DSL Prime: Regulatory Capture

We must remain vigilant against the possibility of regulatory capture, where the regulators are more concerned about the companies they regulate than the markets it's their job to preserve.

by Dave Burstein of DSL Prime and Future of TV [May 18, 2005]

$150 million fines pending on Korean price-fixing
Massive fines considered for KT, Hanaro
The Korean Fair Trade Commission has decided that KT and Hanaro conspired to raise rates, but has postponed the decision on the amount of the fine. Joongang Daily reports "On March 28, the commission said that the companies had conspired in 10 cases of price-fixing between 2002 and 2004. It said KT and Hanaro raised their rates for local calls in the summer of 2003 on the condition that KT give 1 to 2 percent of its market share to Hanaro."

The proposed fine of $178 million is meeting political opposition. A well-informed analyst explains, "The problem with Korea is the regulators are at cross-purposes. The telecom regulator (MIC) wants to decrease competition, so it fixes prices. The FTC then says that price fixing is illegal. Typical Korean regulatory mess. It will only get worse with convergence because broadcasting and financial regulators get involved too."

Duopoly sometimes creates effective competition, but there is enormous temptation to work together to increase prices instead of competing. I'll never forget a Bell CEO casually saying, "We and the cable guys should just get together and both raise prices. We'd all make more money." Brian Roberts of Comcast has virtually been begging the Bells to do that, sending "signals" so clear in multiple public statements the Justice Department should be sending a subpoena. I believe signaling is working effectively to hold U.S. wireless prices up as well. The next story is part of the explanation why they get away with such practices.

Inside D.C.: Microsoft setting antitrust policy
The best professional lobbyists don't make their mark on federal agencies with million dollar suitcases, but instead by creating a "climate of opinion" in the beltway that leads even honest officials to lean their way. Mike Powell, Kevin Martin, or Hewitt Pate at anti-trust wouldn't take a million dollars in cash in a suitcase, I believe, unlike some legislators (remember Abscam?) A good example in telecom is the two members on the FCC "Consumer Advisory Committee" who report to Verizon's favorite astroturf specialist, Sam Simon. Watch for these "consumer advocates" to also follow the lead of new funder Comcast. Verizon's John Thorne makes sure Richard Epstein, a most articulate anti-government scholar, has ample public platforms.

In A Less-Public Path to Changes In Antitrust, Jonathan Krim, a great tech reporter at the Washington Post, shows how it can work:

"In today's Washington, the important decisions don't get ironed out in places as public as congressional hearings. Instead, significant revisions of U.S. antitrust law are being hashed out by a group composed mainly of lawyers who represent large companies. And Microsoft—found to be an illegal monopolist on two continents—is likely to have some influential allies. ... The head of the 12-member Antitrust Modernization Commission is Deborah A. Garza, a partner at Fried, Frank, Harris, Shriver & Jacobson LLP in Washington. Garza's partner and close associate in the firm, Charles F. Rule, represents Microsoft in court proceedings that monitor the company's compliance with its consent decree with the Justice Department. Also on the commission is John L. Warden, based in New York with the firm of Sullivan & Cromwell LLP. The gravelly-voiced Warden was Microsoft's lead outside attorney during much of its case. Alan J. Meese, the commission's senior adviser and a law professor at William & Mary, wrote papers during the case arguing against the government's proposal to break up Microsoft into two companies. ... submitting suggestions is a task force of the American Bar Association led by Richard J. Wallis, an in-house Microsoft attorney who heads the ABA's antitrust section."

Krim goes further, noting, "The issues the commission is tackling could have broad impact, and many are near and dear to Microsoft. Among them: Should state attorneys general play a role in antitrust enforcement? More than a dozen states participated in the prosecution of Microsoft, at first joining with the federal government and then splitting away. ... The makeup of the panel and the questions it is examining, however, suggest that most of the focus will be on the needs of antitrust defendants, or potential defendants."

Telcos will be particularly interested in carving anti-trust exemptions for regulated industries. That's particularly duplicitous, since they argue against regulation on the grounds anti-trust is an alternative protection.

Versatel's Leo van Doorne suspended as Belgacom buying
Insider trading in "Big Brother's" bleeding edge Dutch CLEC
John de Mol made a billion selling the company behind "Big Brother" and "Fear Factor" to Telfonica, and now hopes for another payday bringing Belgacom in to his 42 percent owned Versatel. Versatel rode the dotcom boom to a high of 80 euro, and then fell to 1.5 euro, so inside information could have been worth millions. The scandal has so far has only touched non-exec director van Doorne (who asserts he's innocent), so probably won't derail the deal.

Versatel owns the football rights in Holland, combining that video and "20 meg ADSL 2+" for 40 euros. Alternately, you can buy a modem for 25 euro, with no monthly charge and pay 4.25 euro cents per minute for (slow) DSL, as well as 15 euro and other plans. That's resulted in ~160,000 DSL lines in Holland, along with ~140,000 in Germany and 50,000 in Belgium. Higher German prices produce half their revenue; Versatel is getting 70-80 euro for 12-16 meg ADSL2+ only available in Berlin for now.

Newly privatized Belgacom, struggling for growth, has floated an offer to eliminate a pesky competitor (50,000 DSL lines in Belgium) and expand into Holland (~160,000 DSL lines) and Germany (~140,000 DSL lines, growing 40 percent in Q1). They know the Dutch market well, having several times considered a KPN merger. But the prize is Germany, where Deutsche Telekom's high prices leave margin room for others.

BellSouth. By any means necessary?
Fighting municipal fiber builds isn't a cause that justifies throwing away all your ethics. Bellsouth's behavior in Louisiana should have consequences throughout the company. When BellSouth's Bob Blau makes a speech in D.C., the respect he's earned is diminished if his company falsifies the truth down south. Some great work from the Lafayette Independent, picked up by David I. and Broadband Reports.

"Engaging in the sleazy business of push polling is a bridge too far for us.... Cox Communications allegedly used the tactic last summer when City-Parish President Joey Durel announced his fiber-to-the home intentions. But this latest incident was the first time that the sponsors behind this type of blatant push polling were immediately identified and we could pin the tail on the donkey. As soon as the push poll started last week, a number of city residents contacted local media when they were dragged through the spin cycle. ... Consider its dark side. Think about the unsuspecting recipient of a call who believes he or she is actually participating in a genuine and straightforward "information gathering" exchange with the caller. Push polling slyly attempts to switch off our political message "defense filter" by convincing us the purpose of the call is to get our opinion on the topic. But, of course, that's not why they're calling. The greatest danger from the practice is its capacity to spread lies and disinformation about candidates or issues without the perpetrator having to take ownership of the lie. Consider some of the questions from last week's poll:

• 'Since LUS rations water, how would you feel about receiving your cable 2-3 days a week?'
• 'Since the law separates church and state, how would you feel about losing your cable-based religious programming?'
• 'Do you want Big Brother watching your Internet and e-mail usage?'

When negative political advertising runs on TV, as disgusting as it often is, campaign finance laws require disclosure of the source of the ad, and we can measure the disinformation with the credibility of the opposing candidate or camp. Push polling tries to deny us, as voters, the ability to connect the dots between the lie and those who benefit from its telling. It should have no place in Lafayette."

It's time for Duane Ackerman to make sure his company lives up to his ethical standards. Bellsouth already donates too much money to the sleaziest folk in politics, lining up alongside Verizon and SBC with literally millions of dollars.

Copyright 2005 Dave Burstein.
The DSL Prime Newsletter is reprinted with permission.

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