Why Telecom Policy So Often "Gets it Wrong"

Telecom and Internet regulators often create policies that have effects opposite of what they intended, said Dr. George Ford, Phoenix Center chief economist, from the center stage at the recent PTC’19 conference.

“Modern policy making is plagued by notions about competition,” he said. 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.

If you ask the FCC how many more competitors they want, the answer always is “one more,” Ford quipped. But the agency also wants lower prices. “Policymakers often call for aggressive price competition, not realizing that doing so will, in turn, reduce the number of sellers, which they then lament,” he said.

Long term, lower prices and more competitors are mutually exclusive in any capital-intensive business, so the normal expected outcome is just a few competitors, Ford said.

“We may not like that outcome, but it is economically-driven and not some failure of public policy,” said Ford. 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.

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

When he first joined the staff of the Federal Communications Commission out of graduate school, the agency "would have been thrilled" if told policy could help create two competitors in the local telecom business, said Ford. "We'd  have packed up and gone home," said Ford.

The other big systemic problem is that policy debates often focus on desired outcomes rather than construction of policies to achieve those goals. “This confusion over ideas and policies is endemic to nearly all modern policy debates,” said Ford, pointing to network neutrality as a prime example.

An “open Internet” is an idea, not a policy; an outcome, not procedures to achieve that goal, he said. The recent net neutrality debate, which confused the two, lead to policies that were internally contradictory.

“No blocking” of lawful content is a Title I concept; common carrier regulation a Title II approach. Title I “no blocking”  means zero price, but all Title II services require some non-zero price. It is incoherent.

At the same time, the network neutrality rules imposed prices (set at zero) but also banned tariffs, which meant there was no procedural way to challenge the specifics of the rules.

So, it was not the idea of an “open Internet” that was the problem, it was the actual implementation of it that was problematic, said Ford.

 

Policies to promote broadband deployment suffer from similar problems. “I’ve seen little evidence of effective policy in this space,” he said, and incentives are the issue.

“Policymakers and advocates want more broadband because they believe it provides positive externalities—that is, social benefits that arise outside of the individual transactions,” Ford notred. “Put simply, if I use broadband, other people benefit.”

“But, externalities, by definition, are not captured by sellers or buyers, so they neither affect the supply or demand of broadband services,” he said.

Either firms must be incentivized, perhaps through subsidies, to increase supply or reduce prices, or buyers may be subsidized directly to increase effective demand, said Ford.

Most proposals, mandating zero pricing, prohibiting zero rating or outlawing different quality of service levels, are counterproductive, Ford said.

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.

The net neutrality argument originated from notions about payola, where radio stations would play music because of monetary payments. They would play what they got paid for. That is what people tend to think, Ford says.

In grocery stores, product suppliers often pay for placement on shelves. But those are examples of scarcity. You can only play one song at a time. The internet does not have that kind of scarcity component. Artificial scarcity does not work. Networks do not disable themselves at a standard level so they can upsell a faster product.

Policymakers sometimes also focus on ways to encourage the fastest-possible internet access speeds. But networks are in the business of selling a product, Ford said. “Everybody does not want a 10-gig or 1-gig service.”

People only buy what they believe has value, so over-investment, with business models that are not sustainable can happen. A lot of people argue everybody should have a gig, but where offered, most do not buy it, says Ford.

“So 75 percent of people in the past bought a 6-Mbps connection when they could have bought much-faster service,” he noted.

Or consider the matter of unbundled sales of phones and service contracts. In the past, consumers would sign two-year contracts and then got deeply-discounted phones. Regulators thought that unfair and anti-competitive.

So was the end of mobile phone contracts pro-consumer? It is not anti-competitive to allow people to buy a phone for $200, instead of $800, in exchange for signing a two-year contract, Ford says.

You can outlaw such tying of service to phone subsidies, but the policy solves nothing. It does not improve consumer welfare.