Avoiding a Tech Train Wreck: The Technology Industry Is Consumed by Disputes Eerily Similar to Those That Roiled American Politics Long Ago in an Earlier Industrial Age. James V. Delong on How We Can Avoid the Mistakes of the Past

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The temperature of business reporting these days is raised by numerous disputes that lie at the intersection of technology and politics. Arguments over Internet network management involving telecommunications companies preoccupy the Federal Communications Commission. The European Union is pressuring several U.S. technology companies, including Microsoft, on antitrust grounds. Firms such as Qualeomm, Broadcom, and Nokia are involved in disputes over the use of patented cell phone technologies. Business writer Nicholas Carr lists entertainment, news, software, and financial companies as all having reason to cast a fearful eye on Google.

These battles may seem novel, a result of the frictions of the technological revolution worked by Moore's Law and its progeny. In fact, while the context is new, the underlying structure of the disputes is similar to the issues that roiled American politics a century and more ago, when the great infrastructures of transportation, utilities, telecommunications, and finance were laid down.

And therein lies a cautionary lesson. The battles of that time resulted in an armistice: the creation of regulatory structures that met immediate crises, but which also failed in many ways. These failures caused significant problems of stasis, rent-seeking, political manipulation, and corruption.

It took the great and only partly successful deregulatory effort that started in the 1970s to unchain the economy from the problems caused by the solutions of an earlier era.

As these old problems appear in new areas, or sometimes in the same old areas, the pressure to revert to the old regulatory solutions grows. Yielding to them would be unfortunate, since the same old solutions would inevitably restart the cycle of regulatory dysfunction.

So, while it is foolish to deny that the problems are real and troublesome, we should think in terms of new solutions. These could be hybrids based on contract, public commitment, and self-regulation.

These contemporary disputes are united by a common thread. They involve situations in which one company controls a resource upon which other firms must rely to pursue their own businesses. The resource may be a transportation network, such as a railroad, or a telecommunications network, such as access to the Internet, upon which the firm must depend for distribution. Or it may be a platform, such as a computer operating system (Windows or Linux), for which an application writer provides a complement. Or it could be a distribution network, such as eBay, on which numerous small businesses have staked their futures, which has the characteristics of both. Or it could be a Google search engine that becomes the entry portal for millions of Web users.

The essential characteristics of networks and platforms drive these disputes. For example, the network or platform is commonly characterized by high fixed costs and low marginal costs. A railroad or telecom company is a quintessential example; each requires massive up-front investment in rights-of-way, construction, and equipment before a single customer is served. Thereafter, the extra ("marginal") costs of adding each additional customer are pretty trivial. This structure makes entry by competitors difficult, since they must duplicate the investment before starting business.

The network or platform can also be characterized by a need for interoperability. This creates strong pressures for the industry to coalesce around a single standard. Thus, the proprietor of the resource enjoys considerable market power. A dependent company cannot easily shift its reliance on the network or platform.

Each dependent fears that the network or platform, given its druthers, will raise the price of access to a level that extracts almost all the value from the total enterprise and leaves the dependent with only crumbs. They also know that the network and platform owners have a strong interest in turning the complements into cheap commodities. …