Scott Wallsten:
Hi, and welcome back to Two Think Minimum. It’s Friday, December 11th, 2020. I’m Scott Wallsten, President and Senior Fellow at the Technology Policy Institute. I’m here with Sarah Oh, Senior Fellow at TPI, and today we’re with Greg Rosston. Greg is the Gordon Cain Senior Fellow at the Stanford Institute for Economic Policy Research and Director of the Public Policy Program at Stanford. He served as Deputy Chief Economist at the Federal Communications Commission, working on implementing the Telecommunications Act of 1996 and helped design and implement the first ever spectrum auction in the United States. He co-chaired the Economy, Globalization and Trade Committee for the Obama Campaign and was a member of the Obama Transition Team focusing on economic agency review and energy policy. He received his PhD in economics from Stanford and his AB in economics from Berkeley. Among his many extracurricular activities, he also serves as an advisory board member for A Sustainable Conservation and the Nepal Youth Opportunity Fund. Greg, thanks for joining us.
Greg Rosston:
Great to be here, and thanks for having me.
Scott Wallsten:
So, before we start this, I’ll tell people that the first time we interacted was in 1995 when I was just a Staff Economist at the Council of Economic Advisors, and Greg, you were at the FCC working on these spectrum auctions. And at the council, we wrote a chapter on telecommunications and mentioned auctions. And I wrote in a draft, I said something like, “It’s not the details that matter. It’s the fact that we’re having auctions that’s a really big deal.” And somebody at the FCC wrote back, “Who is this idiot who wrote this thing?” And I was that idiot, and the person who wrote back was Greg.
Greg Rosston:
I’m sure I didn’t use that harsh of language.
Scott Wallsten:
But the sentiment was there *Laughs*
Greg Rosston:
Yes. When I left a consulting firm to go to the FCC to work on auctions, one of the principals, who shall remain nameless, of this consulting firm, who’s a fairly esteemed economist said, “What’s the point of going to do that? You just put stuff up for sale and that’s it. You know, this is not going to be a big deal. It’s not a big, complicated thing and you won’t be doing much.” I think he was extremely wrong, and I think the details do matter about not only auction design, but much more importantly, spectrum policy.
Scott Wallsten:
Yeah, I think that’s right. We’ve seen that now in many of the auctions, but I mean, that sort of raises an interesting question. When you were working on these first auctions, and I know there was a group of you working on them, was there still opposition to doing it or even sort of on the opposite side, people who thought this really isn’t a big deal and it’ll be easy, why are you spending so much time on it?
Greg Rosston:
Yeah, so this was an incredibly big deal. You know, obviously people talked about auctioning spectrum for a long time. We moved from beauty contests, to finally to lotteries, and then finally to auctions with the Omnibus Budget Reconciliation Act of 1993 gave authorization for auctions. And they gave an incredibly short timeframe. But one of the things that happened was Evan Kwerel, Evan, I believe should have been part of the recent Nobel Prize that was awarded to, rightly so, to Bob Wilson and Paul Milgrom, but without Evan, the spectrum auctions would have been done very, very differently. One of the things that Evan did was at the FCC, there’s a notice of proposed rulemaking. And what Evan did was he put in footnotes to lots of the auction theory in the NPRM. This has never been done. And so what happened was when the FCC representatives of AirTouch and AT&T, and the other companies that were thinking of… Pacific Bell… were thinking about the auction and getting spectrum.
Greg Rosston:
They read these footnotes and they said, “Oh my gosh! We got to hire these people.” And so they hired, Pacific Bell hired, Bob Wilson and Paul Milgrom. AirTouch hired Preston McAfee. Other companies hired Peter Cramton and Bob Weber, and all the auction theorists put in proposals. Barry Nalebuff was also in there. And they put in very different proposals about how to run the auctions. And Evan held a conference of academics, and we got submissions from all these economists about how it should be done. And luckily, this was a place where the firms said, we don’t know how this is really going to work, but we think we’re the most efficient providers, so we want to have an efficient auction. And it was relatively efficient, but some of them did have much bigger aims and some had smaller aims, so it mattered how big the licenses were and in what order you auction them.
