Regulatory Grip Could Stifle Efforts To Build Data Highway

Last week’s passage by the United States Senate of a telecommunications deregulation bill is a step toward legalizing something that is so talked-about - almost taken for granted - that many people don’t even realize that much of it is prohibited.

The bill, if reconciled with a similar measure that the House is expected to pass, will allow the information highway to be constructed in the United States.

I expect other countries to take similar steps in the years ahead.

The information highway is the high-capacity communications network that is expected to link homes and businesses over the next decade. This network will transform the way we work, play, shop and learn, provided policy-makers allow it to be built and operated.

Under the laws of the U.S. and many other nations, companies can’t compete to connect you to a single network that delivers information, entertainment and communications.

In most countries, consumers are served by regulated monopolies: A telephone company delivers voice, fax and modem connections; a cable company delivers video and, sometimes, audio programming.

The justifications for governmentmandated monopolies were conceived decades ago, long before anyone had ever heard the term information highway.

But this is 1995, and policy-makers are to be commended for moving to loosen the regulatory grip. Unless the cable and phone companies are allowed to compete head-to-head, it is doubtful how quickly the companies will make the investments necessary to bring the information highway to the doorsteps of the world’s consumers.

Government regulation of the economy is a tricky matter. Centralized decision-making is terribly inefficient in contrast to the free market.

A free market ferrets out the best alternative. It delivers the products and services that consumers support with their purchases and rewards companies for innovation and service.

When the marketplace decides which companies and approaches win or lose, many paths are explored simultaneously instead of just the one path anointed by policy-makers.

Never is a free market more important than when the level of demand for a product or service is unknown. It is impossible for government regulators to effectively allocate resources when no one knows how much of something consumers want.

But when the marketplace is in control, competitors risk many different approaches to unlocking the unknown demand. Many fail, but the public has a collective opportunity to choose the winners - and get what it wants.

This may sound coldly Darwinian, but especially in areas of technical innovation, natural selection allocates economic resources a lot more efficiently than any form of central planning.

On-line services, forerunners of the information highway, are a classic case of unproved demand. Only 16 percent of U.S. households have personal computers equipped with modems, and fewer than half of those households subscribe to commercial services.

Is there a higher potential demand for on-line service? I think so, if prices come down and the variety of information goes up.

But this is entirely unproved, and those of us who are gambling in this marketplace must await its judgment.

One detail that policy-makers face is whether governments should impose technical standards on digital communications.

On the face of it, imposing technical standards sounds like a good idea. Wouldn’t everyone be better off if lawmakers required that all computer networks to be “interoperable” - able talk to each other?

Actually, no. In the long run everyone would be worse off, except the companies such regulation would protect from competition.

The computer and software industries have thrived over the past 20 years, precisely because there was little regulation of technical standards. The ensuing competitive free-for-all drove incredible innovation.

This has made the PC industry a model of how an unregulated industry can develop innovative technology and deliver more choices and lower prices to consumers.

If Congress in 1980 had dictated that all personal computers had to use the same technical standards as mainframe computers, it would have sheltered mainframe makers from the incredible competitive forces that have driven personal computers to astonishing performance levels.

But consumers would have been big losers.

When the marketplace chooses standards, they aren’t perpetually frozen. Competitors have incentives to innovate as they try to topple existing standards.

It’s a great system called capitalism. We need more of it, not less.

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