[jjoonathan]

US Telcos = Natural Monopoly + Regulatory Capture

> The cost is so high partially due to special agreements

This is true, but it doesn't contradict the fact that telcos are also natural monopolies.

Let's play a game: pretend that all of these special agreements have suddenly become invalid and the market has become deregulated. Assume you have (or can acquire) the technical expertise to challenge them. What's your business plan?

[cam_l]

> What's your business plan?

Thanks, this is is a point I do not see expressed enough. Regulatory capture just one expression of a 'free market'. When you are a non-moral entity, free to do business however you want, you will cheat, you will find ways within any system to lock others out of your market, you will screw the customer for every last cent, you will break the law if you can get away with it - or at least the ones that do will end up ahead of the game.

Liberalists seem to believe that free-marketism is a self-perpetuating algorithm. But when the unit tests fail, they suggest it should be unleashed system wide without thinking through the consequences. If your competitor has locked you out, and you are a non-moral entity, and there is no legal recourse, what do you do? How do you break a cartel? Car-bombs?

The opposite of regulatory capture is not no regulation, it is public education and engagement and power. Consumer power is directly proportional to market freedom.

edit: cool, so what do you call them in the states? there is no such distinction in oz, the current governing party is the liberal party and there is no way in hell they are progressives ;)

[jjoonathan]

> Liberalists seem to believe that free-marketism is a self-[optimizing] algorithm.

It's worth noting that in the US, the term "liberal" is often used in association with those who are skeptical of the free market (moreso than their political opponents, anyway). Classical liberalism does promote laissez-faire economic policy, so you aren't incorrect, but the term is a bit ambiguous in context (see the 2nd paragraph in http://en.wikipedia.org/wiki/Classical_liberalism )

Anyway, I agree completely with your point. Business interests and consumer interests often oppose one another, and I believe that governments ought to put consumer interests first, even though presently they have a track record of doing the exact opposite.

Campaign finance reform would be a good start (private campaign finance => bribery is a prerequisite for obtaining power).

[argumentum]

> I believe that governments ought to put consumer interests first, even though presently they have a track record of doing the exact opposite.

For me, this is the part I'd emphasize, and probably where we could create a great deal of consensus. Whether or not we agree that the government should be interfering for the benefit of the consumer, we definitely agree that it shouldn't be interfering for the benefit of big business.

[johndevor]

> Whether or not we agree that the government should be interfering for the benefit of the consumer, we definitely agree that it shouldn't be interfering for the benefit of big business.

But government is largely bought and paid for by special interests. Given that, it seems there's very little point in asking what the gov't should do.

What it will do, is quite obvious: it will serve the interests of the highest bidder.

[jjoonathan]

Not necessarily. Right now our system has a policy of mandatory bribery built into the system by way of campaign finance rules. It's relatively easy to go from "mandatory bribery" to "optional bribery" through public campaign funding, which I think is a step in the right direction.

Campaign finance reform is a boring but necessary first step towards fixing this mess.

[argumentum]

I agree, that's the real world result, but we can't win that argument easily. Instead we can point out each instance of it happening and hopefully the more pragmatic liberals will come around eventually.

[adharmad]

I think cam_l meant libertarian.

[jjoonathan]

I think it's more likely that cam_l was from a country where the term "liberal" was associated with the concept of Classical Liberalism.

[smsm42]

>>> The opposite of regulatory capture is not no regulation, it is public education and engagement and power.

And unicorns. Most of all the unicorns, being the most real part of the deal. At least until people realize that regulatory capture is not some excess of the regulation, it is a direct and inevitable consequence of it. There's no people that can understand the industry enough to regulate it but the people of the industry. There's no people that are motivated enough and having enough concentrated resources but the people of the industry. Thinking that you can beat a team of industry experts knowing everything about their industry and already having majority of regulatory body composed of their former coworkers by chanting "power to the people" and "public education" is beyond naive. Of course, if you're lucky, you can align your interest with a competing group and suppress opposing group's interests for a time. But that would not give you any power - it would just redistribute the power between the two groups. As long as you agree that the power should belong to the regulatory bodies, you would have them to be controlled by major industry players, partially or completely. You can say feel-good things like "public education" all day long, but you'd have to wake up and face the reality one day - and the reality is that regulatory capture is an inevitable consequence of powerful regulation in a big industry.

