Sometimes a question can send you back to first principles. Yesterday I heard one, and it kept me awake last night while I pondered it.
The question was asked by a Commissioner at the mobile wholesale hearing. It went like this. “The mobile sector has seen the most wonderful progress in the last twenty years. The landline side is in relative decline. Yet you say we should apply more of the approach we adopted for ensuring landline competition worked for mobile. Can you explain why? Is that not a contradiction?”
The question is fiendishly difficult to answer, because it embedded a false premise, which needs to be brought to light. The premise is that the degree of regulation has something innate to do with holding back technological progress, as in less regulation=more progress, hence more regulation= less progress.
We need to keep constantly before us why we regulate: to constrain significant market power.
It ought to be a matter of complete indifference to regulators whether the industry is composed of 3, 7 or 207 players. It also ought to be a matter of indifference to us whether the industry is divided into retail and wholesale niches, or any number layers. As regulators we should be concerned with whether market power exists, if it is significant, and what can be done to constrain it.
The foundational conditions of the telecoms markets are legal privileges: rights to spectrum, to set up towers, to dig up streets, to cut trees, to emplace ducts, and put up poles. So it is hard to figure how much “interference” is right when the whole industry depends on previous legal privileges. It is not as if it evolved from time immemorial by natural selection. It is a techno-legal artifact of recent invention. Hence when economists speak of the market-distorting effects of regulation they always assume away the utterly artificial nature of the construct whose privileges they are upholding.
Market power is easy to exercise when you control every condition of the competitors’ businesses.
The first part of the answer to this difficult question is that a market can be effectively regulated for market power independently of the state of technology of that market. Suppose the CRTC regulated canal tolls, bridge tolls, and water rates. The issue would not be whether regulation was holding up technological progress in these 18th and 19th century technologies, it would be whether the market power of the owners of these facilities was being effectively constrained.
The appropriateness of transferring a scheme of regulation of one market to another depends on the effectiveness of the scheme in constraining market power, and not so much the underlying technologies. As long as there are control points, from which market power can be exercised, one scheme may work better at constraining them than another, and within broad limits, the scheme may be more or less effective, independent of the technologies being regulated.
There is another deeper reason why we should think of constraining market power in carrier industries.
The essential fact is that carrier industries do not initiate technological progress. They buy technology from network suppliers (Lucent,e.g.) and from terminal manufacturers (Apple, Samsung, etc). It so happens that the miniaturization of computer devices, coupled with radio technologies, gave rise to the mobile phone industry. Accordingly, regulation of carrier industries does not impede technological progress because they do not cause it. On the other hand, and in many cases, carriers can prevent it. Market power again.
This was the point made by Eliott Noss of Tucows yesterday. Internet service providers such as his capture subscribers and serve them more efficiently than carriers do. That is why a reseller survives. Tucows said it was not interested in climbing “the ladder of investment” by trying to become a carrier. Let carriers be carriers, let us be service providers, was what he was saying.
Carriers are not sources of technological progress, they are adapters. They have different businesses than terminal manufacturers. Computerization has had much greater effects in mobile than in landline technologies, granted. But constraining market power in each sector is the issue, and one sector has been much more effectively regulated than the other, to the consumer’s benefit.
Seeing how long it took me to unpack the question and try an answer, has only increased my respect for those artists who can respond fast and deftly to Commission questions
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“The ladder of investment”, is another false idea which lumbers about through the desert of ideas in telecoms. It too embeds a false idea of how the industry should be organized. I will take it on another time.