Friday, January 25, 2019

Economic Realities, Policy Myths Abound, Says George Ford of Phoenix Center at PTC'19

Telecom and internet regulators often create policies that have effects opposite of what they intended. They want more competition and then create policies that lead to less competition. They want more investment in next-generation networks and produce less. Good intentions produce harmful policies.

Those were some of the themes Dr. George Ford, Phoenix Center chief economist, discussed from the center stage at the recent PTC’19 conference. The point, he said, was that policies on competition, investment, network neutrality, broadband deployment and sponsored data access have had the opposite impact from what was intended, or hoped for.

One example, he noted, is the effect of U.S. net neutrality regulation on capital spending. “Most of the analysis was silly,” he argued. Comparing capital spending from one year to the next several, after the new rules, “is meaningless.”

“The question is what would capital spending have been absent the regulation, which requires the construction of what we call a counterfactual,” Ford says.

Ford is about the the only human being in the communications industry to take seriously the notion of the counterfactual, a concept similar to opportunity cost.

As applied to communications policy, the problem is that claims are made about policies producing an outcome, without the ability to show what might have happened if a different policy choice had been made.

In an investment context, opportunity cost represents the benefits an investor might have reaped by making a different choice.

One clear example is the debate over whether infrastructure investment grew or declined because of network neutrality rules. A counterfactual analysis is always necessary when looking at policy outcomes, in other words.

It is possible that infrastructure investment might have been higher in the absence of net neutrality rules, for example. In principle, such investment could also have been lower, in the absence of the rules.

The same principle applies for analysis of fair use rules, or virtually any other proposed public policy.

Another example is competition policy, which normally takes the form of policymakers desiring “more competitors” in the market. Ford quipped that the desired number of competitors is always “one more.”

“Policy makers often call for aggressive price competition, not realizing that doing so will, in turn, reduce the number of sellers, which they then lament,” Ford says. Ironically, “where a small number of firms exist, that outcome may be the result of aggressive competition, rather than an indicator of lack of aggressive competition,” Ford notes.

The other obvious problem is the capital intensity of communications access networks. That limits the number of viable firms. In most countries, “one” is believed to the viable number of fixed access networks, leaving wholesale as the only option to increase the number of retail providers. Some markets, such as the United States and Canada, have two and sometimes three fixed network competitors in the consumer markets, which is a bit of an anomaly, globally.

The point, Ford says, is that a small number of suppliers in fixed networks is the result of economic conditions, not a failure of policy. “If only two firms can profitably offer the service, then demanding more is wishful thinking and prone to produce bad policy,” he says.

“In my experience, ‘promoting competition’ is unlikely to have a material effect on actual competition.  In fact, it often has the opposite effect,” says Ford.

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