[argumentum]

There's a lot of ambiguity in your scenario. Do I get equal access to the existing infrastructure (presumably paid for by the existing monopoly)? Assuming this deregulation comes along with some law or judicial ruling that no local government can create such an ongoing monopoly, there would likely be created a separate industry that simply builds infrastructure at some price to the locality with no continuing agreement.

Second, who am i? A startup? Since this is a fantasy world, I imagine I'd have invented some new tech that would substantially reduce the cost of operating an ISP. I'd pitch that to investors and raise enough to get of the ground?

But that's only one way I might enter the market. I may be Google, or even an existing telco looking to expand my turf.

My overarching answer is simply: I don't know, but let's get rid of the artificial constraints on the market and see what results. In most unregulated industries, quality rises and price falls (in the long run). There may be exceptions, but which industries do you see this not happening:

1. Finance 2. Medicine 3. Utilities 4. ?

All industries with close connection to the state. I'd wager that sans these connections, things would be a lot different.

[jjoonathan]

> Do I get equal access to the existing infrastructure (presumably paid for by the existing monopoly)?

No, the existing company retains ownership of the infrastructure they paid for and the ability to charge anyone whatever the heck they want for using it. Also, they retain all rights granted in private contracts (not involving government at the federal, state, or municipal level).

> Second, who am i? A startup [with new, cheaper tech]? Google? Another telco?

You get to pick, subject to three constraints:

* Your source of capital is rational (they'll replace you or refuse to fund you if you're acting against their monetary interests)

* Your source of capital is limited (or, rather, their trust in you is limited). Enough to cover a town, but not a city.

* Your competitive advantage isn't disruptive (for the sake of arbitrary concreteness, your up-front and continuing costs are 80% of what they are/were for the competition)

> My overarching answer is simply: I don't know, but let's get rid of the artificial constraints on the market and see what results.

That's what I was afraid of. The "game" we're playing is going to pit my knowledge of anticompetitive market practices against your ingenuity. My thesis is that the anticompetitive opportunities offered by the market will be enough to stymie innovation all on their own, unless the government takes an active role in leveling the playing field.

> In most unregulated industries, quality rises and price falls

Yes, but it works better for some industries than for others, and the industries where it has a track record of failing miserably (utilities, basic research, health care) require government intervention if we want a functional society. Adam Smith himself didn't believe that the market was suited to the task of optimizing infrastructure or military/police forces (he didn't think said list was in any way complete, either). Perverse incentives, externalities, anticompetitive opportunities, information asymmetries, and pathological nash equilibria (prisoner's dilemma) all frustrate the ability of markets to optimize society. Medicine is probably the worst rat's nest of such complications, but let's keep the focus on utilities for brevity.

> which industries do you see this not happening: 1. Finance 2. Medicine 3. Utilities 4. ?

You can't use these observations to support your point over mine because they also fit my model of reality (government must be more involved with industries that stymie the free market's optimization abilities). Also, health care in the US is ~2x as expensive as in "socialist" single-payer systems, so I find your choice of who to blame less than convincing. The ACA is the plan proposed by market reformists -- not even the Heritage Foundation thinks deregulation is the way forward on that front.

[argumentum]

I was in the middle of writing a long-winded reply, but I'd rather just agree to disagree on philosophy and economics. I'm also not the right person to come up with the winning business plan to your scenario (little knowledge of the ISP market other than as a consumer).

And ultimately I probably agree with you about how to deal with the situation right now, in that we shouldn't lose net neutrality when the ISPs are clearly public/private partnerships, not independently operating entities in a free market.

Where we disagree is whether or not it is possible to create the conditions for a truly competitive market primarily by reducing state involvement. I believe it is.

In my opinion, fears of private monopolies are generally unwarranted, that most "natural" private monopolies are flimsy and temporary. I fear more the monopolies created by the government, such as the monopoly that "licensed" physicians hold over what substances we put in our body, who gets to sell us information about our own DNA, who gets to invest in startups ("accredited" investors) etc.

