The Power To Control

Is Internet freedom threatened more by dominant companies or by the government’s efforts to hem them in?

In the early days of the radio industry, in the 1920s, almost anyone could become a broadcaster. There were few barriers to entry, basically just some cheap equipment to acquire. The bigger broadcasters soon realized that wealth creation depended on restricting market entry and limiting competition. Before long, regulation—especially the licensing of radio frequencies—transformed the open radio landscape into a “closed” oligopoly, with few players instead of many.

In “The Master Switch,” Tim Wu, a professor at Columbia University, argues that the Internet also risks becoming a closed system unless certain steps are taken. In his telling, information industries—including radio, television and telecommunications—begin as relatively open sectors of the economy but get co-opted by private interests, often abetted by the state. What starts as a hobby or a cottage industry ends up as a monopoly or cartel.

In such an environment, success often depends on snuffing out competitors before they become formidable. In Greek mythology, Kronos—ruler of the universe—was warned by an oracle that one of his children would dethrone him. Logically, he took pre-emptive action: Each time his wife gave birth, he seized the new child and ate it. Applied to corporate strategy, the “Kronos Effect” is the attempt by a dominant company to devour its challengers in their infancy.

In the late 19th century, Western Union, the telegraph company, tried to put AT&T out of business in the infancy of the telephone—by commissioning Thomas Edison to design a better phone and then rolling out tens of thousands of telephones to consumers, rendering AT&T a “bit player.” It was a sound Kronos strategy, but AT&T survived and eventually prospered over Western Union, thanks in part to aggressive patent litigation. Later AT&T, in its turn, applied the Kronos strategy to every upstart that challenged it.

Mr. Wu notes that, for most of the 20th century, AT&T operated the “most lucrative monopoly in history.” In the early 1980s, the U.S. government broke the monopoly up, but its longevity was the result of government regulation. In 1913, AT&T entered into the “Kingsbury Commitment” with the Justice Department. The deal was meant to increase competition by forcing AT&T, among other things, to allow independent operators to connect their local exchanges with AT&T’s long-distance lines. But the agreement, by forestalling the break-up of AT&T, was really, Mr. Wu says, the “death knell” of both “openness and competition.”

In the past, then, even arrangements aimed at maximizing competition have ended up entrenching the dominant player. Some argue that the Internet will avoid this fate because it is “inherently open.” Mr. Wu isn’t so sure. In fact, he says, “with everything on one network, the potential power to control is so much greater.” He worries about major players dominating the Internet, stifling innovation and free speech.

Mr. Wu’s solution is to propose a “Separation Principle,” a form of industry self-regulation to be overseen by the Federal Communications Commission (though he concedes that there is an ever-present danger of regulatory capture—whereby the FCC or other agencies become excessively influenced by the businesses they are meant to be regulating). The key to competition in the information industry, Mr. Wu believes, is a complete independence among its three layers: content owners (e.g., a games developer); network infrastructure (e.g., a cable company or cellular-network owner); and tools of access (e.g., a mobile handset maker). Obviously vertical integration, where one company participates in more than one layer, would be prohibited. The biggest effect of such a rule would be to separate content and conduit: Comcast, the cable giant, would plainly not be allowed to complete its planned acquisition of NBC Universal, a content provider.

The process that Mr. Wu describes—of a few companies dominating the information industry and requiring regulatory intervention to tame them—plays down the disruptive effects of technology itself. In 1998, the Justice Department launched an antitrust action against Microsoft, partly to prevent it from using Windows, its operating system, to control the Web. But it was innovation by competitors that put paid to Microsoft’s potential dominance. A decade ago, AOL (when it was still called America Online) seemed poised to dominate cyberspace. Then broadband came along and AOL, a glorified dial-up service provider, quickly became an also-ran.

Similarly, mobile carriers, like AT&T Wireless, long enjoyed a near complete control over mobile applications—until the Apple’s iPhone arrived. The App Store decimated that control and unleashed a wave of mobile innovation. Mr. Wu notes that Apple, which at first forbade some competing applications, was “shamed” into allowing apps like Skype and Google Voice on its phones. True enough, but surely that is evidence of market forces creating openness, not the need for more mechanisms to enforce it.

The legitimate desire to prevent basic “discrimination” (e.g., Comcast blocking Twitter) is not enough to justify the broad restrictions that Mr. Wu advocates. Besides, enforcing the new rules would itself stifle innovation, create arbitrary distinctions and protect rival incumbents. Google’s bid for wireless spectrum and its Nexus One smartphone would certainly have crossed “separation” lines—as would Apple’s combination of access devices (the iPhone) and a content-distribution business (iTunes). Mr. Wu’s proposal would blunt the competitive pressure that Google and Apple apply to each other, as well as to Verizon Wireless, Microsoft, Nokia and just about everyone else. As Mr. Wu himself shows when tracing the history of earlier technology-based industries, the effort to regulate openness can often do more harm than good.

Mr. Philips is chief executive of Photon Group, an Australia-based communications company.


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