Economics

New Paper on Wu’s “Separations Principle” & the War on Vertical Integration in the Tech Economy

by on October 16, 2012 · 0 comments

[UPDATE 4/30/13: This article was subsequently published in Volume 65, Issues 2 of the Federal Communications Law Journal in April 2013. The links below now point to the final FCLJ version.]

The Mercatus Center at George Mason University has just released a new paper by Brent Skorup and me entitled, “Uncreative Destruction: The War on Vertical Integration in the Information Economy.”  Brent, who is the research director for the Information Economy Project at the George Mason University School of Law, and I have been working on this paper since the Spring and we are looking forward to getting it published in a law review shortly. The paper focuses on Tim Wu’s “separations principle” for the digital economy, something I’ve spent some time critiquing here in the past. Here’s the introduction from the 44-page paper that Brent and I just released:

Are information sectors sufficiently different from other sectors of the economy such that more stringent antitrust standards should be applied to them preemptively? Columbia Law School professor Tim Wu responds in the affirmative in his book The Master Switch: The Rise and Fall of Information Empires. Having successfully pushed net-neutrality regulation into the policy spotlight, Wu has turned his attention to what he regards as excessive market concentration and threats to free speech throughout the entire information economy.To support his call for increased antitrust intervention, Wu explains his view of competition in the information economy—a view that deviates substantially from current mainstream antitrust theory.

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Scott Shackelford on cybersecurity and polycentric governance

by on October 9, 2012 · 0 comments

Scott Shackelford, assistant professor of business law and ethics at Indiana University, and author of the soon-to-be-published book Managing Cyber Attacks in International Law, Business, and Relations: In Search of Cyber Peace, explains how polycentric governance could be the answer to modern cybersecurity concerns.

Shackelford  originally began researching collective action problems in physical commons, including Antarctica, the deep sea bed, and outer space, where he discovered the efficacy of polycentric governance in addressing these issues. Noting the similarities between these communally owned resources and the Internet, Shackelford was drawn to the idea of polycentric governance as a solution to the collective action problems he identified in the online realm, particularly when it came to cybersecurity.

Shackelford contrasts the bottom-up form of governance characterized by self-organization and networking regulations at multiple levels to the increasingly state-centric approach prevailing in forums like the International Telecommunication Union (ITU).  Analyzing the debate between Internet sovereignty and Internet freedom through the lens of polycentric regulation, Shackelford reconceptualizes both cybersecurity and the future of Internet governance.

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Where are the Broadband Mutuals?

by on July 23, 2012 · 0 comments

I’ve argued (here and here, for instance) against worrying too much about the monopolization of Internet access. Broadband is pretty clearly an industry in which there are increasing returns to scale, and when returns to scale are severe enough, that results in natural monopoly. There are not clear welfare gains from regulatory solutions to natural monopoly problems generally, and broadband in particular is a case where many of the problems associated with monopolization are ameliorated by price discrimination.

Nevertheless, I accept that most people are not persuaded by this logic. Let me try a different tack, explaining what I would expect to see if profit-centered monopolists were really as bad for consumers as their critics claim.

The answer can be summed up in one word: mutuals. Mutual companies are not especially common in today’s economy, but they are worth pondering at some length. Mutuals are firms in which customers, in virtue of their ongoing patronage of the firm, are also its owners. A mutual company generally has no other shareholders to please, and it does not typically distribute dividends. Instead, if it makes a profit it will distribute it to its customers in the form of lower prices in the future.

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Waiting for the Next Fred Kahn

by on July 16, 2012 · 1 comment

It is unlikely there has ever been a more important figure in the history of regulatory policy than Alfred Kahn. As I noted in this appreciation upon his passing in December 2010, his achievements as both an academic and a policymaker in this arena where monumental. His life was the very embodiment of the phrase “ideas have consequences.” His ideas changed the world profoundly and all consumers owe him a massive debt of gratitude for reversing the anti-consumer regulatory policies that stifled competition, choice, and innovation. It was also my profound pleasure to get to know Fred personally over the last two decades of his life and to enjoy his spectacular wit and unparalleled charm. He was the most gracious and entertaining intellectual I have ever interacted with and I miss him dearly.