Greg Rosston:
And it turned out that auctioning them all at the same time was the best answer. And Evan, you know, there were details that really, really mattered. For example, one of the things that Paul and Bob think about is called the Milgrom-Wilson Activity Rule, and that wasn’t part of their original proposal. But Evan said, if you don’t make people bid, they can hide in the grass like people do in eBay auctions and snipe and come in at the last second. And the last second will never happen. We won’t get an efficient auction if we just declare an end and then people bid at the last second. So, we want to get people to be active and reveal information and reveal prices throughout the course of the auction. And so he pushed Bob and Paul to come up with something different, and they did. And that was the basis of this activity rule that has formed the bedrock, to be honest, of auctions around the world.
Scott Wallsten:
So, those were some incredibly valuable footnotes that led to a Nobel Prize and auctions that just wouldn’t have existed otherwise.
Greg Rosston:
Right? Yeah, there was, I believe it was Senator Conrad Burns from Montana was an auctioneer, a cattle auctioneer. And he was involved in telecom at the time as a Senator. And he wanted us to hold oral outcry auctions, like we were auctioning cattle, for the spectrum licenses. We actually held one oral outcry auction for what’s called IVDS, and it turned out to be a disaster because people didn’t think about the intersecting values and substitutes and compliments the way they could in the bigger auctions.
Scott Wallsten:
I have a hard time imagining what that even looked like. How do you do an oral outcry auction for spectrum? Just license by license?
Greg Rosston:
License by license in the ballroom of the Omni Shoreham Hotel.
Scott Wallsten:
Wow, that’s crazy. That’s the way they do tobacco auctions.
Greg Rosston:
It was exactly like that. And in the same week, we held the first simultaneous multiple round auction for narrowband PCS, which was essentially a test case for the big broadband PCS auction. And that worked much better. So, there’s a lot of talk about the auctions, and I think the auctions are incredibly important and useful, but one of the things that the auctions did was really cement in place the idea of flexibility for the licenses. And I think that’s probably, you know, while auctions are important and they generate revenue, I think the best answer would be if we held an auction and we were able to award the spectrum at a price that was extremely low, because that would mean that spectrum wasn’t a scarce input anymore, right?
Scott Wallsten:
Well, I mean, that’s a good point. The auction is to try to get the starting point of the licenses in the most efficient place, and then that’s going to change over time. And so, if the licenses are flexible, and you can sell them later, that will assure you don’t have to re-auction them constantly.
Greg Rosston:
Yeah, so one of the things that the FCC was able to do was in the PCS auction, there were a small number of microwave incumbents that were using the spectrum that became the PCS spectrum, and the FCC effectuated a transfer where these licensees, the new licensees, had to take care of the old ones. Either move them to new spectrum, or give them fiber, somehow buy them out and move them. And there were enough small ones and there was a backstop that said, well, if you don’t agree, then we can move you. And the same thing in that same idea happened in the broadcast incentive auction, where the television stations could be bought out. But if they didn’t, they could be forced to move to other channels. And that really allowed the FCC to transition spectrum from inefficient use, such as broadcasting or microwave into more efficient, flexible use in wide area, licenses.
Scott Wallsten:
Auctions have been pretty much a bipartisan thing now at the FCC. They happen at every FCC since Reed Hundt, I believe. Why has this particular policy been so popular? Do you think it’s because of the revenues that it raises, even though that’s not supposed to be the reason for auctions?
Greg Rosston:
Yeah, it is interesting. We didn’t get auctions until 1993. And Evan Kwerel and I actually have a paper that talks about the first auctions, and one of the things we talked about was, “How did we get there?” And for years, Democrats, John Dingell and Dan Inouye who were influential telecom legislators said, “No way, auctions won’t happen. Over my dead body.” And then they took credit for creating the auction.
Scott Wallsten:
Well, that’s the best way to get someone who’s opposed on board, just give them credit.
