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Farber and Faulhaber on the “Dead hand of regulation”

By 21 December 2010 2 Comments

Inter-networking pioneer David J. Farber and professor Gerald R. Faulhaber have articulated one of the most important points in the Net Neutrality debate by pointing out the dangers of the “Dead hand of regulation”.

Customer needs take second place; regulatory “rent-seeking” becomes the rule of the day, and a previously innovative and vibrant industry becomes a creature of government rule-making. Advocates of government-mandated network neutrality have argued this is necessary to permit new and resource-poor innovators to bring their products to market; in fact, it will have exactly the opposite effect: innovators are better at fighting it out in the market with better products rather than fighting it out in front of the FCC with high-priced lawyers; they will lose out.

I can’t stress the importance of this point enough.  I can’t remember the last time an innovative startup had the resources to retain high-priced lawyers or were able to make significant donations to powerful politicians.  They’re busy innovating and acquiring the minimum funds needed to implement their ideas while the large incumbent companies are weighed down in their own bureaucratic dead weight.

Powerhouses like IBM and Xerox were toppled by tiny startups like Microsoft and Apple even as regulators brought anti-trust proceedings against IBM.  Then even as regulators fought Microsoft over Internet Explorer, Microsoft saw their control of the Internet wrestled away by Google despite all of Microsoft’s efforts to remain competitive.  Then before Google even has time to celebrate, they’re facing a massive threat from Facebook and Twitter.  All these examples showed that true innovation always won over market power and money.

Now the Government promises to step in to help prop up so-called innovators where “innovation” is merely a euphemism for cost shifting and free riding.  We have executives of peer-to-peer companies boasting to reporters and prospective investors that they’ve shifted all their costs, including bandwidth, server hosting, and even electricity to consumers and their broadband providers.  The problem is that when you have to prop something up with the force of government, it isn’t true innovation.

Under “real” Net Neutrality, consumers can no longer be trusted to avoid walled gardens so they argue that government should simply outlaw limited wireless services like the Kindle.  The Internet’s peering and transit agreements that have always worked fine under the free market will not be decided by five (actually three) unelected regulators.

As Farber and Faulhaber articulated so clearly, the power tilts back towards the large companies once the winners and losers are determined by regulators rather than the market place.  It won’t matter how innovative a new startup’s product is if they can’t afford the lawyers, the lobbying, and the donations.