"Somewhere Over the Rainbow:
The Need for Vision in the Deregulation of Communications Markets"
(As Prepared For Delivery)
Good afternoon, and thank you for inviting me to speak with you today. I thank you, not just out of courtesy, but because I am truly glad to be here in the "City That Doesn't Sleep." I love New York. I love the people, the museums, the hustle bustle, the quirky, the off-beat, the food, and more than anything, the theater.
I want to talk to you today about a grand production of another sort being put on by the telecom players out of Washington, D.C. It could be titled "In Search of Competition." In this story, the characters are growing anxious because they have not yet found the town of competition. And, as they stumble around looking for it (using their 1996 Telecom Act map) they are faced with perplexing and scary obstacles. Their lives lack the clarity they once had. We are confused -- because of converging technology, we no longer are sure what regulatory "bucket" to place firms who provide services traditionally provided by separate entities. And the thunder of mergers leave us wondering whether they threaten our arrival to competition or advance the trip in some way. These questions and challenges come faster now than ever before and we are consumed by fear that we will never get to competition.
Anxiety has been defined as the fear of the unknown, and there is nothing so unknown as what these regulatory challenges will be and how they will present themselves. But the challenge for the characters in our play is to keep moving despite our fears. They, we, cannot let our anxiety prevent us from our mission of letting the reins of regulation go. In particular, I am troubled that we will be tempted to hinder firms from organizing themselves or providing services in non-traditional ways simply because we are unfamiliar with these ways -- or because these ways remind us of something we fear, such as that evil character, Ma Bell.
Though we are only in the first act of this play, let me break the fourth wall and share with you my view of what the characters must learn to resolve their conflict and to deal with their anxiety. It is an age-old moral really -- that competition is not a place, not a destination, but a journey. Its rewards are not realized when we arrive there to great fanfare, but are instead enjoyed through the course of the journey. In "wonk" terms, competition is not a static concept, but a dynamic process, and our failure to grasp this is leading to anxiety about deregulation.
Consider many of the fears expressed in recent weeks over telephone mergers. To some, these events seem like a train wreck that will assure we do not get to competition. To many that subscribe to this view, competition is a romantic place where "mom and pop" phone companies flourish, providing new choices to consumers at lower costs. Others are more sanguine about these mergers, for they seem to bring them closer to their vision of competition -- a world where a handful of large vertically integrated companies provide one-stop-shopping for a full range of global communications services. The collective anxiety we see comes from competing tension between these (and other) views about what competition looks like.
The most important thing policymakers can do to quell their fear of the unknown is to come to peace with the fact that competition is a never-ending dynamic. Events along the way are important and must be considered and evaluated for how they impact the competitive process, but we should resist trying to guess, or worse, engineer where the road will take us. The anxiety about how to transport ourselves to the "land of competition" threatens our travels because we are constantly tempted to change course.
This situation reminds me a little of the dilemma Dorothy and Toto faced at the beginning of another of my favorite musicals -- this one from Hollywood rather than Broadway: "The Wizard of Oz." In that movie, as you recall, Dorothy has been whisked away from her family and friends in Kansas by a tornado, only to find herself in the magical land of Oz, in what appears to be a suburb called Munchkinland. When Dorothy asks how she can get home, the Munchkins tell her that her best bet is to travel to Oz to see the wonderful wizard who lives there. But the only directions the munchkins give Dorothy is to "follow the Yellow Brick Road." And so, like those of us charged with transforming highly regulated communications markets into competitive ones, Dorothy sets out to find a place -- home -- via a magical wizard.
What Dorothy discovers is that home is not her house and farm in Kansas. Rather, home can be anywhere. It is less a place and more a state of being or a set of conditions which provide one the safety, support and nurturing one needs to truly develop and grow. We should not forget (if you will allow me to mix metaphors) that, in the words of Luther Vandross, "A house is not a home."
II. If We Only Had A Brain
Viewing competition as a journey, I believe we must enrich our understanding about competition in order to keep "easing down the road" of deregulation, rather than turning down alleys and dead-ends at the slightest fear of going the wrong way. As my contribution to helping enrich our understanding about competition (I play myself in this production of course), let me offer a few observations about the nature of competition.
A. Competition Means Winners and Losers
Let's start with the basics. First, in any truly competitive market, someone must win and others must lose. Losing is not inevitable; a firm may adapt to changing circumstances and thus prevent, or at least postpone, its own demise. But in a competitive environment, the market ultimately punishes those firms that fail to provide value or manage their costs, even if these firms are the richest and most established firms in the industry.
