Outsized Regulation (Always) Slams the Little Guy

By SBE Council at 2 April, 2015, 8:33 am

This time it’s the FCC’s oppressive Internet rules

By Karen Kerrigan-

As reported by the Wall Street Journal on March 29, one single bank has been created since 2010 – the year Dodd-Frank was enacted. In three decades prior to the law “an average of more than 100 new banks a year opened,” according to the article, which looks at Dodd-Frank’s impact on small financial institutions.

SBE Council chief economist Ray Keating also reported on the issue in a recent Capital & Credit analysis. Keating noted the prospect of more consolidation among small banks, higher costs, and the fact that regulation post Dodd-Frank has posed a bigger survival challenge than the financial crises itself.

This is what happens when regulation targeting the big guys is outsized in proportion to the “market failure” it is supposed to fix. Big regulatory initiatives always end up harming the little guy – that is, the small businesses and entrepreneurs who spark innovation and vibrancy in every sector of the economy. Even when efforts are put forth to protect small businesses from the ill effects of “direct regulation” more often than not there is no escape. Moreover, the indirect impact of regulation can be as equally devastating.

Small Businesses in Telecommunications are Next

Unfortunately, small competitors and entrepreneurs in the telecommunications sector are next to feel the weight of heavy compliance burdens and costs, along with the suffocating presence of regulators now that the FCC has enacted its order on Internet regulation. The move hoists outdated, telephone-style regulations upon the Internet, and by extension the small businesses that dominate the industry.

But unlike Dodd-Frank, which at least paid lip service to small business and provided limited exemptions (meaningless ones, but that’s another story), the FCC’s “open Internet” order offers no relief for small businesses. Despite repeated concerns expressed by small Internet service providers (ISPs) and the small business community, which detailed the harmful effects of imposing bureaucratic-heavy Title II regulations on them and within the Internet ecosystem, the FCC was unmoved. It’s as if the FCC (specifically, three out of the five commissioners, including the Chairman) intentionally dismissed these valid concerns.

However, their pleas caught the attention and sympathy of Commissioners Ajit Pai and Mike O’Reilly. In his dissenting statement on the FCC’s vote to regulate the Internet, Pai schooled fellow commissioners about the realities of how small businesses operate in the very industry they were about to smother with draconian regulations. He noted that most of the small providers operate on a “shoestring budget” with “just a few people to run the business, install equipment, and handle service calls.” He relayed the impact on small wireless ISPs who wrote the “FCC’s new ‘regulatory intrusion into our businesses . . . would likely force us to raise prices, delay deployment expansion, or both.’”  The country’s smallest ISPs, (each with fewer than 1,000 residential customers) said public utility-style (Title II) regulation “will badly strain our limited resources” because these small firms “have no in-house attorneys and no budget line items for outside counsel.”

As Pai explained in recent testimony before the House Judiciary Committee, the FCC’s outdated regulatory sheath puts small competitors and innovation at risk.  Many small providers are the only providers of Internet service in their communities. If these small ISPs are squeezed out of business, a real possibility for some, who’s going to step in and provide this vital service in these communities?  And in competitive or somewhat competitive markets, regulation puts small providers at a massive disadvantage. The costs and consequences of regulation designed for public utilities will simply be too much.  Time and time again Pai warned that if monopoly-style regulations “are imposed on a vibrant broadband marketplace, a highly regulated monopoly is what we’ll get.”

Small Business Intervention Fails at the FCC

During the FCC’s proposed draft on the “Open Internet” (but before Chairman Tom Wheeler announced in an Op-ed that he would pursue the “nuclear option”– that is, public utility-style regulation of the Internet) the Small Business Administration Office of Advocacy weighed in on behalf of frustrated small businesses. The office urged the FCC to use the Regulatory Flexibility Act to guide its actions. Then Chief Counsel Winslow Sargeant wrote: “The importance of protecting small businesses’ ability to utilize the internet to share and receive information with their costumers is impossible to overstate; however, the FCC should exercise appropriate caution in tailoring its final rules to mitigate any anti-competitive pressure on small broadband providers as well.  Without rules to ensure fair competition in the broadband marketplace, small businesses in every industry will continue to face steeper climbs than their larger counterparts.”

Advocacy urged the FCC to take the concerns of small businesses seriously as required by the Regulatory Flexibility Act, conduct an outreach event to learn more about the effects of its proposal, and address these issues in the final rulemaking. Unfortunately, buy not surprisingly, the recommendations of Advocacy were ignored. The FCC did not host a roundtable for small businesses, and its final regulatory flexibility “analysis” is wholly deficient.

The FCC received voluminous information from the small business community – broadband service providers, consumers, suppliers and innovators serving the Internet ecosystem – all expressing harmful outcomes in the face of Title II regulation. It was clearly communicated that these outcomes – diminished investment, higher broadband costs, expensive compliance burdens, and government-driven cost pressures – would be destructive to a broad swath of the small business community. (Please note: The public, including small businesses, did not have the official opportunity to provide feedback on the FCC’s final path to an “open Internet” because the plan was keep secret from the public until after the commission’s vote on February 26.)

But let’s give the FCC some credit where credit is due. They did quantify (as required by law) the number of small businesses directly impacted by their regulatory proposal. (See American Action Forum’s “Small Businesses Bear the Brunt of Net Neutrality Rules.”) The FCC estimated that out of the 20,640 companies that would be directly affected by its plan, 18,532 are small businesses – about 90 percent. So the FCC produced this data, but then did nothing with it. No mitigation, no exemptions, no tailoring, not even lip service that the FCC was sensitive to the concerns communicated by small businesses. They were, however, overly excited about one letter signed by a mere 100 small businesses in favor of “net neutrality” regulation.

Entrepreneurs who will bear the brunt of Internet regulation deserve better.  But what they’re getting is more bureaucracy, regulation, higher costs and taxes — in other words, the lamentable features of an era dominated by old-style public utilities.

If the FCC’s Internet regulatory order withstands legal and congressional challenges, will small ISPs go the way of small banks? The country has lost 14 percent of its small banks since the passage of Dodd-Frank, yet only one small bank has been created during this period. Just as the federal government has made it extraordinarily difficult for entrepreneurs in the financial services sector to overcome the regulatory barriers and costs erected by Dodd-Frank (on top of other burdensome regulations), small businesses and entrepreneurs face a harsh, new environment in the telecommunications space. The FCC regime creates enormous uncertainty and costs for small providers, now exposed (under Title II regulation) to complaints and other procedures at the FCC and in the courts. This is not an environment appealing to entrepreneurs or investors. And it is one that will quickly eat the slim margins of existing (small) broadband providers.

The indirect impact of the FCC’s new regulations will prove harmful as well – small businesses as consumers will pay higher prices, have limited broadband choices and perhaps no broadband at all if their small provider is put out of business by crushing regulation. Small businesses and manufacturers who help to deploy broadband and create new technologies and innovations will be hurt by diminished investment.

The legal challenges to the FCC’s regulatory action could take years. Let’s hope “net-neutrality” advocates in the Congress come to their senses and support a legislation solution that focuses on the narrow issues that the FCC plan was originally supposed to be about — not the wholesale regulation of the Internet with rules from a bygone era.

There’s much work ahead to rein in overzealous federal regulators who believe they are accountable to no one. While this is a problem for the small business community across most of the federal government, there is an opportunity to make headway with one agency – the FCC – whose oppressive Internet regulations stand to impact all Americans.

Karen Kerrigan is president & CEO of the Small Business & Entrepreneurship Council.