Today, the House Energy and Commerce Committee concludes another round of public commenting on its effort to update (0) the Communications Act of 1934. The focus of this round was what role Congress and the FCC should play in the market for interconnection of networks (1). The Committee’s white paper notes, “The historic, ‘natural’ monopoly that justified special rules to govern ILECs has faded in the years since 1996; there is inarguably more competition in the voice market today. Yet the rules remain in place as written nearly two decades ago…” Indeed as the US finds itself in the midst of a period of profound and rapid technological change, it is not a good time to impose regulation. In their comments to the committee, AEI scholars offer various thoughts and perspectives on the issue.
Director of AEI’s Center for Internet, Communications, and Technology Policy Jeffrey Eisenach reiterates (2) points from his letter (3) with 14 other economists to Tom Wheeler upon his confirmation to the chairmanship of the FCC. Eisenach notes that the serious threat to continued innovation and dynamism in the communications sector is the potential for public-utility style regulation to be imposed on IP networks in the form of mandatory interconnection requirements.
Since its inception in the 1990s, the modern commercial Internet has functioned remarkably well without mandatory interconnection requirements. There are virtually no significant instances of traffic being blocked or delayed as a result of failures to interconnect. At least equally important, the peering and transit regime has proved to be responsive to transforming market structures and technological conditions through continuous, transformational change.
The success of the Internet’s voluntary interconnection regime stands in stark contrast to the distortionary, inflexible regulatory regimes that have governed interconnection in the POTS world. Simply put, regulators lack both the information necessary to set efficient interconnection prices and the flexibility to adjust them in the face of changing market conditions, leading to inefficient market structures, misallocated investment, arbitrage schemes, and regulatory gamesmanship.
Should even “weak form” interconnection mandates spill over into the rest of the Internet ecosystem, this would certainly distort market outcomes and limit innovation. Moreover, since the Internet is global in scope and scale, any interconnection mandate imposed by the US would invite involvement by international regulators – many of whom would surely welcome a US initiative to regulate IP networks.
Both economic theory and a large body of real-world experience demonstrate that the potential costs of prophylactic imposition of mandatory IP interconnection are very high, while the benefits are likely non-existent.
In his comments, Richard Bennett encourages lawmakers and regulators to think about the future when redesigning communications policies. He states, “As the voice, video, broadband, and mobile networks converge to a common infrastructure, public policy should facilitate the use of common physical facilities. Policy should also encourage growth in the number and quality of interconnection facilities. The best way to ensure such progress is to decouple universal service subsidies from interconnection agreements.”
Daniel Lyons and Gus Hurwitz joined scholars from the Free State Foundation in their comments, highlighting the importance of flexibility and responsiveness in interconnection markets. They argue that interconnection among IP networks is very different and more technical than the interconnection between ILECs that are governed by the 1996 Act. It’s not simply a matter of physically connecting two networks. The IP Interconnection market is competitive, dynamic, and evolving. One of the keys to the Internet’s success has been networks’ ability to modify interconnection terms through voluntary negotiations in response to the changing demands of consumers and content/application providers.
There is a role for a regulator to oversee interconnection going forward because of the possibility of strategic holdouts and the positive externalities of greater interconnection. But intervention should be limited to circumstances in which the regulator finds that a specific interconnection practice creates substantial and non-transitory consumer harm, and when markets are incapable of solving the problem. Intervention should also be limited to arbitration between the parties (perhaps a last-best-offer, baseball-style arbitration model), perhaps preceded by mandatory mediation. This approach limits the regulator’s discretion when intervening and places most of the responsibility on the private parties to solve their impasse.
Bret Swanson reiterates findings from his Digital Dynamism report (4). A new, horizontal, hyperconnected ecosystem has emerged. It is characterized by large investments, rapid innovation, and extreme product differentiation. Firms like Google, Microsoft, Amazon, Apple, Facebook, and Netflix are now major Internet infrastructure providers in the form of massive data centers, fiber networks, content delivery systems, cloud computing clusters, e-commerce and entertainment hubs, network protocols and software, and, in Google’s case, fiber optic access networks.
In my submission, I provide two inspiring stories of deregulation from Denmark and review the findings of a paper by my colleagues Anders Henten and Morten Falch. In October 2011 the new center-left government, upon coming into office, dismantled the telecom regulatory authority NITA (National IT and Telecom Agency) and redeployed it into 4 existing agencies. As my colleagues hypothesize in their paper The Future of Telecom Regulation – The Case of Denmark (5), the changes in the regulatory functions and institutions in Denmark are related to the increasing focus on broadband expansion and decreasing focus on artificially-induced static competition. Rather than see telecommunications as an end in itself with a dedicated regulatory apparatus, the industry is being re-envisioned as an enabling technology for the development of other sectors and industries.
I also discuss the process in Denmark to deregulate the wholesale market. Though Denmark was a first mover in regulating the wholesale market to stimulate the creation of mobile network virtual operators, in 2006 the telecom regulatory and the competition authority deemed the market competitive. It had to win a lawsuit in order to move forward with the effort, and the deregulation came into effect in 2009.
Deregulation means that the telecom authority cannot compel any network operator to engage in the wholesale market, nor can it regulate access or prices. Deputy Director of NITA Finn Petersen remarked (6), “Actually, we are obliged to remove the regulation when the competitive situation demands it. There is no need to regulate something that market forces can take care of.” There have been no complaints to the regulator about the wholesale market since deregulation.