1. Competition, Regulation and Communications Policy in the Digital Era Howard A. Shelanski, U.C. Berkeley Centre for Competition Policy University of East Anglia July 7-8, 2008

2. Abstract Changes in telecommunications markets over the past decade have undermined the economic rationale for conventional monopoly regulation while raising hard questions about the transition from ex ante sector- specific regulation to the more ex post approach of general competition law. This presentation will show data on changes to the U.S. telecommunications market and will discuss implications of those changes for the balance between antitrust and regulation. It will then examine how U.S. antitrust law mediates the boundary between regulation and general competition law after the U.S. Supreme Courts 2004 Trinko decision. Changes in telecommunications markets over the past decade have undermined the economic rationale for conventional monopoly regulation while raising hard questions about the transition from ex ante sector- specific regulation to the more ex post approach of general competition law. This presentation will show data on changes to the U.S. telecommunications market and will discuss implications of those changes for the balance between antitrust and regulation. It will then examine how U.S. antitrust law mediates the boundary between regulation and general competition law after the U.S. Supreme Courts 2004 Trinko decision.

3. Transformation of the U.S. Telecoms Market, 1996 to Today In 1996, the U.S. had 38 million wireless subscribers; in 2007 it had over 200 million. In 1996, the U.S. had 38 million wireless subscribers; in 2007 it had over 200 million. In 1996, incumbent local exchange carriers (ILECs) served over 180 million lines. By 2005 that figure was below 140 million lines. In 1996, incumbent local exchange carriers (ILECs) served over 180 million lines. By 2005 that figure was below 140 million lines. In 1996 only about 1 in 5 U.S. households had internet access. Today, nearly 4 in 5 have internet access. In 1996 only about 1 in 5 U.S. households had internet access. Today, nearly 4 in 5 have internet access.

4. New versus Old Technologies Wireless and internet-based communications Wireless and internet-based communications Complements and, increasingly, substitutes for conventional service Complements and, increasingly, substitutes for conventional service In 1996, Americans placed 504 billion conventional local telephone calls and made an average of 143 minutes of long- distance calls per month. In 1996, Americans placed 504 billion conventional local telephone calls and made an average of 143 minutes of long- distance calls per month. In 2005, Americans placed 336 billion conventional local telephone calls and made an average of only 51 minutes per month of long-distance calls. In 2005, Americans placed 336 billion conventional local telephone calls and made an average of only 51 minutes per month of long-distance calls.

5. Where did the calls go? In 1996, the 38 million U.S. wireless customers used an average of 125 minutes per month => Today, the over 200 million subscribers use an average of over 800 minutes per month. In 1996, the 38 million U.S. wireless customers used an average of 125 minutes per month => Today, the over 200 million subscribers use an average of over 800 minutes per month. In 1996, fewer than than 20 million U.S. households even had internet access => By 2005, the three leading instant messaging services had 100 million distinct monthly users. In 1996, fewer than than 20 million U.S. households even had internet access => By 2005, the three leading instant messaging services had 100 million distinct monthly users. So, calls went from conventional telephony to wireless and internet-based alternatives. So, calls went from conventional telephony to wireless and internet-based alternatives.

6. Regulatory Implications Monopoly assumptions are less warranted Monopoly assumptions are less warranted A priori rules are less applicable A priori rules are less applicable

7. Regulatory Implications Because regulatory benefits decline as competition increases, we need to reconsider: Because regulatory benefits decline as competition increases, we need to reconsider: Retail price regulation, Retail price regulation, Line-of-business limitations, and Line-of-business limitations, and Obligations to provide network facilities to competitors Obligations to provide network facilities to competitors

8. Regulatory implications Costs of regulation increase with competition Costs of regulation increase with competition In the presence of competition, regulation may fail to send correct economic signals and In the presence of competition, regulation may fail to send correct economic signals and Regulation may divert scarce resources from carriers that would otherwise use those resources to compete in local markets. (FCC) Regulation may divert scarce resources from carriers that would otherwise use those resources to compete in local markets. (FCC)

9. Regulatory implications Monopoly gives regulators a margin for error: Monopoly gives regulators a margin for error: regulation can be imprecise and still be beneficial regulation can be imprecise and still be beneficial Under competition, regulators have much less margin for error Under competition, regulators have much less margin for error Prices that are too high or too low both have potential anticompetitive consequences. Prices that are too high or too low both have potential anticompetitive consequences.

