The Master Switch

I have a piece in ABC’s The Drum today on Tim Wu’s The Master Switch. If you are interested in broadband and competition, it is a must-read historical treatment.

Who will hold the Master Switch?

Joshua Gans, ABC The Drum, 20 December 2010.

About 14 years ago we bought our first place. It was a new townhouse and the builder – in the interests of future proofing – had installed Optus Vision cabling throughout the entire house.

Yes, Optus. They were a pay TV competitor for Foxtel back in 1996 and (I think) they nominally still exist. Anyhow, for reasons I can’t remember, we actually wanted Foxtel installed. When the installers came by they saw the Optus cable throughout the house. Instead of putting in new connections they asked us if they could simply unplug the Optus cable from its box (outside the house) and connect their own one up. I didn’t have a problem with this and so it was done. They even went to the trouble of installing Foxtel labelled base plates on the outlets removing the Optus ones.

This story, in one hit, captures the essence of the tension between competition and efficiency in telecommunications and similar network industries. On the one hand, it is inefficient to lay down two cables when one will do. On the other hand, if you just have one cable, then consumers cannot obtain the benefits of competition. And when Governments choose how they are going to manage these industries they face this choice head-on. Have one network and regulate it or have more, accepting some messiness, in the interests of competitive flexibility.

I recalled the Optus cabling story while reading The Master Switch by Columbia Law Professor Timothy Wu. Wu’s compelling and fascinating look at the ebb and tide of communications and information industries in the United States goes beyond this basic tension and identifies a pattern or cycle. In The Master Switch, Wu takes us on an historic journey of the rise, consolidation and eventual fall of a series of information monopolies. While there are many examples – Western Union, Paramount Pictures, NBC/CBS and Microsoft – the story of AT&T stands out. Telephony began, like so many information companies, as a result of the work of hobbyists – in this case Alexander Graham Bell, but then off the back of government interaction turned into a large monopoly. AT&T were sophisticated enough to deal with the government – offering universal service and regulation in return for what amounted to protection from competition. AT&T controlled the Master Switch for the industry. That held government at bay for 70 years until AT&T went too far and forces for stronger action took hold – it was broken up in 1984.

Throughout the entire cycle for AT&T was the ‘cabling tension.’ AT&T successfully argued that one was best and aggressively defended that notion. It went so far as to prevent entrepreneurs being able to attach add-on devices for consumers and even so far as to invent and then bury recording technology at the heart of a potential answering machine. (Why? Because AT&T feared people wouldn’t make calls if they suspected they might be recorded.) The final straw was the active harm – in some cases to the point of sabotage – of competitors to it on long-distance telecommunications. The Nixon administration had had enough. Even though it took a decade AT&T was split. That marked the end of ‘The Cycle’ as Wu terms it from hobby to consolidation to backlash.

In Australia, for Telecom/Telstra we are now in the end point of the backlash of The Cycle. Unlike the US, telecommunications in Australia – as in much of the rest of the world – was a government investment. Alongside that came the same choice towards efficiency in lieu of competition. But competition did eventually come in the 1990s but, even though they had that option, successive governments chose to keep Telstra intact. That maximised proceeds from privatisation but left Telstra firmly in control of the evolution of the industry – as well as potential threats from cable to broadband – until the present day.

One suspects Telstra could have continued to win the efficiency claim had it not gone so far and begun an active war with Government regulators (the ACCC) and the Government itself. The final insult was a few pages of business plan in the hope of winning the Government’s broadband contract – a plan that makes the claimed lack of Government plans today laughable. In 2009, the Government threw in the towel and decided on a plan that could lock Telstra out entirely.

That will mark the end of Telstra’s dominance but Wu believes that the tendency towards monopoly in such industries is a strong one. While the Government’s NBN that will replace Telstra is a step forward in terms of a commitment against vertical integration – something Wu would applaud – it did so without preserving the option for some infrastructure-based competition. Telstra’s copper and cable networks are a valuable commodity in the market place – not for commercial reasons but for social ones. They provide an insurance policy for Australians against the potential for the NBN to follow in the cycle towards monopoly and its costs. Specifically, they prevent the NBN from holding the Master Switch for Australia. However, and surely because this is recognised, our Government is pursuing a commercial agenda with far greater weight than the social agenda that should be its focus. And what is more the Opposition are holding them to that rather than themselves pushing for social value. It is de ja vu all over again.

For anyone who doubts – perhaps blinded by the desire to build broadband ahead of digital demand – Wu’s book is a timely reminder that history is not on the side of delivering the maximal benefits.

Joshua Gans is a professor of economics at Melbourne Business School and a visiting scholar at Harvard University.

One thought on “The Master Switch”

  1. A well argued piece Joshua. I am reading (well, listening to via The Master Switch and recommend it to anyone trying to make sense of the digital tomorrow.
    One of my concerns is that the government also has control of frequencies for LTE – the next and faster wireless protocol. The government – whichever party – will be tempted to manage those allocations to reduce competition to NBN.
    To me, this has always been one of the strongest arguments against government business – they are inclined to use their powers to rig the game in their own favour.


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