We must accept this fact and avoid the traditional tendency of regulators to protect firms or industry segments in exchange for promised results for consumers. This promotes monopoly and not competition. It simply is not possible to offer every firm a soft landing, yet those that adapt and offer high value to consumers will undoubtedly survive.
If we shield mature industry participants from the pressures of having to adapt to the presence of new entrants, we merely prevent these new entrants from offering customers greater value at a lower price, while simultaneously rewarding incumbents for providing no new value to the economy other than income for armies of lobbyists. More importantly, we short-circuit one of the greatest benefits of the free market -- that which Harvard economist Joseph Schumpeter termed "creative destruction," a process by which firms' self-interested drive to provide new goods, use new methods of production, explore new markets and organize themselves in new ways constantly working to undermine the advantages enjoyed by incumbent firms.
B. Triumph of Free Market Economics
Second, we policymakers should take comfort in the superiority of the free market over economies governed by regulators or central planners. As we approach the new millennium, regulators must remember that this has been characterized as the "American Century," not so much because of America's military might but because of the triumph of American-style free market capitalism over central planning. University of Chicago economist Friedrich Hayek offered one explanation for this triumph. He contended that markets outperform planned economies because they "utilize the knowledge and skill of all members of society to a much greater extent than would be possible in any order created by central direction."
Similarly, in his book "The Innovation Age," Peter Pitsch submits that the true genius of the market, relative to planned economies, is that it is a better "discovery process." That is, the market "effectively conveys new information and creates the incentive to act on it for all participants throughout the economy." This advantage will become increasingly powerful as globalization and the rapid evolution of technology increase economic uncertainties, as well as opportunities. In this constantly accelerating environment, economic rewards will flow ever more quickly and decisively toward those firms and consumers lucky enough to inhabit the freest markets.
In light of the historical and scholarly evidence, I believe we policymakers should learn to err on the side of the market in addressing the many difficult regulatory questions that will be raised as deregulation and competition move forward. That is, when in doubt, I believe we should trust that the market will lead to the most beneficial outcomes -- outcomes that utilize the knowledge and skill of both firms and consumers to a much greater extent than would be possible in any order created by regulation.
C. Regulators Do Not Engineer Competition
Third, we policymakers also should recognize that we do not engineer competition, private actors do. Perhaps out of an understandable desire to pat ourselves on the back for our hard work, we have a tendency to over-credit regulatory action for creating competition. This is just wrong. Regulators can add, revise or eliminate as many policies as they want, and as a general matter, I applaud efforts to eliminate the economic distortions caused by previous regulation. But these efforts will be for naught if firms choose not to act on them. Deregulation creates opportunities for competitors, but it is private firms that create a competitive market. For example, spectrum auctions may have allowed markets to evaluate the worth of wireless licenses, but it is private actors that raise the capital and assume the risk associated with valuing their licenses purchased. Thus as we rely more on markets and competition, we must endeavor to see policy through the eyes of private firms.
D. Beware Level Playing Fields
Fourth, as we policymakers attempt to "get smart" about the realities of promoting competition, deregulation and innovation, we must beware the potential dead-end of "levelling the playing fields." Like the beautiful, poppy fields that lured Dorothy and her traveling companions to sleep in the Wizard of Oz, the constant mantra that we must "level the playing field" threatens to lull regulators into thinking that we are doing the hard work of ceding control to the market when we are actually extending regulatory burdens to new or non-traditional providers of services unnecessarily. We utter this mantra in the name of "competitive fairness," but I question whether there is anything truly competitive about this at all, and, I strongly caution against extending regulations solely on this basis.
Competition is not a game of equally matched players, but of equal potential. Competitors have different mixes of competitive advantages and burdens. It is too simple to focus on a single competitive inequity and then declare the game unfair, without examining the totality of advantages and disadvantages among competitors. Moreover, levelling the playing field when the players do not start from the same place, only institutionalizes the advantage of the stronger, better equipped, experienced players.
Let me be clear: I believe it is entirely appropriate for the Commission to consider the extent to which its decisions will have a distorting effect on the market. We should not lose sight, however, of the fact that we can never avoid all such distortions so long as we regulate the market.
Again, we should recognize that competitive advantage is not always an evil to be stamped out; the market is designed to reward companies for finding and exploiting their competitive advantages over other companies. Government policy should not endeavor to throw all companies and services in a blender and homogenize markets. We must leave room for product and service differentiation or we will not be promoting true quality choices for consumers. Consumers should have a choice of flavors, not several choices that taste the same, concocted by government.
E. Deregulation Should Be Pursued in Its Own Right, Not as a Reward for Competition
Fifth, while policymakers should recognize that deregulation can be critical in allowing private firms to compete more vigorously, as a general matter, we should not withhold deregulation until after competition has matured to some ill-defined level. Again, this approach treats competition as a destination rather than a journey. Even more troubling, this approach suggests that deregulation should not be pursued for its own benefits but only as a reward or inducement for promoting (or coercing) behavior in private markets.