Greg Rosston:
Yeah, but well, they took credit. I don’t think they were given credit. They finally came around because before that it was Ronald Reagan and George HW Bush as President, and they didn’t want to give them money or credit for doing it. And they also had significant political capital with broadcasters. And so there’s, I don’t know if it’s an apocryphal story or not, that somebody proposed auctions in the mid-1970s, and a broadcaster said to an advisor to President Ford, “Well, if you go forward with this, you might see a lot of videos of President Ford stumbling and tripping on the local news,” and quickly that lost steam. I don’t know if that’s an apocryphal story, but there are political constraints. And in 1993, in OBRA ‘93, we had a Democratic Congress and a Democratic President, and there were PAYGO rules. So, this freed up money and gave credit to a Democratic President from a Democratic Congress. And these people came along and we got to auctions that way. And now the money, I think, is what’s going on next.
Scott Wallsten:
And now, it’s continuing because of the money.
Greg Rosston:
Yes.
Scott Wallsten:
That was a pretty important role. And there’s, it was a hugely important role for economics then to make this happen and to continue developing. It had been up to the broadcast incentive auction, which is kind of an amazing development. This two-sided auction that even involved machine learning wasn’t necessarily part of the auction, but help things run smoothly. How was the role of economics at the FCC changed, do you think, since those days?
Greg Rosston:
I give a huge amount of credit to Reed Hundt, who was an antitrust lawyer before he came to the FCC, and said, “I want to have economics play an important piece of what we do.” He had a slogan t-shirt made that said, “Read the law. Study the economics. Do the right thing.” And he wanted input from economists. Michael Katz was his first Chief Economist, and then Joe Farrell. And they both were not shy about disagreeing with the Chairman, which was great. And I think that that’s important to have a strong Chief Economist who is not afraid to disagree with the Chairman, and the Chairman is not afraid to listen. I think that it ebbs and flows over time, depending upon who the Chairman is and what they want to listen to in terms of economics. Sometimes it has more influence, sometimes it has less. I think it really strongly depends on how the Chairman and the Chief Economist interact and believe in things.
Scott Wallsten:
What do you think about this, of a new office of Economics and Analysis? Not necessarily the office exactly the way it is or the people in it, but sort of the idea of having all the economists in one place.
Greg Rosston:
I’m not sure there are lots of different ways that things can work, and I am not an organizational expert on these things. I’ve thought about where people should be. Should the economists be sitting shoulder to shoulder with all the lawyers in the bureaus and develop a relationship and work closely with them as the thing gets on, or should they be in a separate Bureau and come in later and say, no, you didn’t think about this, right? You need to go back and change everything. Having a check, I think at the end is important, but I do think also, that making sure that economists are involved earlier on really does make a difference in getting things going in the right direction and influencing them rather than having lawyers talk to lawyers and engineers, talk to engineers and economists talk to economists.
Scott Wallsten:
Along those lines, would you have advice along those lines for whoever is the next FCC Chair?
Greg Rosston:
I would strongly think they should have an economist as their Chief Advisor.
Scott Wallsten:
Oh, I thought you were going to say as Chair.
Both:
Laughter
Greg Rosston:
I don’t think we will be that lucky. But it is, you know, I’ve talked to different people, who’ve become Chief Economists and Chief of OPP, OSP, OEA to say, you know, make sure that you’re in the room. Like Hamilton. You know, who’s in the room matters, right? And developing the relationship. But, you know, as an economist, I went to the FCC and I was much more naive than I am now, even though I’m pretty naive now, and could not understand why Reed Hundt was going out and giving lots of speeches. It was read the law, study the economics, do the right thing, but it was also to convince other people, build political capital, and try to get people on your side was something that he was doing, which I think turned out to be extremely important in making sure that the public, and the firms, and Wall Street supported the things that he did, especially with the Telecom Act, but also with spectrum and making sure that things work. And these relationships matter. In economics we don’t model these things at all, but the relationship with the Chief Economist and the Chair make a difference as to how much influence the Chief Economists will have.
Dr. Sarah Oh:
Where do you think the FCC can do better with economics? Like are there new frontiers that the FCC should consider for more economic analysis?
Greg Rosston:
I think they made a big move, which I think is going to change things to some degree. Again, it depends on how much people want to listen, but the role of cost benefit analysis, to sort of enshrine that in their rules, was a really good move. I was advocating for this a while ago, and I thought that it was a good thing. You know, cost benefit analysis has holes in it several ways from Sunday. If you change the discount rate, what you count, all these different things, but at least making it be part of the framework that you have to do, and that then courts can review is really important because you can’t hide the ball nearly as much when you have to actually explicitly do a cost benefit analysis. So, I think that will be a big change, and it’s going to be hard for the next FCC to say, “Well, we’re going to write that out of the rules,” now that it’s in the rules. I think it’s a lot easier not to adopt it, but it’s hard to say, “No. Cost benefit analysis doesn’t make sense.” So, I’m hoping that they push that and really enshrine it, and that the courts hold their feet to the fire to do a good job. I think that will be a big advance for the FCC.
