What Did He Say?

by on April 18, 2008 · 4 comments

Normally when you quote someone extensively but selectively and you’re making a different (arguably opposite) point, you acknowledge that.

Stanford Law Professor Lawrence Lessig, who got a chance to lecture a captive Federal Communications Commission during a special public hearing on broadband network management this week, began the lesson quoting from remarks Gerald R. Faulhaber, Professor Emeritus of Business and Public Policy at Wharton, made at Stanford on Dec. 1, 2000 when he was chief economist at the FCC.

I think Prof. Lessig is a gifted and well-intentioned scholar and educator. And Prof. Faulhaber framed the issues well, so it’s understandable why Lessig quoted him.

But Faulhaber wasn’t on Lessig’s page.

A transcript of Faulhaber’s full remarks, available on the Stanford Web site, indicates that Faulhaber was merely summarizing arguments made by others and was actually quite skeptical of the “open access” proposal (an ancestor of net neutrality) that was being discussed.

Lessig Thursday credited Faulhaber with observing in 2000 that the “end-to-end” principle (e2e) equals perfect competition:

where does the e2e argument figure into this? if I translate this into planet economics, that e2e in engineering is the equivalent of the perfect competitive market that economists know and love. 

But the full quote makes it clear Faulhaber was summarizing the argument of others:

Now, where does the e2e argument figure into this? Well, the e2e advocates are essentially arguing, if I translate this into planet economics, that e2e in engineering is the equivalent of the perfect competitive market that economists know and love.

Faulhaber made it clear he didn’t agree, a fact which Lessig failed to mention:

But in fact that’s not the way the real world works. It’s neither the economist nirvana of perfect competition nor is it the engineers’ nirvana of e2e. It doesn’t work that way.

First, we notice that customers actually don’t behave as we would wish them to. They keep insisting on things like “I’d rather buy a bundle. I’d rather buy it from one person. I’d rather not have to worry about solving complexity; I’d rather somebody else solve complexity for me,” all of which present enormous profit opportunities for businesses and opportunities to change the technology. And at one level this is what consumers want and this is how it’s going to evolve.

I’ll give you an example, I’ll give you two examples. The first is, and the most obvious, is you should read Dave Clark’s and Marjorie Blumenthal’s paper, which was supposed to be required reading, which will show you that the principles of e2e tend to get violated essentially when, at least in some of the cases that he mentions, customer demand is pushing them to be there. The couple of issues he raised, one is operating in an untrustworthy world, more demanding aps, less sophisticated users.

One of these we seen and we all sort of pooh-poohed, us, you know, cool Internet guys, is the rise of AOL; right? As they put it, somewhat understating the case, “We’re for the people” — “We’re the ISP for the people who go to Jiffy Lube, not the ISP for the people that change their own oil.” And we all pooh-pooh this and we call them “newbies,” and their market share is huge. There’s a market demand for all those nasty things they’re doing. And consumers like it. If we think they’re newbies, tough. So e2e may very well be violated for reasons which are really lower cost or higher value to customers.

Lessig advocates that broadband service providers should obtain permission from regulators before they make any changes in network architecture:

Before we allow it to change the burden should be on those who would change its architecture … show me that innovation won’t be harmed from this change. Show me investment won’t be choked. Show me competition will continue. And until you show me that don’t allow [network architecture] to change.

This isn’t as reasonable as it sounds. Following the divestiture of AT&T in the early 1980s, this is exactly what we had, and it was a nightmare. According to Huber, Kellogg and Thorne (Federal Telecommunications Law [1999], 823-830),

[The] initial division of the Bell System turned out to be the easy part. It immediately was clear that the Decree’s restrictions on the divested local companies were impractical, unnecessarily broad, or simply exceptionally onerous, and a steady stream of requests for relief ensued …. Waivers were filed faster than they were processed, leading to growing backlogs before the Department of Justice and Judge Greene: by 1994, the average age of waivers pending before the DOJ and Judge Greene was two and a half years. This breakdown of Judge Greene’s oversight of the telecommunications industry was of serious concern to legislators when they drafted the 1996 Act.

Is this what we want in a fast-moving sector of the economy characterized by rapid technological change? Two and a half years? That’s an eternity in this industry.

One of the reasons Faulhaber cited for his opposition to open access is the problem of government failure, which Lessig also skipped:

Let me address one thing at the last. Now, we’ve heard something about regulation and that regulators need to step in and fix this problem of open access, and e2e is the touchstone for this. Now, I refer — the notion here is regulators will come in and fix it. And I would refer to this as the high school civics view of regulation. And since engineers really — oh, yeah, right — since engineers usually don’t actually get to see how regulation is done, more or less like Bismark sausages, you can be excused for not understanding what this means. But lawyers who actually often take the same view really should — they see how it’s made — understand what’s going to happen.

So we all sort of think what’s going to happen is a sensible rule gets made, and everybody says “Oh, yeah, that’s very sensible.” It’s never the way it works. It’s not like it — mostly it doesn’t work this way. It never works that way; okay? It’s what you got to understand.

First of all, of course, if you put a regulation in, the reason you put a regulation in is ‘cause you’re making somebody do something they otherwise wouldn’t want to do. So they’re going to object to that. So the first thing that happens is, you know, fifty lobbyists appear in my office, and they’re all over the FCC like a cheap suit. So what you actually started is, you put into place, you know, you’ve put into training this long process of regulatory judicial and legislative hearings, filings, NOIs, MPRMs, years of essentially the FCC or somebody else sitting in the middle of commercial disputes.

The solution here isn’t to regulate broadband service providers but to free up more spectrum for broadband competition. 

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