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FCC vs. Innovation

From the January/February 2008 Issue

Not too many years ago, it seemed that fast-moving technology would happily put the government’s top communications regulator out of business. Why hasn’t it happened?

FCC vs. InnovationJust a decade ago there was discus­sion in Washington about abolishing, or at least significantly streamlining, the Federal Communications Commission (FCC). It was thought that technological innovation had rendered obsolete the agency that regulates tele­communications and broadcasting.

An obscure but influential book by former MIT professor and telecom analyst Peter Huber, Law and Disorder in Cyberspace, helped make the case for eliminating the agency. Huber maintained that technological change made reg­ulation awkward, if not impossible. Simply put, Huber claimed, “technology is advancing much faster than the Commission can make policy.”

How fast has technology advanced? Huber’s book was published in 1997. Look at what has happened in a decade.

In that time, Internet giant AOL and media giant Time Warner merged, and many now think they will split apart. XM Radio launched its satellite service. Google had the most her­alded IPO in modern business history. MySpace, Facebook, and Second Life changed how young people (and, increasingly, older people) interact. Microsoft’s XBox and Nintendo’s Wii altered how kids think about video gaming. In the past two years, YouTube has upended the video mar­ket, and the iPhone, just months old, is remaking the cellular-phone and personal-digital-assis­tant (PDA) markets.

Huber’s arguments were practical, not ideolog­ical. It was not that FCC commissioners weren’t smart and dedicated civil servants. They were then, just as they are today. Rather, the nature of the changes unfolding, with entirely new indus­tries and techniques, challenged the existing order and put sensible regulation out of reach.

The same tech-driven tumult that was trans­forming communications turned other industries upside down, too. Former Clinton administra­tion official Robert Reich notes in his new book, Supercapitalism, that technology prompted a new questioning of regulation.

‘The point is, the FCC finds itself regulating industries in decline, and may well have been part of the reason for their decline.’

Consider air travel. Reich points out that “advances in telecommunications and aircraft design (high-strength materials, better aero­dynamics, improved fuel economy) created new possibilities” for air transport, “so in 1978, Congress deregulated the airlines, and began closing down the Civil Aeronautics Board,” the federal authority that regulated aviation.

Technology revolutionized the shipping indus­try as well. Thanks to new container technologies that improved efficiencies and shipping possi­bilities, “in 1980, Congress deregulated trucking and railroads, and began shutting down the Interstate Commerce Commission,” Reich says.

Not so with the FCC. And yet it continues to be tripped up by technological changes.

Consider the fight over what’s called “à la carte” cable. The idea is that cable companies should be forced to provide only the channels that indi­vidual subscribers select, instead of bundling channels together in packages. So if you want ESPN, CNN, Fox, and Discovery, but nothing else, you should be allowed to select only those, as if ordering from an à la carte menu.

Several activist groups have pushed for man­dating à la carte cable. These groups have powerful allies in Congress and in current FCC Chairman Kevin Martin.

At first blush, the arguments for à la carte seem sensible—why make consumers pay for channels they don’t want? Chairman Martin and Senator John McCain argued in The Los Angeles Times that “at no time...have the cable companies actu­ally asked if you want those additional channels. You have to pay for them whether you want them or not.” The Commission will help customers, the argument goes, by stepping in and prompting industry to provide desired outcomes.

But the push for à la carte fundamentally mis­understands what’s happening, not just with cable, but also across the media, communica­tions, and entertainment landscape.

Cable firms compete not just with traditional rivals such as satellite providers, but also with telecom companies rolling out fiber optic lines. And then there’s Netflix, Apple’s iTunes, and the abundant video content on the Internet.

And technology is already addressing the problems highlighted by critics. Cable operators developed the tools that permit parents to block channels they don’t want in the home. In essence, à la carte is offered to customers already.

Former FCC Commissioner Harold Furchtgott-Roth believes “the à la carte issue may go away entirely in the near future” as content provid­ers offer programming over the Internet through broadband pipes. Huber was right: technology advances more rapidly than policy can.

A persistent regulatory mindset has landed the FCC in the midst of other controversies. The Commission places restrictions on media owner­ship, limiting the number of newspapers and TV and radio stations a firm may own.

But as the Internet undermines old media, the rules become worse than obsolete. They restrict experimenta­tion with new business models that are based on size, scale, and geo­graphic reach.

The problem here, according to Furchtgott-Roth, is twofold. “The media ownership rules were very important 30 years ago. But today it makes no sense for the rules to apply to broad­casters or newspapers but not to, say, Internet service providers. This is not to suggest the rules should be extended to them. Just the opposite. The point is, the FCC finds itself regulating indus­tries in decline, and may well have been part of the reason for their decline.” To his credit, Chairman Martin has pushed to relax the ownership rules at the margins, but activist groups loudly protest.

Meanwhile, the evolution of the communica­tions market thunders ahead. For example, Pierre Omidyar, founder of eBay, is putting some of his $10 billion net worth at stake on entrepreneurial media bets. His main investment vehicle, Omidyar Network, recently invested in so-called “participa­tory media” efforts. These are new-media ventures that let ordinary citizens determine what content gets read or viewed. Omidyar’s investments include wildly popular websites such as Digg.com that lets a dispersed community of Web surfers pick the kinds and variety of stories they want to read.

Soon we can expect a whole new wave of media offerings. These will challenge incumbents and increase the variety and breadth of media offerings once again. And how it will all turn out is impossi­ble for anyone—including the FCC—to know.

Nick Schulz is senior editor of THE AMERICAN and editor of TCSDaily.com. He is currently writ­ing a book with Arnold Kling titled “Economics 2.0” that will be published by Encounter in 2008.

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