Tragedies of the tele-commons
April 18, 2003 By Thomas Hazlett In a 1998 article fast becoming a classic, Michael Heller, a Columbia University law professor, described a baffling economic phenomenon he confronted when working in Russia with the World Bank in the early 1990s.* Why did prime floor-space in vast Soviet-era stores go vacant while, just metres away, tiny kiosks sprouted everywhere, serving a brisk retail trade?
The buildings were spacious, valuable and had been privatised, but were under-utilised because property rights were thinly sliced and widely dispersed. A “property committee” and various local governments might collectively own the right to sell a building, while an institute and state enterprise shared the right to collect money for leasing it. Still others might possess rights to occupy the building or to utilise the land beneath. Actual usage required putting Humpty Dumpty back together again. Hold-out problems were endemic, as each partial owner could block transactions arranged by the rest.
Kiosks, on the other hand, were “authorised” by local mafia-type gangs, which quickly established some degree of effective ownership. It was simple to find out who to deal with and what one’s roubles could buy, even without legal protections.
Prof Heller’s investigation led him to subtle insights about a phenomenon he dubbed the “tragedy of the anticommons.” This market failure mirrors the famous problem of over-grazing, which occurs when there are too many rights to use a scarce resource, eliminating incentives to conserve. Here, however, productive assets go under-utilised because of excessive veto rights. These create incentives to hold out, thwarting efficiency. In either case, the excessive fragmentation of rights prevents sensible deals from being struck.
Across today’s telecommunications landscape, tragedies of the anticommons abound. In spectrum, America’s TV band is itself a vacant storefront. There are 67 channels set aside for TV broadcasts in each of the 210 US TV markets, but just 1,500 stations - little more than seven channels of programming in the average market. Moreover, about 90 per cent of US consumers have abandoned terrestrial TV signals altogether, subscribing to satellite or cable for their video fix.
Yet right next door to broadcast television’s 402 MHz of desolation sits a 50 MHz swath teeming with activity - the cellular telephone band. Cellular frequencies were carved from the little-used UHF TV band in the 1970s. That was an enormous regulatory project spanning more than two decades, and the transfer was not nearly enough. Wireless entrepreneurs could make excellent use of scores of idle TV channels.
They are frustrated by fragmented rights. Because the spectrum allocation system over-protects incumbents, forcing newcomers with innovative technologies to prove that new competition is in the “public interest”, broadcasters essentially exercise options to keep others off “their” spectrum. While promising wireless communications have been denied market access, TV licensees have successfully held out for concessions from the regulatory agencies. In 1997, for example, new digital TV licences valued in excess of $12 billion by the Federal Communications Commission were delivered to the incumbent stations free of charge.
The emerging tragedy of a wired tele-commons may prove just as destructive. The FCC has embraced the idea that the way to develop competing telcoms networks, as called for in the 1996 Telecommunications Act, is to let new companies lease all existing infrastructure - switches, loops, and everything else needed to connect a customer to the telephone system - at a fraction of the incumbent’s costs. Set retail-wholesale margins large, reasons the Commission, and the competitors will come.
But even if wholesale network access were free this sharing plan would not work. The creation of unlimited options for new entrants to use facilities at bargain prices is itself a tragedy of the anticommons - and, strangely, one consciously crafted by regulators. In anticipation of under-compensation, network investors curtail expenditures. A deal could be struck, theoretically, as the cost of providing new telecoms services is exceeded by vast potential benefits. But claims over the network of the future - yet to be built - are too widely distributed to negotiate a win-win situation.
Indeed, a unanimous D.C. Circuit Court of Appeals told the FCC in May 2002 that its network sharing rules were far too expansive, stifling network creation by appropriating the gains of prospective network builders. Unfazed, the FCC expanded many network sharing rules on February 20, 2003, a perverse response that stunned capital markets. The world awaits text of the full ruling, expected to run to 400 pages, due in May.
Network sharing mandates fragment rights. Ownership is split into tiny pieces and sprinkled far and wide. A tragedy of the anticommons occurs when such rights are overly broad in scope and insufficiently remunerative in cash, inviting resellers to free ride on risky investments by others.
Efficient investment in new technologies and network upgrades will go unrealised, because there is no economic way to pay off claimholders. Options to use “unbundled elements” are distributed to all potential rivals, now and forever. The market freezes. Just as the Moscow storefronts wasted precious value, valuable telecoms assets will simply fail to materialise.
Yet, just next door, broadband kiosks - cable TV systems - thrive. Free from the resale obligations of the local telephone companies, cable systems have been able to aggressively upgrade video plant for high-speed internet access. The result is about 12 million cable modem subscribers, more than twice that served by DSL, the phone companies’ rival service in residential markets. The vertically integrated networks owned by the cable company, which has no obligation to share, prevent tragedy of the anticommons. Given this security, multi-billion dollar investments are made, services are offered, and consumers flock. Millions of high-speed users are invited in, and eagerly pay the cover charge. A brisk business pressed right up against a tangled web of regulatory conflict and dashed expectations.
* Michael A. Heller, The Tragedy of the Anticommons: Property in the Transition from Marx to Markets, 111 Harvard Law Review 621 (1998).
Thomas W. Hazlett is a senior fellow at the Manhattan Institute for Policy Research. He has consulted for both incumbent local exchange carriers and competitive entrants. ©2003 FT.com About Thomas Hazlett: articles, bio, and photo |
