

    FCC staff also found, conversely, that an increase in the number of hours that were streamed was associated with an increase in the number of hours of no-fee VOD that was consumed, which indicated (perhaps) that consumers who do not purchase Netflix streaming services might as a group favor no-fee VOD that is included in their cable subscription. .

  35. 35.

    The interconnection condition ensures that New Charter provides adequate settlement-free interconnection capacity to all qualifying parties, thus significantly limiting New Charter’s ability to degrade the quality of settlement-free interconnection.

  36. 36.

    The Ericsson report estimates a ten-fold increase from 2015 to 2021, and the Cisco report estimates an eight-fold increase from 2015 to 2020.

  37. 37.

    The Commission has permitted unlicensed operations such as WiFi in certain bands—e.g. 900 MHz and 2.4 GHz—which are globally harmonized for ISM (Industry, Scientific, Medical) applications and thus especially useful for unlicensed use.

  38. 38.

    The initial rules for the 3.5 GHz Band, as well as some pending issues to be addressed, were laid out in a First Report and Order and Second Further Notice of Proposed Rulemaking (FCC, 2015b) and a Second Report and Order (FCC, 2016c).

  39. 39.

    With precertification, parties can demonstrate that they meet certain non-transaction-specific requirements, such as compliance with foreign ownership restrictions (FCC 2016c, paras. 214–17).

  40. 40.

    With high penetration loss, a signal does not travel as far, which means it is easier to contain in a specified area. Similarly, highly directional antennas make it easier to contain a signal to a specific area or along a specific pathway.

  41. 41.

    The Commission’s use of overlay rights include bands in which the incumbents were relocated, such as Broadband Personal Communications Service (PCS) (FCC 1993) and Advanced Wireless Service (AWS) (FCC 2002b), and bands in which the incumbents were permitted to remain, such as 800 MHz (FCC 1995) and 220 MHz (FCC 1997b). See also FCC (2016c, par. 390).

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Carare, O., Kiselev, E., Leighton, W. et al. Economics at the FCC, 2015–2016: Competition, Merger Review, and Spectrum Management. Rev Ind Organ 49, 557–584 (2016). https://doi.org/10.1007/s11151-016-9546-8

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Keywords

  • FCC
  • Market power
  • Merger review
  • Spectrum management
  • Telecommunications policy