Are they listening to him now?

Nobel-Winning Message for the FCC

Susan Crawford, the John A. Reilly visiting professor in intellectual property at Harvard Law School, is the author of "Captive Audience." Her book "The Responsive City," with co-author Stephen Goldsmith, will be published in September.
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Jean Tirole's Nobel Prize in Economic Sciences is being celebrated on both sides of the Atlantic by academics and economists. But there is no joy in the power circles of U.S. telecommunications policy. More than a decade ago, federal policy makers turned their backs on Tirole's sensible assessments of private communications utilities -- and with disastrous results.

Tirole's insight was that any company controlling physical lines into homes and businesses, left to its own devices, would act as a natural monopoly, extracting tribute from every other business and customer that depends on communications capacity. To constrain that power, regulators might need to separate wholesale and retail communications-access services, and require interconnection with other networks.

Beginning in 2002, the Federal Communications Commission (led then by Michael Powell, now head of the cable trade association) asserted that the telecommunications world was like any other private market: Fierce competition between telephone lines and cable lines would force producers to deliver high-quality service at low cost.

This prediction turned out to be wrong. As current FCC Chairman Tom Wheeler made clear in a forceful speech last month, cable dominates the high-capacity Internet-access market in the U.S. And its advantage is quickly growing larger: Cable companies accounted for 99 percent of new high-speed Internet-access subscriptions in the second quarter of 2014. The former phone companies' old copper lines are fast becoming obsolete.

Yet the giants of the highly concentrated cable industry are seeking even greater market power. Comcast's proposed merger with Time Warner Cable is aimed at achieving Standard Oil-like scale and scope.

Tirole's careful, sector-specific work on imperfectly competitive markets has informed regulators throughout Europe. Other parts of the world, too, have successfully required that operators of natural-monopoly wholesale communications lines -- the basic infrastructure for all information flows -- provide access to information retailers so that competition can flourish. Singapore's NetCo sells wholesale fiber access to retail providers, who now sell gigabit fiber access to households for $50 a month. Starting 20 years ago, Stockholm put in a wholesale passive-fiber network to all homes and businesses, and today enjoys low-priced, high-quality retail services. The invisible hand is also doing its work at the retail level in Seoul, for the same reason: A wholesale fiber network has sparked lively competition.

Meanwhile, a federal-level reluctance to grapple with the economic reality of telecommunications monopolies has left much of the U.S. with a second-class private utility in the form of the local cable company. More and more cities and towns, fed up with this situation, are looking to provide their own wholesale fiber access. Tiny Ammon, Idaho, for one, has built an open-access fiber network connecting community institutions and local businesses. Westminster, Maryland, plans an open-access fiber network, too. And Seattle, San Francisco, Chicago, New York and Boston are all considering next steps in their fiber plans.

The American Public Power Association, the U.S. Conference of Mayors and the National League of Cities have all recently supported local governments' ability to provide advanced communications services -- to meet essential community needs and promote economic development. They turned their attention to local change because federal regulation of telecommunications has seemed so unlikely. Might the public applause for Tirole's Nobel make a difference? Surely the Nobel committee would be gratified if it did.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the editor on this story:
Mary Duenwald at mduenwald@bloomberg.net