Wednesday, October 6, 2010

Telecom Regulation and MIT

TPRC has been an evolving meeting place for the exchange of ideas for a few decades. In the early days it was a place for pre-divestiture discussions and peopled by Bell System types, and economists and a sprinkling of engineers. It also included from time to time people who actually worked in the trade as a professional, really doing something. That was my entry almost a quarter century ago. As the COO of NYNEX Mobile, and as one who had been in cable and satellite before, as a business unit head in all cases, I could try and bring some reality.

I even went as far as becoming vice chair of the TPRC Board.

In reading an MIT Press Release today I was a bit surprised by what it purported to say. Namely:

Google and Facebook became billion-dollar companies with virtually no control over the networks on which their services depend, and there’s no guarantee that their interests will converge with those of Verizon and Comcast. In this new environment, argues... a postdoc in the Computer Science and Artificial Intelligence Laboratory, regulatory bodies, too, need to adopt a new approach. The weekend of Oct. 1, at the Telecommunications Policy Research Conference in Arlington, Va., ... presented a thoroughgoing mathematical analysis of the effects of regulation on the telecommunications industry to an audience of regulators and other academics. The upshot of his analysis: In the Internet age, regulators need to concentrate more on building consensus among disparate economic actors; at the same time, they need to prevent companies from accumulating such dominant market positions that they stifle competition.

Regrettably the young author appears to miss two key points. The market often clears the problems and second the regulator oftentimes does more harm than good. The very suggestion, mathematics notwithstanding, that regulators can attain consensus amongst competitors is not only unrealistic but is counterproductive. The last fellow to do a thoroughgoing mathematical analysis was Kahn in the 1970s and the result was in my opinion a disaster.

The author allegedly continues:

The purpose of a regulator, ... says, is to balance societal objectives with economic vitality. In the case of telecommunications, the central social objectives are emergency communication, access for the disabled, and law enforcement. But today, meeting those objectives is much harder than it used to be. The old telephone infrastructure guaranteed access to emergency providers to anyone who dialed 911, but many of the computer applications that enable voice communication over the Internet don’t. Similarly, federal agents trying to track down terrorists used to just subpoena phone records; but if the terrorists are using different voice applications, text services, and Web servers, with data traveling over multiple networks managed by yet other companies, who does the subpoena go to?

The objective of any business is to make money by providing a service. The issue of universal service for example is the support of those who cannot afford telephone service from those who can. It is plain and simple redistribution. And how does it work? Well just look at the rural telcos, they collect money from the big city dwellers and redistribute it to the folks in the hinter lands. The current Administration has taken this farce to the ultimate extreme in redistributing almost $10 billion to rural residents so that the intended result is that any moose on the Canadian border will have 100 Gbps service! It is an abject waste of money. It takes money from an economic system which would distribute it in an effective economic manner and redistributes it to many who will just waste it. I suspect that many of the recipients will never achieve their intended goals!

Moreover the basic concept of creative destruction is inhibited by regulators. They retain the past rather than assist the future. Once something falls under the rubric of the FCC it slows to a halt. Had the Internet, and its predecessor, been under the FCC, and in turn under AT&T we would still have rotary dials! It is useful to re-read Coll's book, The Deal of the Century, which in many ways lays out this effective Darwinian process, the survival of the fittest, and AT&T was the dinosaur!

Frankly it is a shame that a student gets so much press when the reality of the world of telecommunications and the Internet requires a great deal of understanding; technical, economic, legal, and human.

The author's paper is presented at the TPRC Conference. After reading through the paper, in my opinion, it lacks any sense of reality. The author creates a straw man which he proceeds to demolish or otherwise use to bolster his ad hoc propiter hoc argument. Regrettably this is just another piece of work from the MIT group on Engineering Systems, the same group I have been critical of over the past few years. They seem to try to apply engineering methods to business situational yet do so in my view with limited understanding of the underlying realities of the business. One recent example was work done on the cost of broadband deployment with neglect of the costs of obtaining franchises which I had demonstrated was substantial. In contrast to the long legacy of MIT having its faculty and students in the midst of the evolving industry, such as exemplified by the practice group in Chemical Engineering and RLE in electrical engineering, this division frequently seems somewhat detached from day to day realities, in my opinion.

Perhaps I just have the distinct disadvantage of experience, perhaps the facts are just too distracting, perhaps having a mathematical model independent of reality is better than the real world!

Why the uproar, if this had been merely some post grad presenting a thesis it would likely have gone unnoticed. Yet MIT PR decided to acclaim this as the greatest contribution to policy formation of the century, or at least that is how I perceived it. That is what makes this so critical to review. One need look at the paper, and the thesis from which it is drawn, and see that in my opinion the author presents models from whole cloth, with no basis, and from the models draws conclusions. Not even the macro economists go that far, they are honest enough to call them models. Yet as I see and interpret it the conclusions appear to be promulgated as new truth. What basis is there for any of these new truths?