As 2020 begins,
reflecting on the past year and what can be inferred for the coming one is
inevitable. But with a new decade beginning, we can reflect back further, into
the past decade (or more) for inspiration. Fortuitously, as 2019 drew to a
close, I was working on a review of Australia’s telecommunications competition
law and policy over the past thirty years.

The review revealed
that, no matter how much telecommunications technologies have changed, the
policies governing sector interaction have remained remarkably stable. The
overriding objective has been that the interests of consumers are best served
in the long run by a policy, regulatory, and competition law environment that fosters
competition between (private-sector) operators of different networks. However,
competition policy must govern interactions between participants in real-world
markets that are continuously in flux as technologies change and consumer
preferences evolve. Effective regimes will take these factors into account. The
objective is to govern a process that allows the industry to evolve in line
with these changes, not to impose on it an exogenously predetermined,
textbook-inspired structure.

With the endorsement of the International Telecommunications Union and the Organization for Economic Co-operation and Development, in 2020 a near-worldwide consensus on the importance of promoting competitive telecommunications markets has emerged. Different jurisdictions have interpreted the means to the end somewhat differently, but led by the United States, the world now sits on the cusp of the technological reality not just of competition between discrete fixed-line or discrete mobile networks, but with the advent of production 5G networks, the prospect of genuine substitutability of, and competition between, fixed and mobile networks. 

The US leads

US competition law of the 1980s, inspired by contemporary economic and legal scholarship, taking form in the Bell breakup and introduction of competition in equipment and calling markets, and reinforced subsequently by international theoretical and empirical validation, can quite rightly be given the credit for fostering competition as a process and not an end state. As early as 2001, this insight was influencing Australian policy. The Productivity Commission’s (APC) review of competition in Australia’s telecommunications market states:

The goal of policy should not be to mimic outcomes that might be achieved in a purely competitive market or to determine a regulatory approach that purports to guide the industry over the long run. The limits to effective regulation and the speed of technological change make this an unachievable ideal. A more pragmatic and modest policy goal is to devise a set of arrangements that are workable, that improve efficiency over the medium term, that reduce some of the bigger risks of making regulatory errors and that promote the contribution of telecommunications to Australia’s future economic growth.

These principles were, in 2017, still being applied by the FCC when declaring US mobile markets effectively competitive and by the Australian Competition and Consumer Commission when determining that regulatory intervention in mobile roaming and mobile wholesale access markets would on balance not be in consumers’ long term interests. The principles have endured because, compared to the stultifying preceding era of centralized control where technological innovation was stifled by both public and private sector monopolists, consumers have unequivocally benefited.

And the world follows

What had been recognized
and subsequently nurtured (albeit somewhat controversially) in the US context
was (as expressed by the APC in 2001):

Firms have different capacities for developing new technologies and products. Thus, an entrant with a sufficiently differentiated product may be profitable even in a declining cost industry and may improve economic efficiency despite what might look like wasteful duplication to someone who failed to take account of the consumer gains associated with differentiated products. Also, if different firms have varying comparative advantages in different technologies or emerging differentiated market segments, then it can be efficient to have several firms investing simultaneously in technologically divergent networks (as well as some using old technologies). There may be apparently high duplication costs from a static perspective, but this would ignore the value of having technological options, when the future characteristics of markets are uncertain.

Further:

Although at any one time, there may be apparent economies from having just one network element, the fact that investment occurs in irregular steps ahead of demand and that technology develops, suggests that it may be efficient to have two (or more) coexisting network elements. Say that a single firm initially supplies a market, taking into account the demand characteristics a few years ahead. As the market expands, additional capacity becomes necessary and it is not necessarily the case that the most efficient outcome is achieved by expanding the existing capacity with the same firm. Indeed, another firm may enter and provide further capacity, often using technology of a different vintage.

And:

In the absence of the legacy infrastructure, a single firm with the latest technology may most efficiently serve the market — the apparent condition for natural monopoly. However, neither technology nor demand are fixed. Accordingly, it may be economic to have a new network infrastructure alongside one of an older technology. The old technology network is unlikely to be immediately redundant following the introduction of a new lower cost technology. So long as it can meet quality standards and interconnection requirements it will continue to provide part of the demand with its existing capacity. This is because parts of the old network are likely to be sunk, so that the owner of the old technology can therefore price its services at something above marginal cost and still survive (until the old technology is scrapped). The old technology will limit the extent to which the new entrant could exploit its potential monopoly power. If technology is rapidly changing, then the existence of continually overlapping generations of technology can increase competition and optimally lead to multiple firms.

Back to the future

While technologies may
change rapidly, this does not mean policies should also change in response. If
the policy environment has succeeded in enabling the evolution of different
forms and generations of networks in the manner described by the APC in 2001, as
has been observed generally in mobile markets worldwide, then the advent of a
new technology — 5G, for example — should be welcomed for its competition with legacy
technologies.

However, as 5G will
compete directly in capabilities for serving applications with fixed-line
broadband networks (cable, copper and fiber), its advent will pose challenges
for jurisdictions where fundamentally different approaches have been taken to
regulating fixed and mobile technologies.

Once again, the US provides
the international lead.

Since the early 2000s
(albeit controversially) US data transmissions have been for the most part regulated
effectively neutrally, regardless of the underlying technologies on which they
are used.  The same cannot be said of
other countries — for example the European Union and Australia — where
fixed-line incumbents have faced stringent access regulations similar to those initially
in the Telecommunications Act 1996 but subsequently overturned, in large part
because it had been demonstrated that the development of effective competition
is hobbled when substitutable networks (i.e. cable and copper) are regulated
asymmetrically.

Caution!

While the world
dawning in 2020 may be characterized by calls for increased centralized control
of many markets, reflection reveals that in telecommunications at least,
competition driven by decentralizing decision-making is both longstanding and
has served consumers well.  Policymakers
can learn much for the governance of other technologically-driven markets from
this experience.

The post Reflections on telecom (5G) and competition regulation for 2020 and beyond appeared first on American Enterprise Institute – AEI.