Regulatory capture in telecommunications

There are probably several ways that this takes place, but as far as I can tell this takes two forms, originating from both interests (regulators and carriers). The first is from the carriers themselves, who demand, and generally tend to get, high prices in compensation for providing a “common good”. They are usually required to offer some concessions, but in practise, being granted a monopoly, or near-monopoly, in exchange for some penalty isn’t a bad deal. It is, however, a horrible deal for consumers, who get to benefit from very little innovation, much less investment, and no incentive to drive down costs (and prices). The worst case of this is the almost complete wasting of the radio spectrum. Regulators don’t want to sell it off, because it’s a cash cow, and those who already bought spectrum demand the status quo because it protects their “investment” (read, “protection money”) — see the taxi medallion market for a smaller example. As a result: for some ill-conceived common purpose we get to use a miniscule slice of radio spectrum while regulators extract billions from us through the fees we must pay so carriers can afford to use it. Nobody loses but us. I am almost afraid to imagine a world where the spectrum is traded in an emergent (Coasian) market.

The second cost is misuse of services for other purposes; this is usually required as a condition for the license. It’s not too hard to imagine those, but they’re probably less costly; regulatory capture tends to work more to the benefit of the provider and individual regulator rather than the regime. With prohibition, bootleggers make a hell of a lot more money than the baptists who push for it. If you need an example closer than that, Satellite radio is a good one. There are content providers who pushed for, and received, preferential and virtually free access to satellite distribution at the expense of what is already an unprofitable and marginally-competitive business. We get to pay more, because regulators like to dine at the expense of execs at NP.. er.

On the net neutrality side, it’s much more insidious, I fear. It’s hard to explain this without drawing on another example that elicits similar reactions but let me start by referencing the market as it is. Throughout the course of basically a decade, we have gone from the BBC prophesying a halt to the internet for lack of bandwidth (seriously, I even had a dean of a university repeat this claim to me across a table full of serious-looking people), to a world where FOUR people in my house watch simultaneous HD video streams — and, AFAIK, many others do the same thing. The market hath provided, and though much of this is for the exact purpose I’m describing, I’ve been in the IT world long enough to know that the initial fibre was paid for, and used exclusively, for other things first. I have no problems with that; I know that my relatively cheap internet plan is a pittance compared to what others had to pay to bring high speed networks into the city, and even into my neighbourhood.

Anyway, on to that other example. There was a case recently that involved investment trade carriers outrunning, through the use of ultra high speed networks, their customers (traders) and placing buy-sell orders in advance, reaping an arbitrage rent in the process. The universal response to this was outrage. I get why the traders are upset — someone else benefitted from their trades, and I suppose they can seek damages if their contracts with providers explicitly forbade this kind of interception, or sharing. But I also see a benefit. Those intermediaries, more likely than not, had to build incredibly high speed networks to make it possible to do what they did. This means that this “leakage” cost (as traders apparently like to call it) was actually investment money that funded what is most likely the fastest inter-market dark fibre network in the world. This is just speculation, because it would be hard for someone to brag about it, but I am willing to bet that New York business will be benefit from what was likely a substantial investment in latency reduction for decades to come. Was it worth the secrecy and the cost? I don’t know.. but i wouldn’t jump to conclusions without knowing the details. If it’s hard for you to see the benefits, just imagine a similar situation, but back in 1900, where order couriers might have sold the information to an enterprising investor with a telegraph. He could execute the trades early to pay for his investment, and then probably decide to offer his services directly to brokers when others caught on and started doing the same thing.

Anyway, I dislike the term “net neutrality” because it implies something that very obviously has never been true. Many people have paid tremendous amounts of money to get faster access to the internet, and consumers have benefitted from this in ways that were hard to even imagine a mere 10 years ago. This is NOT a bad thing. It’s a way for those with deep pockets to pay for the expensive things we all get to use.

Once the FCC classifies the internet as a utility, I have absolutely no doubt that their requirements for “fair” access will stifle innovation, and lead us into a regime that will resemble the telecommunications industry prior to the internet — remember how transformational a decade was between 1970 and 1980? I don’t.

In exchange for equitable access, carriers will be granted protection from competition. If you don’t believe me, imagine a situation where a carrier complains that neutrality or licensing requirements are being undermined by a new ISP; be it wireless, or whatever. The ensuing torrent of complaints about destruction of “American jobs”, fairness and an “uneven playing field” would almost certainly lead to penalties, bans, etc. All paid for by the consumer. Carriers will get to sit on their laurels as threats to their models are peeled away by a compliant and naive FCC.

I say let Netflix pay for the additional capacity. I have no doubt that my family’s addiction to the service is a very heavy burden on the infrastructure and Netflix is consequently able to extract good money without having to bear a proportional share of the cost. The internet has evolved just fine for the last 2 decades. Nothing has been neutral, and investment has abounded as a result. Impose a regulated egalitarian order and I am certain the next two decades will look completely different.

Leave a Reply