Scott Wallsten:
Do you think they will push forward on it? I mean, it’s unfortunate, but it seems as if often Democrats believe that the main point of cost benefit analysis is to block new regulations. I mean, obviously as an economist, I think that’s not what cost benefit analysis is for at all, but there does seem to be this impression, and I worry that a new administration won’t want to focus as much on cost benefit analysis. Do you think that’s an actual concern?
Greg Rosston:
I think it is definitely a concern that people won’t listen to it as much, or they’ll say you need to do the cost benefit analysis so you have the conclusion before the analysis. I want to make sure that there’s the analysis before the conclusion.
Scott Wallsten:
Right, policy-based evidence making.
Greg Rosston:
Yeah, exactly.
Scott Wallsten:
Another thing that we actually, that we’ve all worked on is universal service and analyzing the programs, trying to improve the programs. What was your first paper on universal service, and why did you do it?
Greg Rosston:
I did a couple of papers looking at the Telecom Act of ‘96, looking at universal service. You know, what did it do? But the first real research paper was with Brad Wimmer at UNLV, and we looked at how universal service programs affect, mainly rural universal service programs, and we looked at the demographics or the, you know, how these programs split the revenues and costs among low- and high-income families or households. And we found that most of the money that went to rural areas went to relatively high income households. And that’s not surprising as an economist. If we were thinking about universal service programs, we’d want to have money go towards low-income households to households that wouldn’t otherwise subscribe. And the rural universal service program has no test like that at all. And this was in late 1990s that we did this work and it was about telephone service, but the lessons are still applicable in broadband. If you want to get bang for your buck, you want to give money to people who wouldn’t otherwise subscribe.
Scott Wallsten:
So, I mean, the lesson is clear and like you said, this was for telephone service from a while ago. Do you think anyone’s paid attention to that lesson and have policies changed to address this problem?
Greg Rosston:
I think that, so first a little self-deprecating comment, which is I did another paper with Brad and with Dan Ackerberg and Mike Reardon, David DeRemer, where we looked at universal service programs for telephone service, and we looked at lifeline and link up. Lifeline subsidizes the monthly rate, and link up subsidizes your hookup charge. And we found that the linkup program, the hookup charge was much more effective on a cost-effective basis than lifeline, and within roughly a month or two of our paper coming out, the FCC got rid of the linkup program. So that was not a great answer, we don’t think, in terms of this.
Scott Wallsten:
Hopefully not causal because of your paper.
Greg Rosston:
No, I don’t think it was causal. I hope not. I agree. But for example, there’s becoming more attention, especially over the last eight months, on low-income adoption and affordability. Derek Turner has written something recently from Free Press about universal service and going to think about the number of unconnected households in urban areas is much higher than the number of unconnected households in rural areas. And that’s because of affordability, not because of availability. So, I hope that things are going to change and push more towards if we’re going to connect people, let’s do the Willie Sutton Theory. The Willie Sutton Theory was, “Why do you rob the banks? Because that’s where the money is.” Let’s try connect people because the people are in urban areas. We need to make sure that people who have it can be connected and it may be much, much cheaper to connect a lot of households in urban areas than connecting a lot of households in rural areas.
Scott Wallsten:
It sounds like so far, the FCC, the Universal Service Program, has also used the Willie Sutton Theory, but kind of wrong. They also go where the money is, but that’s where they subsidize.
Greg Rosston:
Right. So, they’ve been doing it, you know, for years and years and years. They subsidize rural areas. One of the things that they’ve started doing, we, in fact, you and I were both signatories to this, a group of economists pushed for using auctions to award universal service dollars. And the FCC has over the past few years done auctions to try to reduce the costs of providing service to rural areas. And that’s, again, the auction is actually a pretty good way of doing things here. I think the auction is really important of reducing the amount the FCC funds, because the FCC doesn’t really know what it costs to fund an area. So, if they’re going to find areas, let’s make it lower cost. Obviously an even better solution will be to give these people who live in these rural areas vouchers and let them choose and have the market work more. but I don’t think that’s viable at this point in time.