10. The Market Calls For A New Approach The new competition is not perfect, but in network industries with high fixed costs, even partial substitution can provide more effective competitive discipline than in other markets. Revenues fall faster than costs as customers leave, so even small losses in market share hurt. The new competition is not perfect, but in network industries with high fixed costs, even partial substitution can provide more effective competitive discipline than in other markets. Revenues fall faster than costs as customers leave, so even small losses in market share hurt. Even in concentrated and imperfectly competitive telecom markets, incumbents can lose market power; this provides good cause to reconsider the conventional, a priori approach to regulation. Even in concentrated and imperfectly competitive telecom markets, incumbents can lose market power; this provides good cause to reconsider the conventional, a priori approach to regulation.

11. New approach The new competition does not imply complete regulatory laissez-faire. The new competition does not imply complete regulatory laissez-faire. It does imply that, with some exceptions, regulation through punishment of anti- competitive behavior ex post, on a case-by-case basis, would be more likely to create benefits and less likely to distort competition than conventional a priori conduct rules. It does imply that, with some exceptions, regulation through punishment of anti- competitive behavior ex post, on a case-by-case basis, would be more likely to create benefits and less likely to distort competition than conventional a priori conduct rules.

12. Hard Questions When should basic interconnection among competing networks for the exchange of traffic be mandated and when left to the market? When should basic interconnection among competing networks for the exchange of traffic be mandated and when left to the market? Even if most regulation yields to general competition law, there is a good case for keeping mandatory interconnection among rival networks Even if most regulation yields to general competition law, there is a good case for keeping mandatory interconnection among rival networks What other anti-discrimination measures might still be warranted as the telecommunications market becomes more competitive? What other anti-discrimination measures might still be warranted as the telecommunications market becomes more competitive?

13. Hard Questions To what extent is antitrust law adequate for such ex post enforcement? To what extent is antitrust law adequate for such ex post enforcement? Is the essential facilities doctrine in the EU a strong enough tool for such a shift in Europe? Is the essential facilities doctrine in the EU a strong enough tool for such a shift in Europe? In the U.S., is sector specific competition policy needed to get around U.S. antitrust laws right to refuse to deal (see Verizon v. Trinko)? In the U.S., is sector specific competition policy needed to get around U.S. antitrust laws right to refuse to deal (see Verizon v. Trinko)?

14. Trinko, Essential Facilities, and Antitrust in Regulated Industries Trinko can be interpreted in a number of ways, depending on whether one reads the case narrowly or broadly. Trinko can be interpreted in a number of ways, depending on whether one reads the case narrowly or broadly. I will discuss 3 possible readings and their implications: I will discuss 3 possible readings and their implications: Trinko as barrier to expansion of antitrust law by regulatory statutes Trinko as barrier to expansion of antitrust law by regulatory statutes Trinko as presumption against strong application of antitrust in regulated industries Trinko as presumption against strong application of antitrust in regulated industries Trinko as presumption against any antitrust enforcement in regulated industries Trinko as presumption against any antitrust enforcement in regulated industries

15. Trinko as Barrier to Regulatory Expansion of Antitrust Law A narrow reading of Trinko is that regulatory statutes cannot, without express provision by Congress, broaden the scope of conduct for which antitrust imposes liability. A narrow reading of Trinko is that regulatory statutes cannot, without express provision by Congress, broaden the scope of conduct for which antitrust imposes liability. U.S. antitrust law imposes no duty to deal with competitors except as in Aspen, so plaintiff, stating no Aspen claim, cannot use the 1996 telecom Acts duties to deal as grounds for liability against defendant under Section 2 of the Sherman Act. U.S. antitrust law imposes no duty to deal with competitors except as in Aspen, so plaintiff, stating no Aspen claim, cannot use the 1996 telecom Acts duties to deal as grounds for liability against defendant under Section 2 of the Sherman Act. This seems perfectly sound. Congress should not be deemed in one statute to unwittingly or implicitly alter the scope of other statutes. This seems perfectly sound. Congress should not be deemed in one statute to unwittingly or implicitly alter the scope of other statutes.

