Publications

Permissionless Innovation: For an End to the Presumption of Regulation in Telecommunications

Research Paper inviting the CRTC to proactively rescind the telecom exception and thereby reintegrate the sector under the general competition regime

The question of the price of cellphone packages in Canada recently resurfaced again, this time during the election campaign. In the context of this debate, we too often forget that Canada has top quality telecommunications infrastructure, despite a regulatory framework that is very restrictive for companies in this sector.

Related Content

The CRTC needs to get out of the way (National Post, October 31, 2019)

 

Highlights

Innovation delivers widespread benefits throughout society. While this disrupts markets and topples established models, the socially efficient rule is clear: Innovation should be permitted by default. Regulations, if not well designed and narrowly tailored, tend to impede innovation. The telecommunications industry in Canada is subject to regulations above and beyond the general competition regime. This Research Paper invites the CRTC to proactively rescind the telecom exception and thereby reintegrate the sector under the general competition regime.

Chapter 1 – Innovation, Growth, and Regulation

  • The main source of growth in an economy is figuring out new approaches for being more productive with the same resources: in a word, innovation.
  • By making it more expensive to run a business, or invest in a new technology, regulation delays projects, or diminishes the chances that projects will be undertaken.
  • When it opened up the local telephone market in 1997, the CRTC imposed “mandatory wholesale access” on the former telephone monopolies, a policy used around the world to ease the transition from a monopolistic environment to a competitive one.
  • Policies subsequently used to introduce additional, artificial competition in new services like high-speed internet have not benefited Canadian consumers in a sustainable way, instead sheltering competitors from market forces.
  • In the wireless sector, measures to introduce artificial competition in recent years, such as spectrum set-asides or caps, as well as mandatory roaming and tower sharing rules, have also undermined efficient competition.
  • There was a clear recommendation from the Telecommunications Act as early as 1993 to forbear from regulating as long as the industry keeps progressing toward long-term public policy goals.
  • The emergence of cable operators as serious contenders in the provision of telecommunications services accomplished in a few years what regulation had been unable to do: bring about dynamic, facilities-based competition.
  • The CRTC’s recent decision to further reduce the wholesale rate large internet providers can charge their smaller competitors, which those large providers have appealed, would further reduce their incentives to invest.

Chapter 2 – Regulation by Default: A Misconstrued Approach to Markets and Competition

  • Consumers commonly substitute across markets, as when cellular phones—originally considered separate and distinct—came to offer a compelling alternative to fixed line telephone monopolies, eliminating the market power of legacy network providers.
  • Even if infrastructure-based markets could not sustain too many suppliers, it would not justify a technocratic body picking market winners instead of letting firms compete, with no legal barriers to entry, and trusting consumers to decide which ones deserve their business.
  • When mobile operators compete for the bottom of the pyramid in emerging markets, their competitors are not only the other mobile operators, but also the providers of other goods that compete for the same disposable income.
  • Customers of fixed line providers in an industrialized country aren’t captive at all, since alternative services (such as satellite, mobile, and cable operators) are already available and improving fast, but also because of the emergence of “third places” such as coffee shops offering good Wi-Fi speed.
  • A good illustration of how indomitable customers can be is the saga of the Blackberry, produced by Research in Motion (RIM), whose market valuation reached US$42 billion in 2007, but which lost 75% of its stock value within the following five years.
  • The number of mobile and fixed operators has not changed much over the past few years, but the number of their suppliers has decreased drastically, with a few equipment manufacturers becoming giant players, and their bargaining power increasing significantly.
  • Equipment manufacturers, terminal manufacturers, internet service providers (whether wireless, wireline, or cable companies) and content providers all belong to the same ecosystem, and must adapt their strategies to each other’s progress, always driven by what the general public is willing to pay for.