Scott Wallsten:
What is the objection to vouchers? Because in lots of conversations it comes up, that that would be a good outcome, and yet it never happens. I mean, in a sense maybe lifeline is kind of a voucher because it goes with the person, but you know, why is it not more popular?
Greg Rosston:
So, I think this is a complicated issue because people, there are telephone companies, they think this is their territory. And if you give somebody a voucher and they may use it some other way. I like the example of, you know, should you give in rural areas, fiber to the farmhouse or mobile service to the tractor? Is it better to have a gigabit service to that home or a hundred-megabit service that can be used anywhere mobile? Some people may want it for their home. Other people may want it so that they can be mobile. And if you give vouchers, then somebody can choose. If you give subsidies and you say, “
You have to provide gigabit service,” the fiber’s going to win. And the person who provides the fiber may object to having vouchers.
Scott Wallsten:
So you’re saying it’s, we’re using fiber as the example, but it’s pressure from those groups that prevent vouchers from happening.
Greg Rosston:
Right, exactly.
Scott Wallsten:
So, it doesn’t seem like there’s a lot of promise in overcoming that.
Greg Rosston:
I think that, you know, as you do the auctions that the FCC has done have given subsidies for a fixed period of time for build-out. And I think that over time, once those subsidies end, there either will be facilities built out and they just won’t do anymore, which is kind of the hope that they would only give low-income subsidies beyond the 10 years of subsidy. And that would be great, but there also are possible things that could come in. For example, 5G service from wireless promises to cover 97%, 98% of the country. Satellite service, if it works, could cover 100% of the country the moment it’s up and running. So, these things might not provide fiber service areas, but they might provide competition. And if they’re cheaper or more flexible providing other things, I think that’s where the hope is for rural service.
Scott Wallsten:
And you think the subsidies would go away if that happened? I mean, they should, but it’s hard. I mean, these are pretty popular subsidies.
Greg Rosston:
Yeah. If, you know, obviously somebody was pushing for, I don’t know who, but people were pushing for higher speeds. You keep hearing people talk about futureproofing; we need fiber everywhere. But if these lower orbiting satellites are really good, maybe that’s going to be good enough. And the combination of them for some areas, and 5G service for a lot of areas, and fiber for a lot of areas could work out very well.
Scott Wallsten:
I hate the concept of futureproofing. It doesn’t make any sense to me. I mean, it’s all a matter of what the net present value and net benefits are of your investment. I’m not sure I understand the concept. Are we trying to plan for things that may or may not happen and that we could invest in, in the future? It just seems like adding lots of costs that you don’t necessarily need to add. I don’t know if there’s a better, you know, a good definition of future-proofing that makes sense. But I don’t know that. That discussion always annoys me, but lots of things annoy me.
Greg Rosston:
Really, Scott? I didn’t know that. No, you’re right. The discount rate is incredibly important, you know, , are you investing for the next 10 years? The next 50 years? But it could be that fiber is great for the next 10 years, but something is going to come along in 10 years that makes these satellites even better. And we may have wasted all this investment in fiber. We may not, maybe the answer is not, but I don’t think that anybody knows enough now to say that that’s the right answer for the whole country. I don’t want to send fiber to Ted Kaczynski’s cabin because it’s pretty remote and it’s going to be really expensive to do that.
Scott Wallsten:
And he’s not there anymore.
Greg Rosston:
Well, that’s true too, but to his cabin.
Scott Wallsten:
Right. So, things that are not FCC. You’re out in Stanford, Silicon Valley. And in DC, we talk about lots of policies and issues that affect tech. Right now, there are the cases against Google and Facebook and so on. You interact with venture capitalists and, you know, students who start companies. How do they see DC, and what do they see us as?