16. Contd But, this narrow reading is hard to square with other parts of the Courts opinion. But, this narrow reading is hard to square with other parts of the Courts opinion. The Court goes on to say more about the way that antitrust should apply in regulated industries. The Court goes on to say more about the way that antitrust should apply in regulated industries.

17. Trinko as Limiting Strong Antitrust Enforcement in Regulated Industries The Court notes that antitrust must consider the particular circumstances of an industry, and states that regulation is an important factor in that consideration. The Court notes that antitrust must consider the particular circumstances of an industry, and states that regulation is an important factor in that consideration. This could mean only that courts should be especially wary of undue expansion of liability where there is regulation that affects competition in an industry. This could mean only that courts should be especially wary of undue expansion of liability where there is regulation that affects competition in an industry. So interpreted, the Court is saying that regulated industries are not the place to add to the scope of conduct for which antitrust will impose liability. So interpreted, the Court is saying that regulated industries are not the place to add to the scope of conduct for which antitrust will impose liability. So in this case, regulation means that there should be a presumption against adding to the few existing exceptions from the proposition that there is no duty to aid competitors. So in this case, regulation means that there should be a presumption against adding to the few existing exceptions from the proposition that there is no duty to aid competitors.

18. Contd This interpretation limits the use of cases in regulated industries to move antitrust in a particular pro- enforcement direction; i.e. as settings for strong antitrust enforcement that goes beyond the established scope of liability existing at the time of the case. This interpretation limits the use of cases in regulated industries to move antitrust in a particular pro- enforcement direction; i.e. as settings for strong antitrust enforcement that goes beyond the established scope of liability existing at the time of the case. The implication, however, would be that courts can still apply antitrust to its full, pre-existing extent. The implication, however, would be that courts can still apply antitrust to its full, pre-existing extent. This would mean in this case that, had antitrust law already recognized broader duties to deal with rivals, courts should recognize those duties even if plaintiffs claim were at or near the outer boundary of liability. Just as regulation shouldnt add to antitrust law, it shouldnt contract it either. This is consistent with the text of the 1996 Acts antitrust savings clause. This would mean in this case that, had antitrust law already recognized broader duties to deal with rivals, courts should recognize those duties even if plaintiffs claim were at or near the outer boundary of liability. Just as regulation shouldnt add to antitrust law, it shouldnt contract it either. This is consistent with the text of the 1996 Acts antitrust savings clause.

19. Trinko as Strongly Limiting Antitrust Enforcement in Regulated Industries Under this interpretation, Trinko imposes a general presumption that courts should be particularly modest in their application of antitrust law in regulated industries. Under this interpretation, Trinko imposes a general presumption that courts should be particularly modest in their application of antitrust law in regulated industries. Not only should courts refrain from adding to antitrust liability, but they should presume against separate antitrust liability in regulated industries. Not only should courts refrain from adding to antitrust liability, but they should presume against separate antitrust liability in regulated industries.

20. Contd The implication is that antitrust plaintiffs should know going into a case involving a regulated industry that their burden will be especially high. The implication is that antitrust plaintiffs should know going into a case involving a regulated industry that their burden will be especially high. The Courts discussion of the costs of section 2 enforcement suggests that, in rule-of-reason balancing, the fact of regulation should lead courts to emphasize the costs and discount the marginal benefits of antitrust enforcement, thus potentially leading to a decision against liability for the same conduct that might have led to liability in a non- regulated context. The Courts discussion of the costs of section 2 enforcement suggests that, in rule-of-reason balancing, the fact of regulation should lead courts to emphasize the costs and discount the marginal benefits of antitrust enforcement, thus potentially leading to a decision against liability for the same conduct that might have led to liability in a non- regulated context.

