Anyone watching the Federal Communications Commission these days should be careful not to whisper too loudly. The troubling phrase is not “network neutrality.” Nor even Title II. Everyone has heard these phrases, all too often without having the vaguest idea as to what they mean.
The panic-inducing word, that should never be spoken, is “bubble.” It is a euphemism for investors systematically misunderstanding market dynamics. Understanding past bubbles may unlock the mystery that is network neutrality, and the all-too-central role the FCC has in both.
American financial markets have had many bubbles. Real estate markets suffered bubbles in 2008-2010. But the heart-breaking bubbles were those that wiped out entire sectors of the economy. From 2001-2002, America saw those bubbles. The dot.com sector was decimated. The competitive telecommunications industry all but disappeared. Once famous companies, with names such as WorldCom, Enron, Global Crossing, and Adelphia, collectively valued in the hundreds of billions of dollars, employed some creative accounting and relied on FCC rules. The combination turned out to be toxic. They were relegated to the ash heap of financial history. Hundreds of smaller companies joined them. The hopes and aspirations of a generation of investors were dashed.
From 1996 through 2001, the FCC implemented the Telecommunications Act of 1996, the first major rewrite of federal communications law in 60 years. Rather than write rules that clearly coincided with the statute, the FCC aggressively wrote regulations that had only a passing reference to law. Federal courts were clogged with complaints related to the new FCC rules and their legality.
The FCC set up a casino with federal communications regulation. It was a coin toss: heads one industry favored by the FCC would win; tails another industry hostile to the FCC would win. The courts were left to toss the coin.
What followed can only be described as one of the most misguided investment periods in American history. Tens of billions of dollars poured into new companies with business models aligned with, and reliant upon, the new FCC rules. These new companies were called Competitive Local Exchange Companies and Dot.com companies. Tens of billions of other dollars flowed to companies with business models that would prosper only if the FCC rules were overturned.
Businesses are accustomed to risk and to making investments with uncertain outcomes. Understanding changes in technology or consumer preferences is the staple of clever investors and businesses. Understanding the whim of government to write extraordinarily risky rules is not.
Companies favored by the FCC and companies punished by the FCC in the 1990s could not both succeed. As it turned out, the courts largely sided with the latter set of businesses that opposed the FCC. Those investors who had relied on FCC rules discovered, belatedly, that they were little more than a mirage. Federal rules that go beyond federal law can maintain the illusion of legality for a few years, but not forever. Eventually, the law caught up with illusionists at the FCC.
The CLEC and Dot.com bubbles of 2001-2002 were not so much the result of imprudent investors as the calamity of imprudent FCC regulation. When the federal government encourages businesses to invest tens of billions of dollars without revealing that the security is little more than a game of legal Russian roulette, the inevitable outcome is all too predictable.
Bad investments are cleansed in the investment community. Investors lose their money; investment professionals lose their jobs; poorly performing companies go out of business.
Bad regulation, however, is not self-cleansing. The agencies that promulgate unlawful rules survive and even prosper. So too do their regulators. Regulators are not rewarded for writing rules that stay narrowly inside the law. Nor are they punished when regulations are found unlawful.
Fast forward a precious few years to 2015. Federal communications law has not changed since 1996. A new set of FCC commissioners has reinvented an old idea: write rules that go far beyond the law. Set up a new casino of communications regulations that looks hauntingly similar to the 1990s. Give it a new name—network neutrality—and invite investors to come bet their money not on technology but on legal brinksmanship.
The American stock market is at record highs. Not so most telecommunications stocks which are well off their 52-week highs. They are not in dramatic decline, but they are not doing as well as many other stocks. As was the case in the 1990s, many American telecommunications companies today are curbing investment plans. Many are shifting investments to unregulated activities or overseas. Network neutrality, in the guise of stimulating investment, is all too likely to have the opposite effect.
The FCC is reliving the 1990s. We have all seen this movie before. It has a bad beginning. It has a worse ending. It is called “Telecommunications Bubble.” Just don’t whisper it too loudly.