Tim Wu, Regulatory Battles, and Obstructionism

The podcast is considerably longer than usual this week because it featured an extremely productive discussion with Prof. Tim Wu on the merits of his “wireless Carterfone” proposal. Normally, we try to keep the podcast under half an hour, but one of the great things about podcasting is that here’s no reason we have to stick to the same length for every episode. In this case, the discussion was just too good to truncate. I encourage you to listen in—we’ve got a handy in-browser listening widget—and if you like what you hear you should subscribe.

One point I want to clarify: around minute 11, I observed that forcing unwilling incumbents to open their markets is usually an “expensive and messy procedure.” Wu responded that this amounted to preemptive surrender, and that we shouldn’t shy away from enacting good policy simply because it faces entrenched opposition.

Which is a good point, but let me expand a bit on what I meant. Obviously, if the problem were simply that the carriers don’t like a given proposal and will lobby against it, that’s not a good rationale for opposing it. However, I think two additional considerations are relevant. First, regulatory uncertainty is always bad. When the rules are unclear, existing firms will be reluctant to invest and new firms will be hesitant to enter the market. Moreover, those firms that do enter the market sometimes get the rug pulled out from under them when the regulatory body changes course—think of the way the CLECs got hosed in the 1990s.

Secondly, and perhaps more importantly, incumbents facing open access regulations often engage in economically destructive activities as part of their campaign to resist the regulations. We see this with the CableCARD, for example: the first-generation cable card spec included a raft of baroque “security” requirements while simultaneously omitting some important features that new entrants need to compete on a level playing field with the traditional set-top box. And the incumbents in the DSL unbundling wars became experts at putting petty logistical obstacles in the way of CLECs seeking access to their facilities.

In most of these battles, one of the claims the incumbent almost always makes is that more open networks are impossible/impractical/too expensive/unreliable/etc. They sometimes exaggerate the difficulties involved. One of the side effects is often that the incumbents will rule out any voluntary opening of their networks—even opening that’s otherwise in their interest—for fear the FCC will seize on it as evidence that openness isn’t as difficult as the incumbent claims, and perhaps use it as a basis to mandate still further opening. So to head off that danger, incumbents often go into a bunker mentality in which any increase in network openness is greeted with suspicion, even if the business case for it is otherwise quite sound.

The point here is that in some cases, such obstructionism doesn’t just delay the introduction of a good policy and waste the incumbents’ lobbying resources. In many cases, the incumbents tactics in opposing the policy can lead to perverse behavior that makes consumers worse off than they would have been if the incumbent had merely left well enough alone.

Or to put it another way, the political process inevitably generates rent-seeking, and the wider the scope of regulatory powers, the more resources we should expect to see devoted to seeking advantage in the regulatory arena. There are obviously some instances where the effort is worth the costs, but it’s foolish to ignore the costs in weighing different policy options.

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