“The first step in recovery is admitting you have a problem.” So goes the self-help cliché. For regulatory agencies, the first step is admitting that industry has a problem and that the wonderful happy world of the unregulated market – no matter how wildly competitive it might or might not be – doesn’t always protect consumers and that in fact, sometimes, free market dogma to the contrary, you actually reach the best result for everyone by having government set basic rules of disclosure and enforcement (the classic paper on this being George Akerlof’s oft-cited “The Market For Lemons”). The recent experience with the meltdown of the financial services sector and its ongoing tribulations provide rather vivid proof that “trusting the market” and waiting for “proof of a problem.”
Which brings me to FCC Chairman Julius Genachowski’s latest app release for Genachowski 2.0 – the Relaunch. With network neutrality on the backburner until after the election, Genachowski has taken the opportunity to get the agency on track with its substantive agenda. In addition to moving forward for the second month in a row on significant National Broadband Plan Items (White Spaces last month, CableCARD and Mobility Fund this month), Genachowski has started taking the FCC in the welcome direction of consumer protection.
Genachowski laid out his general agenda in this speech at the Center For American Progress. It commits the FCC to ideas that would appear not only uncontroversial, but good common sense. Have the FCC empower consumers by requiring clear disclosure of things like billing terms and possible fees. In addition, require businesses to give consumers tools to avoid hidden fees and set some standard definitions for things like “download speed” that ensure that customers can easily understand the terms of an agreement before signing and can verify that they get what they pay for. These last recognize that, while businesses have incentive to keep customers happy, they also have a strong incentive to maximize revenue in the short term which may prompt them to try to nickel and dime subscribers or promise more than they can deliver, so responsible consumer protection means actually stepping in to ensure that businesses choose the consumer-friendly path rather than being seduced by the counter incentives. As Genachowski observed in his speech, this overall creates a win-win for business and consumers alike by giving consumers confidence that they get what they pay for and thus getting them to buy more products and services.
For consumers, this would seem so obviously the right thing to do that one might mistake Genachowski’s initiative for something trivial rather than a dramatic 180-degree turn over the last ten years. But for the last ten years, the FCC (like much of the regulatory apparatus in Washington) have been in the hands of enablers unable to recognize when their adorable, wonderful and all around perfect deregulated (and therefore perfectly competitive) market had a consumer abuse problem. It’s not that former FCC Chairs Michael Powell or Kevin Martin supported consumer abuse by industry, or even that they failed to take action against it. For example, when the telephone company Madison River blocked VOIP calls, Powell moved quickly to stop the practice and impose a fine as a warning to the rest of the industry. When the Bells tried to keep charging consumers for DSL USF contributions after the FCC repealed the DSL contribution, Martin forced them to back off. But, following good Church of the Marketplace dogma — which holds that companies are basically good because they have the incentive to do the right thing (regardless of the temptation of counter-incentive), whereas regulation is inherently harmful and to be avoided at all costs – they treated these incidents as the isolated acts of a few bad apples, easily dealt with by using the FCC’s bully pulpit, and not something that would actually require systemic regulation to empower consumers. To the extent there was a systemic problem, the solution was to create more competition (go broadband over power lines!) rather than create “burdensome regulations” that empowered consumers. After all, preach the Gods of the Marketplace, what could more possibly empower consumers than a competitive market.
So for the last ten years, the FCC has been like the indulgent parents on the after school special who keeps saying “Free Market Timmy doesn’t have a drug problem! You’re the one with the problem!” So Ma and Pa FCC, rather than admit their little Free Market Timmy has a problem, make all kinds of excuses for the obvious signs and rationalizations about what a good kid Timmy is and how maybe he sometimes hangs with the wrong crowd or goes to a wild party and makes a mistake or two, but he’s young and all kids make mistakes. Meanwhile, of course, little Timmy keeps getting worse and worse until it turns out his “science fair project” is actually a meth lab. But when the FBI show up and a gun battle ensues, Ma and Pa FCC keep saying “no, please let me just talk to him, I know I can set him straight! You don’t need to actually punish him or anything!”
