What Wu Wants

by on February 13, 2007 · 2 comments

Wow, we’ve really been piling on Tim Wu’s new paper. Having read it, I’m inclined to think that we didn’t quite give him enough credit.

With my libertarian hat on, I’m still far from convinced that regulations of the wireless market is either necessary or beneficial. But wearing my geek hat, I think it’s worth noting that Wu does an excellent job of documenting a real problem. Along some dimensions, the wireless marketplace is fiercely competitive and consumers are benefitting from lower prices and better service. But along other dimensions—especially next-generation data services—the current state of the market leaves much to be desired.

Admitting to the existence of these sorts of problems obviously puts us as libertarians in a bit of an awkward position. The argument for limited government is easiest to make when we can simply argue that whatever’s happening in the marketplace is working perfectly. So our first instinct is to just reflexively defend whatever the current incumbents are doing. But the reality is that even in a competitive market, the incumbents are far from perfect.


Now, where I think folks like Wu go wrong is in thinking that the existence of flaws in the marketplace immediately lead to the conclusion that new regulations are the solution. I won’t rehash all of those reasons here, as most of them will be familiar to TLF readers: the difficulty of defining clear rules, the disincentive effects on new investment, regulatory capture, the likelihood that the regulator will mandate bad technologies, etc. The issue isn’t whether the market is flawed. It almost always is in at least some respect. The issue is whether the market is so seriously flawed that its worth bearing all the risks and costs that inevitably come with the regulatory process. The principle bone of contention between libertarians and left-liberals is not (or at least ought not to be) whether or not the market is perfect. The disagreement centers on whether the flaws in the regulatory process tend to be more serious than the flaws in the market. Many lefties seem to think that regulation is a magic wand that will instantaneously transform the marketplace to conform to policymakers’ whims. (And to be fair, some libertarians exhibit a similarly fanciful attitude toward the market.)

So with that caveat in mind, I think Wu’s paper is highly worth reading to get a realistic sense of the weaknesses of the current market structure. Wu makes a pretty convincing case that the incumbents—Verizon especially—are baroque, stifling hierarchies that would bring a smile to the face of a soviet bureaucrat. It would be impossible to summarize all of the perverse management decisions and design choices, but here’s just a sample:

Imagine you want to create a user-moderated news service like digg.com that operates on SMS. On the neutral Internet, you rent a Web server ($7-$100 per month to start), register your name, and start programming. Total time required: less then two hours in most cases. But getting a service on the non-neutral US cell phone network would be a little different:

The first step would be to contact a company known as an aggregator. This company manages your relationships with the cell phone carriers–and that’s carriers, plural, because making an agreement with just one carrier ensures that your service will fail because it cannot effectively spread via word of mouth. The first requirement from an aggregator is a service charge, which starts at $1,000 per month. Then, you must buy a shortcode (which kind of serves as your Web site name) for an additional $500-$1,000 per month. But you’re not done.

The next step is satisfying the requirements of the cell phone companies. Many of these steps, such as requiring affirmative opt-in before a subscription can start, are not burdensome, and serve to protect the carriers’ customers. Others, however, border on ludicrous. Requirements vary by carrier, but some prohibit operators from offering games or sweepstakes, or require that subscription periods can only be monthly: not daily, weekly, or yearly. Others require that content, such as ringtones, be locked so users can’t forward them from their phones to their friends’ phones.

Other requirements are outright offensive: as of this writing, Cingular, Sprint/Nextel, T-Mobile and Verizon all prohibit charities from raising money through their Premium SMS services. Too bad for the United Way, Greenpeace, and the Red Cross.

Some carriers also have “decency” restrictions that are so silly and restrictive that they make the production code that governed movies between 1934 and 1967 seem quaint. Verizon is the worst offender in this case: It prohibits dating services, images that are suggestive (the same images would be acceptable if aired on prime-time network TV), and any use of”crude” words, including such shockers as “fornicate” and “genital.”

After you make your application compliant to the carriers’ requirements, you wait weeks or months for the carriers to approve it, and jump through more hoops if they reject your application, which they can do for any or no reason.

I don’t think you have to be a socialist to think that this is kind of appalling. It’s indisputably true that the explosion of innovation we see on the Web is due in large part to the incredibly low barriers to entry we see there. Although there may be technical obstacles to making the barriers to entry in the phone software market quite as low as they are on the web, it seems pretty clear that there’s some room for improvement.

One of the most appalling problems documented in the report—and one that I think libertarians ought to be quite comfortable supporting government action to stop—is Verizon’s habit of advertising “unlimited” Internet access when in fact what they offer is crippled Internet access (web and email only) with a restrictive bandwidth cap. Verizon should be free to offer crippled Internet access if they want to, but they should clearly advertise it as such. At least if Wu’s description of Verizon’s marketing practices is to believed, I’d say that borders on fraud, and combatting fraud is something that every libertarian agrees is a legitimate function of government.

  • Tim Wu

    Tim Lee, thanks for the writing.

    I think my main problem with the criticism so far is this: my paper has been misinterpreted as a call to regulate the industry. And since its the most familiar thing to do everyone is bringing out their favorite “don’t regulate” arguments.

    The main point of the paper is to get the facts out on what is happening in wireless, and why it is bad for innovation. That as I say in the introduction, doesn’t immediately mean regulation. It may mean questions for the industry itself, for example, or greater consumer pressure.

    The problem is that people, especially in DC, get too used to a “regulate don’t regulate” debate, which is boring after a while frankly. We all know the arguments on both sides.

    Libertarians, in my opinion, make a mistake when they assume that companies here are making the right decisions all of the time. If you spend time in industry, you know that they make serious mistakes. Think, say, MCI, if you need a telecom example.

    It is only a unthinking libertarian who assumes these industries don’t make mistakes, and I see it as part of my job to point these things out.

    TW

  • Tim Wu

    Tim Lee, thanks for the writing.

    I think my main problem with the criticism so far is this: my paper has been misinterpreted as a call to regulate the industry. And since its the most familiar thing to do everyone is bringing out their favorite “don’t regulate” arguments.

    The main point of the paper is to get the facts out on what is happening in wireless, and why it is bad for innovation. That as I say in the introduction, doesn’t immediately mean regulation. It may mean questions for the industry itself, for example, or greater consumer pressure.

    The problem is that people, especially in DC, get too used to a “regulate don’t regulate” debate, which is boring after a while frankly. We all know the arguments on both sides.

    Libertarians, in my opinion, make a mistake when they assume that companies here are making the right decisions all of the time. If you spend time in industry, you know that they make serious mistakes. Think, say, MCI, if you need a telecom example.

    It is only a unthinking libertarian who assumes these industries don’t make mistakes, and I see it as part of my job to point these things out.

    TW

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