When Less is More: A Tale of Two Kinds of Regulation

The light regulation and subsequent success of the Internet prove regulation in telecommunications is losing relevance.

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Robert Hahn is director of economics at the Smith School, University of Oxford, and a senior fellow at the Georgetown Center for Business and Public Policy. Peter Passell is a senior fellow at the Milken Institute and the economics editor of the Legatum Institute's Democracy Lab. They are cofounders of Regulation2point0.org, a web portal on regulatory policy.

Are you a policy wonk or Internet geek? (Or maybe a policy geek or Internet wonk?) We commend your attention to a perceptive report just issued by the Organisation for Economic Co-operation and Development, an update on the promise and perils of telecommunications regulation. It explains why telephone regulation is losing relevance—and why the current light touch applied to the Internet is working very, very well.

The study by Dennis Weller (an economist at Navigant Economics) and Bill Woodcock (the research director of the nonprofit Packet Clearing House) reaches three overarching conclusions. First, less-is-more regulation of the Internet has led to startlingly low costs of use. Second, telephone regulation is dogged by regulators' stubborn focus on protecting entrenched interests. Third, the ongoing success of the Internet could well require further investments in research and development.

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Start with that first point. You knew the Internet was a bargain, but betchya didn't know just how much of a bargain compared to information transfer by phone. As the authors note: "If the price of Internet transit were stated in the form of an equivalent voice minute rate, it would be about $ 0.0000008 per minute—five orders of magnitude lower than typical voice rates." Plainly, the system ain't broke, so we don't need new sorts of regulation to fix it. (See our earlier post here on the dangers of UN intervention.)

Then there's that second point. Voice calls between Internet devices cost nothing. But give the phone regulators a way to horn in—say by calling a mobile phone in the United Kingdom or France with a PC (or tablet, etc), and you could end up paying upwards of 20 cents per minute. Phone regulation was designed for an era in which Ford made cars in any color you wanted, as long as it was black. Giving these throwbacks room to mess up the Internet would be madness.

[Read the U.S. News Debate: Should Congress Pass Anti-Online Piracy Legislation?]

Lest you think, by the way, that Weller and Woodcock have drunk the libertarian Kool-Aid, they do make a case for giving the government a role in maintaining the spectacular rate of Internet innovation. "The speed of network interfaces has stalled," they point out, "and this has led to a transition from exponential growth to linear growth. Investment in basic research needs to be reinstated to return to a level of growth that will meet the economic and social development goals OECD countries expect of the Internet economy."

One final thought. The authors conducted a huge survey of Internet contracting arrangements, discovering that 99.5 percent of them are concluded without a written contract. Indeed, they found "that these rules of the game are so ubiquitous and serviceable indicates a degree of public unanimity that an external regulator would be hard-pressed to create."

We couldn't have put it better ourselves.

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