Wisdom at the FCC

I noticed a piece from the FCC by Commissioner Pai speaking of the 100th anniversary of the Kingsbury Decision of 1913. Simply, the Kingsbury Decision was an inside deal with the Justice Department that gave AT&T the exclusive monopolistic control of all telecommunications. This was in the Wilson term and Wilson was at the same time attacking all other monopolies.

As Pai states:  

What should a new Kingsbury Commitment look like? At the risk of being an impolite guest, I’d like to dispute the premise of that question. To me, the Kingsbury Commitment is not a model to be emulated. Instead, it’s a cautionary tale about the dangers of regulatory capture and the folly of attempting to manage competition. A comforting mythology has long existed in many quarters about the development of our nation’s telephone system. We are often told that the telephone industry was a natural monopoly. The rise of Ma Bell, or something like it, was inevitable. And it follows that the proper role for government was—and, by implication, still is—to regulate that monopoly and ensure that it served socially productive goals. As AT&T’s slogan in the early part of the 20th century put it, “One System, One Policy, Universal Service.” But there’s a tiny problem with this view of history. As Adam Thierer and others have explained, it doesn’t comport with the facts. To be sure, in the earliest days of the telephone industry, there was little competition. But that’s because of patents obtained by Alexander Graham Bell. Once those patents began to expire in 1893, things began to change—dramatically. By 1894, eighty competitors had entered local telephone markets. Less than ten years later, there were over 3,000. As a result, AT&T’s market share fell from 95 percent in 1894 to 49 percent in 1907.

This is a brilliant and quite true observation. This was an inside deal to destroy competition and establish a monopoly. It was a monopoly that was to hinder telecommunications development for another seventy years.

Pai continues:

Here are three of the lessons we should draw.

First, the government should not try to manage competition. The Kingsbury Commitment is a prime example of regulators attempting to do so and failing miserably. No regulatory scheme, no theoretical formula for competition, no matter how finely crafted, can replace actual competition, with all its unmanageable imperfections.

Second, the government should not confuse the goal of protecting competitors with the objective of promoting competition. One could argue that the Kingsbury Commitment served the interests of both AT&T and its rivals. For AT&T, the compact ended an antitrust challenge to its domination of the longdistance market. For independents, the compact ensured their survival in some form. The real losers were the American public, who lost the benefits of actual competition. Similarly, our goal today should not be to preserve the position of any particular company in the marketplace or to help one segment of the industry gain regulatory advantages over its rivals. In a competitive marketplace, we must understand that there will be winners and losers. It is not the government’s job to tilt the playing field by punishing the winners or helping the losers.

Third, beware of businesses bearing commitments. Companies do not offer commitments out of the goodness of their hearts. Instead, as in the case of the Kingsbury Commitment, these commitments are generally designed to serve a company’s self-interest. This is entirely understandable, of course. Butwe regulators must keep it in mind when companies come to our door. Is a company trying to use a voluntary commitment that sounds good on paper to obtain a regulatory leg up on a competitor? What is couched as an attempt to serve the public interest is often in reality an attempt to further private interests and raise rivals’ costs of doing business.

I would never have expected such a statement from the FCC. This is a brilliant analysis of Kingsbury and worth a read by all. Pai in my opinion stands out as a brilliant star whose insight may be highly productive at the FCC, long in need of such understanding.