Charge of the Regulatory Brigade

As published in Financial Times, 08/03/2000

American regulatory authorities are spinning out of control, wildly flailing at any combination of companies that does not meet their whimsical notions of what can only be called “managed competition”.

The Microsoft case is the best known, but there are many others such as the recent collapse of the merger – because of pressure from both US and European regulators – between WorldCom and Sprint, the telecommunications companies. The government’s extraordinary new and sweeping concepts of what constitutes anti-competitive behaviour should send chills down the spine of every innovative, creative, entrepreneur in the US and abroad. Worse, these out-of-control regulators are a real threat to the “new economy”.

Neither William Kennard, the chairman of the Federal Communications Commission, who criticised the WorldCom-Sprint deal from day one, nor Joel Klein, the Justice Department’s antitrust chief, who finally put killed the deal, ever articulated a comprehensible theory of market concen-tration or impact on consumer welfare to justify blocking it.

In the market for long-distance telephone service – the market that Mr Klein and the Department of Justice supposedly were concerned about – the combined share of Sprint and WorldCom is only 27 per cent. Even more telling is the fact that a stand-alone, long-distance market did not exist as a viable, stand-alone business until the authorities introduced regulations that effectively created it in 1984. The likelihood is that it will disappear as soon as the regulators do. Unfortunately, there is no sign that the regulatory conspirators will disappear soon.

There are a few truisms about markets. First, they change in unexpected ways because market innovation by definition is original and unpredictable. Second, markets work best when governments minimise the amount of friction – regulatory, tax, and administrative – that they impose on market activity.

These truisms are truer than ever when it comes to the internet economy, which is transforming both how we do business and our definitions of business activity. If anything, sensible regulators should proceed with more caution than ever when dealing with complex business arrangements in such high-technology areas as telecoms, electronic commerce and genetic engineering.

Yet the regulators are charging ahead more aggressively than ever, desperately seeking a broadened role for government – and for international regulatory collusion – in the new economy.

This is scary stuff. Companies that flirt with the Justice Department in order to gain a temporary edge on competitors may rue the day they helped to foster a strong, global regulatory regime that, as likely as not, will turn on them next. Indeed, antitrust is often supported by companies wishing to gain a temporary advantage over their competitors rather than by a desire to improve consumer well-being. That is no way to promote consumer welfare or increase shareholder value. And with the emergence of a true shareholder democracy in America, more citizens will be watching what is going on than ever before.

It is a sure sign of a bankrupt regulatory doctrine when it has to constantly redefine itself even to be relevant to today’s global economy. That is a perfect description of what is going on with the Clinton-Gore-Klein antitrust policies.

In the specific case of WorldCom and Sprint, there was no concentration effect even in the mythical “long-distance market” to attract legitimate antitrust attention. More importantly, there is no longer a way to segregate the long distance sector from local phone service, broadband, satellite feeds, internet communications or cable.

All of these modes of communication are competing with one another, and truly integrated service providers operating across national boundaries are the way of the future. Research by Merrill Lynch illustrates why. Per-minute long-distance rates have declined about 6 per cent a year between 1984 and 1998. It is hard to imagine how this merger could have overcome the competitive environment to engage in oligopolistic behaviour to the detriment of consumers.

Indeed, the industry is so competitive that many experts foresee the per-minute price of long-distance calls falling to zero, in which case only integrated service providers would be able to provide long-distance service.

Standing in the way of the future is never a good idea, and it is disturbing to detect an undercurrent of mercantilism behind the government’s rhetoric about “serving consumers”. Sprint and WorldCom will continue to serve consumers, and I have no doubt they will evolve in productive ways that regulators cannot imagine. But the regulatory warning signs are there for everyone to see, and the public should be warned.

The writer is a co-director at Empower America, who served as US secretary of housing and as a member of Congress.