TCS Daily

Yea, AOL-Time Warner Merger

By James K. Glassman - October 9, 2000 12:00 AM

Former FCC chairman slams TV broadcasters, would let AOL Time-Warner merger go through and reject Microsoft breakup.

James K. Glassman: Can you see a day that the FCC would be abolished? And would you be happy to see that happen?

Reed Hundt: Well, I can see a day when about half of what it does now it ought to stop doing and that day would be next year.

Glassman: Which half?

Hundt: I don't think that what the FCC actually does in the broadcast area it needs to be doing. I don't think what it does in its field offices needs doing. I don't think that most of what it does in cable needs doing. About half of what it does in wireless does not need doing. I'm not criticizing any individual, I'm not criticizing any of the public servants. They are all doing their jobs. They work hard.

One of the things they do, by way of example, is they try to see whether TV towers are meeting signals of a regulated power or strength. That's something that you could let the businesses do on their own, and if they don't do the right thing, you can let them sue each other. You don't really need government engineers on government payroll to do a job that the industry ought to pay for doing out of its own pocket.

Do I think that you need the FCC to follow congressionally mandated goals, like putting the Internet in every classroom? We don't have any agency better equipped to do it. That's the right place to do it. It has happened well, it should continue to occur. Do I think you need the FCC to implement Congressionally set goals and objectives in terms of unbundling local loops, defining interconnection prices? As long as you have monopolies in this industry and in the different sectors of the communications industry as a whole, well then of course, you will need government intervention to promote competition. We don't have yet a pure competitive market that would let people let FCC rests on their laurel. We don't have that yet.

Glassman: What about license renewals? Is there a necessity for the FCC to do that?

Hundt: It depends upon the licenses. There is not much necessity to do that for the 1.5 million wireless licenses for all different forms of wireless communication. On the other hand, broadcasters, you know, wiggle out of the public a $100 billion gift of spectrum to serve the public interest, and then you turn around and see that Fox's definition of it is not to show the presidential debate last week but rather to show Dark Angel, the second highest rated show in the network during the debate that took away 17 million households away from it. Debate audiences from 1976 to 1992 averaged 65 million homes. This one was 20 million short. Fox was accountable for almost the entire shortfall. This act, intended or not, represents an assault on the public interest and has to be regarded under the best of circumstances as making a mockery of the gift of the spectrum to Fox. Under the worst of circumstances, it ought to be regarded as justification for taking their licenses away from them.

Glassman: Well, I was wondering about that. Your successor, William Kennard, has had some harsh things to say about the holding of those licenses. But will he take any action?

Hundt: Well, the words were more than justified. And if the Republican Congress had not limited his ability to investigate the holding of the licenses in real time, which they did do, he'd be able to start the process to take the licenses away right now. Instead, in a little known provision a couple of years ago, Congress clipped the FCC's wings and basically took extra steps to pour concrete on the broadcasters hold of the public property of the airways.

And by the way, it should be noted that CBS and ABC drew huge audiences to the debates, these debates are not fundamentally damaging to the economics of broadcasters. In fact, nine percent of all the revenue of all the broadcast industry in this election year comes from political ads.

So, it's not like the political processes making paupers out of them. It's making them reach beyond the dreams of Midas. It's just astounding that Fox and NBC, with its baseball, were so contemptuous of the public interest in this particular respect. I don't know why Tom Brokaw isn't resigning over it. I say that's quite seriously, he must be really embarrassed.

Glassman: In another area, do you think that the FCC has a role in overseeing, or in making decisions about mergers?

Hundt: It depends upon the mergers. I think the FCC plays a very useful role with respect to Bell company mergers --

Glassman: Let's say AOL-Time Warner, or anything that has something to do with communications.

Hundt: Well, I think you have to look at it sector-by-sector. The reason why it is good for the FCC to be involved in the Bell company mergers is that when the Department of Justice approves the merger as it does, it is then up to the FCC to impose conditions that increase the likelihood that competitors can connect to these still-larger networks. And that's what the FCC did with respect to SBC and with respect to what is now Verizon. And if it had not done that, these mergers would have been much more likely to hurt competition, bit because the FCC did do that, they were much more likely to invigorate competition. DOJ will not do that and does not have the expertise to do that.

