Thursday, March 21, 2002

What's good for the Internet? Doc asked if Tauzen-Dingell was good for the Internet. I think that innovation and efficiency are good for the Internet, and as Tauzen-Dingell promotes both, I'd argue it's also good for everyone's favorite network-of-networks.

What's good for competitors is not always good for customers. For example, if there is some minimum efficient scale of production, marginal competitors would like to keep dominant players down, but end consumers might prefer the lower prices offered by an oligopoly over high-priced choice. Or they might not.

The local loop is a natural monopoly. TA96 made incumbent Bell monopolists offer access to the local loop for marginal cost plus a little (read the gory details here). CLECs (competitive local exchange carriers) took advantage of this by offering end consumers stuff more cheaply. Note that they did not invest in upgrading equipment, they just freeloaded of the Bell's sunk costs, AND they picked the best customers ("cream skimming") while telcos had to serve everybody (through Universal Access provisions). Some champion the CLECs as being heroes of the people, but all they did was remove the incumbent's incentive to upgrade (which it had, even as a monopolist). CLECs themselves never had any incentive to invest in equipment, so sensibly never did. Removing the incentive to invest and upgrade is bad for innovation, and therefore bad for the Internet.

A more arcane point is that CLECs may have been less efficient than the incumbent monopolists. As the Bells priced at monopoly price (or even average variable cost), CLECs could undercut them by pricing at *their* marginal cost, even if that was higher than the incumbent's marginal cost. A system that funds inefficient entry is wasting money, and thus, inefficient. This is bad for innovation, and therefore bad for the Internet. But this point is boring, let's move to something jucier.

Taxes are bad for efficiency (create dead weight loss), and therefore bad for efficiency. "Universal Access" is essentially a tax on long distance that subsidizes local calls. It's grown over the years and currently burns 40 cents for every dollar it raises (incumbent monopoly pricing burns 11 cents for every dollar it raises, income tax burns about 25 cents for every dollar it raises). This is clearly bad, and is one of the reasons CLECs found cream-skimming to be profitable. TA96 called for Universal Service of broadband to be extended to schools. I'm not sure whether Doc thinks this is good for the Internet or not. It's certainly wasteful, but it's important kids have Internet access (and it's worked pretty well, particularly in the poorest schools). This is the sort of decision society needs to make for itself.

What is absolutely bad for the Internet is vetoes on innovation. Any kind of a tax on broadband provision eliminates marginal areas from receiving it, costing the entire consumer surplus of those populations (which will be huge). Digital television has vetoed non-digital TV use of that spectrum, eliminating services we haven't even dreamt of yet. The satellite industry has paid Congress for a clause stipulating that their spectrum will never be allocated by auctions, vetoing all other uses for that slice of real estate (and robbing the country of billions in auction fees). All of these are bad for the Internet, and innovation. Tauzen-Dingell does none of these things. And while some overheated commentary argues telcos will just block competitors from using their networks, they're just wrong. Telcos will simply charge competitors the monopoly price, forcing efficient entry, while reducing incentive to innovate by less than alternative pricing schemes.

Tauzen-Dingell removes the quid pro nihilus regulations TA96 offered CLECs, and lets local incumbent monopolies act like rational local incumbent monopolies. Is this ideal? No. But it's better than making them act like local incumbent monopolies with no incentive to upgrade equipment.

And how is the Internet doing through all of this? 90% broadband growth last year. Fairly stiff competition between the equally hated cable company and telco. CLECs are toast (but they did no infrastructure investment anyway). All in the face of fairly flat dial-up growth. I don't think this is bad, but Bruce Kushnick would disagree. But then again, he thinks there isn't enough fibre optic in the ground (even though 98% of what exists is unlit), doesn't see cable modems as a DSL competitor, and thinks CLECs should be supported, no matter how little they do to improve the infrastructure the Internet runs on. (He's also partially funded by the Morino Institute, that I once did a little work for.)
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