21. Which Interpretation is Right? The narrowest interpretation, Trinko as barrier to regulatory expansion of antitrust law, is a key part of the story but the opinion clearly goes further. The narrowest interpretation, Trinko as barrier to regulatory expansion of antitrust law, is a key part of the story but the opinion clearly goes further. The choice is really between interpretations 2 and 3: Trinko as barrier to strong antitrust claims, or as strong barrier to any antitrust claims, in regulated industries. The choice is really between interpretations 2 and 3: Trinko as barrier to strong antitrust claims, or as strong barrier to any antitrust claims, in regulated industries. The opinion is ambiguous, but to my reading tilts toward the broader interpretation: in the regulated industry context, courts should presume not only against extending the scope of antitrust liability, but against applying antitrust as already clearly established because of the cost/benefit balance of section 2 enforcement. The opinion is ambiguous, but to my reading tilts toward the broader interpretation: in the regulated industry context, courts should presume not only against extending the scope of antitrust liability, but against applying antitrust as already clearly established because of the cost/benefit balance of section 2 enforcement.

22. Implications for Antitrust Enforcement Generally Rule-of-reason cases usually focus more on the costs and benefits of the conduct at issue than those of enforcement. Trinko moves enforcement costs to center stage, at least in regulated industries. Rule-of-reason cases usually focus more on the costs and benefits of the conduct at issue than those of enforcement. Trinko moves enforcement costs to center stage, at least in regulated industries. But the Court says nothing about the costs of regulation. Why should antitrusts costs cause it to retreat in regulated industries, without balancing the costs of antitrust against the costs of regulation? But the Court says nothing about the costs of regulation. Why should antitrusts costs cause it to retreat in regulated industries, without balancing the costs of antitrust against the costs of regulation? The Court is more expressly and generally concerned with the costs of antitrust than in past cases; see its discussion of false positives. The Court is more expressly and generally concerned with the costs of antitrust than in past cases; see its discussion of false positives. While antitrust cases have long cautioned against barring conduct we dont understand, Trinko moves in a more expressly skeptical direction. While antitrust cases have long cautioned against barring conduct we dont understand, Trinko moves in a more expressly skeptical direction. Opinions may differ on whether these observations are accurate or reveal good or bad developments. A topic for future discussion. Opinions may differ on whether these observations are accurate or reveal good or bad developments. A topic for future discussion.

23. Trinko and Antitrust in Regulated Industries: Open Questions When is an industry sufficiently regulated to trigger Trinkos presumption against antitrust enforcement? When is an industry sufficiently regulated to trigger Trinkos presumption against antitrust enforcement? The Court cites precedent involving pervasive regulation The Court cites precedent involving pervasive regulation But the Court also refers more generally to the mere existence of regulation as relevant But the Court also refers more generally to the mere existence of regulation as relevant

24. Contd A fair reading of the opinion suggests the Courts presumption should apply only when a particular kind of regulation exists: A fair reading of the opinion suggests the Courts presumption should apply only when a particular kind of regulation exists: One factor of particular importance is the existence of a regulatory structure designed to deter and remedy anticompetitive harm. One factor of particular importance is the existence of a regulatory structure designed to deter and remedy anticompetitive harm. There must be something built into the regulatory scheme which performs the antitrust function (quoting Silver). There must be something built into the regulatory scheme which performs the antitrust function (quoting Silver).

25. Open questions, contd Does the competition-focused regulation have to be actively enforced, or is its mere existence on the books sufficient? Does the competition-focused regulation have to be actively enforced, or is its mere existence on the books sufficient? This is a key question, perhaps the key question, after Trinko. If a presumption against antitrust can apply absent active enforcement of a regulatory statute that ostensibly performs the antitrust function, then a little regulation could be a dangerous thing for competition enforcement in regulated industries. This is a key question, perhaps the key question, after Trinko. If a presumption against antitrust can apply absent active enforcement of a regulatory statute that ostensibly performs the antitrust function, then a little regulation could be a dangerous thing for competition enforcement in regulated industries.