As I noted in my earlier appreciation, Fred was a self-described “good liberal Democrat” who was appointed by President Jimmy Carter to serve as Chairman of the Civil Aeronautics Board in the mid-1970s and promptly set to work with other liberals, such as Sen. Ted Kennedy, Stephen Breyer, and Ralph Nader, to dismantle anti-consumer airline cartels that had been sustained by government regulation. These men achieved a veritable public policy revolution in just a few short years. Not only did they comprehensively deregulate airline markets but they also got rid of the entire regulatory agency in the process. Folks, that is how you end crony capitalism once and for all! Continue reading →

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Video: Competition & Innovation in the Digital Economy

by on July 14, 2012 · 0 comments

Is competition really a problem in the tech industry? That was the question the folks over at WebProNews asked me to come on their show and discuss this week. I offer my thoughts in the following 15-minute clip. Also, down below I have embedded a few of my recent relevant essays on this topic, a few of which I mentioned during the show.

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FCC Commish Robert McDowell on Regulatory Failure & “Regulate My Rival” Politics

by on June 28, 2012 · 3 comments

This may be the best speech by a regulator that you will read in your entire life. Federal Communications Commission (FCC) Commissioner Robert McDowell delivered an address in Rome today entitled, “The Siren Call of “Please Regulate My Rival”: A Recipe for Regulatory Failure.” I highly recommend it (and not just because I’m cited in it!) It is infused with important insights about the ugly downsides of excessive regulation of technology markets.

McDowell is an astute student of regulatory history and he documents how, despite the best of intentions, economic regulation has often been turned into a tool that industry exploits for their own narrow interests. Sadly, examples of such “regulatory capture” are rampant, as I have documented here before. McDowell notes that many telecom and media companies “suffer from the ‘please regulate my rival’ malady of an industry that has been regulated too much and for too long.  History is replete with such scenarios,” he says, “and the desire for more regulation for competitors always ends badly for the incumbent regulated industry in the form of unintended and harmful consequences.” That is exactly right.

I strongly encourage you to read the entire speech, but if you only have time to read one thing, make it the powerful and poetic closing paragraphs, which I have reprinted below:

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Internet Security without Law

by on June 19, 2012 · 5 comments

That is the title of my [new working paper](http://mercatus.org/publication/internet-security-without-law-how-service-providers-create-order-online), out today from Mercatus. The abstract:

> Lichtman and Posner argue that legal immunity for Internet service providers (ISPs) is inefficient on standard law and economics grounds. They advocate indirect liability for ISPs for malware transmitted on their networks. While their argument accurately applies the conventional law and economics toolkit, it ignores the informal institutions that have arisen among ISPs to mitigate the harm caused by malware and botnets. These informal institutions carry out the functions of a formal legal system—they establish and enforce rules for the prevention, punishment, and redress of cybersecurity-related harms.

> In this paper, I document the informal institutions that enforce network security norms on the Internet. I discuss the enforcement mechanisms and monitoring tools that ISPs have at their disposal, as well as the fact that ISPs have borne significant costs to reduce malware, despite their lack of formal legal liability. I argue that these informal institutions perform much better than a regime of formal indirect liability. The paper concludes by discussing how the fact that legal polycentricity is more widespread than is often recognized should affect law and economics scholarship.

While I frame the paper as a reply to Lichtman and Posner, I think it also conveys information that is relevant to the debate over CISPA and related Internet security bills. Most politicians and commentators do not understand the extent to which Internet security is peer-produced, or why security institutions have developed in the way they have. I hope that my paper will lead to a greater appreciation of the role of bottom-up governance institutions on the Internet and beyond.

Comments on the paper are welcome!

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What is “Optimal Interoperability”? A Review of Palfrey & Gasser’s “Interop”

by on June 11, 2012 · 4 comments

I’m pretty rough on all the Internet and info-tech policy books that I review. There are two reasons for that. First, the vast majority of tech policy books being written today should never have been books in the first place. Most of them would have worked just fine as long-form (magazine-length) essays. Too many authors stretch a promising thesis into a long-winded, highly repetitive narrative just to say they’ve written an entire book about a subject. Second, many info-tech policy books are poorly written or poorly argued. I’m not going to name names, but I am frequently unimpressed by the quality of many books being published today about digital technology and online policy issues.

