Why Verizon and AT&T are more innovative than ‘the left’ thinks

September 14, 2013
Jeffrey Eisenach (American Enterprise Institute)
Jeffrey Eisenach (American Enterprise Institute)

The American Enterprise Institute is one of the best known and most respected conservative think tanks in Washington. Its scholars write about a broad range of issues, from foreign policy to health care. But until recently, tech policy topics like copyright law and broadband regulation have not been a major focus for AEI scholars.

That will change on Monday as the think tank launches its new Center for Internet, Communications, and Technology Policy. The center will be led by Jeffrey Eisenach, an economist who has spent time at the Federal Trade Commission, the Office of Management and Budget, and Harvard's Kennedy School of Government. James Glassman, the founding executive director of the George W. Bush Institute and author of the 1999 book Dow 36,000, will join the center as a visiting fellow. The center will disseminate its work through a new blog, TechPolicyDaily.com, which will feature the work of Eisenach, Glassman and a number of affiliated scholars.

Eisenach and I spoke by phone on Friday. The transcript that follows has been edited for length and clarity.

Timothy B. Lee: What is the vision of the Center for Internet, Communications, and Technology Policy?

Jeffrey Eisenach: We're at a crucial time in terms of the role that the government is going to play in all aspects of the Internet. There is a point of view that I think is most thoughtfully presented by Jonathan Baker, former chief economist at the Federal Communications Commission and now a law professor at American University, which says we need an industrial policy approach that is focused on directing not just the telecom infrastructure but the whole ecosystem in a kind of pre-planned or pre-thought-out direction. Depending on what happens with the net neutrality order going forward, it's very easy to see the FCC expanding its footprint down a slippery slope. You end up with a Federal Computer Commission or a Federal Internet Commission.

But the Internet has functioned extraordinarily well as a very lightly regulated part of the economy. The only exception to this is the legacy regulation of public utility carriers. The potential for regulatory intervention and, ultimately, state control of all aspects of the Internet is very present today. We hope that we can push back on that. It's not only present at the FCC and around communications networks, it's present around privacy in the Federal Trade Commission's desire to regulate the use of private information by private entities.

One common argument for government regulation is a fear that incumbent firms will use their market power to raise barriers to entry for competitors, slowing the pace of innovation. Is that a legitimate concern?

It's entirely possible in a world where dominant firms are commonplace. There probably aren't going to be five search engines with equal market share. So in markets you're going to have dominant firms or firms with high market shares. The way they get that way is they invest, they innovate, they differentiate their products, and they come up with things people want to have.

[Once a firm becomes dominant], everyone else shows up and says "it would be good if you would share this." Whether it's communications networks, Microsoft's APIs, they say, "Boy, the world would really be a better place if you could share that with your competitors."

I did a lot of writing on the Microsoft case. I was on the plaintiffs' side [e.g. critical of Microsoft]. So it is entirely possible, and Microsoft in my view was an example, for a firm to gain a dominant market position and [then abuse it]. [There's] a legitimate role for government [when that happens.]

But I don't think it's very commonplace. That's the story Harold Feld would apply to Comcast and BitTorrent. I think it's far-fetched to believe that Comcast thought BitTorrent was a competitive threat.

BitTorrent doesn't seem like a serious threat to Comcast, but what about Netflix? They compete directly with Comcast's lucrative video business, right?

Here's the question. Do we have ex ante regulation or ex post antitrust enforcement? I'm for the latter in this space. My concern is, let's suppose we all agree that anticompetitive possibility is always there. We set up a regime that says we've got to find a way to root out these anticompetitive uses of market power. As soon as we do that, the problem is the line forms at the door of all the rent-seekers who just want something for nothing. All the people who want access at a special price. There is this public choice problem that leads to over-enforcement.

Once you start in a systematic way taking away the ability of innovators to profit from the fruits of inventions, people will innovate less. Innovation is the secret sauce of the whole enterprise. What sets the economy apart today is that we've had good policies in all of these respects compared with virtually any place in the world. So if you were to try to sum up the message, if you listen to the left on this, they will tell you that America's got it all wrong, and we need to be like Australia or Europe.

The Internet is a free-market success story made in America. We want people to recognize that the market-oriented approach the U.S. has taken on these issues is the right approach. We have protected property rights to intellectual property. We have not forced innovators to share the fruits of their efforts. On all of those fronts, the U.S. has taken a market-oriented approach, and in our view that worked.

I think your critics would question whether regulators really took a hands-off posture in the early years of the Internet. In the 1980s and 1990s, the Federal Communications Commission took a number of steps to prevent the Baby Bells from damaging in the fledgling market for online services.

