Tuesday, December 02, 2008

Reforming the FCC: Diagnosis

The financial crisis has called into question how markets are regulated; calls for reforming the FCC have been growing louder for some years. The legal/regulatory shortcomings of the FCC are a topic of frequent conversation (e.g., GMU Sep 08, PK/Silicon Flatirons Jan 09. It is therefore instructive to ask why it has ended up in this situation. Some of the problems are due to the personalities and politics of the moment, and are thus transitory. Some are due to its terms of operation; the FCC’s structure and mission are determined by the Communications Act, and won’t change fundamentally unless the Act changes. The deeper cause, which most interests me, is a change in the nature what is being regulated: the transformation of the communications business from telecoms+broadcasting to the internet.

Since the mid-90s, the computer, information and communication services have come to dwarf telecommunications services. For example, the graphic at the top of this post charts the service exports of the OECD countries according to the OECD Communications Outlook 2007 (p. 256). This was not only a quantitative change; computing brought a qualitative change. The internet/web is modular, decentralized, self-organizing, adaptive and diverse on a fundamentally different scale to telecommunications (Internet Governance as Forestry). These are all characteristics that distinguish complex systems from merely complicated ones.

An analogy may help: the FCC in the telecoms era was like a farmer managing agricultural production; today it is like a ranger responsible for a wilderness. A farmer can decide which crops to cultivate, where to plant them, and when to rotate – though the plants do the work of converting sunlight to carbohydrate, and the animals convert food to meat. Some inputs, like weather and market conditions, are unpredictable, but many – irrigation, fertilizer, seed type, antibiotics – are under the farmer’s control. (And even weather and market risk is mitigated by massive government subsidies for major crops.) The desired output is well-defined and easily measurable. Rangers, on the other hand, have to deal with a very different balance of power and responsibility. They have to protect endangered species, prevent catastrophic fires, and provide access to citizens, but have little or no control over the animals and plants in the ecosystem, or the inputs in the form of weather, migrating animals, or pests.

This limited control implies that detailed, rule-based regulation is no longer sustainable. An approach based on principles, supported by tools such as transparency and computer simulation, is the only viable strategy. Rules can determine which crop hybrid to use for a particular market need given climate and soil type; but principles – such as flexibility, taking a big picture view, fostering diversity, and delegating responsibility – are unavoidable when managing an ecosystem.

In a New Yorker article about the financial crisis, James Surowiecki uses a sport analogy to explain the difference between principles and rules:
It’s something like the difference between football and soccer. Football, like most American sports, is heavily rule-bound. There’s an elaborate rulebook that sharply limits what players can and can’t do (down to where they have to stand on the field), and its dictates are followed with great care. Soccer is a more principles-based game. There are fewer rules, and the referee is given far more authority than officials in most American sports to interpret them and to shape game play and outcomes. For instance, a soccer referee keeps the game time, and at game’s end has the discretion to add as many or as few minutes of extra time as he deems necessary. There’s also less obsession with precision—players making a free kick or throw-in don’t have to pinpoint exactly where it should be taken from. As long as it’s in the general vicinity of the right spot, it’s O.K.

--- James Surowiecki, Parsing Paulson, The New Yorker, 2 Dec 2008
Pursuing this metaphor, the FCC is not only the referee of a football game, it also makes the rules – often as the game goes along.

I’ll suggest some possible ways for a new FCC to manage the new communications business in an upcoming post. However, a caveat: The ICT business hasn’t had a crisis of melt-down proportions, as finance has had, to concentrate the mind. It remains to be seen how the change in power in DC will affect this process. Some of the loudest calls for change at the FCC have come from the Right, arguing that the FCC regulates too much and too intrusively; the Left has chimed in, arguing that it regulates too ineffectively. With Democrats now in control of both Congress and the Administration, and the GOP in some disarray, the pressure to reform the FCC may well abate; calls for its abolition will certainly have less resonance.

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