Both sides sound off on media mergers

By Jonathan Krim
The Washington Post

Over the next few months, a single federal agency will begin to fundamentally alter the nation's communications and mass-media landscape, rewriting a broad swath of rules that affect the choices consumers have for getting online and the variety of television and radio programming they watch and hear.

If all of the changes being reviewed by the Federal Communications Commission (FCC) are enacted as proposed, major telecommunications and media corporations will be less regulated, and more free to grow, than at any time in decades.

The rules in question govern how much telephone companies need to open their lines to competitors for local phone and high-speed Internet service, set restrictions on how many TV and radio stations can be owned by one company, and determine whether a company can own both newspapers and TV stations that serve the same community.

FCC officials say they expect to begin making decisions as early as February, after more than a year of intense debate and lobbying over sharply different visions of the best way to spur growth and competition in the country's information economy.

Opponents of the proposed rules fear that, taken together, they ultimately could lead to a few powerful conglomerates controlling the flow of electronic information, from programming of television and radio news and entertainment to owning the pipes that connect people to the Internet.

Those pushing for the changes argue that the old rules fail to account for emerging technologies that can provide a wealth of diverse information and means of communication. Burdensome regulation has stunted their deployment — particularly of high-speed Internet access — these people say, and this in turn has hampered recovery of the battered technology sector.

"We've teed up a lot," said Michael Copps, one of two commission Democrats. "It's high noon at the FCC."

With the stakes high, the corporate owners of three of the nation's major TV networks came together Thursday to call on the FCC to abolish its ownership rules. Viacom Inc., which owns CBS and the Paramount movie studio, joined with News Corp., owner of the Fox TV network and the 20th Century Fox studio, and NBC/Telemundo in arguing that the regulations are no longer needed given the "wealth of media available to virtually all Americans."

Proposed rules often are modified through negotiations among the commission's five members, and FCC officials insist that final decisions have not been made. But analysts are increasingly convinced that, for the most part, the deregulatory agenda of Chairman Michael Powell will prevail, marking a definitive turn from the policies of the FCC during the Clinton administration.

Powell and Republican commissioners Kevin Martin and Kathleen Q. Abernathy have a 3 to 2 majority, and while they don't always vote in lock step, they are in general philosophical agreement that less regulation is beneficial.

Meanwhile, Powell's most powerful and ardent critic, Sen. Ernest Hollings, D-S.C., lost control of the Senate Commerce Committee when the Republicans won a Senate majority last month.

Although the FCC is an independent agency, Congress controls its purse strings. Taking over the Commerce Committee is Sen. John McCain, R-Ariz., who championed Powell's nomination to the commission in 1997 and who shares his deregulatory instinct. McCain has promised hearings on several of the issues the FCC is grappling with.

The commission's existing regulatory regime also has been under attack by the courts, which have issued key rulings challenging the commission's requirements on the sharing of telephone networks and its limits on media concentration.

In an interview, Powell rejected the notion that he seeks mindless deregulation, or that the contemplated changes would necessarily shift the media and telecommunications balance in dramatic fashion.

"No industry is so fraught with impassioned histrionics as this one," he said. Congress requires the commission to review many of its rules every two years, Powell said, and to toss out those that cannot be justified as providing benefit.

But Powell said he is determined to keep the Internet relatively free from the decades-old, tightly regulated framework of local telephone service. He also disparages claims that changing FCC rules will mean open season for consolidation that will stifle competition.

"That assumes that the antitrust division takes a pill and goes to sleep," said Powell, who once worked in that Justice Department division. He added that the FCC will continue to evaluate mergers to determine whether they are in the public interest. He cited the agency's recent rejection of the proposed buyout of Hughes Electronics Corp.'s DirecTV by satellite competitor EchoStar Communications Corp. as one example.

But industry experts, consumer groups and several major technology companies aren't convinced.

"The most important thing the Powell commission will do is eliminate all the rules that proactively prevent telecommunications and media companies from entering new lines of business," said Blair Levin, an FCC official in the Clinton administration who now analyzes regulatory policy for the investment firm Legg Mason Wood Walker Inc. "We are clearly going to have a lot of consolidation. The question is, is the nature of technology such that we can still get the vibrant competition that you would want?"

Paul Misener, vice president of global public policy for Amazon.com Inc., who also worked at the FCC, said it is "an operating assumption" in his industry that there will be fewer Internet access providers in the future.

Misener said the direction the FCC is headed creates the likelihood that while consumers will have a choice between high-speed Internet technologies — via cable or souped-up telephone service known as DSL — there will be only one or two Internet providers within each technology.

That prospect has Amazon, Microsoft Corp. and a coalition of other technology companies worried that those gatekeepers could prevent users from looking at certain content.