26. Open questions, contd The opinion suggests that the Court found it relevant that the FCC was actively enforcing the statute, citing examples of the FCCs section 271 proceedings and enforcement of ILEC unbundling obligations. The opinion suggests that the Court found it relevant that the FCC was actively enforcing the statute, citing examples of the FCCs section 271 proceedings and enforcement of ILEC unbundling obligations. But the Court also talks about the statutes pro-competition provisions as being enforceable as opposed to actually enforced, so there may be an open question here. But the Court also talks about the statutes pro-competition provisions as being enforceable as opposed to actually enforced, so there may be an open question here. Moreover, suppose an agency does not issue regulations to implement a competition-focused statute. Should Trinkos presumption still apply or should some reasoned agency decision (either to regulate or not) be required? Moreover, suppose an agency does not issue regulations to implement a competition-focused statute. Should Trinkos presumption still apply or should some reasoned agency decision (either to regulate or not) be required?

27. Implications for Antitrust in Regulated Industries My interpretation of Trinko so far is that it creates a presumption against antitrust enforcement in regulated industries, even for conduct that would trigger liability in the non-regulated context, where: My interpretation of Trinko so far is that it creates a presumption against antitrust enforcement in regulated industries, even for conduct that would trigger liability in the non-regulated context, where: the regulatory statute addresses the competition concerns of antitrust, and, the regulatory statute addresses the competition concerns of antitrust, and, the statute provides for continuing oversight and enforceability by the authorizing agency. the statute provides for continuing oversight and enforceability by the authorizing agency.

28. Implications, contd The implications for actual cases will depend on how broadly courts choose to enforce the presumption under these conditions. Should Trinko apply: The implications for actual cases will depend on how broadly courts choose to enforce the presumption under these conditions. Should Trinko apply: Where the statute merely authorizes, but does not mandate, competition enforcement? Where the statute merely authorizes, but does not mandate, competition enforcement? Where the agency is passive in exercising its authority? Where the agency is passive in exercising its authority? Where the statute establishes competition standards or requirements that are weaker than those of antitrust? Where the statute establishes competition standards or requirements that are weaker than those of antitrust? The Court is silent on the above questions, leaving a zone of discretion for lower courts. The Court is silent on the above questions, leaving a zone of discretion for lower courts. Credit Suisse (2007) suggests the Supreme Court will take a broad view of the preclusive effects of regulatory statutes on antitrust. Credit Suisse (2007) suggests the Supreme Court will take a broad view of the preclusive effects of regulatory statutes on antitrust.

29. Implications, contd The case raises some risk that merely nominal regulation could displace antitrust enforcement in regulated industries, but some language in opinion hints otherwise. The case raises some risk that merely nominal regulation could displace antitrust enforcement in regulated industries, but some language in opinion hints otherwise. Whether a little regulation could be a dangerous thing for antitrust will depend on lower court interpretations of Trinko and related cases like Credit Suisse. Congress, courts, and agencies should pay attention to ensure a good balance between antitrust and regulation. Whether a little regulation could be a dangerous thing for antitrust will depend on lower court interpretations of Trinko and related cases like Credit Suisse. Congress, courts, and agencies should pay attention to ensure a good balance between antitrust and regulation.

30. Conclusions The U.S. telecommunications market has become remarkably more competitive since 1996. The U.S. telecommunications market has become remarkably more competitive since 1996. This transformation undermines the rationale for conventional telecom regulation through a priori rules, and weighs in favor of regulation through ex post competition enforcement. This transformation undermines the rationale for conventional telecom regulation through a priori rules, and weighs in favor of regulation through ex post competition enforcement. Hard questions remain about the scope of remaining regulation, about the need for sector-specific competition rules to supplement general antitrust law, and about when antitrust law will apply in the presence of such regulation. Hard questions remain about the scope of remaining regulation, about the need for sector-specific competition rules to supplement general antitrust law, and about when antitrust law will apply in the presence of such regulation.