Interview: Government Is Holding Back Telecom Innovation

Published December 2, 2009

Larry Downes, a fellow with the Stanford Law School Center for Internet & Society, is the author of The Laws of Disruption: Harnessing the New Forces That Govern Business and Life in the Digital Age (Basic Books 2009).

In the new book, Downes outlines nine strategies for success in the emerging world of information law–an area of expertise he honed teaching courses on corporate strategy and technology law at the University of Chicago Graduate School of Business, Northwestern University School of Law, and the University of California-Berkeley’s Haas School of Business.

Downes and James G. Lakely, managing editor of InfoTech & Telecom News, carried out an email interview about Downes’ book and the past, present, and future of government regulation in the digital economy.

InfoTech & Telecom News: What compelled you to write your book? And what is the thesis of The Laws of Disruption?

Larry Downes: I read a variety of business publications every day looking for interesting news about information technology. I started to notice over the past few years that more and more of the headlines about technology were in fact stories about the regulation–through lawsuits, laws, or regulatory action–of technology, and that the stakes in these efforts to control innovation were getting increasingly life-threatening for the companies involved.

The thesis of The Laws of Disruption is that the cause of so many breakdowns at the intersection of innovation and the law is the different speeds with which both adapt to change. Information technology roughly follows Moore’s Law–exponential change. Law, by design, changes slowly, with a variety of checks and balances and other mechanisms for ensuring incremental improvement.

That’s normally a good thing, but during times of technological revolution the slow pace of legal change becomes dangerous. We stand on the edge of a legal revolution, a necessary rethinking of the legal paradigm to match the emergence of what I call digital life.

ITTN: Just as the steam engine, automobile, telephone, and airplane were the “big disrupters” of previous generations, the Internet is the big disrupter of the modern era. Talk a little bit about how the Internet has caused disruption in our society.

Downes: We’re making the shift from an economy based on industrial consumption to one based on information collaboration. It’s not “consumption,” in the sense that information–unlike commodities such as food and oil and steel–doesn’t get “used up” while it’s being put to productive use.

That interesting economic feature of information is what makes the transformation so disruptive. We have a legal system built on the assumption that property is “rivalrous” and must be protected as such for the market to function efficiently.

Consumers already understand that their digital lives inhabit an environment that follows a very different set of physics than do their physical lives. Laws that protect information and warp it into a kind of property (copyright, patent, trademark) made sense when information had to be transferred to physical media to be enjoyed. But as information production, distribution, and use all become digital, the metaphor of “intellectual property” is breaking down.

Consumers don’t put up with laws that no longer support an efficient market. They ignore them. Today, copyright is a law in name only.

ITTN: How do you see the basic “disruption” evolving in both the near future (five years) and beyond (a decade or more)? And what will be the long-term effects on society in the personal and political/policy realms?

Downes: When one is dealing with revolutionary change, making any prediction about either the destination or the route is likely to lead to embarrassing hindsight. My intuition–and that’s all it is–is that information is the great democratizer. Therefore, information technology is working toward a global community that will be more open, not less, as well as more merit-based and just.

How we get there, how fast we get there, and what roadblocks will be thrown up along the way by those with a vested interest in keeping the world closed, I wouldn’t want to predict.

But you can predict resistance. Historically, all great technological revolutions are met with resistance by those with vested interests–political, economic, social, cultural, religious–in keeping things unchanged. They always fail in the long term, and often those interests turn out to be beneficiaries rather than victims of long-term changes made possible by technology, but that’s hard to see in the midst of a crisis.

ITTN: You noted earlier, “during times of technological revolution, the slow pace of legal change becomes dangerous.” How, and why, have our laws not kept up?

Downes: Legal systems are optimized to work when social, economic, and cultural change is happening incrementally. We need stable governments to keep the day-to-day passions in check. For example, changing the U.S. Constitution is very hard, and it should be. The federal system pits the three branches of government against each other, and against the states, to ensure that laws only get passed after careful consideration of their consequences.

Technological disruption, however, challenges that model. During the Industrial Revolution, railroads and other economic trusts used the law to gain tremendous economic leverage over their customers, and in many cases greatly burdened some classes of customers.

We’re at a similar crossroads today. Information producers have used their economic leverage to change the law in ways that discourage, rather than encourage, optimal information flow. That is causing severe pressure for change by consumers who know a rigged market when they see one.