Amazon wants the FCC to add a rule that would require high-speed Internet providers to agree to refrain from content discrimination or to be required to give at least three competing Internet providers the ability to offer service on their systems.

Consumer groups have called on the FCC to require the cable and phone companies that provide broadband connections to be required to allow other Internet service providers — such as EarthLink Inc. or United Online Inc. — onto those systems under any circumstance.

The pipe owners want no such requirements, although America Online Inc. and Time Warner Inc. had to accept them as a condition of merger approval in 2000.

Powell said that providing choice for Internet service is vital for consumers and that the commission is still mulling the issue. But the question, he said, is whether the pipe owners should be required to allow other providers on their systems, or whether they will have enough market incentive to negotiate deals with other providers on their own, as some have.

That question is at the heart of the broader argument over how best to nurture and encourage competition in the digital world.

Proponents of deregulation say that owners of existing infrastructure, such as cable and telephone networks, cannot be expected to invest in new technologies and ultra-fast fiber-optic lines if they are forced to share their facilities with or lease them to potential competitors.

The other side argues that only by requiring owners of monopoly networks to compete will they have incentive to invest in new services and expand their revenue opportunities. To do otherwise would force many competitors out of business, these people say.

In passing the landmark Telecommunications Act of 1996, Congress forged a patchwork filled with compromise. But it required the regional phone companies to open their networks to competitors to provide local service and high-speed DSL Internet access.

On the local-service side, the results have been mixed.

Under the Telecommunications Act states have the power — based on FCC rules — to set the lease rates that the phone companies can charge competitors to use the equipment needed to provide local service.

But states were slow to act, faced in part with heavy lobbying from phone companies arguing that they would fail to recoup their costs if rates were lowered. Meanwhile, many start-up companies were swept away in the collapse of the telecom sector.

Recently, however, several states have moved aggressively to lower the lease rates, and long-distance companies have made significant inroads into local-service markets, winning customers from the former regional Bell companies. Nationwide, the regional competitors provide about 8 million customers with local phone service, up about 40 percent from a year ago. As a result, costs to consumers have dropped as the Bells have been forced to compete.

In states where those rates are low, such as Michigan and Wisconsin, AT&T Corp., WorldCom and Sprint Corp. have been particularly successful in offering package rates to consumers for long-distance and local phone service.

The FCC is considering changes in the rules specifying which parts of the network the Bells must make available. The changes also might preempt the states' rate-setting authority, in light of court decisions that have questioned the fairness of, among other things, rates varying from area to area.

Similarly, the FCC is examining how much telephone networks should be opened to competition for high-speed Internet access, or broadband, which the phone companies also provide.

The phone companies want to be treated in the same fashion as the cable operators, which are not required to offer competing services on their broadband networks. Only then, the phone companies say, will they have the incentive to extend the "last mile" of fiber-optic lines to homes.

Commissioner Martin agrees. He said he fears that the current 2 to 1 subscription advantage that cable broadband enjoys over DSL will widen, threatening competition between the two platforms.

The newest commissioner, Democrat Jonathan Adelstein, said that "competition is key to deployment" of high-speed lines and revitalizing the telecommunications industry, but he declined to state a position on how best to achieve it.

Powell called much of the Telecom Act "an experiment" from which the FCC is learning what works and what doesn't.

It is clear, though, that Powell wants companies to compete by building their own facilities and networks, rather than relying on piggybacking. Moreover, he sees emerging technologies, such as voice-over-Internet, cable telephony and expanded wireless, as providing new avenues of competition.

That is the argument the large phone companies have been making aggressively, lobbying hard both in Congress and at the FCC.

Commissioner Copps worries about changing the broadband rules, but he is so incensed about the proposals that would ease limits on media ownership that he has threatened to hold public hearings, on his own, around the country. Powell agreed to one hearing in Richmond, Va., in February, but a senior FCC official said that it is unlikely to change any minds.

Under the proposals, a newspaper and a radio or TV station in the same market could be owned by the same company. The commission also is considering lifting rules that bar one company from owning more than one of the top four TV stations in a market, raising the cap from 30 percent to as much as 45 percent on the number of total viewers nationwide that one cable system can serve, raising or abolishing the cap that prevents one company from owning or controlling TV stations that reach more than 35 percent of households nationwide, and ending the ban on the major networks being merged.

A limit that bars one company from owning more than eight radio stations in the largest metropolitan areas also is under review.

"This is public property we're talking about," said Copps, speaking about the airwaves. The changes have "the potential to change media choices, for better or for worse, for years to come. And what I keep asking is, what if we make a mistake? How do you put the genie back in the bottle?"