Freeman

ARTICLE

Internet Access Should Be Left to the Free Market

Forced Access Legislation Will Not Achieve Its Intended Goals

APRIL 01, 2000 by LAWRENCE W. REED

The explosive growth of the Internet in recent years has transformed the lives of millions of people at home and work in ways that were unimaginable a generation ago. The benefits to society have been enormous. The proliferation of e-mail addresses, personalized Web pages, and e-commerce are now integral parts of our burgeoning “cyber-culture.” Always eager to crash the party, governments and their special-interest allies are looking for excuses to tax, regulate, censor, and otherwise spoil the fun.

Access to the Internet is one issue that already elicits controversy and promises to generate even more. Do- gooders itching to regulate argue that the marketplace will not be able to sustain competitive, affordable access in many U.S. communities because cable companies are in a position to monopolize something new called “broadband” technology. Some form of government intervention, say the do-gooders, must counter this so that everyone can afford to be “wired” in the future.

Broadband technology allows cable-television providers to offer Internet access through their cable connections. Its emergence represents a challenge to the more traditional dial-up (narrowband) technology that uses telephone lines. Largely because broadband permits much faster Internet speeds, its popularity is growing enormously. One projection suggests that the number of Internet users who use narrowband will fall from nearly 100 percent just a couple of years ago to 50 percent by 2005. Cable firms will even be able to offer telephone service because unlike narrowband, broadband technology can transmit voice and data simultaneously.

Lobby for Intervention

Rather than standing up to this challenge with the money and effort required to compete, major Internet service providers (ISPs) such as Mindspring Enterprises have joined with some telecommunications firms and “consumer advocacy” groups to form a new lobbying organization called the OpenNet coalition. OpenNet is trying to convince federal, state, and local regulators to intervene and force cable television companies to “share” their broadband cables with other companies. Legislation pending in many states would do just that. The Clinton administration endorses forced access as well. Meanwhile, any economist worthy of the name would argue that the likely result will be higher costs for consumers and no significant increase in the number of Internet access options.

This story is typical of what happens when innovation opens new vistas for free enterprise. Some people are always in better position to take advantage of a new opportunity than others. But that doesn’t justify the government’s stepping in and disrupting the process by which the market shakes out supply and demand. If that happens, it sabotages a process that most often produces the best and widest variety of services for the lowest price.

The late economist Alfred E. Kahn put it well when he explained the importance of deregulating the airline industry. His observation is just as relevant to a discussion of the market for Internet access: “The essence of the case for competition is the impossibility of predicting most of its consequences. The superiority of the competitive market is the positive stimuli it provides for constantly improving efficiency, innovating, and offering consumers diversity of choice.”*

If government implements “forced access;’ the edge will come off the urgent market incentive for ISPs—including new upstart companies—to develop broadband capacity. The incentive for cable operators to take advantage of their head start also will diminish. And the competition over price that would naturally ensue in an unhampered market—to the advantage of consumers—will be far weaker and produce far fewer options and advantages.

This is precisely what happened when Congress passed the 1996 Telecommunications Act, designed to “level the playing field” in telephone service by forcing established telephone companies to make their network facilities available to competing firms. Here in Michigan, instead of facilitating competition, “forced access” stifled it. In 1998, despite all the advertising we heard from new companies, the big local telephone companies Ameritech and GTE-Michigan still earned 96 percent of all local service revenues.

A recent study from the Mackinac Center for Public Policy argued that by all measures the market for Internet access is dynamic and competitive and will remain so if government butts out. Author Donald Alexander, a telecommunications economist from Western Michigan University, maintains that consumers who want access to the Internet can, in many localities, purchase this service from a wide range of suppliers, with each one offering a different technology with distinct advantages and disadvantages.

Undermining Innovation

Alexander points out that if government requires cable firms to provide access to its cables to any ISP, the resulting increase in users would cut transmission speeds—a major reason why people prefer broadband in the first place! Congestion problems would undoubtedly then be blamed on the cable companies. In the long run, those companies would likely cut back on their investments in broadband technology, which would have the effect of limiting future access options for consumers—the exact opposite of what OpenNet says it wants to achieve.

For these reasons and a host of others, says Alexander, politicians and regulators should reject specious claims about “leveling the playing field” and refrain from passing “forced access” legislation.

Instead, they could actually stimulate competition by ending the system by which cable companies gain monopoly franchise agreements in local areas. Since the 1960s, local governments have granted cable operators monopoly status, stifling what would otherwise become a healthy competition among cable operators. This—not the cable operators’ broadband capability—is the real inequity lawmakers should address. Nationwide, only 3 percent of cable subscribers can select from competing providers. That enforced lack of competition boosts prices to consumers while allowing local governments to rake in millions in franchise fees.

What’s the bottom line? Government should not force cable operators to make their cables available to their competitors, and it should not grant exclusive local monopolies to those cable operators either. Better Internet access, better cable television service, and even cheaper telephone calls are all on the horizon as broadband technology spurs innovations. Free markets, not new regulations, will bring that about.

* Alfred E. Kahn, “Deregulation and Vested Interests: The Case of Airlines,” in Roger G. Noll and Bruce M. Owen, eds., The Political Economy of Deregulation (Washington, D.C.: American Enterprise Institute, 1983), p. 140.

ASSOCIATED ISSUE

April 2000

ABOUT

LAWRENCE W. REED

Lawrence W. (“Larry”) Reed became president of FEE in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s. Prior to becoming FEE’s president, he served for 20 years as president of the Mackinac Center for Public Policy in Midland, Michigan. He also taught economics full-time from 1977 to 1984 at Northwood University in Michigan and chaired its department of economics from 1982 to 1984.

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