How smoothly we’ll transition to a new kind of market–and new kinds of government to support it–remains to be seen.

ITTN: In his review of your book in The Wall Street Journal, Jeremy Philips said you characterized our federal regulators as living “in a prelapsarian world–with a landline phone, a typewriter, and a library card.” Is that accurate, and why should regulators change their thinking?

Downes: Philips was characterizing, not unfairly, my view of the Federal Communications Commission, which regulates, for better or worse, the infrastructure of information flow–the Internet, the telephone network, the broadcast network. These three are rapidly merging into a single channel, greater than the sum of its parts, but the FCC is working hard to hold back the flood. They can’t succeed, but they can gum up the works in the short term.

Like most federal bureaucracies, the FCC is a victim of significant regulatory capture–treating the industries they regulate as clients rather than following their legislated mission of promoting consumer interests. Career bureaucrats, like career managers in the associated industries, have a natural resistance to change. The FCC and the FTC, to pick two, are clearly still in the “denial” stage of response.

Regulators need to move themselves through the grief cycle more quickly, for two reasons. One, if they don’t, the market will simply find ways to bypass them, making the agencies irrelevant. Two, and more to the point, the mission of these agencies is to protect public interests. We have right now the greatest opportunity to create new wealth in the history of Western civilization. But rather than promoting that opportunity, regulators are trying like Sisyphus to push the boulder back up the mountain.

I shouldn’t leave out the European agencies, who are doing something even worse, which is to use the law–particularly antitrust–to pursue local protectionist interests in a pretty naked manner. Again, they see their job as protecting local interests, even when those local interests are uncompetitive.

ITTN: Why are the regulatory distinctions government regulators have made between different types of voice and data carriers outdated?

Downes: Remember that the goal of the 1996 Act was to deregulate communications, which had, since the breakup of AT&T in the early 1980s, been regulated largely from judicial chambers. In 1982 a clear distinction between voice carriers and data carriers made sense, but the Internet has obliterated those distinctions.

Voice, data, and video content are increasingly all transported using the same protocols–the Internet. It’s all bits now. I think leaving the data carriers out of the FCC’s clutches was a very good thing indeed. Now, however, it’s time to level the playing field and let the phone companies compete fairly.

ITTN: What did you make of FCC Chairman Julius Genachowski’s speech at The Brookings Institution in September justifying more government intervention in the Internet?

Downes: I think the FCC’s plan is a bad idea, and I think, more to the point, that the FCC is the wrong organization to be “saving” the open Internet. Among other crimes, as the Electronic Frontier Foundation points out, the FCC is the same regulator that has ramped up the penalties and frequency of fines for “indecent” content over the airwaves.

The FCC is also the organization that has tried repeatedly to push through, at the behest of the media industries, the notorious “broadcast flag,” which would force electronics and software companies to limit the legal use of broadcast content.

Meanwhile, the agency that now believes there is a severe lack of competition in broadband provisioning–severe enough to regulate–has done everything it can to stop alternative broadband technologies, including broadband over power lines and municipal wireless projects.

The open Internet is a great thing, but the FCC is wrapping itself in the flag of Internet freedom and consumer advocacy in a most unconvincing manner.

ITTN: How should libertarians and free marketeers frame their arguments to convince skeptics among the masses that government intervention in the tech sector–and the Internet in particular–poses a threat to their freedom?

Downes: Remind them of all the examples of government intervention that harmed rather than helped technological innovation. As for individual liberty, the Patriot Act and the refusal of Republicans or Democrats to scale it back proves the point nicely. In response to 9/11, every law enforcement officer in the country pulled out their old Christmas wish lists and dumped them into the bill.

Governments always believe that new technologies create new opportunities for criminals to hide their activities, and they always argue that they need new powers of surveillance, investigation, and enforcement to maintain “parity.” But those new powers also affect the privacy interests of law-abiding citizens.

Clearly, given the opportunity, government is always prepared to move the needle as far over to “their” side as they can. The result has done little to improve public safety and a great deal to diminish the civil liberties of ordinary citizens.

I suspect a solid majority of Americans of all political persuasions recognize that we went too far in response to terrorism. I believe that is the natural tendency of government, not an isolated incidence.