The Master Switch

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by Tim Wu


  It is an oft-repeated assertion, but one that nevertheless always bears repeating: information industries, enterprises that traffic in forms of individual expression, can never be properly understood as “normal” industries, ones dealing in virtually any other sort of commodity.*

  Today, the information industries are collectively embedded in our existence in a way unprecedented in industrial history, involving every dimension of our national and personal lives—economic, yes, but also expressive and cultural, social and political. They are not just effectively integral to every transaction; they also decide who among us gets heard or seen and when, whether it be the aspiring inventor, artist, or candidate. And that creates a challenge for an American system used to a clean split between the treatment of political and economic power, a strict control of the former and only moderate regulation of the latter. Among the great questions of our time is whether our approach to the power of information should be informed by a sense of that power’s political consequences, subject to our ingrained habit of balancing and checking any great power. Or should we simply follow our approach to economic power in general, in which we tolerate, and even reward, aggrandizement?

  While perhaps not immediately obvious, such questions are in fact at the heart of the ongoing struggle between the armies of open systems and closed, represented in the last chapter in the battle between Google and Apple but manifest elsewhere as well and destined to outlast that rivalry. The two defining firms of our time have come to represent, respectively, the utopia of openness (the dream of the Internet’s founders, of which the early days of telephony, radio, and film offered a foretaste) and the perfection of the closed system (Vail’s dream). The same question of how to treat information industries is also raised by a less well reported alignment now shaping up: by the FCC’s own reckoning, the cable companies will soon enjoy an uncontested monopoly over broadband Internet in much of the United States beyond the East Coast, and they are also seeking control of more Hollywood studios and television networks.

  To come at these problems afresh in the twenty-first century is to be struck by an obvious reality: information has become exceptional as an industrial category even in relation to that industry’s own history. To consider the extent of that reality is to recognize immediately that the purely economic laissez-faire approach, the old television-as-toaster thinking that prevailed in the late twentiety century, is no longer feasible. To leave the economy of information, and power over this commodity, subject solely to the traditional ad hoc ways of dealing with concentrations of industrial power—in other words, to antitrust law—is dangerous. Without venturing into the long, rancorous debate over what, if any, kind of antitrust policy is proper in our system, I would argue that by their nature, those particular laws alone are inadequate for the regulation of information industries.*

  The rejection of a narrow economic approach might seem to propose a high degree of regulatory involvement, along the lines taken by the New Deal agencies. And indeed, following the logic that the information and news media peform a vital public function, most nations in the twentieth century, even liberal democracies, have simply made broadcasting, telephony, and the news media either actual or de facto parts of government. The United States came close to this model during the years of AT&T’s regulated monopoly and the golden age of the television networks, but has since reverted to the idea that industry is industry.

  Yet this approach is also wrong. What I propose is not the sort of nationalization that found favor in Western Europe and briefly in the United States during the 1930s. Far from it. For history shows that in seeking to prevent the exercise of abusive power in the information industries, government is among those actors whose power must be restrained. Government may function as a check on abusive power, but government itself is a power that must be checked. What I propose is not a regulatory approach but rather a constitutional approach to the information economy. By that I mean a regime whose goal is to constrain and divide all power that derives from the control of information.

  Specifically, what we need is something I would call a Separations Principle for the information economy. A Separations Principle would mean the creation of a salutary distance between each of the major functions or layers in the information economy. It would mean that those who develop information, those who own the network infrastructure on which it travels, and those who control the tools or venues of access must be kept apart from one another. At the same time, the Separations Principle stipulates one other necessity: that the government also keep its distance and not intervene in the market to favor any technology, network monopoly, or integration of the major functions of an information industry. Such interference—often to preserve an industry that figures mightily in the national economy (in a sense, too big to fail)—is ultimately destructive of both a free society and the healthy growth of an information economy or any other kind.

  Like the separation of church and state, the Separations Principle means to preempt politics; it is a refusal to take sides between institutions that are historically, even naturally, bound to come into conflict, a refusal born of society’s interest in preserving both. Thus the First Amendment’s church and state separation has been used by secularists and the religiously minded alike in the defense of their respective causes. Such refusal to favor is the essence of how a liberal society preserves itself as such while availing itself of the dynamism of diverse, sometimes disruptive, perspectives and ideas.

  And like the separation of powers, the Separations Principle accepts in advance that some of the benefits of concentration and unified action will be sacrificed, even in ways that may seem painful or costly. An autocracy may make the trains run on time, and in the information world, a perfectly unified Bell system might be able to guarantee a good connection 99.999 percent of the time. But those satisfactions come at too high a price.

  As we have seen, power can be concentrated both by monopolistic control of a technology (such as telephony or film) and by the integration of industrial functions (as when a single entity controls every stage of creating and delivering the product). Such concentration through horizontal monopoly and/or vertical integration typically finds its license, its basis for societal acquiescence, in a specific kind of consumer gratification that size and centralization make possible: reliable, universal telephone service (the Bell system), radio shows backed by advertising (the networks), big-budget movies (the Hollywood studios and the media conglomerates), a dazzling device that seems to put the world in the palm of your hand (Apple and its collaborators). To see what is sacrificed to such efficiency, polish, and convenience, however, takes work, and to some it may forever remain invisible. It requires appreciating the merits of systems in which, so to speak, the trains do not always run on time. It requires an appreciation of the forms of speech and technical innovation that are excluded in the name of perfection and empire.

  More than anything else, the preceding chapters chronicle the corrupting effects of vertically integrated power. A strong stake in more than one layer of the industry leaves a firm in a position of inherent conflict of interest. You cannot serve two masters, and the objectives of creating information are often at odds with those of disseminating it. That is the very first reason for the Separations Principle. Broadcast witnessed a dramatic winnowing of content with the introduction of the advertising-based model by the Radio Trust. Film, for its part, was subject to two regimes of severe private censorship. The first, under the Edison Trust, was a matter of simple monopoly: a patent on technology, restricting its application. But the second was entirely a result of Zukor’s and his fellow studio heads’ efforts to protect their empire by acquiring the industry’s means of exhibition. As technological monopoly, film was a boring, underdeveloped medium. But as a unified, fully integrated industry, film was vulnerable to the efforts of a few private individuals to enforce the Production Code, a regime of censorship without equal in American culture and entirely insulated from First Amendmen
t challenge.

  By fighting vertical integrations, a Separations Principle would remove the temptations and vulnerabilities to which such entities are heir. It represents the difference between free speech as an abstract ideal and the habit of fostering a practical environment in which the ideal can be realized. It is a recognition that the disposition of firms and industries is, if anything, more critical than the actions of the state in controlling who gets heard. The public square is a fine conceit, but in an information society it matters little that one is free to speak one’s mind in public; the public square, if it exists, is an information network nowadays.

  The second broad justification for a Separations Principle may be derived mainly from the story of the AT&T monopoly that is woven throughout this book. Communications by wire, an incredibly dynamic market at the turn of the century, became a stagnant, oppressive industry under decades of AT&T rule. The sector began to resemble a small-scale version of the planned economies of the Soviet Union. We like to imagine that in the United States, we’ve never had such a manifestly socialist industrial regime. But of course we have, only with ultimate power in the hands of regulated monopolists in partnership with government planners. The Separations Principle protects entrepreneurial freedom by preventing stagnation and repression of business innovation, especially repression abetted by the state. It also promotes vitality and innovation in different parts of the information economy by preventing one layer from smothering the others.

  There was, as I’ve allowed, much to admire about the internal efficiency of AT&T, particularly in its early incarnations, and the achievements of the Bell Laboratories cannot be doubted. But this does not negate the pernicious effects of Bell’s having gained control over too many layers of the industry and having blocked every way forward inconsistent with its consolidated vision of progress. Everything is a matter of degree. Had the monopoly limited itself, say, to local telephony, the trade-off between quality and innovation might have been far more tolerable. But it became a menace when it sought to control every single aspect of “the System”—all handsets, long distance, data communications—ultimately making itself the gatekeeper for all innovation. As a consequence, inventions from magnetic recording and electronic television to packet networking and fiber optics, developments feasible long before the moment with which they are associated, were squelched. The consequences of such action for economic growth and further innovation are incalculable: imagine trying to determine the effect on GDP growth if the broad rollout of email had been delayed for ten years to suit one company.

  This brings me to the inadequacy of traditional efficiency calculations in regulating information industries. As we have observed, it has been the habit of the Justice Department to identify failures of competition by their effect on prices. In practice, however, not all dangerous arrangements inflate prices. The Edison Trust, one will remember, kept prices low by preventing more sophisticated product development. AT&T reaped handsome rewards by undercutting its competition with lower prices. The real problem with AT&T was in fact evident only after the government took decisive action to break up the telephone monopoly: as wave after wave of new services crashed on the market, beginning with voice mail and ending with the Internet, it became clear how drastically the Bell system had retarded progress. And when the government did take its long-deferred action, the suit was triggered not by objective calculation of malfeasance but by Bell’s increasing arrogance. With no objective or automatic standard of response to anticompetitive behavior, the application of the Sherman Act, a relatively rare and extreme step, is largely discretionary, unlike most responses to the violation of federal law. A Separations regime would take much of the guesswork and impressionism, and indeed the influence trafficking, out of the oversight of the information industries.

  Finally, the third justification of the Separation Principle derives from an awareness of the historical role of government in the information industries. That awareness leads to an inescapable conclusion that what is sauce for industry should be sauce for the state as well.

  Again and again in the histories I have recounted, the state has shown itself an inferior arbiter of what is good for the information industries. The federal government’s role in radio and television from the 1920s through the 1960s, for instance, was nothing short of a disgrace. In the service of chain broadcasting, it wrecked a vibrant, decentralized AM marketplace. At the behest of the ascendant radio industry, it blocked the arrival and prospects of FM radio, and then it put the brakes on television, reserving it for the NBC-CBS duopoly. Finally, from the 1950s through the 1960s, it did everything in its power to prevent cable television from challenging the primacy of the networks.

  It isn’t merely that government has been slow to act against the bad; it has quite often misconstrued the good. Time and again it has stood beside concentrated power against the underdog at the expense of economic dynamism. Government’s tendency to protect large market players amounts to an illegitimate complicity, whether by reason of the firm’s involvement in important government concerns (such as AT&T’s work with the NSA) or a general sense of obligation to protect big industries irrespective of their having become uncompetitive.

  Most of the federal government’s intrusions in the twentieth century were efforts at preventing disruption by new technologies in order to usher in a future more orderly, less chaotic. That might sound like a sensible objective, but the effort can easily be perverted into serving special interests. The simplest expression of the Separations Principle as it relates to the state is that government’s only proper role is as a check on private power, never as an aid to it. To grant any dominant industrial actor the protection of the state, for whatever reason, is to arrest the Schumpeterian dynamic by which innovation leads to growth, an outcome that is ultimately never in the public interest.

  The Separation Principles I’ve called for require a certain breadth and ambition in its application. I’ve described it as more a constitutional than a regulatory framework, the former sort generally understood as being implemented by multiple institutions, including those restrained by it.* The norms found in the U.S. Constitution work not because the Supreme Court, the system’s final arbiter, is inherently, let alone supremely, powerful; in fact the Court can do nothing but opine. Rather, the system works because the president, the armed forces, and Congress swear fealty to it and the way the Court interprets it, generally observing constitutional principles. It is on such consensus that the Separations Principle depends, a sort of informal compact between the people and their government, an acceptance on the part of the three estates of government as well as the governed—that is, the information industry, and most of all, the people.

  Let us talk about each party in turn, starting with government and the Federal Communications Commission, which has day-to-day authority over the information industries, the duty to specify the basic rules under which they operate. The commission’s birth was ignoble, and in recent memory its abolition has been called for by those across the political spectrum (including Peter Huber of the Manhattan Institute and Larry Lessig of Harvard University). And yet whatever its beginnings, from the 1970s through the 1990s, it effected some extremely successful policy, some of it arguably a prototype for just the sort of dispensation I am recommending.

  It was through the FCC’s power that the Nixon administration implemented the first and still the most fundamentally important extant separation: that between carriage and services. It took the form of the FCC’s separating AT&T’s phone system from all the new services that had begun to operate on that network, from computer networking, through the Internet. The commission’s second great separation parted the phone networks from the equipment that attached to them, thereby creating a market not only for telephones but also for answering machines, faxes, and modems. The work continued in this vein in the 1990s, when, under President Clinton, Chairman Reed Hundt protected thousands of new Internet Service Providers from being bled to death b
y the cash demands of the Bell companies.

  It is worth noting that the divergent political dispositions of the Nixon and Clinton administrations were of no matter in the course of this progress. In this realm, both subscribed the same essential principles: that a free market would foster economic growth, and that government’s only proper role in the market was to ensure opportunity, not to favor entrenched interests. The subsequent history speaks for itself. True, phenomena like the infotel revolution of the late twentieth century are complex macroeconomic events, and this one resulted from an incalculable combination of many factors, from the “peace dividend” created by the end of the Cold War to certain technological advances. But it would be impossible not to count among the foremost what was, in effect, the FCC’s extensive pilot program for a Separations regime—a use of federal regulatory power not to limit freedom (as it is popularly believed to do) but to promote it. It is, in other words, a case of regulation achieving the good we commonly ascribe to deregulation.

  There is a persistent misconception in the annals of American information industries that the radical transformation of the sector beginning with the rise of the computing Internet in the 1970s and continuing to pulse ever since was essentially owing to a return of laissez-faire, a purer free-market capitalism that had fallen out of favor after the Great Depression and was slow to regain its natural place. If the stories in this book tell us anything, however, it is that the free market can also lead to situations of reduced freedom. Markets are born free, yet no sooner are they born than some would-be emperor is forging chains. Paradoxically, it sometimes happens that the only way to preserve freedom is through judicious controls on the exercise of private power. If we believe in liberty, it must be freedom from both private and public coercion.

 

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