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August 29, 2018

Regulations are Herbicide for the Weeds of Innovation

Innovation is a weed, not a pampered flower. It grows in the cracks; it grows where it’s not wanted. It’s almost, but not quite, unstoppable. You should be very suspicious that Google and Facebook are suggesting “some” regulation as a way of stopping the behavior which empowered their growth. The herbicide of regulation will kill would-be competitors.  Competitors will be a much more effective brake on the power of these monopolies than any regulator will be.

To further stretch the metaphor, incumbent businesses monopolize the sunlight whenever they can. They cast a mighty shadow. They demand subsidies to prevent them from falling down and crushing everyone. They will only grow in your neighborhood if you pay them to (see Amazon searching for a new headquarters or Foxconn’s Michigan con).

New innovative businesses can bring down the mighty oaks of monopoly. I had the privilege of being part of that creative destruction when then-innovative Voice over IP (VoIP) deflated the bubble of the international telephone voice cartel, run for the benefit of all the giant telcos. The price of calls to India and China from the US went from over a $1/minute to pennies within a year. Guest workers, travelers, and soldiers could afford to call home. Also call centers could be located abroad, to be fair. You might even blame globalization on this success in reducing communications costs.

The carriers fought back, of course. Internationally they tried to give regulatory power over the Internet to the ITU, the UN body which administered the mechanisms of maintaining cartel pricing called international settlements, basically a penalty for any company that dared to lower rates paid to those which kept rates up. See Price – Splitting the Pie – Why Not Just Bill and Keep? for probably more detail than you want on how the cartel operated.

In some countries where huge payments to governments (or government officials) were made by the incumbent telco (which might also belong to the government), the incumbents were successful for a while in blocking VoIP. Even India and China blocked it initially. But the price of having a communication barrier between these countries and the developed world was too high. The regulations stayed on the books but were not enforced.

In the US regional carriers tried to get the FCC to regulate VoIP like a phone monopoly. They even wanted VoIP software in a box regulated because it could be used for voice. The FCC, however, first under Clinton and then under Bush, decided to forbear from such regulation. This forbearance was codified in the FCC’s “Pulver” decision in 2004. I lobbied for this and certainly had an interest in it as a VoIP provider; Google also supported this effort to leave the Internet free of the regulation which had stifled innovation in voice services.

Now we have Skype (old news) and Vonage (even older news). The price of domestic calling is part of an unlimited minutes bundle and only some continued cartel-like behavior among cellular carriers keeps the price of international cellphone calls up – although “free” VoIP is often an alternative.

VoIP, of course, is only one example of what has been possible on a largely unregulated Internet. There are some things which need to be stopped in my opinion. Law enforcement needs to be able to trace the use of the Internet in committing crimes just as it can, with a warrant, tap phones and open mail.

The massive invasions of privacy which we allow out of ignorance, or because we consider them a fair price to pay for “free” service like Google Search and Facebook, need to be fully revealed with at least the weapons of FTC enforcements and class-action suits to discourage misrepresentation.

It has just been publicized that Verizon’s Yahoo subsidiary reads mail in its customers’ inboxes so that it can bundle the customers into categories like “investor” or “traveler” and sell access to the categories to advertisers. To be fair, if they know about it customers CAN opt out. They can also switch from Yahoo Mail to gmail or Microsoft, both of which say they don’t do this (“anymore”, in the case of Google). In this example competition can act as an effective deterrent to this action. No regulation necessary.

But what if Facebook is engaging in a practice you don’t like. If your social life revolves around Facebook (mine doesn’t), you don’t have a practical alternative. I haven’t found a search engine whose results I like better than Google results even though I know my searches are being watched and monetized.

So do we need regulation to protect us from Facebook and Google? Whose lobbyists do you think will write that regulation? Whom do you suppose the regulators will be captured by?

We need innovation to give us alternatives to the giants: a better way to search or even a substitute for what we call searching today which will break the Google monopoly (which was earned in part by very good service). We need social media sites that our friends will flock to or ways to congregate online which don’t require an intermediary.

But revolutionary innovation never seems to fit old regulation. If the Internet giants can spread the herbicide of regulation on the grounds from which innovation would come (using their own current success as an excuse), we won’t get the new companies which can and would bring down the old trees which have grown too far to the sky.

Late breaking: Trump’s call to regulate Google et al because of bias (which all humans have) makes me even more convinced that regulation is more dangerous than helpful. The regulatory herbicide is hard to put back in the bottle. I hope my friends at Google et al will see the danger in their call for regulation “lite”.

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