Thursday, September 2, 2010

Getting to the meat of market forces

Over the past few months, I've found myself taking a step back from the day-to-day goings on in technology and thinking about the bigger picture. Not just about technology, but how technology fits into the grand scheme of things, like the rise and fall of nations.

Recently, the term "market forces" has become a bit of a dirty word up here in Canada (and I'm sure the case is similar in other developed nations). The term is rooted in economics and generally means that a free and open market can solve all problems that may crop up. For example, if Company A comes out with a really good product and ends up monopolizing the market for that product, Company B can come up with a different product that offers some alternative or advantage and thereby possibly unseat Company A.

Eventually, problems occur in just about every market, and authorities have to step in to put market forces back on track. There are many examples in just the technology world. A good one is IBM, which in the early twentieth century created the first real computers - in the form of punch-card machines - that automated many calculation tasks. The company's machines were so fantastic that they eventually dominated the market, which gave IBM a considerable amount of power.

And you know what they say about power: it went straight to IBM's figurative head. The company refused to sell its machines to businesses, and instead forced them to lease them at, shall we say, rather usurious rates. Even worse, the company forced its customers to buy only IBM punch cards, rather than cheaper alternatives from third-party makers.

Eventually, governments and regulators realized this was a problem that was inhibiting innovation and economic growth and broke up IBM's monopoly with new regulations, thereby correcting the course of the market. It's a pattern that's been replicated a number of times throughout the past century of technology, most notably with Microsoft and its abuse of dominant position with its Windows operating system, and it'll probably happen again - possibly to Apple if it's not careful with things like iTunes.

The concept of "market forces" is great, but it has become icky in technology circles up here in Canada because we don't really have them. We have a strange bastardization, particularly when it comes to telecommunications, or the pipes that enable innovation to happen.

Ever since the Conservative government took office in 2006, telecom regulations have been dropping like flies, with one important exception: the wall that keeps foreign companies out of Canada is still standing. According to the Telecommunications Act, foreign companies are not allowed to own the majority of any Canadian telecom company that actually owns any infrastructure on Canadian soil.

It's an anachronistic rule that's out of touch with much of the rest of the world - the Organization for Economic Co-operation and Development has called it a "backwards" law.

Canadians have therefore been caught in the worst of all situations: domestic companies are getting fewer and fewer rules to play by, but new, foreign companies aren't allowed to come in and compete with them. It doesn't take an economist to forecast that this is a disaster in the making.

Fortunately, our government isn't stupid - certain ministers have recognized this is happening, and they're trying to do something about it. Industry Minister Tony Clement, recognizing that Canada is royally screwed as far as cellphone services and prices are concerned, last year effectively bent the laws by letting Wind Mobile, largely backed by Egyptian financiers, to start up. Canada's desperate need for more wireless competition proved to be stronger than the law itself, and the government is now wisely seeking to change those rules.

Similarly, there is much concern today in the U.S. and Canada over broadband internet access, and net neutrality. There have been numerous reports that have found both countries are falling behind in rolling out the next generation of super-fast internet infrastructure, which means we will ultimately lose our economic and innovation edge to more advanced broadband countries such as Japan and South Korea. Many have urged both governments to take more proactive action in expanding broadband, either through building networks themselves (like Australia is doing) or by forcing phone and cable companies to spend more or compete more.

On the net neutrality front, there is also the worry that if our governments allow phone and cable companies to pick and choose which sorts of traffic get priority, then innovation - and the economy - will indubitably suffer. As such, net neutrality advocates have been pushing for stronger rules to prevent exactly this sort of thing from happening.

The problem is, here in North America, a different kind of thinking has settled in. To put it in regulatory terms, our governments and regulators have become "ex-post" thinkers rather than "ex-ante" thinker. In other words, they prefer to deal with a problem only once it has occurred, rather than trying to prevent it in the first place. In Canada, this is in fact how our regulator, the CRTC, has been ordered to think by the government.

That's probably a good approach, and the news the other day about Canadians getting refunds from phone companies is perhaps the best example of why. In 2002, when the CRTC was still thinking "ex-ante," it came up with the brilliant plan of allowing telephone companies to overcharge customers in order to give cable companies a fighting chance with their new phone services. The idea was to prevent a price war, which seems to be the ultimate reversal of what competition is supposed to bring about: i.e. lower prices.

The idea seems really bone-headed now, especially considering that phone companies, consumer groups, the CRTC and the Supreme Court spent the past four years arguing about how to refund some of the money that was overcharged.

To put it in context: imagine you wanted to make and sell a new kind of shoe, and then you could get rules instituted that prevented other shoe makers from matching your prices. The concept seems as far away from capitalism and market forces as possible, and more akin to something that would happen in Soviet-era Russia.

There has been a lot written about how falling behind in broadband negatively affects a country economically, but perhaps less proof of how a lack of strong net neutrality rules can cause the same. I have no doubt that both issues do affect economic growth and innovation, and I'm certain that both Canada and the U.S. will eventually suffer because of our lack of attention on both fronts.

However, it's clear that we live in a "let the chips fall where they may" society. Our motto in Canada and the United States isn't so much "if it ain't broke, don't fix it," but more like "let's fix it when it's clear it's broke."

While "market forces" have generally been used to describe a national situation, in today's world they also apply globally. Just as the problems with IBM and Microsoft had to become glaringly apparent before something was done about them, so too will the U.S. and Canadian inattention to next-generation broadband and net neutrality have to result in serious issues before they are properly dealt with. Things are just going to have to get a lot worse before they can get better.

In that sense, market forces are just going to have to be allowed to take their course.


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