Greg Rosston:
I think that’s changed a lot over the last 20 years since I’ve been here. It used to be, they didn’t worry. They looked for, to some extent, they looked to DC for protection. If you are a tech company like Google or Facebook, you’re not happy with tech regulation right now. If you are DuckDuckGo, you want to make sure that there is regulation. But I think for the most part, there were VC companies, VC backed companies, have a view that they either, you know, they want exit. And the exit is either, their dreams are going public or being acquired. And they’re kind of indifferent in some sense on the money. I think they’d like to keep control. We just had Airbnb and DoorDash go public this week. I have two students who I think are very, very happy, who have been those two companies for a long time. And they are enough separate from what the tech regulators are focusing on right now, that they’re not worried about it. But DoorDash, right now, is being pressured by Santa Clara County and San Francisco to limit the charges on delivery because the amount they charge restaurants.
Scott Wallsten:
Yeah. I think actually DoorDash just reached a settlement with Washington DC, and they had to pay like two and a half million dollars or something back to the city because of earlier charges or something. So, yeah. Cities are getting involved.
Greg Rosston:
Yeah. So, regulation is important for them. It’s important for Airbnb. It’s important for nearly every company. So, they need to worry about it, but most of these startups don’t worry about it yet. And I think that’s the right answer, but they do, you know, this is a question about… Mark Lemley of the Stanford Law School has a paper about exits, and if the exits are primarily to build up a company that then will be bought by one of the big tech companies, that’s a very different way of thinking about your startup then if you’re thinking about, I want to build a business that could be viable and is going to go public.
Scott Wallsten:
I mean, aren’t the vast majority of startups purchased? I mean, it’s the rare company that goes public, right?
Greg Rosston:
So, I think the vast majority aren’t purchased and don’t go public.
Scott Wallsten:
Right, right. Exactly, they disappear completely.
Greg Rosston:
So, it’s the lucky ones that are in those two categories, and most of them are purchased, you’re right. In 1999, they were going public. More recently, they’ve been acquired. And a lot of them are, I want to abstract from what is termed the “acquihire”, where you acquire a firm to get the six engineers. Those are more hiring talent than they are hiring a product. But there are a lot that get acquired to get a specific product or something that would be there. And the question is, are these acquisitions that are to stave off potential competitors? If they’re going to be staving off potential competitors, I think that the tech companies are going to be playing whack-a-mole. If you start acquiring everybody who might be a competitor, then there are going to be a lot more companies poking their head up to try to get you to buy them.
Greg Rosston:
And this is a question, you know, part of the FTC’s Facebook suit said, one of the remedies we want is that you have to notify us of any acquisition. And a lot of acquisitions fall under the Hart-Scott-Rodino filing notification. They’re still subject to antitrust challenge and there have been challenges to mergers. In fact, unwinding of a merger, I believe it was a called Bazaarvoice, that was under the HSR filing, but the FTC still filed suit and caused the acquisition to be undone. But to require all these to be seen in advance, that doesn’t seem like it’s a huge burden on a company like Facebook with its size. And it may be a huge burden on the FTC to investigate every single one of Facebook’s acquisitions.
Scott Wallsten:
Right. I mean, there were stories even recently about how the FTC doesn’t have enough resources as it is. But you’re also, I mean, what you said though, kind of suggests a different theory of what acquisitions for the purpose of squashing competition would be. I mean, the FTC and others will argue that this is an anti-competitive practice, Facebook buys firms to prevent competition. And you’re saying that it’ll cause more firms to pop up. You said it’s like playing whack-a-mole. But if that’s the case, then their sole purpose of quashing competition could be a good thing, right? Because you’re going to cause lots more firms to enter, right? I mean, that would be a completely different response.
Greg Rosston:
Right. So, I do think the question is, are they… for example, the Instagram purchase. Was Instagram only photo sharing? You know, this is something they, in addition to the FTC saying, “Oops, never mind,” to the earlier 5-0 decision they had to approve them. They need to say, and by the way, there were 10 other photo sharing sites at the time, but this was clearly and obviously the best one. And they bought it just to stop competition from Instagram. The others died because they weren’t as good. Or did they die because Instagram became much better as part of Facebook? It’s going to be a tough job for the FTC to argue that this was obviously a wrong decision by the five commissioners of the FTC, and it was obvious that Instagram was going to become great, and the others were going to fail without a purchase of Instagram by Facebook.
Scott Wallsten:
Has that ever happened before? That the FTC has gone back to say an earlier decision was wrong and essentially invalidated it?
