April 1, 2011

Channeling Nathan Kingsbury

Theodore Vail must be grinning from ear-to-ear! Randall Stephenson, the current CEO of AT&T, is channeling Vail’s leadership of a century ago that built AT&T into the nation’s dominant telecommunications provider. The $39 billion agreement for AT&T to acquire T-Mobile leapfrogs AT&T into the leadership of the telecommunications medium of the future.

There is, of course, a “small” detail that must be resolved on the way to consummating that vision. The U.S. Department of Justice and Federal Communications Commission will have to approve the merger. The Justice Department’s review will focus on the merger’s impact on competition. The FCC’s review targets a more amorphous public interest standard. It is just possible that these reviews could establish new policy expectations that will govern all wireless carriers for the coming decades.

Theodore Vail is well known as the man who created AT&T by buying up other carriers and championing the concept of a “natural monopoly.” Less well known is Nathan Kingsbury, an AT&T vice president working for Vail, whose negotiations with the Federal government established the parameters of the regulatory framework that allowed Vail’s vision to flourish.

The so-called “Kingsbury Commitment” was a 1913 letter to the U.S. Department of Justice. In that letter Kingsbury, in behalf of AT&T, agreed to a turn-of-the-century equivalent of Net Neutrality by agreeing to allow independent telephone companies to connect with AT&T’s long distance monopoly. It also stipulated that AT&T would divest Western Union. As the AT&T/T-Mobile merger goes through the government’s review process the Justice Department, and particularly the FCC, will have the opportunity to establish terms and conditions which could become the Wireless Age equivalent to the Kingsbury Commitment.

The key tool used by government to oversee Theodore Vail’s “natural monopoly” was rate regulation. Such regulation is unavailable in the wireless arena, however, because Section 332 of the Communications Act prohibits its imposition on wireless carriers. As wireless rates have plunged for both voice and data such regulation has less impact than it did in the wireline era anyway. When each connection required an analog circuit, the cost of such a connection, and the return on that investment was a more logical nexus than today’s digital networks where the incremental cost of a packet of information approaches zero.

The Communications Act, however, does not prohibit the regulation of the “terms and conditions” of wireless offerings, nor does it prohibit the FCC from imposing merger terms and spectrum auction rules that might seem to be regulation in another guise. It is this authority which offers the Federal government the opportunity to impose on AT&T merger conditions that could define the four corners of wireless regulation going forward; rules that would ultimately impact all wireless carriers.

Telecommunications regulation is presently mired in a debate regarding the Communications Act’s Title II authority that was created to deal with analog, switched circuit wired networks, and the wireless digital networks that will define the future. Regulation designed around early 20th Century technology and monopoly market structure isn’t a perfect tool for dealing with distributed digital networks and multiple service providers. As the recent kerfuffle around Net Neutrality/Open Internet demonstrates, the courts look to the law (even if it’s outdated), and politics makes updating that law a challenge. Into this regulatory neverworld strides the AT&T/T-Mobile merger review.

The most important times in any merger approval process are the first two weeks when the acquiring company gets to define the discussion and the last four weeks when the concerns raised by others and the analysis by the government congeals to define the issues to be negotiated in the final outcome. AT&T shot out of the blocks brilliantly, framing their action in terms of the spectrum shortage and President Obama’s desire to provide wireless broadband to rural areas. Over the coming months those who were caught by surprise, as well as those who would use the review process to gain their own advantages, will have organized to present their messages. At the same time, the staffs of the Justice Department and FCC will be doing their analysis and reaching their conclusions. At the end of the day, if successful, AT&T will sign a Consent Decree with the Federal government dictating the terms under which the acquisition may proceed.

AT&T’s recent negotiations with the FCC on the Net Neutrality/Open Internet issue provide an insight into how the company deals with such a complex issue. Jim Cicconi, AT&T’s Senior Executive Vice President, is one of the smartest and shrewdest policy mavens in the capital. His negotiations with the FCC were key to the ultimate Open Internet Rule that AT&T endorsed and Verizon opposed. Recently, when House Republicans took out after the FCC’s decision AT&T stood firm in its support. While many Washington policy debates are approached as quasi-religious issues, negotiating with Cicconi is a matter of rational deliberation, not religious zeal. Cicconi led AT&T to find a middle ground on Net Neutrality/Open Internet with which they could live; there is no reason to suspect his skills won’t produce the same result again in the negotiations over the terms for the AT&T/T-Mobile merger.

Given the statutory paralysis preventing the Communications Act from keeping pace with new technology and market structures, a mutually-agreed-to set of merger terms could become the de facto regulatory template for the wireless industry. While most merger terms last for a limited period, a Kingsbury Commitment-like agreement can have a longer shelf life. The FCC has the opportunity to follow the new template in reviewing all future mergers, as well as in establishing the rules for future spectrum auctions. Finally, future policy debates would be shaped by an attitude of “we’re already having to do it,” which could dull opposing arguments.

Randall Stephenson may be channeling Theodore Vail, but Jim Cicconi sits astride a process that could determine the future of wireless policy, first for AT&T and then by extension for everyone else. Quite possibly the result of this merger decision will be far wider than the merger itself. At the end of the day we may be talking about a new era of wireless policy based on the Cicconi Commitment.

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