So, in any merger where conditions by the FCC can be attached to something otherwise approved by the Department of Justice and where those conditions will promote competition, that's a good thing. The FCC never rejects a merger that has been approved by the DOJ or the FTC. That has never happened in history. And the FCC does not seriously delay approval of mergers that have been approved by those agencies. And because those agencies come first, when they reject mergers, the FCC never gets involved at all. So, no harm is done here by the FCC's process of taking a last look at whether conditions are to be attached to otherwise what is approved mergers.

Glassman: You were an antitrust lawyer.

Hundt: That's right.

Glassman: What do you think specifically about the AOL-Time Warner merger. Does that threaten competition?

Hundt: No, not at all, not one bit. The issues that are being festooned around the AOL-Time Warner merger are important issues, but they are being raised only because, you know, like some huge bandwagon rolling through town. You know, the AOL-Time Warner merger is picking up a lot of extra burdens and vegetables that are being thrown under. I am referring to the fact that because of the merger people are trying to raise the open access issue. They are trying to raise the question of instant messaging. But the merger itself does not make the Time Warner cable system more or less likely to succeed as a bandwidth play and the merger does not make AOL's instant messaging more or less pro-competitive. Those issues, if they are to be debated, should not be debated on the context of the merger but ought to be debated on the context of whether we do or don't want regulations on those topics. And a long time ago, in my judgment, the merger should have been pronounced OK.

Glassman: What about WorldCom and Sprint?

Hundt: That should have been pronounced OK also. I would like to say these things without any sense of criticism of what I know to be the very serious thinking done by friends and former government colleagues of mine. But, in my view, when you see three consumer long distance businesses on the auction block at the same, I refer to Sprint, MCI and AT&T, then you really have to wonder why the government was so concerned with blocking the merger of two of them.

I am not saying that Sprint should have been able to merge its data network with UUNet. That was a different topic. But that was negotiable from the get-go. I am not saying that you could not have attached conditions to the MCI, Sprint, and other long distance mergers that might have mitigated any competition risk. But what I am saying is that, by rejecting that merger in this collaborative European-American government method, what has happened is that the question of what to do with the industry structure of consumer long distance has simply been escalated. The question that will next be faced is whether you want all those businesses to be bought by Bell companies.

And here is what the government has not done. It has not really laid out a blueprint so that the CEOS of these different companies has some sense of what the rules are. I think that's what government ought to do.

Glassman: So that they know in advance before taking these steps.

Hundt: It would be helpful, otherwise, you know, everybody is driving looking through the rear-view mirror.

Glassman: What about the antitrust action against Microsoft?

Hundt: Well, my opinions are not criticisms; they are not reflections of anybody else's policies. I think that case ought to be compromised in a way that some people would call regulatory and I would call reasonable. And that is, there ought to be general purpose licenses, GPLs, granted to Microsoft's source code. The deal ought to be cut around essentially making the API, the Application Protocol Interfaces, open to all users. Beyond that, the case ought to be dropped. I think breaking up Microsoft was not a good idea. To seek something that the judge himself said he did only reluctantly, and frankly out of a certain amount of feeling that he could not get the Microsoft`s attention otherwise, I don't think it will stand up on appeal. And it's far too cumbersome to accomplish the operation. This is a vascular surgery, not amputation that is necessary.

Glassman: You called your book, your excellent new book, Say You Want A Revolution. Part of that revolution certainly is the Telecommunications Act of 1996?

Hundt: Absolutely, and that is an excellent description of my book.

Glassman: Thanks. But some would say there are attempts being made right now to roll back that act, with bills like HR 2420, which would let the Bells get immediately into the data part of the long distance without opening up the local switch. What do you think of that?

Hundt: Well, that bill is not going to pass. That's just another one of the chronic efforts to tilt the law in favor of one industry sector and against another. One of the key aspects of the 1996 telecom act is that it gave us a chance in this country to decide that we wanted to promote competition as opposed to some particular group or competitor. What we did decide, however, both in Congress and in the FCC, and frankly under Al Gore's leadership more than any other single official, were not to take individual companies as winners but to promote the Internet. We did that by numerous specific rules that allowed Internet access providers, Internet service providers, ISPs as they are called, to use the existing telephone network at very, very low prices.

