On the 150th anniversary of the first telephone call, John Haigh, Nancy Rose, and Jonathan Sallet reflect on lessons from the history of telecommunications competition that inform competition policies aimed at digital platforms today.
March 10 is the 150th anniversary of the first telephone call, made by Alexander Graham Bell in Boston. The telephone seems like an ancient technology today. It’s easy to go online to find funny videos of young people trying to figure out how to use a rotary phone (hint: the thing in the middle turns).
But while the technology of communications has changed, core economic principles have not. The lessons of telecom regulation provide lessons for the enforcement and creation of new digital-platform competition policies around the world. Not all the lessons stemmed from successes, but they all should be remembered.
1. Beware of monopolies extolling monopoly.
Monopolies always seem to be such solipsistic souls. They come to competition authorities, regulators and politicians focused only on what they do to innovate and serve consumers. But too often they fail to confront the core idea that it is competition, not the insulated decision-making of incumbents protected from challenge, that best provides lower prices, higher quality and more innovation.
The old AT&T monopoly was frank about this. In 1973, AT&T’s CEO John deButts spoke out against competition, extolling the achievements of the regulated AT&T monopoly: quality, dependability ad innovation arising from reliance on Bell companies that were “each solely privileged to purvery its services within its territory but all in turn strictly accountable thorugh regulation to the public they serve.” Noting the push for new entry, DeButts noted the “not altogether happy experience of competition” and called for “a moratorium on further experiments in economics” that promoted competition.
Today, we hear talk of national champions and promised domestic investments. But the underlying current of the narrative is the same: Messy competition isn’t as tangible or valuable as the incumbent with which politicians can make a deal (and invite to a ribbon-cutting ceremony). That’s as wrong now as it was fifty years ago.
2. Lowering barriers to entry to encourage new entry aligns economic incentives with the goals of public policy.
There’s a rich dialogue comparing, contrasting, and sometimes synthesizing Kenneth Arrow’s view that monpolists have less incentive to innovate and Joseph Schumpeter’s emphasis on the ability of large firms to innovate and be challenged by upstarts. But where they come together is here: There can be no creative destruction if barriers to entry bar new competition and innovation. That’s why the focus on barriers to entry is so important. With new entrants able to challenge incumbents, the marketplace can do work that would otherwise be left to competition enforcers and regulators.
Of course, regulation is oft-criticized when it risks regulatory capture. But the promise of lower entry barriers is that, once markets are opened, there won’t be the same regulatory oversight to be captured. When public policy is aligned with economic incentives, markets and consumers are better off.
Ask economists to name regulation that worked and the invariable answer is this: number portability, or the ability of a customers to change carriers without giving up their phone numbers. It’s a classic example of reducing switching costs, and it works. When customers can easily switch, prices fall, and in the case of mobile phones, technological advance occurred and quality of service improved. When the break-up of AT&T required that consumers be able to reach competitive long-distance carriers (like MCI and Sprint) as easily as they could connect to AT&T, competitors gained market share and prices fell.
The important policy point here is that barriers to entry were lowered without a necessary finding that the incumbents had engaged in anticompetitive conduct. To our knowledge, there was never a finding that telecommunications companies had adopted a conscious strategy of barring number portability. But that didn’t matter for the policy to be successful.
3. Restraining vertical integration can provide breathing space for innovation.
The Federal Communication Commission’s 1968 Carterfone order threatened the AT&T monopoly because it allowed consumers to buy telephones from other companies and plug them into the AT&T network. Its subsequent Computer Inquiries orders aimed to maintain the evolution of data services free from AT&T’s control.
There’s a mix here:Carterfone didn’t prohibit AT&T from competing in the sale of telephones and the Computer Inquiries struggled with the terms on which AT&T might provide proto-internet services, including establishing the early—and long contested—boundary between telecommunications and data-driven information services on which the fate of net neutality in the United States rose and fell. Nevertheless, the principle remains sound: Regulation should guard against the ability of monopolies to use their power in a distribution or input market to harm competition in related markets. Various prohibitions on self-preferencing are designed for this purpose. Indeed, competition increased and equipment prices fell in the wake of Carterfone and the AT&T breakup.
To be sure, the nuances and economics of vertical integration are complex. When a company is regulated in the platform market, however, it is straightforward: allowing them to use monopoly power in that platform market to control adjacent markets (like Apple controlling the apps market) is bad news. And that is why Carterphone was such a clear-cut economic winner.
4. Sharing isn’t just for kids.
Children don’t like to share. Neither do monopolies. And there’s logic for the latter (if less so for the former). Incentives to innovate require the ability to be rewarded for innovation. Think copyright and other forms of intellectual property.
But there are times when public policy can—and should—require sharing in a manner that benefits competition. The Telecommunications Act of 1996 required that all telecommunications companies interconnect with each other. That was the sharing of networks and scale—a new entrant could provide service to customers without having to duplicate an entire incumbent network. And there’s evidence that it worked: interconnection increased entry and consumer welfare.
The issue is important today. Firms must believe they can benefit from their large capital investments, or they won’t invest and innovate and don’t achieve scale. But scale protected by moats and monopolistic profits stifles innovation. By controlling access to users, today’s digital platforms can fuse network effects and scale efficiencies in a manner that makes new entry difficult. When the European Union Digital Markets Act orders a Big Tech gatekeeper to share data with competitors so they can improve the quality of rival services, it seeks to share scale for the benefit of competition.
5. Monopolies can wait out enforcers.
The Telecommunications Act of 1996 that de-monopolized local markets is often described as a failure or, at best, mixed success. One can quarrel with that view. But whatever the verdict, the logic of the matter lies in plain sight. Monopolies have no economic incentive to give up monopoly profits. That means that successful competition enforcement must match the resiliency and resolve of the monopolist being regulated.
This is a big ask and it depends on people and institutions, not just economic principles. What’s politically important today may not be so important tomorrow. Government employees take private-sector jobs. Institutions can be weakened or undermined.
What to do? Louis Brandeis, age 19 when the first telephone call was made, believed in the power of institutions to carry on the hard work of competition enforcement. Brandeis thought the answer to the economic and social problems exposed by populism was to construct institutions that could solve problems rather than indulging any populist impulse to tear down instruments of governance. We need not be naïve about the challenges of holding the reins on the wild-horse of monopoly, as depicted in stone outside the offices of the Federal Trade Commission. But we cannot achieve competition in a world beset by monopoly power without strength and staying power.
Authors’ Note: The authors thank Rebecca Collins and Sam Yu for their research assistance and feedback.
Authors’ Disclosures: Nancy Rose is currently consulting as neutral expert for Judge James Donato in the Epic Games v. Google litigation. As a special assistant attorney general for the state of Colorado, Jonathan Sallet lead the bipartisan state coalition adverse to Google in the Google Search case (alongside the DOJ case against Google Search). John Haigh reports no potential conflicts of interest. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
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