The Regulatory Pendulum

Many years ago I took an economics course in regulatory theory. That’s a course that looks at how government can and should regulate markets. Economic theory makes it clear that most markets trend towards consolidation over time and at the point where large companies come to dominate a market that the biggest companies inevitably engage in monopolistic behavior.

I got to thinking about the topic lately as I’ve been reading about how politicians in the US and in Europe are thinking about ways to regulate large internet platforms like Google and Facebook. Those companies are clearly monopolies in their sector.

My real interest is in the way that we regulate broadband, which has grown to be one of the most important industries in the country. It’s interesting to compare the way that broadband is regulated compared to almost any other important sector of the country. Banks have bookshelves full of regulations. Big electric companies are highly regulated. There are tons of safety and other regulations concerning our food and drug industries.

The most lightly regulated industry in the US are the web companies like Google and Facebook. There have been very few attempts to regulate them in this country. Europe has taken a more normal regulatory approach and has imposed various kinds of privacy and consumer protection regulations on the industry to protect customers. Europe is debating if there should be even stronger regulation.

Broadband is the second least regulated major industry in this country. The current FCC killed what little regulation we had when they killed their own Title II authority. Even before the FCC axed Title II regulation the broadband industry was barely regulated, with only a few rules concerning net neutrality and privacy. All that’s left now are some minor regulations such as CALEA, where an ISP must allow law enforcement to wire-tap or track customers with a subpoena. FCC Chairman Pai calls the current regime ‘light touch’ regulation, but what we have now is basically no regulation. It would be more accurate to say that we used to have light touch regulation before the FCC killed net neutrality and Title II, since even then our ISPs were far less regulated than other major sectors of the economy.

We still have some regulation of broadband by the Federal Trade Commission. However, that barely counts as regulation because the FTC regulates only by exception – they can go after an individual ISP for bad behavior that harms the public, but each case is individual and doesn’t create a rule that stops other ISPs from engaging in the same behavior. The hope is that other ISPs modify their behavior due to an FTC ruling, but without the ability to create rules the FTC has no real regulatory teeth. They are more like the traffic cops of the industry handing out random speeding tickets rather than a real regulator.

Regulatory theory says there are two major tools that can be used in a monopolistic industry. The first is a strong regulatory agency that can set firm rules that prohibit bad behavior and that also encourages good behavior. That’s what the FCC is supposed to be doing – but they killed Title II regulation and gave away their authority to regulate broadband.

The other regulatory tool is antitrust. The FCC and the DOJ get to weigh in on possible mergers and are required to decide if the mergers are in the public interest. They occasionally turn down mergers like the merger attempt a few years ago between AT&T and T-Mobile. But for the most part, we’ve had weak antitrust regulation and most mergers have gone through. The ISP industry is dominated by a handful of huge companies, and they continue to grow larger and more dominant, such as the the merger of Charter and Time Warner Cable.

The flip side of mergers is divestiture and there has only been one major divestiture in the industry when the courts decided to break AT&T into multiple parts. That divestiture lasted only a few years and AT&T was able to reassemble many of the divested companies into one entity again.

I think it’s inevitable that broadband will eventually be regulated again. Governments that don’t regulate monopolies pay dearly. Right now there is nothing stopping the ISPs from shooting broadband prices up to $100 or from harming the public by selling customer data. the big ISPs talk a good public game, but there are almost no constraints on any bad behavior.

Every industry goes through a cycle called the regulatory pendulum. When regulations grow too harsh the big companies gain sympathy for relaxing some of the rules. But as rules relax, big companies seem to be unable to resist taking advantage of customers – and eventually the regulations are again tightened.

We are now at a regulatory extreme with broadband. The primary regulator, the FCC, has washed their hands of regulating broadband. The FTC occasionally makes an appearance and levies a fine but doesn’t really regulate. Mergers are more likely to go through than not, and so we see continued consolidation of the industry. The ISPs will eventually be unable to constrain themselves from flexing their monopoly power. When they go too far and the abuses mount up we’ll see the regulatory pendulum swing the other way. There’s no telling how long that might take – but it’s inevitable.

One thought on “The Regulatory Pendulum

  1. We’re in an interesting moment. There have been a spate of articles in the conservative press about how awesome it is that we have big companies. National Review, WSJ, are all glowing about the incredible advantages of large company power. The key phrase is “market warping.” Conversely, places like Axios and Vox are churning out pieces on “we have monopolies in most consumer brands, all forms of food production, meat packing,” … etc. The key phrase is “lack of competition.” (And, privacy threats and corporate overreach, etc.)

    I’m assuming this is all “softening the ground” or “loin girding” given various candidates’ rhetoric on anti-trust or big company breakups. Having had some exposure to marketing campaigns it’s more than a little disappointing to see the degree to which media is used to sway public opinion. Why does this story need to be told in multiple outlets, just now… It’s more an issue of “fake urgency” than “fake news.”

    The problem in broadband is that we nurtured monopolies in areas that require immense investments in infrastructure to get started, so just slowing down or breaking up the incumbents doesn’t necessarily improve the outcome. Unless we treat network pathways as public right-of-way — like freeways — we’re unlikely to see any real change no matter where the regulatory pendulum has swung.

    And, Agit Pai is delusional or craven or maybe both. Interestingly, the politicians’ approach to finances in the City of London was “anything between consenting adults.” Which sounds a lot like “light touch.” That was, of course, before the financial crisis and one of the major contributors to why the EU managed to have an even worse time in the financial crisis than we did. Extraordinary popular delusions and Hyman Minsky have a lot to say that isn’t followed nearly closely enough by the anti-regulation zealots.

    Overall, we need a clearer view of how markets do and don’t work and what the basic physics issues are, around making networks that can support robust competition.

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