There are two things that cause those arguments to fail today. One, it's not a monopoly today. The notion that a communications monopolist could leverage its market power into the market for computing was entirely plausible, but we live in a different world. Today you've got a lot of options. That's a fundamental difference.

The other thing people on the left want to ignore is the level of innovation in communications. The most recent FCC data, from 2012, shows delivered DSL speeds increasing at a 38 percent annual rate. I ask you, has your search engine or operating system gotten 38 percent better in the last year? That's an almost facetious example.

It's important to look at the level of change and innovation on the communications side. People talk about millions who don't have Internet access, but every American has 16 Mbps down and 4 Mbps up from Viasat. They now have latency down to the point where you can do VoIP over it. They offer connections speeds of 16 Mbps down and 4 Mbps up.

[People on the left] just want to ignore the fact that innovation and investment are changing the market. Apple did not launch the iPhone by itself. Apple launched the iPhone in conjunction with AT&T. It took the two of them. People don't realize that Siri doesn't live on their phone. The only reason it works is because the bandwidth on your iPhone is fast enough that it can send your voice up to the cloud and have a supercomputer translate it because voice recognition is still too hard for your iPhone. The notion of dumb pipes is an ill-informed idea.

Copyright and patent law are important tech policy issues. How do you approach them?

There are a lot of people out there who think that what matters is that information wants to be free. But people who [create content] want to get paid for it. Having said that, you can argue until the cows come home [about issues like] fair use. There are a lot of debates down in the weeds. But on the big-picture issue of whether property rights are the core of any market, and whether we ought to preserve them, this is something where we disagree with both people on the left and the "technolibertarians."

Can you be more specific about who you're describing as the "information wants to be free" crowd? There aren't that many people who want to get rid of copyright and patent protection altogether, are there?

I was astonished to see in the latest journal of economic perspectives, there are several papers that advocate abolishing software patents and abolishing patents altogether.

I do think that the copyleft have gone overboard in a number of ways. A lot of people defended Napster. There are a lot of people who blamed the music industry for not getting their music licensed online. They feel it's okay to steal. I think the copyleft has gone overboard on occasion.

There is a thoughtful middle ground. Where exactly to draw the line, I'm not saying anyone who's in favor of any kind of patent reform or anyone who's critical of Nathan Myhrvold [CEO of patent trolling firm Intellectual Ventures] is crazy or necessarily wrong. But you need a system that protects property and rewards innovation.

Property rights need clear boundaries, so you know who owns what. But it seems like there are some industries, particularly information technology, where there are so many overlapping patents that no one knows who owns what. Is that something that concerns you?

I couldn't agree with you more. We'll be doing a conference in mid-October about patent issues. I think you're exactly right. In my consulting role at a law firm called Howrey and Simon, I was exposed to a case where an industrial, process-control firm, Schneider Automation, had a patent portfolio and it decided it wanted to go after our client, Rockwell Automation. So they gave their portfolio to the worst of the trolls and said: "Don't sue Rockwell, but their customers. That will raise the cost of using our competitors' products." That's unconscionable. And it was very difficult for the patent holder in that case to even get into court.

So that's one symptom of a broken patent system. It's clear that a lot of bad patents have been issued. Bringing some order to this very chaotic and very litigious market is important.

How will you approach the issue of cybersecurity?

I recently republished a November 2001 article arguing that if the government were to maintain and collect indefinitely large amounts of information, the implications for privacy could be monstrous. I said we should give some thought to how to restrict or restrain or constrain that. Now we have it. And we're doing it.

I worry that terrorism is not the only evil in the world. If we have a capacity to deter wrongdoers, I'm not sure why we wouldn't extend it to human trafficking. I worry about the potential over time for the ability to surveil, retain and analyze eventually to the point of omniscience. I think that's something that ought to give people pause and concern.

That sort of issue is interesting, how the U.S. goes about continuing to create a strategy that is effective in securing [not just] the Internet infrastructure, but the entire ecosystem -- what's the right balance between defense on the one hand and offense on the other.

In the Wyndham case [in which the FTC filed a complaint against the Wyndham Hotel chain after its allegedly lax security practices led to the disclosure of customers' credit card numbers], we've got the police giving tickets to people who didn't put sufficiently strong bars on their Windows. Maybe we should spend more time going after criminals.

Correction: We originally quoted Eisenach saying that Viasat offered a 6 Mbps upstream connection, but he notified us that the correct figure is 4 Mbps.

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