In the long run, I think our freedom is better protected by fighting against artificial monopolies such as these ..

[jjoonathan]

> I'd rather just agree to disagree on philosophy and economics.

I'm sure you would. I'm armed with a long list of time-honored principles that allow a big player to anti-competitively grind a small player into the ground long before any real competition can take place.

You are armed with your faith in the market.

> Where we disagree is whether or not it is possible to create the conditions for a truly competitive market primarily by reducing state involvement. I believe it is.

You hit the nail on the head: I believe that there are a handful of important markets where the "more freedom!" approach not only doesn't lead to optimization, but leads to counter-optimization.

I take international comparisons of health care costs/efficacy as my evidence.

> In my opinion, fears of private monopolies are generally unwarranted, that most "natural" private monopolies are flimsy and temporary.

If only I could force reality to comply with your opinion, I would be a much happier person.

> I fear more the monopolies created by the government, such as the monopoly that "licensed" physicians hold

Seriously?

http://en.wikipedia.org/wiki/List_of_countries_by_total_heal...

I fear a "free" health care market more than I fear a single-player "govrnment monopoly."

I also object to the use of the term "monopoly" in relationship to the government. Market monopolies have direct incentive to screw you for whatever they can, and they get to keep the spoils. The government has checks and balances that frustrate the process, and the people involved get to keep a far smaller fraction of the spoils. Market monopolies are worse.

[leoc]

It's also worth adding that the "dumb pipe" model of utility regulation was the one adopted (rather successfully) by Margaret flipping Thatcher when she privatised the UK utilities.

[Retric]

Umm, the only way you would have access to there infrastructure is with heavy regulation so no there is no access to any of it. Suggesting otherwise is seriously ignoring the question.

PS: 1 billion in capital no regulation no access to any existing infrastructure no magic wand and the only way you can dig is to convince the local government or individuals that there is so reason to let you dig aka spend money. Which is clearly harder where there is already existing high speed internet. So what do you do you find city's without FIOS (etc) and build there at which point there yours and everyone else leaves them alone more or less. (Though if there is no natural monopoly then fighting in existing markets should be easy...)

[argumentum]

Clearly a local government is going to be less receptive to more digging if high speed service is in place, but it's not a "natural" monopoly if a deal with the government must be made as a prerequisite to provide services. You are also assuming that the "digger" is necessarily the service provider. In my view, local governments are basically seduced by telcos subsidizing or eliminating the up front costs of building infrastructure. In the long run, it's a bad deal.

I would say the monopoly is "natural" if and only if the local government is required to allow anyone (or no one) to dig. Or if it pays for the digging itself.

[XorNot]

Ah, yes it is? Someone owns that land, and it's not you. And for that matter, you want to see expensive, wait till you have to convince 10,000 property owners individually to let you trench up their gardens.

[markgraydk]

A natural monopoly is an economic concept about how high fixed costs makes a single company the most efficient. Regulation of a natural monopoly is secondary to that. A telco might then be a both natural monopoly, due to how the business works, but also have a government-granted monopoly due to licenes etc.

[devhinton]

If any of the subsequent logic is flawed I'm very open to conceding points based on logically rebuttals.

Aside: This community is awesome, so much respect for this intelligent lengthy, conversation.

It seems 'regulated' vs. 'unregulated' is a false dichotomy, no?

A company in the US (there maybe some complications due to globalization) cannot kill a customer who writes a bad yelp review. This might be advantageous, if the customer will never use the company's service again and may convince others to avoid that company (and the killing does not cause PR harm) then it as a gain to have this customer, and their review, gone.

This is a regulation. So are anti-discriminatory laws (it is true that the market can potentially correct for racists attitudes by naturally punishing those who refuse do business with a segment of the population. This only holds when the discriminated group is large enough and the market is not saturated).

Lets look at this point:

> In most unregulated industries, quality rises and price falls (in the long run)

Can we instead substitute: 'In most industries, as you decrease regulation, quality rises and prices fall'.

