January 17, 2006

Would we, as a society, want a situation in which Fedex owns the road system and could refuse to allow UPS (or, for that matter, the Post Office) to use its roads to make their deliveries or, using a less heavy-handed competitive strategy, charge these other shipping companies arbitrary fees for the ability to use the passing lane when traffic gets bogged down in the slow lane (as telco CFOs and regulators have long known, in industries so heavily weighted toward fixed costs, virtually all fees are pretty arbitrary)?

To extend the analog a bit, would it be good public policy to allow Fedex to not only own the roads, but also to merge with Wal-Mart, which would add the element of vertical integration in the form of substantial market power in retail products and services?

To be accurate, this analogy should actually have two road systems (to some this would seem unnecessarily expensive and redundant, but it’s where we’re starting from today). One would be owned by Fedex/Wal-Mart, the other by UPS, which might merge with Target…a vertically integrated, capital intensive, high-barrier-to-entry duopoly market structure.

In some ways this world would be appealing. We’d probably have two entities with stable and relatively controllable (through their market power) costs, revenues and margins. They’d no doubt compete to some degree, but neither would be likely to aggressively innovate. Why take the risk, when Wall Street will reward solid predictable cash flow growth and may move its investments elsewhere if that stability begins to appear threatened?

It also seems likely that both entities would do what they can (and, with their market power, they could probably do quite a lot) to nip in the bud innovative technologies, products, services and entities that pose a threat to the financial health and stability of their relatively predictable duopoly market structure. Their investors would and should expect no less of them.

That could make these two entities powerful gatekeepers in terms of technical and economic innovation, perhaps increasingly so over time.

As a society, we need to ask ourselves if having a pair of cable-telco “innovation gatekeepers” is a good idea. Maybe it is and maybe it isn’t. Today, the context in which we make that decision is an increasingly competitive global economy, where a mix of different economic and broadband policy models are being pursued, and where we face serious and chronic economic, social and political problems. If we end up choosing a competitively weak model, we do so at considerable risk.

I’m reminded of the old saying “what’s good for General Motors is good for the country.” Maybe what’s best for Verizon, Comcast, AT&T and Time Warner really is best for the country. But I don’t think we should accept this on faith, just as we shouldn’t dismiss it on faith.

If the next-generation broadband Internet is as important as many of us believe, there’s too much at stake to leave the choice of policy models to politics-as-usual…especially since, as recent scandals suggest, politics-as-usual appears to have sunk to new lows in its ability to serve (or even consider) the public interest.

Rather than pass any new legislation, I’d like to see federal and state governments sponsor more broadband policy-related research and encourage real-world experimentation aimed at understanding and comparing different models. Together, this experimentation and research can provide fuel for fact-based debates that clear away the confusion generated by simplistic arguments and politically motivated claims (on all sides), and unhelpful analogies (such as Smith’s). As I’ve said before, that’s the kind of collective decision-making process I like to call IP Democracy.

Update: I just read Cynthia’s post on News Corp/DirecTV’s WiMAX plans, and since its relevant to this post, thought I’d include a quick comment. If it unfolds as some are predicting, the News Corp. move would change my duopoly reference to a “tri-opoly” (which may not be a word), which would arguably exhibit a wider range of competitive and innovative behavior than a duopoly (especially with Rupert Murdoch running the show). On the other hand, it appears to underscore my point about the significance of vertical integration as a source of exclusionary market power, especially when combined with high barriers to entry. Though News Corp. might be relatively late to the broadband network business in comparison to cable and telco competitors, it would have most of these competitors trumped by a wide margin when it comes to vertical integration with content and (with its recent acquisitions) web services.