Competition is a dynamic process that serves to allocate resources to their highest and best uses and to promote innovation. Because competition is not static, there will be no point at which competition "arrives" and thus regulators should not justify continued regulation on the notion that such arrival will occur. How will we know when "full competition" has pulled into the driveway? How many competitors is enough? How many customers must these competitors have? In what markets must competitors operate? Is there some magic price that we will deem "competitive"? Will we know it when we see it? I submit that if we condition deregulation on competition, we will never agree on a vision of the latter because this quid pro quo thinking cannot produce a clear signal for when we should disembark from the regulatory train.
Making competition a precondition for deregulation also ignores the fact that continued regulation imposes a direct opportunity cost on the competitive process, one that is difficult to quantify, but equally difficult to ignore. Who knows, for example, how much of an opportunity cost was imposed by early policies designed around having only two wireless competitors in each market? Clearly, many markets are sustaining far more wireless competitors than many regulators would have imagined just a few years ago. I readily concede that regulatory intervention has its place, but we must acknowledge that such intervention distorts the competitive process from seeking economic efficiency. Regulation interjects the regulator between commercial providers and their consumers and thus fundamentally infringes on the key relationships that make markets work. Regulatory intervention also fundamentally affects the risk to capital and skews investment decisions, as it often sours the enthusiasm of investors by introducing new uncertainties.
The "bottom line" for these observations is that there are reasons why we policymakers should pursue deregulation, whether or not we feel we have reached some "competition destination." In short, if we only had a brain, we would recognize that we can never fully anticipate how the market will develop or how it will respond to the policies that we implement, however well-intentioned. In the words of Friedrich Hayek, who advised regulators to be cautious in their attempts to redesign the market, "It is high time . . . that we take our ignorance more seriously."
III. The Need for Heart and Some Courage
I have discussed what I think we policymakers would consider "if we only had a brain" about agreeing on a vision for promoting competition, deregulation and innovation. In closing, however, I would remind you that, in the "Wizard of Oz," Dorothy did not get back to Kansas on her own. In addition to relying on the wise advice and judgment of the Scarecrow, she had to rely on the previously-concealed heart of the Tin Man and the newfound courage of the Cowardly Lion.
Likewise, I do not contend that, in "getting smart" about the realities of competition, we should forget to "have a heart" about the potential for consumer harm by some firms in some circumstances. I believe strongly that consumers should be protected from certain, identifiable harms. No one should quibble about government intervention that protects the health and safety of consumers for example. Nor, as a proponent of strong enforcement mechanisms, would I dispute the need for some government intervention to protect against the anticompetitive harms of market failure and monopoly prices, as well as to prevent fraud, misrepresentation and the like.
"Consumer protection" should not, however, be flown as the banner for guaranteeing all customers the same level of services, regardless of whether such customers value those services enough to pay the cost of providing them. Nor should consumer protection be invoked merely to protect sympathetic firms. It should carry no weight that a given business model will suffer or disappear if the government no longer guarantees its viability, provided that the ability and opportunity to provide the same value to consumers is transferred from firms of the defunct model to other firms.
I strongly caution against treating proponents of competition as pro-business and anti-consumer. Free markets do not somehow place the interests of business over those of consumers as some appear to believe. As I have said, both history and scholarship make clear that the market provides the best mechanism for expanding economic welfare by allowing all actors in the market -- consumers included -- to react to and benefit from new information. As such, I believe that competitive markets comprise one of the most effective devices for maximizing consumer welfare ever created by mankind.
Similarly, I don't believe we can effectively promote competition, deregulation and innovation if we don't have some courage. Policymakers must find the courage to release the reins of regulation and let competition roam free. Rather than attempting to provide guaranteed outcomes for consumers, policymakers must, among other things:
- have courage to promote innovation, because innovation breeds new markets and shatters the entrenched advantages of incumbency, as the recent history of communications has shown;
- have courage to address convergence, because technology will continue to erase the differences that historically have justified regulating different services differently and thereby force policymakers to reconcile these conflicting regulatory approaches; and
- have courage to strengthen enforcement, rather than continuing to rely on prospective, prophylactic regulation.
I firmly believe that if we (1) use our brains to envision competition as a journey and not a destination, (2) have a heart and (3) find some courage, we will be more successful in promoting competition, deregulation and innovation in communications markets. If we do, we will no doubt transport ourselves somewhere over the rainbow to a place that constantly changes, but where the benefits of a free market in communications can continue to grow -- a place I hope we soon can call home.