So Genachowski’s consumer empowerment initiative is actually a pretty big deal — especially because some of the folks at the FCC are still in denial and as fiercely protective of their uber-competitive free market woogums as my Mom is whenever I attempt to discipline my son and her Most Perfect Grandchild in her presence. For FCC Republican Commissioners Robert McDowell and Meredith Baker, based on their statements on the two consumer protection items at the October open meeting, there is still considerable resistance to admitting there is a problem and that government action may be the greater power necessary to help Free Market Timmy over his short term profit addiction and consumer abuse problem. Again, I want to stress that’s not because McDowell or Baker think consumer abuse is OK. They don’t. It’s not because they don’t take it very seriously. They clearly do. But neither one of them seems really ready to deal with the idea that there is a systemic problem that the unregulated (and therefore competitive) market can’t solve on its own and that government regulation, rather than being something that can only hurt consumers in the end, may actually be the only way to reach the most pro-consumer result.
Genachowski’s first step in implementing the consumer empowerment agenda was the Notice of Proposed Rulemaking (NPRM) on “bill shock” for mobile telephone services. Again, at first glance, these look like fairly sensible, low-cost, easy to implement rules that could go a long way to helping consumers avoid unnecessary charges and have a better consumer experience overall: send out alerts when customers get close to incurring overcharges or fees (for example, when something would trigger an international roaming charge rather than a standard charge, or when getting close to the maximum number of text messages), and clear disclosure of tools providers make available to review charges or avoid fees. Yes, the cell phone companies could have taken these steps themselves, and they had incentive to do so to keep their customers happy. But while some companies have taken some steps, none of the companies have given any indication that they would be willing to go as far as needed to avoid the continuing frustration and overcharging of consumers. Even if one believes that something as important as consumer protection ought to be left in the first instance to “the market,” it’s pretty clear empirically that the mobile market has failed to reach the consumer satisfaction maximizing result in much the same way that economist George Akerloff showed in “The Market For Lemons” how the market for used cars – without government imposed consumer protection – would invariably remain a market for bad cars (“lemons”) rather than good cars (“cream puffs”).
Still, despite the voluminous evidence that millions of consumers experienced “bill shock” at least once with regard to their mobile phone plans, and despite the absence of any sign that “the market” will reach the right result without government intervention, McDowell and Baker still seem unwilling to hear Counselor Genachowski’s advice and admit that Free Market Timmy has consumer abuse issues – let alone believe that a “higher power” in the form of modest government action might help. In his statement McDowell, playing Daddy-in-denial, questioned whether there was really enough evidence to conclude bill shock was a problem, suggested that trying to fix the problem might actually hurt consumers by forcing mobile companies to raise prices to cover increased cost, and suggesting that it’s really the fault of consumers anyway because they should just magically develop an app to solve the problem. Baker, for her part, pleaded with the industry to behave itself and clean up its own act by developing an “industry-led” solution rather than making mean old government actually act, and arguing that the problem wasn’t so bad anyway because millions of abused consumers were able to resolve the complaints after the fact so it really wasn’t so bad. On CableCARD, where the record was a lot stronger that cable operators have pretty much made life Hell for consumers trying to use third-party devices rather than those provided by the cable operators, the two of them were somewhat better. Even so, McDowell still couldn’t help wondering if it wasn’t all really Congress’ fault for trying to regulate the cable industry as a means of creating competition rather than the fault of the cable operators for undermining the law through non-compliance, and perhaps Congress ought to just repeal the law rather than force the FCC to keep trying to get cable operators to stop abusing consumers who want to buy their own set-top boxes and DVRs rather than lease them. Baker, while willing to go along with the idea that everyone really ought to obey the law rather than blame Congress for making the law, still couldn’t help taking a swipe at nasty bad regulation for supposedly creating “uncertainty” that purportedly has delayed the cable digital transition.
Clearly, Genachowski has his work cut out for him in getting the FCC through recovery and getting regulations in place to stop enabling consumer abuse. Hopefully, there will be enough public participation and support to help those still resistant to admitting that “yes, even competitive markets can sometimes misbehave and start abusing consumers.” Because remember, the first step on the road to recovery is admitting there is a problem, and that someone outside the market can help.
Stay tuned . . . .