Tim Wu Writes Incredibly Important Paper on Wireless Networks

Tim Wu, a brilliant scholar who combines an understanding of law, technology and economics to his writing, has written an incredibly important paper on wireless networks for the New America Wireless Future Program. You can download it here.

But Tim has done more than write a brilliant paper about why we need network attachment rules and network neutrality rules for wireless networks. He has — by accident or design — put his finger on the critical issue of public policy of our time. Do we regulate to increase public welfare, or do we only regulate to cure “market failure”?

What the paper is about, why it’s important, and what the opposition to it tells about the state of public policy these days, below….

Briefly, Wu demonstrates that the refusal to require wireless companies to allow subscribers to attach devices to their networks — in the way we have required telcos and (to a lesser extent) cable cos to permit “foreign attachments” to their networks — has driven up cost of equipment, crippled the availability of new technologies, and generally sucked all around from an economic and social perspective. Wu meticulously describes how the attachment right developed in the telco world (he doesn’t touch on cable, where it is limited mostly to set top boxes and other navigation devices). The list of innovations made possible by the network attachment rule (and the protection of the transmissions by common carriage or, as we now call it, network neutrality) include the fax machine, the modem (which made the widespread adoption of the internet possible) and cordless phones. More importantly, the network attachment and network neutrality rules fostered a culture in which edge innovation became possible. Before the Cartefone case, few folks bothered to try to invest in developing equipment that used the phone system. Why bother? But once it became possible, then a whole new sector of our economy sprang into being.

Wu then makes same case for how the refusal to mandate network neutrality in the wireless space has crippled the development of internet services available wirelessly. He provides a catalogue of technologies crippled or prevented from coming to market at all because wireless operators demand these limitations to maintain control, protect profit centers, and extract additional money from the equipment or service providers themselves. in other words, despite the fact that wireless is a “competitive” market (five providers in most markets), none of the networks chooses to add value by permitting unlimited attachments.

Wu then concludes with a set of recommendations that include extending the Cartefone/network attachments principle to wireless, requiring network neutrality for wireless networks, and enhancing mandatory disclosures about limitations. As Wu observers, the current situation is costing consumers billions extra in equipment and in the inability to access certain types of services (except at a premium extracted by the wireless carriers solely due to their ability to control access). This is no “hypothetical speculation” or “solution in search of a problem.” Wu provides real evidence of this loss of consumer welfare.

In other words, the paper lays out a strong case that adopting rules that created trillions of dollars in

Unsurprisingly, Wu’s paper has generated pushback from anticipated quarters, i.e. the industry and the Libertarian/anti-reg crowd. While not making a serious attempt to argue against Wu’s catalog of exclusions and crippled services (they are, after all, fairly well established), what they argue is that it isn’t a problem because this isn’t “market failure.”

Sure, the network attachment rules and network neutrality imposed as a consequence of Cartefone and the FCC’s Computer proceedings produced tons of innovation, but it was only necessary because the phone system at that time was a regulated monopoly with guaranteed rate of return (bad for innovation — makes the monopolist lazy). Now that we have competition (3-5 providers in most markets) there is no need for regulation. We should let the market in all its magnificence decide things and not try to “pick winners.”

In other words, yes we are losing potentially billions in consumer welfare and in other sectors of our economy. Yes we are preventing one form of innovation. But it’s o.k., because it is better for everyone when the market functions without interference and we ar eprmoting different types of innovation by facilitating direct competition between the various network operators.

And it is therefore time to admit this isn’t an argument about economics. This is about broader issues about the purpose of government. Do we still believe in a New Deal-type ideal of using regulatory power to improve the lives of all citizens, recognizng that this limits the ability of some to engage in certain kinds of wealth-maximizing economic activity (although in many cases it has proven that even those regulated end up making more money than they would in a balkanized, unregulated world)? Or do we wish to return to the world of the Gilded Age where we uncap the ability of people to maximize their wealth by any means, recognizing that this creates a huge gap between rich and poor and may very well stunt the economic development of the country as a whole?

Because the Wu paper does not deal in hypotheticals. It does not say that failure to impose network attachment rules and network neutrality “might” have a crippling impact on technological development and deployment of new equipment or services, or “might” splinter the market s that no one can access all goods and services, or “might” result in higher prices for services and equipment. It documents these impacts as existing facts. Nor does the Wu paper propose any untried or novel solutions. To the contrary, Wu argues for adopting the network neutrality and network attachment rules precisely because they have worked so well in the past. These rules demonstrably do not deprive network operators of the ability to manage their networks, innovate or reap incredible (if not monopoly) profits. Indeed, if history as well as economic theory serve as our guide, adoption of these rules will, in the long run, better serve the bottom lines of these companies than letting them continue to balkanize and fracture the wireless communication market into competing fiefdoms each with its own set of services and captive equipment markets.

And the counter argument rests, primarily, not on any assertion about consumer welfare (beyond the general claim that consumers are always better off if government does not regulate), but on a religious principle that only clear and demonstrable market failure can justify government “intevention” in the “market.”

Because those opposing Wu’s paper are right in one particular. What is happening in wireless is not a market failure. It is by objective standards, in many places, only a modestly concetrated market (under accepted anti-trust principles). That the market under these conditions produces a particular set of results is not a failure of the market.

Nor will releasing more spectrum for auction, as urged almost reflexively by the Libertarian crowd, change the underlying dynamic. For one thing, absent significant changes in the way the FCC distributes spectrum licenses by auction, auctioning more spectrum will not produce new competitors.

For years, market enthusiasts have urged ever increasing deregulation by asserting that a competitive market will inevitably produce greater consumer welfare. Tim Wu has now documented that this does not always happen. You can have a functioning and competitive market, as deregulated as one could possibly wish, and end up in a world where the functioning competitive market produces a series decline in consumer welfare. And all it would take to change things is imposing a relatively modest rule designed to foster innovation and economic productivity in additional segments of the supply chain, by expanding the available universe of people who can proiftably and easily innovate and offer services. This rule has worked well in the past, and no one suggests it would work differently here than in the wireline world where it proved so successful.

And the only reason for not imposing this rule is because the market is not failing. This is how the world is meant to work. Because absent demonstrated market failure, there is no justification for regulation, even where it would demonstrably increase consumer welfare and economic productivity overall.

It’s not an economic choice. It’s a policy choice, a politcal choice, and a moral choice. And, for me at least, a rather obvious choice.

Because while we may not have market failure, after reading Tim Wu’s paper, I am certain that we have a failure of policy.

Stay tuned . . . .