Running the Internet Like the Post Office
Once upon a time there was an economic service central to growth and prosperity, social cohesion, and innovation. With the benefit of wisdom and foresight, government got the service going and it grew rapidly across the country. It worked rain or shine. It served as a way for far-flung families to stay connected. It was a very easy way to pay the bills. Artists could share their poems, watercolors, novels and photographs. Businesses relied on it for timely communication within companies, to exchange contracts and other agreements with suppliers, and to ship products to customers. Households used it to shop, buying in the convenience of their homes and, especially, avoiding the chaos of shops at the holidays.
It was so important that the government kept it in a firm grip. Everyone paid the same price; well almost – businesses negotiated a lower rate. Service quality was strictly mandated to ensure fairness – everyone got the same service on the same days for the same price. And over time, everybody came to despise the U.S. mail.
The massive inefficiencies of mandated services and fixed prices led to bad service and choked-off promise. Of course, it also provided a wide-open opportunity for new entrants in business package and overnight delivery. A sophisticated pricing system for size, weight, delicacy, and timeliness delivered strong competition for residential dollars. Eventually, the government was forced to relinquish the iron controls and allow flexibility in pricing and service to businesses and households. The mandated 6-day delivery schedule to every doorstep survives only through a government-provided monopoly on first class mail.
Sound familiar? If so, then look out. The Federal Communications Commission seems to have the same design for the internet. Despite no evidence of any real problem, it is set to impose “network neutrality” – whose key features are mandated one-size-fits-all service and prices. Almost certainly, this approach will lead to inefficiencies and a diminished internet. Texas Senator Kay Bailey Hutchison is right to lead the charge against this policy error.
This is an important problem because the key to the future will be delivering more network capacity. Entrepreneurs will need a robust network to deliver new content to global consumers. The demand for network capacity (bandwidth) is increasing sharply.
The impact will be widespread. If network upgrades match capacity with digital innovation, perpetual Schumpeterian competition in a U.S.-based entrepreneurial class will build a comparative advantage in the knowledge economy to continuously penetrate new markets, identify new market niches, and deliver innovative products to global consumers. U.S. manufacturers of information technology products will build on their existing technical superiority to churn out a steady supply of hardware, underpinning consumers and digital entrepreneurs. This robust manufacturing sector works hand-in-hand with a robust pool of nearby research and development that, in turn, generates an ongoing stream of new intellectual property and propels an aspiration for education in the United States and international mobility for the elite abroad.
But if there is no incentive for network upgrades the global market for innovative digital products suddenly starts to look like a bricks and mortar business model. Network congestion or security limitations raise the “transport costs” for U.S. entrepreneurs trying to reach customer markets. To compete, they must shift their “factories” abroad to be closer to profitable markets. To remain flexible, they begin to work more closely with hardware sources in these locations, which become alternative magnets for research and development budgets, innovating engineers, and intellectual property advances. In short, just as with the mail, others will seize the opportunity. But they will not be in the United States.
Some observers express concern over the potential market power of telecommunications and cable companies. With their existing connections to residential homes, the traditional players are portrayed as a threat to competition. This is a sensible view of history and there is room for debate on the present. But the recent experience of market expansion evidenced by the rapid rise of satellite and wireless communications and rapid technical advances such as the expanding capacity of a single copper wire, suggest that the market that matters – the market five or ten years from now – will be fiercely competitive. And given a choice between regulators and the market, it is better to bet on the market.
Market forces – appropriately policed for abusive monopoly practices – can handle the pricing and delivery for an enormous variety of content providers to consumer market niches.