Chapter 3 – Reintegration of the Telecommunications Industry under the General Competition Regime

  • Rescinding the specific regulation of the telecommunications industry will create immediate economic value, as some financial and human resources currently devoted to compliance matters will be freed up and made available for productive use.
  • As mandatory sharing policy is rolled back, incumbent wireline and cable operators, who were reluctant to make further investments that would have also benefited their competitors, will be encouraged to put more money to work.
  • Commercial offers which were banned by the regulator even after having already found their customers, such as the zero-rating practices banned by the CRTC in 2017, will likely be reinstated if possible.
  • One interesting scenario would be for facilities-based operators to finally manage to extract money from the OTT (Over-the-Top) firms which benefit greatly from their infrastructure without having to pay for it.
  • As the share of online spending made by Canadians with their smartphones keeps growing, the stakes for online retail platforms to ensure access quality and reliability are getting higher.
  • It is easier for most people to comprehend the expected results of a regulation than to imagine the future benefits derived from the freedom to innovate, for the very reason that these benefits don’t exist yet and still need to be invented, which gives us a cognitive bias in favour of regulation.
  • As both theoretical arguments and public policy experiments show, the CRTC must rescind its special regulatory policies and let the sector fall under the general competition regime in order to enjoy the proceeds of unhampered competition.

Introduction

Experiments creating new technologies, services, and businesses are producing stunning advances in the modern economy. They constitute a discovery process delivering widespread benefits throughout society, while disrupting markets and toppling established models. This inevitably sparks controversy. But the socially efficient rule is clear: Economic innovation should be permitted by default.

This notion of “permissionless innovation” puts the onus on the would-be regulator: “Unless a compelling case can be made that a new invention or business model will bring serious harm to individuals, innovation should be allowed to continue unabated and problems, if they develop at all, can be addressed later.”(1)

Regulations, if not well designed and narrowly tailored, tend to impede innovation. In fact, it is often the very purpose of regulation to render market access more difficult. Reducing both the scope within which initiative can take place and the number of firms authorized and able to compete necessarily limits the possibilities and the incentives to innovate. This in itself can (and will) discourage entrepreneurs from investing in the risky market experiments that lead to discovery and progress.

The telecommunications industry in Canada is an example of a sector of the economy that is subject to regulations above and beyond the general competition regime. The Canadian Radio-television and Telecommunications Commission (CRTC) is currently struggling to complete its migration from a “presumption of regulation” to a “presumption of competition.” The former typically uses expedients to encourage a certain pattern of market conditions and behaviours, whereas the latter relies on spontaneous dynamic forces to generate benefits for the general public.

Existing regulatory rules have been influenced by the view that infrastructure businesses—because of their size, economic importance, and cost structure—are de facto natural monopolies which ought to be heavily regulated. However, as seen in myriad fields, competitive entry has often challenged or destroyed monopolistic arrangements. This compulsion to regulate first has moreover sometimes ended up wasting vast resources and hindered economic growth.

Regulators can improve the situation by updating their view of the market and their unduly low expectations for rivalry—whereby operators are from the outset suspected of abuse and customers are deemed to be powerless—and by embracing a more receptive approach to market dynamics.

Indeed, once markets are understood as an organic system centred on consumers and their ever-evolving needs—which entrepreneurs and capitalists incessantly seek to discover and serve, realizing profits for successful anticipation and adaptation—it becomes clear that competitive advantages are temporary, not permanent. In this context, regulatory actions are seen to involve fundamental trade-offs and risk gumming up the process by which the long-run dynamics of the market naturally work to counter fleeting positions of dominance.

It is the presumption of competition—and an underlying freedom to innovate without asking for permission—that should be the guiding principle of the regulator. Under such an entrepreneurial paradigm, the future of the industry is continually being rewritten, as technologies emerge, networks evolve, devices are invented, and software applications are created. The consumer experience is transformed in competing forays, as rival carriers attempt to earn the loyalty of customers by serving them better and at lower cost.

This Research Paper discusses the case for “permissionless innovation” and applies it to the Canadian telecommunications industry. It invites the CRTC to proactively rescind the telecom exception with regard to regulation and thereby reintegrate the sector under the general competition regime. Such a rollback would provide new incentives to innovate and unleash untapped creative potential for the benefit of the entire economy. Consumers should at last be empowered by a system in which the regulator stands back, intervening only upon a breach of the general competition regime.

Read the Research Paper in PDF Format

References

  1. Adam D. Thierer, “Embracing a Culture of Permissionless Innovation,” Cato Online Forum, November 17, 2014.
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