Comparing The Telecom Industry To OPEC Isn't So Crazy

from the too-much-regulation dept

Wed, Jul 30th 2008 3:46pm — Timothy Lee

Tim Wu has an op-ed in the New York Times comparing the American telecommunications market to the OPEC oil cartel. My esteemed co-blogger Adam Thierer calls the comparison -- and Wu's piece -- "absurd." I'm going to have to respectfully disagree with Adam on this one. Wu's basic point is the same one that Techdirt has been making for years: there's not enough competition in the broadband marketplace. Adam suggests that OPEC is nothing like the telecommunications industry because "OPEC is a GOVERNMENT-RUN cartel," implying, I guess, that the telecommunications industry is not a government-run cartel. That's strange because Adam loves to talk about how excessive FCC regulation is holding back the telecommunications sector. Likewise, Adam has written eloquently about the harms of the FCC's over-regulation of the spectrum. Government regulations still impose significant barriers to entry in the telecommunications market. That sounds like a "government-run cartel" to me.

It's true, of course, that the American telecom market is less constrained than the telecom markets in some other countries. And it's certainly less constrained than it was 30 years ago. But it's also far from being a free market. Potential entrants to the wired broadband market face hostile local governments who often enjoy cozy relationships with the incumbents and a variety of taxes and regulatory mandates. As for wireless, Wu puts it as well as I could: "The federal government dictates exactly what licensees of the airwaves may do with their part of the spectrum. These Soviet-style rules create waste that is worthy of Brezhnev." I read Wu as making a point that couldn't be more libertarian: that bad regulatory decisions have limited competition in the telecom marketplace. He explicitly calls for "relaxing the overregulation of the airwaves and allow use of the wasted spaces." Amen to that.

Now, Adam and Wu aren't going to agree on what should be done about these problems. Wu is a fan of municipal broadband, while Adam is not. Wu supports network neutrality regulations that Adam opposes. And Wu wants more spectrum to be made available for use as a commons, while Adam would prefer to see the creation of robust property rights in spectrum. My sympathies are with Adam on all three issues. But in criticizing those specific proposals, I think it's important not to lose sight of the big picture. The big ideological debate of 20th century telecom policy was over whether market competition or government planning is a better way to promote progress. I think it's a sign of how completely the pro-market side has won that argument that Wu explicitly clothes his modest regulatory proposals in pro-competitive, deregulatory language. Wu explicitly acknowledges the potential for unintended consequences and the importance of robust market competition. Wu is no libertarian, but it's silly to paint him as some kind of throwback from the 1930s.

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Filed Under: cartels, competition, monopolies, opec, pricing, telcos

12 Comments

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Kevin Donovan, 30 Jul 2008 @ 4:07pm

Labels
Another example of the out-of-date labels assigned to policy these days...
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Joseph Weisenthal, 30 Jul 2008 @ 4:21pm

It is kind of crazy
Even if accept the premise that there's not enough competition in broadband, it doesn't follow that we're witnessing Opec 2.0. In one case you have an oligopoly, and in another case you have a cartel -- a cartel that frequently has meetings where its members discuss what they want the price oil to settle at, and the extent to which members will compete with each other (volume caps).

Not only don't cable operators do this, but they frequently try to best each other on price and product. What else to explain self-immolating capex year after year, so as to improve their network.

Now you might say he was just taking some literary license, and that he didn't really mean to say that the cable operators acted like a collusive cartel. But I don't think it's an accident that he picked an organization perceived as being responsible for soaring oil prices. Not to mention, there's the whole foreign oil, fear factor thing he's playing off of.

It's too much of a stretch to say that broadband market=OPEC because one is an organization comprising of non-democratic governments, and the other one exists in a state where government regulation is less than ideal.
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Tim Lee, 30 Jul 2008 @ 4:33pm

Re: It is kind of crazy
Fair enough. I'm not going to claim it's a perfect analogy. Wu was obviously going out of his way to be provocative, and there are, as you say, some important differences. The telecom industry isn't a cartel exactly like OPEC. But it does possess the essential characteristic of a government cartel: a small number of competitors with entry limited by law. If we're willing to call, say, the trucking industry under the ICC a cartel, I don't think it's too much of a stretch to call the modern telecom industry a cartel, although it's admittedly a cartel that's getting less effective over time.
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Mark Murphy, 30 Jul 2008 @ 4:37pm

Re: It is kind of crazy
Not only don't cable operators do this

I'd tag a "that we're aware of" on the end of that.

What else to explain self-immolating capex year after year, so as to improve their network.

I'm not aware of any cable companies that have burned themselves to the ground, which is what "self-immolating" means. Do you have a citation?