The result is we have the only mass-market phenomenon Internet experience of any country in the world other than Finland. That is because we have the lowest cost Internet. We have the cheapest retail prices for Internet users. We have 5,000 companies competing to market Internet usage. We have an entire eco-structure built on top of that, which is called e-commerce, and it flourishes here as it does nowhere in the world, precisely because we have the best competition policy.

So all the efforts in Congress to tilt the playing field back in favor of the incumbent should be loosely grouped under the category of bad. For the category of good, it would be the maintenance of a policy that is spreading productivity gains and job creations for every sector of the whole economy.

Glassman: Some people, though, would say that broadband is not getting around the country fast enough. Do you have faith in the Telecommunications Act of 1996 is producing the desired results soon?

Hundt: I have absolute faith that a robust competition policy, which is what was expressed in that act, but which always needs to be fought for in regulations and in courts year in and year out, is precisely the best way to get private investments to build the most bandwidth and biggest cascade of bits down in residences and businesses all across the United States. There is no plausible way to think that should be done by public sector expenditures, you know. The public money ought to be used to guarantee Social Security forever and to define a set of medical benefits that are appropriate for everybody. But it should not be used to build the Internet infrastructure, you know, we're long, long past the original R&D efforts that I was involved in. The private sector is going to build the bandwidth. How long is it going to take? As long as it takes muster capital and meet the demand. And you know better than I, that that's the way markets work and that's the way that they ought to work.

The one exception to what I am saying is that kids don't have money and public schools don't have budgets for this and they ought to put broadband, not just narrow band, but broadband in every classroom in America, certainly in every government facility and every library. But other than those particular places, the right way to get a broadband America built is on the broad backs of capital and industry and that's what we're doing through our competition policy and it is working. Actually, to be honest, far beyond anyone's expectations.

Glassman: Last year, Kennard, in basically rejecting the FCC's involvement in the open access issue, said that if we've learned anything about the Internet over the last 15 years, it is that it has thrived quite nicely without the intervention of government. The best decision the FCC ever made was to not impose regulations on it. What is your own view about whether the FCC or any other government agency should play a role in mandating open access?

Hundt: Well, what is meant by open access here is taking a certain amount of the bandwidth of the cable pipe and in some way guaranteeing that it can be used by content providers who are not under the corporate rules of the proprietor of the cable pipe.

In other words, they'll let somebody else come into their house.

I think that's an example of a pretty serious regulatory intervention in private property that should only be justified when you have a monopoly that cannot be innovated around, when you see that output is being reduced by that monopoly, when you see that content is being restricted by that monopoly.

There is no serious evidence of that today. There is, you can't describe the existence of a monopoly in residential broadband when you can find hardly any residential broadband to begin with. This is like saying that DeLorean had a monopoly over the DeLorean automobile. That might be true, but there are only two of them in the entire world. So, you don't need the government to make sure that there was competition in DeLoreans. And you don't really need it in the present time for government to establish a new regulatory paradigm for a virtually unborn and almost non-existent business.

Glassman: Quickly, what are you doing now?

Hundt: I am following my game plan, which is to not practice law in Washington and get as far away as possible from there and what I was doing. Unfortunately for me, in the American geography, as far as away as possible will plunk you right down I the middle of Silicon Valley, where I am an entrepreneur of my own kind, being on the board of eight different companies. Some of them you've never heard of, or didn't exist while I was in government. And Novell, the other one, didn't have anything to do with the FCC.

Glassman: What are some of the companies?

Hundt: Oh, I'm the chairman of a company called Sigma Networks, which is going to have its launching this month. And I'm on the board of, which is a totally cool way of accessing the Internet through a cell phone. I'm on the board of Core Express, a new quality of service on the Internet; Gemini Networks, a big bandwidth provider to residences; Allegiance Telecom, a competing competitive local exchange carrier; Edg2Net, a global interconnection company, and North Point Communications, a digital subscriber line provider. They are all Internet-related. They are all companies that are the embodiment of the spirit of competition. I'm also half time at McKinsey & Co. as a consultant. So the only other thing that is needed to make my days complete is vote for Al Gore. I beseech you on that one.

Glassman: Well, I might even vote for Al Gore, if he got rid of half of the functions of FCC. So -

Hundt: Well, you now, you got to stick with your classmate.

Glassman: That's right. I do.

Hundt: Thank you. Be true to your school.

Glassman: Thank you so much, Reed.

Hundt: Good luck to you.

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