The books of Harvard University cyberlaw scholars John Palfrey and Urs Gasser offer a welcome break from this mold. Their recent books, Born Digital: Understanding the First Generation of Digital Natives, and Interop: The Promise and Perils of Highly Interconnected Systems, are engaging and extremely well-written books that deserve to be books. There’s no wasted space or mindless filler. It’s all substantive and it’s all interesting. I encourage aspiring tech policy authors to examine their works for a model of how a book should be done.

In a 2008 review, I heaped praise on Born Digital and declared that this “fine early history of this generation serves as a starting point for any conversation about how to mentor the children of the Web.” I still recommend highly to others today. I’m going to be a bit more critical of their new book, Interop, but I assure you that it is a text you absolutely must have on your shelf if you follow digital policy debates. It’s a supremely balanced treatment of a complicated and sometimes quite contentious set of information policy issues.

In the end, however, I am concerned about the open-ended nature of the standard that Palfrey and Gasser develop to determine when government should intervene to manage or mandate interoperability between or among information systems. I’ll push back against their amorphous theory of “optimal interoperability” and offer an alternative framework that suggests patience, humility, and openness to ongoing marketplace experimentation as the primary public policy virtues that lawmakers should instead embrace. Continue reading →

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What Kinds of Content Would a Selfish, Unregulated Cable Monopolist Block?

by on May 26, 2012 · 135 comments

Tim Lee and I are narrowing in on our core disagreement (or, at any rate, one of them) with respect to cable broadband regulation. I argued that certain unpopular price discrimination techniques, such as broadband caps, have efficiency rationales. After some apparent talking past each other, Tim has clarified that he agrees with my argument as far as it goes, but his real concern is that cable companies will prevent new forms of content from emerging.

Internet video isn’t just a lower-cost source for the same kind of video content you can get from Comcast. Internet video has the potential to offer totally new kinds of video content that wouldn’t be available on Comcast at any price.

As Tim put it in a comment on my last post,

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Lafayette Muni: Phone, Cable and Internet at Only $45,000 a Day

by on May 25, 2012 · 1 comment

Lafayette, La., like a number of U.S. municipalities, is facing a recession-driven budget crunch, largely due to health care and retirement costs. Unlike most municipalities, however, Lafayette faces a $140-million reckoning in the form a municipal fiber to the home system.

After an auditor’s report raised some flags about the extent city’s been dipping into its reserve savings, Lorrie Toups, Lafayette Consolidated Government’s chief financial officer said $5 million in reductions might be needed to maintain a status quo budget.

This might not be so bad save for the loans that start to come due in 2013 on Lafayette municipal FTTH system, which, according to the auditor’s report, is costing the city of Lafayette $45,000 a day. Thus far, the city has issued the full $125 million in bonds authorized for construction and operation of LUS Fiber. In addition, LUS Fiber has borrowed $15 million from its parent, Lafayette Utilities System, the city’s municipally-owned water and power utility. (One reason LUS is so flush is that in 2009 it received $11.6 million as part of the Obama stimulus, ostensibly to fund a smart grid electricity system.)

Andrew Moylan at the National Taxpayers Union picked up the item from the Lafayette Advertiser:

In sum, LUS Fiber is losing boatloads of money and exacerbating an already-difficult budget situation in the area. There is a silver lining though! According to LUS’s own numbers, the project might break even by the time 2014 or 2015 roll around. Or maybe not…you know, whatever.

The Advertiser reports that Toups defended LUS Fiber as a start-up enterprise that “budgeted for losses and expected to incur them in its early years.”

That’s true–to an extent. LUS launched in 2009, and is only half-way through its fourth year of operation. The original feasibility report on the Lafayette FTTH system, produced by CCG Consulting in 2004, projected net losses of $7.1 million and $4.9 million in years two and three of operation. The recent audit, however, showed LUS Fiber ended the 2010 fiscal year, its second year of operation, with a net loss of $12.3 million. In 2011, its third year, LUS Fiber reported a loss of $16.5 million–more than three times the deficit projected in the business plan.

Of course, this is exactly what I warned about when I analyzed the CCG plan back in 2005.

Lafayette is now in the running to be the country’s biggest municipal broadband failure–a fact made worse its diving in headfirst despite the documented financial messes of those cities that went before it.

 

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