Innovation and the free market

One of the reliable myths of free market ideology is that regulation always stifles innovation. The argument goes that government regulation increases the cost of doing business, decreases profits, and hence, discourages investment and innovation. Per this line of thinking, the recent deregulation of the telecommunication industry should have unleashed a torrent of new technologies. The market, freed of the yoke of government interference, would blossom a plethora of new products and faster service. Funny thing though, the exact opposite happened because we failed to grant open access the most important wire in the network – the one into our homes.

Yet the story of how Japan outclassed the United States in the provision of better, cheaper Internet service suggests that forceful government regulation can pay substantial dividends.

The opening of Japan's copper phone lines to DSL competition launched a "virtuous cycle" of ever-increasing speed, said Cisco's Pepper. The cycle began shortly after Japanese politicians -- fretting about an Internet system that in 2000 was slower and more expensive than what existed in the United States -- decided to "unbundle" copper lines.

For just $2 a month, upstart broadband companies were allowed to rent bandwidth on an NTT copper wire connected to a Japanese home. Low rent allowed them to charge low prices to consumers -- as little as $22 a month for a DSL connection faster than almost all U.S. broadband services.

In the United States, a similar kind of competitive access to phone company lines was strongly endorsed by Congress in a 1996 telecommunications law. But the federal push fizzled in 2003 and 2004, when the Federal Communications Commission and a federal court ruled that major companies do not have to share phone or fiber lines with competitors. The Bush administration did not appeal the court ruling.

"The Bush administration largely turned its back on the Internet, so we have just drifted downwards," said Thomas Bleha, a former U.S. diplomat who served in Japan and is writing a history of how that country trumped the United States in broadband.

By allowing more provider access to the wires into Japanese homes, the market fostered greater competition and better service. The US needs to follow a similar model if we are to ride the next wave of technological innovation spawned by true high-speed internet service. As someone would pays way too much for broadband, I would love to hear what the Presidential field has to say on this issue.