February 2007

Two days ago, I posted a short essay expressing my strong reservations about the new Skype petition requesting that the FCC impose Carterfone-like regulations on wireless operators. James Gattuso followed up yesterday with a piece of his own. And this followed last week’s series of essays about Tim Wu’s “Wireless Net Neutrality” paper by Jerry Brito, Hance Haney, James Gattuso, Tim Lee, Scott Wallsten, and Randy May. (The Skype petition essentially asks the FCC to implement Prof. Wu’s ideas into law, so for purposes of this essay I will treat them as the same proposal.) I wanted to elaborate a bit more on this proposal because I think this issue is profoundly important to the future of innovation and competition in the wireless sector.

Burning the Village to Save It?
The fundamental question raised by the Skype-Wu proposal is whether America will continue to allow competition in wireless network architectures and business models to see which systems and plans (a) consumers truly prefer and that also (b) allow carriers to recoup fixed capital costs while (c) expanding and innovating to meet future needs. The Skype-Wu proposal would foreclose such marketplace experimentation by essentially converting cellular networks into a sort of quasi-commons and forcing private network operators to provide network access or services on someone else’s terms. That someone else, of course, is the Federal Communications Commission (FCC), which will be tasked with devising rules and price regulations to ensure “fair and non-discriminatory” access / interconnection pricing.

In my opinion, when you get right down to it, this proposal is a declaration of surrender. That is, Skype and Prof. Wu almost seem to be saying that while it’s nice we’ve seen innovation at the core of the wireless sector over the past two decades, we now need to get on with the important business of establishing rules to ensure the maximum amount of output or innovation at the edge of networks while largely ignoring what happens at the core, or even prohibiting certain things from happening at the core. In other words, to maximize the freedom to innovate at the edge of networks, we must now restrict the freedom to innovate at the core in some ways.

In essence, therefore, this proposal represents a call for the forced commoditization of cellular networks and would necessitate at return to the rate-of-return regulatory methods of the past. It would freeze network innovation in place and stop of the clock on one of the great American success stories of the past quarter century. For these reasons, I will argue that it is essential it be rejected.

Continue reading →

SHARE: 2 comments

Don’t look now, but it may be time to dig out those old bell bottoms and love beads from your closet. The calendar may say its 2007, but in Washington regulatory circles it may soon be 1968 all over again. You may remember 1968 as a year of turmoil–with anti-war protests, assassinations, and the election of Richard Nixon. Forget all that. At the FCC, it was the year of the Carterfone decision, in which the Bell System was banned from restricting equipment consumers could put on their phone lines. The same year, the Commission allocated the first frequencies for cell phone service.

Both decisions revolutioned the communications world: Carterphone opened the first crack in the previously iron-clad, legally-protected Bell System monopoly to competition, and the cell phone allocation planting the seed for today’s wireless services, which shattered the idea of telephone monopolies at its root.

These two regulatory threads of 1968 are now on a collision course. Yesterday,
Skype –the Internet phone company now owned by eBay– petitioned the FCC to apply the Carterfone decision to wireless carriers (see Adam’s excellent post on this.) The filing follows by less than a week a paper by Tim Wu, father of the term “net neutrality”, endorsing the same idea (discussed here, here, here, here and here.)

Skype–whose founders weren’t even born in 1968–see Carterfone in grand Jeffersonian terms, using the word “right” some 35 times. One practically expects to read of the right to life, liberty, and the right to use non-harmful devices and software on telecommunications networks. Carterfone, however, did not create a right. It created a regulation. A regulation that was justifed in the face of a legally-protected, comprehensive, vertically-integrated old-fashioned monopoly, but a regulation nonetheless. It makes no sense to saddle today’s competitive, innovative and growing cell phone market with the same regulation.

The battle over regulation of wireless networks promises to be a divisive one–in effect a new front in the larger war over neutrality regulation that has been raging for over a year At its heart are two vastly different visions of how best to create competition: one based on forced access and restrictions mandated by government, the other based on reducing barriers to the creation of alternative networks, with consumers–through the marketplace–deciding how they should best be run. Network managers throughout the economy–and consumers as well–should be watching this debate with interest.

SHARE: