The Path to Deregulation--Lessons From the Computer Industry : Telecommunications: Productivity and quality will rise and prices will fall if government sets the market free.

House Speaker Newt Gingrich and Senate Majority Leader Bob Dole are calling for quick action on the telecommunications deregulation bills stalled in the last Congress. Much of the direction for this can be found in the U.S. computer industry.

The digital technology that has produced a six-thousand-fold increase in productivity in computing since 1960 is now surviving the rapid innovation and efficiency gains in voice, video and data communications. In the future, the personal computer may well be the single device providing interactive voice, video, data transmission and computing services to the consumer.

A decade ago, many Americans were worried that Japanese and European competitors, aided and subsidized by their governments, would come to dominate the computer industry as they had so many others. Instead, in a burst of technological innovation and entrepreneurial genius, the U.S. industry led the world in the creation and development of personal computing. The Japanese and Europeans are now peripheral players in the industry. Ninety-seven percent of the world's computers today use U.S. technology. The six leading manufacturers of personal computers and disk drives are American, as is three-quarters of all software sold legally in the world.

The computer revolution is also changing the face of U.S. manufacturing and service industries, leading to steady productivity gains in both sectors and increased competitiveness throughout the economy. U.S. business has more than twice as many computers in use as its European counterparts and four times as many as those in Japan. More than one-third of all American homes now use personal computers, including an estimated 6 million new users from the 1994 Christmas season alone.

Further economywide efficiency gains can be expected from more rapid deployment of new telecommunications technologies, provided that this industry is freed from regulatory barnacles dating back to the 1930s. The Clinton Administration and the Democratic Congress in 1993 and 1994 tried a gradual approach to deregulation, which would have phased out old rules but maintained government control over market entry and pricing of television, cable, voice and data-transmission services. Such a dated, centralized approach has been discarded in favor of virtually complete deregulation in New Zealand, Chile, Hong Kong and Great Britain, causing the technologically advanced American companies to test new equipment and services in these countries rather than at home.

To protect its technological edge, the United States should abandon its gradualist approach and instead move to the radical deregulation that worked so well in the computer industry. In particular, the government should remove barriers to entry and limits on investment, lift price controls and cross subsidies and end any attempt by bureaucrats to set standards and pick winners and losers.

Just as advances in microelectronics lowered the cost of entry and allowed Apple, Quantum and Microsoft to displace IBM and DEC, we now see the price of building new telephone and television systems falling because of wireless digital technology. A competitor to the telephone monopoly in Northern Mexico, for example, expects to offer voice telephone services with an investment of only $40 million. Direct satellite broadcast television now is competing with wired cable television in the United States and around the world. Regulators need to catch up with technology and remove unneeded constraints on investment, such as those prohibiting cable and telephone operators from competing.

Fears of price-gouging are misplaced. Prices for long-distance and cable services declined and household penetration rates increased when these services were deregulated. Innovation continually drives down prices in telecommunications hardware and services as an abundance of transmission capacity spurs the supply of new services to use it. Standards in the computer industry have always been established in the private sector and the marketplace, while government led standard-setting in Japanese high-definition television and European computing have been disasters.

Vice President Al Gore and his friends in regulatory agencies look to the distant history of railroads or interstate highways for guidance in promoting the telecommunications revolution of the 1900s, while a better analogy--computers--is much closer in terms of time and application to the industry. The increasing merger of computing and telecommunications, along with the unparalleled success of the totally unregulated computer industry, points clearly to quick and virtually unfettered deregulation of telecommunications. If we jettison the metaphor of the information superhighway, we can also throw off the shackles of the dated regulatory mentality that goes with it.

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