Shaping Science and Technology Policy: The Next Generation of Research

12. Technology Policy by Default: Shaping Communications Technology through Regulatory Policy

Introduction The relationship between regulatory policy and technology is difficult to trace, especially when much of the policy that influences technology has a different purpose. For example, policies designed to influence industry structure will often create incentives that influence investment in technology development and deployment. Communications in particular has a long history of policy that predetermines industry structure and thus technology development. Regulation designed to manipulate industry structure has often brought about technologies that favor certain market structures. Currently, the debate on mandatory unbundling of telecommunications networks to promote competition in local telephone and broadband access features the question of whether such policy encourages or discourages investment in technology. This chapter addresses this question by exploring how regulatory policies targeting industry structure shape technology development in telecommunications and Internet. To clarify the relationship between regulation and technology, I first analyze select policies in the history of telephony and the Internet in the 256 12 Technology Policy by Default Shaping Communications Technology through Regulatory Policy   United States to see how they may have influenced investment in technology . I then discuss the network pricing game, a model that shows when a market is more likely to be a natural or inevitable monopoly and when it is more likely to sustain competition, as a counterfactual for how technology investment might be different had network firms continued to compete. These discussions are then applied to the debate on mandatory network unbundling, considering three types of innovation: cost reduction, facilities deployment, and development of new products and services. The chapter shows that the incentive for investing in costreducing innovation does not change with mandatory unbundling, while investment in deployment of broadband facilities and new products and services are likely to benefit from these requirements. The chapter concludes with policy implications about the shaping of technology through regulatory policy. Regulation and Communications Technology: A Historical Perspective Industry structure has long been considered critical to investments in technology. Most prominently, Schumpeter ([1942] 1975) claimed monopoly returns are necessary for investment in new technology. It is tempting to simply reject this idea when we think of the many industries—including computer equipment and semiconductors—that are not monopolies and are characterized by significant investment in technology. In fact, the history of telecommunications regulation and investment in technology shows that competition may better favor technology advancement. This section provides a brief historical analysis of the relationship between policies targeting industry structure and the development of technology for telecommunications and the Internet. While anecdotal—and not meant as a comprehensive history of the policy or the technology—the analysis suggests a strong positive relationship between policies promoting competition and the advancement of technology. Predivestiture When the initial Bell patents for telephones and local network service expired in 1894, there was a rush of entry. Competitors entered, building Gideon: Technology Policy by Default 257 their own facilities, reaching toward markets neglected by Bell. In particular , they built facilities to provide residential service. Bell had never intended to provide residential telephones and service, considering telephones instruments for business. Predictably, Bell responded by quickly building facilities in new markets, including residential (Noll 2002). The result was a high level of intense competition, with Bell’s market share as low as 56 percent in some markets, and many advances in telephone technology, often developed by Bell’s rivals (Faulhaber 1987; Brock 1994; Noll 2002). This is an example of technology benefiting from competition without the sharing of facilities. The additional firms developed markets and technologies ignored by the incumbent. The telephone market’s evolution from this competitive state to monopoly was not the natural evolution of a natural monopoly.1 In fact, early telephone system technology had decreasing returns to scale (Mueller 1997). The Bell Company used its exclusive control of the developing long distance technology and facilities to regain monopoly, refusing to connect non-Bell service providers until threatened with antitrust action. Bell Chairman Theodore Vail also adopted a strategy of embracing regulation through advocating the social goal of universal service, then defined as a single network for all telephone service in the country. Vail successfully promoted a single national monopoly telephone network owned by Bell. The result was a protected national monopoly. Once entry was prohibited, no firms remained to invest in technology that might change the industry’s cost structure. The incentive for the monopolist was to improve its cost position given its monopoly structure, thus investing in cost...