Vivek Wadhwa on High-Tech’s “Best Regulator”

by on July 8, 2011 · 7 comments

Vivek Wadhwa, who is affiliated with Harvard Law School and is director of research at Duke University’s Center for Entrepreneurship, has a terrific column in today’s Washington Post warning of the dangers of government trying to micromanage high-tech innovation and the Digital Economy from above.

For reasons I have never been able to understand, the Washington Post uses different headlines for its online opeds versus its print edition. That’s a shame, because while I like the online title of Wadhwa’s essay, “Uncle Sam’s Choke-Hold on Innovation,” the title in the print edition is better: “Google, Twitter and the Best Regulator.” By “best regulator” Wadhwa means the marketplace, and this is a point we have hammered on here at the TLF relentlessly: Contrary to what some critics suggest, the best regulator of “market power” is the market itself because of the way it punishes firms that get lethargic, anti-innovative, or just plain cocky. Wadhwa notes:

The technology sector moves so quickly that when a company becomes obsessed with defending and abusing its dominant market position, countervailing forces cause it to get left behind. Consider: The FTC spent years investigating IBM and Microsoft’s anti-competitive practices, yet it wasn’t government that saved the day; their monopolies became irrelevant because both companies could not keep pace with rapid changes in technology — changes the rest of the industry embraced. The personal-computer revolution did IBM in; Microsoft’s Waterloo was the Internet. This — not punishment from Uncle Sam — is the real threat to Google and Twitter if they behave as IBM and Microsoft did in their heydays.

Quite right. I’ve discussed the Microsoft and IBM antitrust sagas many times here before. In particular, see my 2009 review of Gary Reback’s book on antitrust and high-tech and my recent essay on “Libertarianism & Antitrust: A Brief Comment.” I’ve also commented on the FTC’s look at Twitter and Google in my recent essays, “Twitter, the Monopolist? Is this Tim Wu’s “Threat Regime” In Action?” and “The Question of Remedies in a Google Antitrust Case.”

The crucial points I have tried to get across in these essays, as well as all my essays countering the modern cyber-progressives,” is that high-tech market power concerns are ultimately better addressed by voluntary, spontaneous, bottom-up, marketplace responses than by coerced, top-down, governmental solutions. Moreover, the decisive advantage of the market-driven approach to correcting market or “code failure” comes down to the rapidity and nimbleness of those responses, especially in markets built upon bits instead of atoms.

That’s why Wadhwa’s insight — that “the technology sector moves so quickly that when a company becomes obsessed with defending and abusing its dominant market position, countervailing forces cause it to get left behind” — is so cogent. We’re not talking about markets like steel and corn here. Things move much, much more quickly when bits and code and are the foundations of what Tim Wu calls “information empires.” There’s no doubt that some companies will gain scale and even “power” quickly in our new Digital Economy, but they can also lose it in the blink of an eye.

The best modern example that I’ve documented here before is AOL. It’s easy to forget now, but just a short decade ago, academics and regulators were in a tizzy over Big Bad AOL. And why not? After all, 25 million subscribers were willing to pay $20 per month to get a guided tour of AOL’s walled garden version of the Internet.  And then AOL and Time Warner announced a historic mega-merger that had some predicting the rise of “new totalitarianisms” and corporate “Big Brother.”

But the deal quickly went off the rails. By April 2002, just two years after the deal was struck, AOL-Time Warner had already reported a staggering $54 billion loss. By January 2003, losses had grown to $99 billion. By September 2003, Time Warner decided to drop AOL from its name altogether and the deal continued to slowly unravel from there.  In a 2006 interview with the Wall Street Journal, Time Warner President Jeffrey Bewkes famously declared the death of “synergy” and went so far as to call synergy “bullsh*t”!  In early 2008, Time Warner decided to shed AOL’s dial-up service and then to spin off AOL entirely.  Looking back at the deal, Fortune magazine senior editor at large Allan Sloan called it the “turkey of the decade.” The formal divorce between the two firms took place in 2008. Further deconsolidation followed for Time Warner, which spun off its cable TV unit and various other properties.

Meanwhile, AOL has lost its old dial-up business and walled garden empire and is still struggling to reinvent itself as an advertising company. It’s about the last company on anybody’s lips when we talk about tech titans today. What an epic tale of creative destruction! That all happened is less than 10 years! And yet, again, a decade ago, tech pundits and cyberlaw intellectuals like Larry Lessig were penning entire books about the ominous threat posed by the AOL walled garden model of Internet governance.

Lessig’s myopia was based on an inherent techno-pessimism I have discussed and critiqued in my Next Digital Decade book chapter, “The Case for Internet Optimism, Part 2 – Saving the Net From Its Supporters.” Countless Ivory Tower cyber-academics today adopt a static view of markets and market problems. This “static snapshot” crowd gets so worked up about short term spells of “market power” – which usually don’t represent serious market power at all – that they call for the reordering of markets to suit their tastes.  Sadly, they sometimes do this under the banner of “Internet freedom,” claiming that techno-cratic elites can “free” consumers from the supposed tyranny of the marketplace.

In reality, that vision wraps markets in chains and ultimately leaves consumers worse off by stifling innovation and inviting in ham-handed regulatory edicts and bureaucracies to plan this fast-paced sector of our economy. Importantly, that vision ignores the deadweight losses associated with expanding government red tape and bureaucracy as well as the very real danger of “regulatory capture” that exists anytime Washington decides to get cozy with a major sector of the economy.

As Wadhwa correctly concludes, “Government has no place in this technology jungle.” I wish other academics and tech pundits would heed that warning.




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