Greg Rosston:
So, I’m not an FTC expert. I thought I read something about that yesterday, but I don’t know.
Dr. Sarah Oh:
Oh, it sounds like it’d be really unusual for the FTC to say, “We’re going to vote 5-0, but in 10 years, if you’re very successful, we’ll come back and say that we were wrong. We’ve reserved the right to change our minds when you prove us wrong.”
Greg Rosston:
Right. So this is a question, you know, the FTC has done a series of merger retrospectives. What happened? Were we right or wrong, and how did prices turn out? And I think that’s important for them to do to see were there bad actions that took place or other things that came about as a result of a merger, but not, were we wrong in the merger decision? And I think that’s something that makes it very difficult to say, “Oh, your merger has never really completed because we always have the right to come back and review it later.” And that’s going to cause, I think the FTC has a difficult case. Monopolization cases are difficult. Reversing a merger that you approved 5-0 is going to be very difficult, and both of these cases will become more difficult with the judicial appointments over the past few years that have tended to be more market oriented and more skeptical to regulatory arguments.
Scott Wallsten:
Well, you know, people who think that there are just too many mergers period might think that making a government’s commitment of saying that the merger is okay with a decision, and even a 5-0 decision, making that not credible anymore, it might be a good thing because it might make companies more hesitant to merge because it could be undone.
Greg Rosston:
So, I think one of my dissertation advisors was Bill Baxter, who was really the father of the modern merger guidelines when he was Assistant Attorney General for antitrust. And one of his arguments was, “We need to give some certainty to business, a framework and certainty to make sure things work. So they know when they’re stepping over the line and when they’re not stepping over the line, so we can have efficiency enhancing mergers and not have anti-competitive mergers.” I think this is an important piece of framework that we put forth so companies can know what to expect and they can know when to merge or not merge. You’re right, that if we kind of make the line fuzzy and move the line against mergers, we’ll get fewer mergers. You’re absolutely right on that. But is that a good thing or a bad thing? I think it depends on your point of view.
Scott Wallsten:
Right. And I think a lot of people right now would think that’s a good thing. People who are sort of coming into taking office now. So even just questioning the merger and questioning that decision, they might see as a win.
Greg Rosston:
I think there are other ways to do it, that don’t create the uncertainty. For example, burden shifting might be a different way of doing that. Right now, to challenge a merger the burden is on the agencies, and this is something that happened in the AT&T/T-Mobile merger that had to clear both FCC and DOJ approval. The DOJ filed suit, and it had to go to court and prove that this was an anti-competitive merger. At the FCC, the parties had to prove that it was in the public interest. So, the burden was on the parties to come to the FCC and say, “This is in the public interest.” And the parties had said they were going to challenge the DOJ in court. And then the FCC came up with a staff report that said, we don’t think this is in the public interest. And here’s what we’re going to show. And you’re going to have to overcome this burden, and the parties then dropped the merger. So I think there is a difference in, you could shift the burden, have legislation or something that says we’re going to shift the burden. And that would be easier. I don’t see, you know, buy graying out the area and other things like that, you still have to get through the court system. So, I don’t see it as, unless you have legislation, I don’t see things shifting quickly towards more skepticism of mergers simply because somebody thinks there’s a bad idea because parties can challenge them like T-Mobile and AT&T did when they were challenged in court and they both won.
Scott Wallsten:
You know, that suggests a kind of an interesting paper. I mean, when the burden of proof is different at the FCC compared to elsewhere, if there were a way to compare the outcomes of different mergers under the different scenarios. Not necessarily whether the mergers went through, because if you have another veto point, fewer are going to go through, but how the firms did, for example, what competition in the industry looks like afterwards?
Greg Rosston:
Right. I think you do have the endogeneity problem or selection problem because the firms knowing that the FCC have to approve a merger, might change their willingness to even propose a merger. In AT&T and Time Warner, they actually sold off one television station, the one television station they own. So, all of a sudden the merger did not have any radio licenses changing hands. So, they avoided FCC review.
Scott Wallsten:
Well, I think on that note, we should probably wrap up. So, Greg, thanks a lot for being with us.
Greg Rosston:
Thanks for having me