Can we agree that if a company could force us to buy their products at gun point, they would sell us terrible products? Or at the other extreme, if the government regulates everything, companies often create shitty products (Products in some communist countries)?

If we can, what we are looking for is a 'sweet spot of regulation'. Maybe that allows the natural spirit of competition to create the best product given the constraint of cost?

To look even further, (I'm blanking on an example >_<) is it unreasonable to say that the advent of new technology can shift this 'sweet spot'?

So would a comprise to this question of 'should telecommunications be regulated?' fall to, yes, 'there should be a set of regulations which allow for competition' and that change when 'a new technology emerges that hopefully decreases (it could increase by the same logic. For example, advent of very expensive technology that is advantageous to have) the amount of regulation need (or even that changes the type of regulation).

In this picture, the government might be more akin to a gardner, the lump of citizen action (a tree) and the laws (in case the regulations) the frame used to shape the tree as it grows[1].

So if we accept this flow, we have arrived at, 'regulation which shifts as technology affects the barrier to entry meant to allow for competitive spirt to flourish and natural create the best product given cost constraints'

I'll readily admit this logically path takes a wide definition of what 'regulation' means.

[1] http://en.wikipedia.org/wiki/Tree_shaping#Methods (just awesome examples of tree shaping 0.o)

[jessaustin]

Are we throwing out the FCC's regulation of the spectrum? If so, then WISPs will sweep across the nation, competing to provide consumers the best wireless access at the lowest prices, on frequency bands previously wasted on broadcast, cell, and official uses. A great deal of money will be made in that sector, especially to whichever equipment maker rolls out the best first- and second-generation wideband modems.

Another good business will be replacing car radios, at least for some time.

[fm8892]

> Let's play a game: pretend that all of these special agreements have suddenly become invalid and the market has become deregulated. Assume you have (or can acquire) the technical expertise to challenge them. What's your business plan?

My business plan is to be Google: Install duplicate infrastructure for 80% of what the incumbent paid (per your other post), using my massive cash reserves, and charge $0 for equivalent or better service. Revenue comes from my massive ad network (which my competitors don't have), so I can sustainably run the business like this for as long as necessary to force the incumbent to fold. I now have the local monopoly, which I can use as I see fit. I might (for example) give priority to packets originating from hosts who are also customers of my ad network.

This creates a virtuous cycle for me--advertizes will only want to spend money with me, so I can upgrade my infrastructure more rapidly that the former incumbent ever could. That brings me more internet-users, which makes my ad network more valuable. Since I have a monopoly, I can also rent-seek with respect to internet access fees (though I might keep it at $0 to encourage end-uses to continue clicking on ads).

I will then repeat this process in other cities until I have a nation-wide monopoly. Despite being in blatant violation of anti-trust laws, I will continue to do this by bribing^H contributing to the election campaigns of friendly politicians.

Of course, this is cheating a little (because my business plan replaces one natural monopoly with another)--but not a lot, because you asked for my business plan to break into the current natural monopoly, not how one could sustainably obtain a competitive market. The answer to the latter question is obvious: You can't.

[markgraydk]

Considering the economic defintion of a natural monopoly, deregulation would be the wrong path to go down. Instead, we should see more regulation like that of "last mile" and caps on or forced wholesale pricing.

I was working on creating an MVNO (http://en.wikipedia.org/wiki/Mobile_virtual_network_operator) at one point but after crunching the numbers we decided (among other reasons) not to pursue it further. We were looking at handing over about 80% of turnover, even with fairly good laws in place (EU). On top of that, the contracts we were looking at where all based on bundling of services (i.e. XX amount of data, minutes and texts) which would have made our business more of a game of demand estimation. We could perhaps have gotten a small margin if we could estimate what our users would use of services better than what we paid for them wholesale. This has also led to the unfortunate business strategy of most MVNOs around here where they look for a quick exit by being bought out by the infrastructure owner when they have gotten enough customers. Few make it into into black numbers before that.

[Benferhat]

You love the phrase "regulatory capture", don't you? :)

[jjoonathan]

Not as much as I despise both the thing it refers to and the propensity of self-styled libertarians to pretend that it's the only problem in the world :)