Regulation Wars

The need for regulation arises for 3 reasons: to assign scarce resources; to protect citizens; and to promote public policy. In the case of telecoms, these equate to, for example: (i) assigning radio spectrum, or rights-of-way; (ii) enforcing public health and safety standards, and quality and security standards such as limits on the location and power of radio emissions, or establishing cyber-security standards; and (iii) promoting effective competition or innovation policies.

Many of these functions cut across agencies. Competition policy, for example, may come under the telecoms regulator, a competition authority or an M&E commission; cyber-security may also come under the police enforcement of a computer crimes act or under a national security agency, etc. How these areas of responsibility are distributed is less important than how they are applied. And how they are applied is becoming an issue!

Nowhere is regulation more critical than in the banking and financial sector because the life blood of the market economy is directly involved: the monetary system. Yet in this sector the failure of regulatory supervision has recently been the most spectacular. What chance then for the converging arena of ICTs? The initial “big bang” for telecoms was initiated by the US Department of Justice in the 1970s and came into effect in 1984 when AT&T was divested of its regional operating companies, soon to be followed by the privatization of British Telecom in the UK and Nippon Telegraph & Telephone (NTT) in Japan. Since then regulatory bodies around the world have over-seen the shift to a competitive telecoms market and the emergence of convergence. Hence ICTs.

The US has set the stage in more ways than one. The culture of litigation, of legal challenges to key regulatory determinations, has increasingly become a weapon of first resort for large ICT companies (the small ones cannot afford it unless they support class actions) either through challenging regulations that curtail their freedom of action, or to add roadblocks and costs to their competitors. And as ICTs went global so too did regulation wars. Companies took their battles overseas. For well over a decade Microsoft was looking down the barrel of first the DoJ’s and then the EU’s gun. More recently Microsoft has swopped places with Google. Regulatory wars have become complimentary to patent wars.

There are three problems: first, the ever present threat of regulatory capture. Regulators are in many ways dependent upon those they regulate for information. Stand too far away and regulators can lose touch with industry; stand too close and acquaintance becomes friendship which in turn can become compromised. Second, regulatory failure, often arising from a conviction that private profit and public interest are inherently complimentary, is the counterpart to market failure. When the two go together we have… well a global financial crisis for one thing, unrestrained monopoly power for another. Third, heavy-handed regulatory overbearance, is especially a problem in two circumstances: when regulators are over-reacting to commercially sensitive markets (as opposed to light-handed forbearance when regulators intervene only when ‘red-flag’ warnings justify intervention) and in markets where regulators are under political pressure to protect state-invested or state-favoured companies. In a nutshell, it often seems that regulators only get it right when the market is working well! But who is to say which is cause and which is effect?

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