Monday, October 08, 2007

Competition, Innovation, and Regulatory Paradigms

The net neutrality, open access, mandatory unbundling proponents argue that regulation of broadband providers is needed to promote innovation, especially at what they call the networks’ “edge,” the realm of application and devices. Having in mind today’s competitive environment, I say just the opposite. A Carterfone regime may have been fine for 1968. AT&T had a monopoly, or a near one, then. It is not fine for 40 years later when competition is now the norm, not the exception.

In their zeal to enforce absolute non-discrimination rules, the net neutrality proponents ignore —and are willing on behalf of consumers in whose name they purport to speak— to sacrifice any cost-saving efficiencies and innovation that might result from unfettered integration of networks, applications, and devices. They close their eyes to how competition in an unregulated marketplace leads to innovation.

I am struck by an October 4, 2007 article, “Apple Raises Bar on Smart Phone,” in the New York Post. The lead: “Pushed by the successful launch of the iPhone, mobile device makers are scrambling to come up with innovative gadgets that geeks will want in the Christmas stocking.”

The article says that the iPhone’s introduction “has triggered a lot of innovation and experimentation and new design approaches on the part of competitors.” According to the piece, Verizon Wireless will begin selling more “up-market” phones, including one made by LG Electronics that incorporates touch screen technology. Microsoft is upgrading its Zune digital music player. And Noika is undertaking a marketing blitz touting the fact that iPhone users must use AT&T’s wireless network. Not surprisingly, all manner of different competitive marketplace responses.

Please understand that the innovative iPhone was introduced in an environment yet to be governed by net neutrality, although the FCC, wrongly, took an unwise step in that direction in its 700 MHz decision this summer. Indeed, had the government had in place neutrality rules that would have prohibited the non-neutral (read: discriminatory) relationship between AT&T and Apple, we quite likely would not have the iPhone, at least not now. Why? Because almost certainly it was the ability of the two companies to structure a negotiated business arrangement that they thought made economic sense that led to the decision to go forward. (Note: This is not the same thing as saying that the deal they struck, in fact, makes good economic sense for either or both. The vagaries of the marketplace will make that determination.)

I was quoted last week in the press as saying the current FCC and its cohort of commissioners had “bounced around a bit” and needed to establish a firm free market policy orientation. True to my nature, I was being a bit kind. The current FCC cohort has bounced around too much, not just a bit. The three Republicans, the commissioners who by all rights, and by their own professions, ought to be most sympathetic to eliminating and relaxing existing regulations and not imposing new ones, have been inconsistent and unsteady in their adherence to market-oriented principles.

We live in an era of increasing competition among service providers that, like Myamar, were formerly known by different names (“telephone companies,” “cable companies,” “cellphone companies,” and “satellite companies”) tied to their twentieth century identities). Despite marketplace convergence, services often still go by names tied to particular technologies and functionalities (“cable television,” “telephone,” “special access,” “Frame Relay,” “Ethernet,” “FiOS,” “DSL,” “U-Verse,” “BPL,” “wireless” and so on and so forth). In reality, most of the companies known by their former names and many of the services still known by their particular technological handles, either do now, or will soon, compete in the marketplace against each other in one way or another to some extent. In the current dynamic environment characterized by technological innovation and marketplace competition, an FCC majority has yet to emerge that demonstrates, consistently, that it is anchored in a principled way by a free market policy orientation.

If such a market-oriented majority existed, there would not be talk of the FCC mandating the unbundling of cable and satellite channels in a competitive audio and video marketplace. There would not be an existing FCC decision to impose net neutrality mandates on the wireless broadband sector, a competitive market segment.

There would not talk of re-regulating the “special access” services of the companies formerly known as “telephone companies” in markets the FCC already has determined to be served by competitors offering high-capacity services, albeit under different names and with different technologies. There would be an understanding that it is not appropriate to judge the competitiveness of the special access marketplace on such a narrow frame of reference as a building-by-building basis, or even a wire center-by-wire center basis, because the nature of communications facilities and networks is that they can be extended to meet customer demand where such demand exists based on payment of a market price. There would be an understanding that once new entrants have demonstrated that it is possible for them to enter a market by actually entering the market and promoting their services, re-imposing government price controls on the companies still known as the incumbents almost certainly will make it more difficult for the new facilities-based entrants to expand their businesses or for still other new competitors to enter.

In short, there would be an understanding by an FCC majority that in order to promote innovation, encourage investment, and advance consumer welfare, that it must choose, and consistently so, a principled free market-oriented, deregulatory approach over the legacy managed competition paradigm that has so dominated communications policymaking in the past.