I think the OPEC/broadband comparison is a little over the top myself, but you don't help your arguments any by making unproven claims.
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Joseph Weisenthal, 30 Jul 2008 @ 4:39pm

re: re: it is kind of crazy
I think collusion is a necessary ingredient for a cartel, and I don't see any evidence of that here, nor has it ever been alleged afaik. If it has, I wouldn't mind if it would be pointed out to me.

But I think the reason he compared it to Opec was to raise the specter of these big evil corporations conpsiring to raise prices and choke off access -- a story, I might add, that plays well to much of the NYT readership.
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Tim Lee, 30 Jul 2008 @ 4:49pm

Re: re: re: it is kind of crazy
Well, there certainly has been collusion to the extent that the incumbents tend to be singing off the same hymn book inside the beltway. The cable industry has fought ruthlessly against franchise reform, and the Baby Bells have been pushing to impose various regulatory mandates on companies like Skype. That's obviously not collusion on the same level as OPEC's price targets and production quotas, but it's collusion of a sort.

Anyway, I agree that Wu was being deliberately provocative and playing to his audience. That's kind of par for the course for op-eds. However, I think when you strip away the sensationalism, the underlying point—that there's too little competition and bad regulatory policies are a major cause for that—is basically right. The Adam Thierer post I was criticizing didn't seem to acknowledge that at all.
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Adam Thierer, 30 Jul 2008 @ 5:36pm

So, let me get this straight. You are rushing to Tim Wu’s defense based on the notion that I am somehow accusing him of a “hidden socialist message.” Is that your point? Well, first of all, I didn’t say that, did I? Nor did I say anything about “secret agenda lurking behind his words.” All I said in my brief rant was that it is absurd for Wu to compare America’s broadband marketplace to a government-run cartel, and that more muni wi-fi like schemes were not going to get us to broadband nirvana.

Are misguided regulatory policies the cause of many of our current problems? Of course they are, and as you note, I’ve spent many years making that exact point for wireline, wireless, and now broadband markets. But do you really not understand the difference between that and a government-run cartel? A government cartel allows NO competition, NO new entry, NO pricing freedom, and, more importantly, there is collusion at every turn. And yet you say that “Government regulations still impose significant barriers to entry in the telecommunications market” and “That sounds like a "government-run cartel" to me.” Really? Well, I guess we just have different definitions of cartel, then. Frankly, I don’t think many economists would agree with your definition of barriers to entry being the same as a government-run cartel.

Moreover, when you accuse me of failing to “engage the arguments Wu actually makes,” well, I have been doing just that in countless papers and 1-on-1 debates over the past 5-6 years. Tim and I have always engaged in friendly, but heated, exchanges on these issues. And I never need to “ferret out the secret agenda lurking behind his words” because he is always quite willing to be perfectly upfront about his positions. And they are most definitely not libertarian. Not when he leads the intellectual crusade for Net neutrality regulation. Not when he leads the battle to adopt “Carterfone for wireless.” Not when he is the Chairman of the Board of Free Press, the most unapologetically activist group on media and technology policy issues in the US today. Of course, I suppose you are now going to accuse me of unfairly attacking him for even bringing up these points.
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Anonymous Cowherd, 30 Jul 2008 @ 5:41pm

Digging
"Potential entrants to the wired broadband market face hostile local governments who often enjoy cozy relationships with the incumbents and a variety of taxes and regulatory mandates."

Those local governments also don't like the idea of someone digging up half the city to lay cables when there is already a perfectly good set of cables laid.

The physical infrastructure of wired broadband forms a natural monopoly.

Improving broadband competition won't be quite as simple as simply having government get out of the way and let private businesses compete.
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Dan, 30 Jul 2008 @ 6:04pm

TELCOPEC
Finally an appropriate acronym for for the telco duopoly's.
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Allen (profile), 30 Jul 2008 @ 11:16pm

You're both right
I think you're arguing at different levels

It's not crazy to compare apples and oranges and conclude that they're both fruits; but to conclude that an apple is the same as an orange...

At some level they are similar but on other levels they are so completely different the comparison is meaningless.
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Jim Harper, 31 Jul 2008 @ 6:03am

Adam was especially cranky yesterday
He needlessly gave up some credibility with all the bombast in his post, and argumentativeness here, but I suspect he'll calm down today.

Not that you're right, Tim, about companies enjoying the protection of regulatory barriers to entry being equivalent to a cartel. Allen is right that there are some similarities, but not enough to treat them as equivalent, I don't think.
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دردشه, 8 Jul 2009 @ 6:46am

Finally an appropriate acronym for for the telco duopoly's
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