November 25, 2002
New Telecom Act for 2003
We need a new telecom act. Let's face it, the 96 telecom act was predicated on a very different world of telecommunications than the one we have today. It also, as with nearly all legislation, suffered from a mess of special interests all demanding their pound of flesh, and so was similar to energy "deregulation" in California in its incoherence. But the final problem was that it was based on the underlying idea that while competition is good, the government had to create, prompt, and protect this competition. This is an unsuccessful mixing of free-market and big government ideas. Surely there is a case to be made that in cases where there is a technical, or natural, monopoly state intervention can be a legitimate course. The phone service of the 1950s may have been a candidate. But when there is not a monopoly situation it is a real mistake for the federal government to distort natural market forces in an attempt to micro-manage competitive forces. It's not needed and the unintended consequences make things worse.
There is no technical monopoly in telecommunications anymore (save perhaps the most rural of areas, which may have to be treated separately.) There are multiple networks (phone, cable, terrestrial and satellite wireless, etc.) that compete or have the POTENTIAL to compete (potential competition can be as good as real competition in holding competitors in check and protecting consumers.) The problem is that each of these are heavily regulated in numerous ways and so are constrained in their ability to respond to market forces. The details are too great to get into here, but the guiding principle of MY telecom bill would simply be that there is no longer a justification for the heavy regulation of telecommunications and the tight federal control and rule making on spectrum. These areas should be left for the market to address. And by the way, the REAL reason why these markets are so controlled is NOT that this is needed to protect the consumer. They are regulated because the various big business competitors have successfully lobbied the government to construct regulatory barriers to their existing/big and would-be entrepreneurial competitors.
I understand the impetus to keep regulations which empirically have demonstrated that they keep prices down. But this only works in a closed system in which all factors are considered. In the case of RBOC reglation, there are substantial costs to the mandate that RBOCs share their infrastructure with their competitors. Most notably that they are less inclined to invest in additional networks. Consumers, therefore, might be (and I would estimate are) suffering from lack of choice in telecommunications services and features and may be missing out on future price savings. Put another way, the quick fix approach of forcing competition in the immediate term may simply be costing consumers more in the future--and more in real terms when you figure in the present value of those future costs. The math on this is hard and uncertain, but how you align incentives is how you will get results--so the disincentive that this provision in the 96 telecom act creates is problematic. Experimentation in new networks is stalled for the sake of price control on the existing (and insufficient, aging) networks.
Finally, let me muse a bit on the nature of competition, for I think there are varying concepts of competition and if the government works to engineer one form, it may by that action work against another, more useful, form of competition.
Consider two diverging views on competition that can be found across the political spectrum. The first view, let’s call it “price-oriented competition,” adopts the mentality of the average commodities broker: competition is valued first and foremost for price discovery on goods and services and to this end the more competition the better. Just as a commodities broker wants many sellers selling the same thing, the emphasis here is on clearly defined products and services, comparable across competitors. Perversely, innovation, by creating new and unique products and services, works against this ideal of competition, and so the tendency is to ensure that whenever innovation occurs that competition is encouraged, and often mandated. This view espouses shortening patents and close monitoring of business through regulatory and anti-trust mechanisms. New drugs need competition so patents must be shortened. New telecommunications networks, such as DSL, must be shared. Powerful operating systems must be carefully pried open.
The countervailing view holds that competition of approach is more important than competition of price and has at its core a respect for property rights and innovation--call it “property rights-oriented competition.” Property-oriented competition assumes a dynamic, changing economy, while price-oriented competition assumes a static view of the world (which may be well suited for commodities such as gold but not for many technologies, business practices, and indeed social problems.) It is competition of approach, ideas, methods, etc., not central planning, that prompts innovation, spurs growth and ultimately solves market problems (or, put another way, capitalizes on market opportunities and efficiently allocates capital.) Property rights are required to align incentives with those that would innovate to create the new drugs, technologies, and ideas that grow and improve the state of humanity. In this view, shortening patents, regulating networks, and over-zealous anti-trust do more harm in curbing innovation than they benefit in price control.
The problem with telecommunications today is that networks (both wired and wireless) are not treated as their property. The federal government effectively tells network operators what they can and can't do with their resources and who else should be able to use them. Markets can't operate efficiently in this way and it is a huge distortion on incentives. Larry Summer has said that no one in the history of man has ever washed a rented car. How would the constant threat of confiscation affect your willingness to invest in a property? Would you remodel your kitchen in a rented house knowing the landlord could evict you at amny moment? Of course not.
There is plenty of competition to protect consumers--if PacBell rates go higher than I am willing to pay, I will use my cell phone at home or Internet telephony. Let the consumers decide, through this system of voluntary exchange we know as the market, what services they want and from whom--not the politicians.